FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[Mark One]
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the Quarterly period ended December 29, 1996 or
[ ] Transition report under Section 13 or 15(d) of the Exchange Act For the
Transition period from ________ to _______
Commission File Number 0-18707
SPECIALTY RETAIL GROUP, INC.
(Exact Name of Small Business Issuer as specified in its charter)
Florida 59-2824411
--------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
Of incorporation or organization)
1720 Post Road East, Suite 112, Westport, Connecticut 06880
(Address of principal offices)
(203) 256-4380
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No___
On February 5, 1997, 9,538,071 shares of the issuer's Common Stock were
outstanding.
There are no exhibits
<PAGE>
SPECIALTY RETAIL GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1 - Financial Statements
Condensed Consolidated Financial Statements as of December 29, 1996
Condensed Consolidated Balance Sheet at
December 29, 1996 (unaudited) 3
Condensed Consolidated Statements of
Operations for the thirteen-week and twenty-six week
periods ended December 29, 1996 and
December 31, 1995 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the thirteen-week and twenty-six week periods ended
December 29, 1996 and December 31, 1995 (unaudited) 5
Notes to the Condensed Consolidated Financial Statements
as of December 29, 1996 (unaudited) 6
Item 2 - Management's Discussion and Analysis or Plan of Operations 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 16
Signature 17
Page 2 of 17
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Balance Sheet (unaudited)
as at December 29, 1996
ASSETS
Current Assets:
Cash and cash equivalents 267,332
Inventory 382,727
Other Current Assets 176,572
- --------------------------------------------------------------------------------
Total Current Assets 826,631
Property and equipment, net 412,829
Goodwill (Note 6) --
Other assets, primarily security deposits 92,356
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 1,331,816
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 1,321,953
Accrued liabilities 1,068,735
- --------------------------------------------------------------------------------
Total Current Liabilities 2,390,688
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 5)
Stockholders' equity:
Series A-1 Preferred Stock; 10,000,000 shares
authorized; $.001 par value; issued and
outstanding, 2,394,130 shares 2,394
Common Stock; 100,000,000 shares authorized; $.001
par value; 9,538,071 issued and outstanding 9,538
Additional paid in capital 11,573,357
Accumulated deficit (12,468,497)
Treasury stock- 240,500 shares at cost (175,664)
- --------------------------------------------------------------------------------
Total stockholders' equity (1,058,872)
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,331,816
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Page 3 of 17
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
13 weeks ended 26 weeks ended
-------------- --------------
Dec. 29, 1996 Dec. 31, 1995 Dec. 29, 1996 Dec. 31, 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 1,068,749 $ 3,066,506 $ 2,316,042 $ 4,475,079
Cost of Sales 805,878 1,697,154 1,625,385 2,435,335
- ------------------------------------------------------------------------------------------------------------
Gross Profit 262,871 1,369,352 690,657 2,039,744
Operating Expenses:
Selling 590,681 780,004 1,369,967 1,470,839
General and Administrative 435,116 459,368 890,012 889,061
- ------------------------------------------------------------------------------------------------------------
Income (Loss) from operations (762,926) 129,980 (1,569,322) (320,156)
Other income (expense):
Interest income 64 95,995 850 126,316
Miscellaneous Income 18,894 -- 21,600
Gain on extinguishment of debt- Note 4 -- -- 45,256 --
Loss on Fixed Assets due to store closings (314,595) -- (314,595)
Writedown of Goodwill (136,882) (136,882)
- ------------------------------------------------------------------------------------------------------------
Income (Loss) before income tax expense (1,195,444) 225,975 (1,953,092) (193,840)
Income tax expense -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Net Income (Loss) $(1,195,444) $ 225,975 $(1,953,092) $ (193,840)
- ------------------------------------------------------------------------------------------------------------
Per share amounts:
Net Income (Loss) $ (0.13) $ 0.03 $ (0.20) $ (0.02)
- ------------------------------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 9,538,071 8,766,105 9,538,071 8,674,738
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
Page 4 of 17
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
26 weeks ended 26 weeks ended
December 29, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,953,092) $ (193,840)
- ---------------------------------------------------------------------------------------------
