As filed with the Securities and Exchange Commission on February 21, 1997
Registration No. 333-11535
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post Effective
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. |_|
<PAGE>
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |X| 333-11535
If delivery of this prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
The registrant hereby amends this Amendment to 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 Amendment to
Registration Statement shall become effective on such date as the Securities and
Exchange Commission, acting pursuant to said Section 8(a), may determine.
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<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 Key Employees; Principal
Stockholders; Certain
Transactions
Security Ownership of Certain Principal Stockholders;
Beneficial Owners and Management.............. Selling Stockholders; Certain
Transactions
Description of Securities..................... Description of Capital Stock;
Plan of Distribution
Interests of Named Experts and Legal Matters
Counsel.......................................
Disclosure of Commission Disclosure of Commission
Position on Indemnification for Position on Indemnification for
Securities Act Liabilities.................... Securities Act Liabilities
Organization Within Last Five *
Years.........................................
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<PAGE>
Description of Business....................... Prospectus Summary; Risk
Factors; Summary Selected
Financial Data; Management's
Discussion and Analysis;
Business
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.
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<PAGE>
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. As of the date
hereof, the Company has been advised that 62,000 of said 650,000 Shares have
been sold. See "Business - Settlement of Legal Proceedings."
-------------------
THE PURCHASE OF THESE SECURITIES INVOLVE AN EXTREMELY HIGH RISK OF LOSS OF
THE ENTIRE INVESTMENT WITHIN A SHORT PERIOD OF TIME. SEE "HIGH RISK FACTORS"
COMMENCING ON PAGE 7.
-------------------
The Selling Stockholders may sell the Shares from time to time in one or
more transactions. The Shares may be sold in the Over-the-Counter 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
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<PAGE>
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."
Under certain circumstances, the Company is entitled to receive payments
from the Selling Stockholders equal to 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 traded in the Over-the-Counter market.
On February 14, 1997, the last reported sale price of Common Stock was $.03 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 February ___, 1997.
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<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission" or "SEC") a registration statement on Form SB-2 (herein, with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement, certain items of which
are omitted in accordance with the rules and regulations of the Commission. The
omitted information may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. For further information with respect to the
Company and the Shares offered hereby, reference is made to the Registration
Statement and the documents incorporated by reference therein. See
"Incorporation of Certain Documents by Reference" herein.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the Commission's New York Regional Office at 7 World Trade Center, 13th Floor,
New York, New York 10007 and Chicago Regional Office at 500 West Madison Street,
Room 3190, Chicago, Illinois 60661. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this prospectus.
The Company
The Company was organized under the laws of Florida in 1987. The Company
originally operated a clinical laboratory which it sold as of December 31, 1991
to Cardinal Testing Laboratories, Inc. ("Cardinal Transaction"). As a result of
the Cardinal Transaction, the Company received approximately $6 million. On
April 13, 1993, the Company acquired all of the issued and outstanding capital
stock of Building Blocks, Inc. ("Building Blocks" or "BBI"), for shares of the
Company's Common Stock.
Building Blocks thereafter operated a specialty educational and
developmental toy store chain. 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 second
tier wholly-owned subsidiary and BBFC began actively marketing franchises. The
stock of BBFC was held by Building Blocks Holdings, Inc. ("BBHI"). By the fall
of 1996 BBFC had sold franchises for stores in Dallas, Texas and Chicago,
Illinois.
Due to a lack of working capital to fund anticipated 1996 holiday season
inventory buildups, a plan was developed in the fall of 1996 whereby Building
Blocks would close certain of its stores and consolidate their inventories at
its other stores prior to the holiday season, and, together with BBFC, would
aggressively pursue sales of Building Blocks-operated stores to franchisees.
Simultaneously, BBFC would pursue new franchise sales. It was intended by this
plan that all BBI-operated stores would be sold to franchisees and that the
Company's retail toy operations would thereafter be limited to franchising by
BBFC.
The plan was 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. 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 BBHI sold all of the outstanding capital stock of
BBFC. 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
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<PAGE>
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 as 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 are no understandings regarding a
business combination and 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. See "High Risk Factors" and
"Management's Discussion and Analysis."
As used herein, the "Company" refers to Specialty Retail Group, Inc. only
and does not include its subsidiaries unless otherwise indicated.
The executive offices of the Company are located at 1720 Post Road East,
Suite 112, Westport, Connecticut 06880. Telephone: (203) 256-4380.
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."
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<PAGE>
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(2) (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.
(2) As of the date hereof, the Company has been advised that 62,000 of Mr.
Sayet's Shares have been sold.
Risk Factors
AN INVESTMENT IN THE COMPANY INVOLVES AN EXTREMELY HIGH DEGREE OF RISK.
The Company has no business operations and no source of operating revenue. It
has been and will continue to be dependent upon the willingness of certain of
its stockholders to make advances to finance its working capital needs and the
forbearance of its unaffiliated creditors who have approximately $350,000 of
claims against it. The Company is seeking to effectuate a business combination
with an operating company but has no agreement or understanding for such a
combination. In the event the Company does not obtain additional needed advances
and continued forbearance from its creditors (as to neither of which there is
any assurance) until it can consummate a business combination, the Company
will, unless it obtains additional capital, be forced to liquidate. In such
event, owners of the Common Stock will suffer the loss of their entire
investment. See "Risk Factors" and "Management's Discussion and Analysis" for a
further discussion of these factors.