Adjustments made to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 70,845 148,426
Writedown of Goodwill 136,882 --
Loss on Property and Equipment 314,595 --
Gain on extinguishment of debt (Note 4) (45,256)
(Increase) decrease in inventory 899,050 (85,095)
Decrease in other current assets (47,034) (29,235)
(Increase) decrease in other assets 2,287 (67,643)
Increase (decrease) in accounts payable
and accrued liabilities 282,231 (308,617)
- ---------------------------------------------------------------------------------------------
Total adjustments 1,613,599 (342,164)
- ---------------------------------------------------------------------------------------------
Net cash used in operating activities (339,494) (536,004)
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Expenditures for property and equipment (5,180) (127,808)
Equity Investment (220,000)
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (5,180) (347,808)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings (note 4) 225,000
Investment in Notes (1,000,000)
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 225,000 (1,000,000)
- ---------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (119,674) (1,883,812)
Cash and cash equivalents, beginning of period 387,006 2,913,188
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 267,332 $ 1,029,376
- ---------------------------------------------------------------------------------------------
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
On August 26, 1996 , the Company issued 650,000 shares of its Common Stock
valued at $570,000 as part of a legal settlement.This item appeared as "Legal
settlement-equity to be issued, " in the Company's June 30, 1996 Consolidated
Balance Sheet. Please refer to Note 4 in the accompanying notes for a further
discussion of this matter.
See accompanying notes to consolidated financial statements
Page 5 of 17
<PAGE>
Specialty Retail Group, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
December 29, 1996
1.
The accompanying unaudited consolidated financial statements of Specialty
Retail Group, Inc. (the "Registrant") and subsidiaries (collectively, the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form
10-QSB.
With respect to the unaudited consolidated financial statements for the
thirteen and twenty-six weeks ended December 29, 1996 and December 31, 1995, it
is the Registrant's opinion that all necessary adjustments (consisting of normal
and recurring adjustments and an adjustment to Goodwill described in Note 6)
have been included to present a fair statement of results for the interim
periods.
These statements should be read in conjunction with the Company's
financial statements included in the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996. Due to the Filing and the
Sale,operating results for the interim period are not indicative of results that
may be expected for the fiscal year ended June 29, 1997. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations promulgated by the Securities and
Exchange Commission.
2. Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern and, except as described in Note 6,
they do not include adjustments relating to the recoverability of recorded asset
amounts and classification of recorded assets and liabilities.
Page 6 of 17
<PAGE>
On January 31, 1997, the Company's Building Blocks, Inc. ("Building
Blocks") subsidiary filed a petition for relief under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New
York (Case No. 97-B-40684 (BRL)). The petition seeks protection from creditors
while Building Blocks attempts to dispose of its retail stores either through
sales of the stores and assignment of their leases or by the liquidation of
inventory and fixtures. Effective January 28, 1997 the outstanding capital stock
of the Company's Building Blocks Franchise Corp. ("BBFC") subsidiary, which owns
the "Building Blocks" trademarks, was sold by the Company's Building Blocks
Holdings, Inc. ("BBHI") subsidiary. The net proceeds from the sale received at
closing ($33,231) were paid over to BBI pursuant to an agreement requiring BBHI
to obtain a general release from BBI to BBFC. BBHI will also receive additional
net proceeds of the sale in an amount of up to $20,000, which becomes payable,
subject to possible offsets, 100 days after the closing. Such net proceeds are
also payable to BBI.
The Company, which has no other business operations, has been attempting to
attract an operating business with which to effectuate a business combination.
The Company has only nominal cash and has accounts payable of approximately
$400,000. In addition, the Company is a guarantor of a store lease on which
Building Blocks has defaulted and a to which the landlord has commenced a suit
against Building Blocks for $180,000. The Company may also be liable, at some
future date, for payment of up to $160,000 to certain parties pursuant to the
settlement agreement described in Note 5.
Page 7 of 17
<PAGE>
It is not expected that the Company will receive any cash from Building Blocks
upon completion of Building Blocks' bankruptcy proceedings. The Company has been
receiving cash advances in the form of demand loans from two of its stockholders
in order to meet its operating expenses and has been obtaining forbearances from
its principal creditors. At February 10, 1997 such advances (which are included
in the accounts payable described above) aggregated $52,500. There are no
assurances as to the time or extent that the stockholder advances and/or
forbearance will continue. Further, there is no assurance that any business
combination can ever be effectuated. Any such combination may depend upon the
Company's ability to reach settlements of its outstanding obligations.
The foregoing raise substantial doubt about the Company's ability to
continue as a going concern.
3. Chapter 11 Petition of Debtor
In the Chapter 11 case, substantially all liabilities of the Debtor as of
the date of the Filing are subject to resolution under a plan of reorganization
to be voted upon by the Debtor's creditors and stockholders and confirmed by the
Bankruptcy Court. Financial schedules will be filed by the Debtor as of the date
of the Filing as shown by the Debtor's accounting records. Differences between
amounts shown by the Debtor and claims filed by creditors will be investigated
and resolved. The amount and settlement terms for such disputed liabilities are
subject to allowance by the Bankruptcy Court. Ultimately the adjustment of all
liabilities of the Debtor remains subject to a Bankruptcy Court approved plan of
reorganization, and, accordingly, are not presently determinable.
Under the Bankruptcy Code, the Debtor may elect to assume or reject real
estate leases, employment contracts, personal property leases, service contracts
and other executory pre-petition contracts, subject to Bankruptcy Court review.
The Debtor cannot presently determine or reasonably estimate the ultimate
liability which may result from the filing of claims for any rejected contracts
and no provisions have yet been made for these items. Similarly, the Debtor
cannot presently determine the net realizable value of its remaining assets,
except that the Debtor has determined that its Goodwill has no
future value (See Note 6).
4. Equity Investments
Effective December 14, 1995, the Company acquired 25% of the Common Stock
of CM Franchise Corp., a franchiser 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 acquire an additional 12.5% of CM Franchise Corp.'s common stock. The
Company accounted for this transaction using the equity method.
Page 8 of 17
<PAGE>
In July 1996, the Company received a loan of $225,000 to cover a working
capital shortfall. Under the agreement, the Company had the right to either
repay the advance without interest or to transfer to the lender 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 . The Company transferred the rights and interests in satisfaction
of the loan on September 29, 1996. As a result, the Company recorded a $45,256
gain on this transaction in the accompanying Condensed Consolidated Statements
of Operations for the 26 weeks ended December 29, 1996.
5. Commitments and Contingencies
Legal Settlement-Issuance of Common Stock
The Company was a party defendant in a lawsuit with a former officer,
director and shareholder who alleged, among other things, breach of contract,
fraud, defamation, interference with stock transfer rights, breach of fiduciary
duties by certain former officers of the Company, conspiracy to defraud, and
interference with respect to the inspection of corporate records. The Plaintiff
claimed he was entitled to a termination payment of $1,400,000 pursuant to an
employment agreement with the Company.
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 valued at $570,000 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 be
required to satisfy the guarantee by a cash payment or by the release to the
holders of an additional 213,333 shares of common stock currently being held by
an escrow agent.
Other Legal Proceedings-Leases
At November 12, 1996, landlords at two mall stores which were closed
between June and October 1996 had obtained judgments of $86,000 (Westend Garden
State Plaza Limited Partnership v. Building Blocks Inc. Superior Court of New
Jersey, Bergen County, commenced June 4, 1996) and $104,000 (Natick Limited
Partnerships v. Building Blocks , Inc. , District Court, Middlesex,
Massachusetts, commenced August 12, 1996) against Building Blocks for rent
arrearages and damages, an action seeking $47,000 in back rent and $140,000 in
damages is pending with respect to a third mall store closed prior to October
1996 (Westland Properties, Inc. v. Building Blocks, Inc., Superior Court -
Fairfield, Connecticut, commenced June 24, 1996), and a suit for rent arrearages
of $180,000 was pending with respect to a mall store closed in October 1996.
(Fashion Mall Partners, L.P. v. Building Blocks, Inc., City Court - Westchester,
New York, commenced September 26, 1996). At December 29, 1996, substantially all
unpaid rents were accrued on the Company's financial statements, and no
provision was made with respect to the damage claim.
Page 9 of 17
<PAGE>
6. Write down of Goodwill and Loss on Property and Equipment
Due to the Chapter 11 filing by Building Blocks and the sale of BBFC the
Company has determined that the Goodwill has no future value and has recorded a
writeoff of $136,882 during the 13 week period ended December 29, 1996.
Additionally, the Company recorded a Loss on Property and Equipment during the
same period of $ 314,595 due to the closing of certain stores.
7. Subsequent Event
As described in Note 2, on January 28, 1997, the Company sold all of the
outstanding capital stock of BBFC and on January 31, 1997 Building Blocks filed
a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. Subsequent
to December 29, 1996 Landlords at four of the five remaining stores currently
operated by Building Blocks served "Notices to Quit" based upon non-payment of
rent.
Page 10 of 17
<PAGE>
Part I-Item 2
Management's Discussion and Analysis or Plan of Operation
Set forth below is a discussion of the Company's lack of liquidity and
capital resources on an unconsolidated basis and of the significant factors
affecting the consolidated operating results of the Company for the 26 weeks
ended December 29, 1996 and December 31, 1995. These discussions should be read
in conjunction with the financial statements and notes thereto.
The reported results of operations and the consolidated balance sheet of
the Company are not indicative of future results of operations or financial
position of the Company, because of the subsequent disposition by the Company of
its toy store franchising subsidiary and the subsequent filing by its toy store
operating subsidiary of a petition for relief under Chapter 11 of the U.S.
Bankruptcy Code, all as described under "Liquidity and Capital Resources,"
below. The financial statements have been prepared in accordance with generally
accepted accounting principles for year-end and interim financial information
applicable to a going concern, which principles, except as otherwise disclosed,
assume that assets will be realized and liabilities will be discharged in the
normal course of business. The financial statements do not include any
adjustments relating to the recoverability of recorded asset amounts and
classification of recorded assets and liabilities which may result from the
occurrence of the foregoing events subsequent to the dates of such financial
statements.
Liquidity and Capital Resources
The matters discussed under this caption that are forward looking
statements involve risks and uncertainties, as described herein and others which
may arise from changes in general economic conditions, unanticipated changes in
the Company's circumstances, and other factors.
The operating subsidiary of the Company during Fiscal 1995 and Fiscal 1996
was Building Blocks, Inc. ("Building Blocks"), which the Company acquired on
April 13, 1993 and which thereafter operated a chain of specialty retail toy
stores. Building Blocks Franchise Corp. ("BBFC") was organized subsequent to
June 30, 1996 as a second-tier subsidiary for the purpose of marketing
franchises for Building Blocks stores.
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 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 management began negotiating
with the landlords of such premises for the settlement of approximately $330,000
of rent arrearages
Page 11 of 17
<PAGE>
and of $470,000 of additional claims which Building Blocks disputed. In July
1996 the Company received $225,000 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 29, 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 believed, would have enabled
Building Blocks to arrange for any needed additional holiday season working
capital. These franchise transactions did not occur, and --as a result--
Building Blocks did not have adequate working capital to finance additional
inventories.
Management therefore determined 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 also actively sought other
potential franchisees to acquire Building Blocks-operated stores and their
leases, fixtures and inventories. BBFC simultaneously pursued the sale of
franchises for new locations.
In October 1996 the Company's plan contemplated that any Building
Blocks-operated stores in operation after January 1997 would be transferred to
franchisees, and that the Company would 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 was
dependent on the success Building Blocks achieved in its plans to transfer
Building Blocks-operated stores to franchisees and upon BBFC's ability to sell
additional franchises. It was expected that cash generated by Building Blocks
would be applied to reduce its accounts payable and other obligations and would
not be available to fund BBFC's operations and that BBFC would rely upon cash
held by the Company and franchise revenues.
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.
The Company's plans to convert to an all-franchising operation were not
successful.
On January 31, 1997 Building Blocks filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Southern District of New York (Case No. 94-B-40684 (BRL)). The petition seeks
protection from creditors while BBI attempts to dispose of its retail stores
either through sales of the stores and
Page 12 of 17
<PAGE>
assignment of their leases or by the liquidation of inventory and fixtures.
Effective January 28, 1997 BBHI sold all of the outstanding capital stock of
BBFC which, in addition to its franchising activities, owns all of the "Building
Blocks" trademarks. The net proceeds from the sale received at closing ($33,231)
were paid over to BBI pursuant to an agreement requiring BBHI to obtain a
general release from BBI to BBFC. BBHI will also receive additional net proceeds
of the sale in an amount of up to $20,000 which becomes payable, subject to
possible offsets, 100 days after the closing. Such net proceeds are also payable
to BBI. It is anticipated that, as a result of the foregoing actions, BBI will
be relieved of claims of its creditors and thereafter the Company's liabilities
and assets will, on a consolidated basis, be as described in the next paragraph,
subject to changes resulting from the Company's operations.
The Company, which has no other business operations, has been attempting
to attract an operating business with which to effectuate a business
combination. The Company has only nominal cash and has accounts payable of
approximately $400,000. In addition, the Company is a guarantor of a store lease
on which Building Blocks has defaulted and a to which the landlord has commenced
a suit against Building Blocks for $180,000. The Company may also be liable, at
some future date, for payment of up to $160,000 to the selling stockholders. It
is not expected that the Company will receive any cash from Building Blocks upon
completion of Building Blocks' bankruptcy proceedings. The Company has been
receiving cash advances in the form of demand loans from two of its stockholders
in order to meet its operating expenses and has been obtaining forbearances from
its principal creditors. At February 10, 1997 such advances (which are included
in the accounts payable described above) aggregated $52,500. There are no
assurances as to the time or extent that the advances and/or forbearance will
continue. Further, there is no assurance that any business combination can ever
be effectuated. Any such combination may depend upon the Company's ability to
reach settlements of its outstanding obligations.
Results of Operations- Twenty six weeks period ended December 29, 1996 compared
with the corresponding period ended December 31, 1995
Operations
Net sales, substantially all of which were generated by Building Blocks,
were $ 2,316,042 for the twenty six week period ended December 29, 1996, a
decrease of 48% when compared with $4,475,079 for the corresponding period ended
December 31, 1995. This decrease in net sales is due principally to the decrease
in the number of stores operated by the Company. Additionally, the Company's
lack of working capital to purchase holiday season inventory had an adverse
impact on sales in the current year period.
Gross Profit as a percentage of net sales decreased from 46% for the
twenty six week period ended December 31, 1995 to 30% for the twenty six week
period ended December 29, 1996. This is as a result of price discounting
associated with the closing of
Page 13 of 17
<PAGE>
mall stores during this pereiod. Gross Profit in dollars decreased from
$2,039,744 for the tweenty six week period ended December 31, 1995 to $690,657
for the twenty six week period ended December 29, 1996 because of lower margins
and a net decrease in the number of stores.
Selling expenses consist primarily of payroll, occupancy and advertising
expenses associated with the Building Blocks stores. Selling expenses were
$1,369,967 (59% of net sales) and $1,470,839 (33% of net sales) during the
twenty six week periods ended December 29, 1996 and December 31, 1995,
respectively. This increase as a percentage of sales is primarily due to rent
charges still being incurred in those stores that the Company closed.
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. General and
administrative expenses were $890,012 (38% of net sales) and $889,061 (20% of
net sales) during the twenty six week periods ended December 29, 1996 and
December 31, 1995, respectively. This increase as a percentage of sales is
attributable to higher legal costs associated with a legal settlement as
discussed in the following paragraph.
During August 1996, the Company settled litigation, without admitting
liability, by issuing an aggregate of 650,000 shares of the Company's common
stock valued at $570,000 to the plaintiff and his designee. The Company
previously recorded this non-cash expense during its fiscal year ended June 30,
1996.
During the quarter ended September 29, 1996, the Company recorded a
$45,256 gain on the extinguishment of debt as a result of transferring the
rights and interests in the common stock of CM Franchise Corp. with a recorded
value of $179,744 in satisfaction of the $225,000 debt.
Due to the filing of the Chapter 11 petition by Building Blocks and the
sale of BBFC the Company has determined that the Goodwill has no future value
and has recorded a writeoff of $136,882 during the 13 week period ended December
29, 1996. Additionally, the Company recorded a Loss on Property and Equipment
during the same period of $ 314,595 due to the closing of certain stores.
Page 14 of 17
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
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: (1) $160,000 and (2) 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.
Page 15 of 17
<PAGE>
Other Legal Proceedings
At November 12, 1996 landlords at two mall stores which were closed
between June and October 1996 had obtained judgments of $86,000 (Westland Garden
State Plaza Limited Partnership v. Building Blocks, Inc., Superior Court of New
Jersey, Bergen County, commenced June 4, 1996) and $104,000 (Natick Limited
Partnerships v. Building Blocks, Inc., District Court, Middlesex, Massachusetts,
commenced August 12, 1996) against Building Blocks for rent arrearages and
damages. An action seeking $47,000 in back rent and $140,000 in damages is
pending with respect to a third mall store closed prior to October 1996
(Westland Properties, Inc. v. Building Blocks, Inc., Superior Court - Fairfield,
Connecticut, commenced June 24, 1996), and an action for rent arrearages of
$180,000 was pending with respect to a mall store closed in October 1996
(Fashion Mall Partners, L.P. v. Building Blocks, Inc., City Court - Westchester,
New York, commenced September 26, 1996). At December 29, 1996, substantially all
unpaid rents were accrued on the Company's consolidated financial statements,
and no provision had been made with respect to the damage claims. At February
11, 1997 Landlords at four of the five stores currently operated by Building
Blocks have served "Notices to Quit" based upon non-payment of rent.
On January 31, 1997 Building Blocks filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
Southern District of New York (Case No. 97-B-40684 (BRL)). The petition seeks
protection from creditors while Building Blocks attempts to dispose of its
retail stores either through sales of the stores and assignment of their leases
or by the liquidation of inventory and fixtures.
Item 6-Exhibits and Reports on Form 8-K
(a) Exhibits.
NONE
(b) No reports on Form 8-K were required to be filed during the fiscal
quarter ended December 29, 1996.
Page 16 of 17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereto duly
authorized.
SPECIALTY RETAIL GROUP, INC.
Date: February 18, 1997 By /s/ Steven E. Glass, as Secretary
------------------------------------
Steven E. Glass, Secretary
Page 17 of 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-QSB FOR THE
QUARTER-ENDED DECEMBER 29, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jun-29-1997
<PERIOD-START> Sep-30-1996
<PERIOD-END> Dec-29-1996
<CASH> 267,332
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 382,727
<CURRENT-ASSETS> 826,631
<PP&E> 889,827
<DEPRECIATION> 476,998
<TOTAL-ASSETS> 1,331,816
<CURRENT-LIABILITIES> 2,390,688
<BONDS> 0
0
2,394
<COMMON> 9,538
<OTHER-SE> (1,070,804)
<TOTAL-LIABILITY-AND-EQUITY> 1,331,816
<SALES> 2,316,042
<TOTAL-REVENUES> 2,316,042
<CGS> 1,625,385
<TOTAL-COSTS> 1,625,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,953,648)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,953,648)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,953,648)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