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<PAGE>
RISK FACTORS
1. Termination of Business Activities: Dependence Upon The Possibility of
a Business Combination to Avoid Liquidation; Current Dependence Upon Stockholder
Advances and Creditor Forbearance: The Company has disposed of its toy store
franchising business and its retail toy store operating subsidiary is in the
process of liquidating its operations as a debtor in possession under Chapter 11
of the U.S. Bankruptcy Code. Consequently, the Company does not and will not
have a source of revenue absent the infusion of a new business activity. The
Company's toy store subsidiary has liabilities substantially in excess of its
current and anticipated assets and all such assets will be applied to the
subsidiary's creditors' claims. 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 resources;
has accounts payable of approximately $350,000 to non-affiliated creditors, and
is a guarantor on a defaulted lease in respect of which the landlord has
commenced an action for $180,000. The Company may also be liable, at some future
date, for payment of up to $160,000 to the Selling Stockholders. The Company has
been receiving demand loans from two stockholders in order to meet its operating
expenses and has been obtaining forbearances from its principal creditors. There
are no assurances as to the time or extent that these advances and/or
forbearance will continue. Further, there are no understandings regarding a
business combination and 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 liabilities.
2. Risks of Completing a Business Combination. While management believes
that the Company's status as a publicly traded company should be attractive to a
privately held operating company, there can be no assurance that the Company
will be able to effectuate a business combination on terms satisfactory to the
Company or at all. In addition, the use of the Company's net operating loss to
offset profits after a business combination is subject to satisfaction of a
number of highly technical rules and such use may not be available to potential
business combination partners. Further, the results of Building Blocks'
bankruptcy could adversely impact the Company's ability to effectuate a business
combination. Any business combination which the Company might consummate may
result in a very substantial increase in the number of outstanding shares of
Common Stock.
3. Limited Trading Market; Overhang.
The Company's Common Stock is traded on the Over the Counter market. It is
likely that any attempt to sell a substantial number of shares in that market
will result in a
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<PAGE>
substantial percentage decline in the bid price. In addition, to the extent the
Selling Stockholders seek to sell the Shares in the Over the Counter market,
such efforts can be expected to have an adverse effect on the bid price for the
Common Stock.
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<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. In addition, the
following summary financial data do not include any adjustments which may result
from certain material events, as described in Management's Discussion and
Analysis.
<TABLE>
<CAPTION>
For the
13 Weeks Ended
For the 52 Weeks For the 53 Weeks --------------
Ended Ended
June 30, 1996 July 2, 1995 December 29, 1996 December 31, 1995
---------------- ---------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales ............. $ 7,126,444 $ 5,629,643 $ 1,068,749 $ 3,066,506
Gross profit .......... 2,989,954 2,343,370 262,871 1,369,352
Restructuring and other (660,767) (2,788,626) -- --
expenses
Income (loss) from
operations ............ (2,973,634) (5,808,837) (762,926) 129,980
Net income (loss) ..... (3,378,668) (5,499,339) (1,195,444) 225,975
Net income (loss)
per share ............. (.39) (.63) (.13) .03
Balance Sheet Data June 30, 1996 December 29, 1996
(at end of period): ------------- -----------------
(unaudited)
Cash and cash
equivalents ......... $ 387,006 $ 267,332
Working capital ....... (310,135) (1,564,057)
(deficit)
Total assets .......... 3,002,678 1,331,816
Stockholders' equity .. 324,222 (1,058,872)
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, and for the 53 weeks ended July
2, 1995 ("fiscal 1995") and the 52 weeks ended June 30, 1996 ("fiscal 1996").
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 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,
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<PAGE>
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 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. 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 those
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 sold and
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 upon 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.
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<PAGE>
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. 97-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 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 as 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. See "High
Risk Factors."
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<PAGE>
Results of Operations -- 13-week 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 26-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 26-
week period ended December 31, 1995 to 30% for the 26 week period ended December
29, 1996. This is as a result of price discounting associated with the closing
of mall stores during this period. Gross Profit in dollars decreased from
$2,039,744 for the 26-week period ended December 31, 1995 to $690,657 for the
26-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 26-
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 26-
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.
- 17 -
<PAGE>
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.
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. Twelve stores were in operation at
June 30, 1996 (a thirteenth store was closed on June 28, 1996). Six of these
stores were fully comparable. That 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
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<PAGE>
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 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
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<PAGE>
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.
- 20 -
<PAGE>
BUSINESS
Summary
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" or "BBI"), for shares of the
Company's Common Stock.
Building Blocks thereafter operated a specialty educational and
developmental toy store chain. 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 second
tier wholly-owned subsidiary and BBFC began actively marketing franchises. The
stock of BBFC was held by Building Blocks Holdings, Inc. ("BBHI"). By the fall
of 1996 BBFC had sold franchises for stores in Dallas, Texas and Chicago,
Illinois.
Due to a lack of working capital to fund anticipated 1996 holiday season
inventory buildups, a plan was developed in the fall of 1996 whereby Building
Blocks would close certain of its stores and consolidate their inventories at
its other stores prior to the holiday season, and, together with BBFC, would
aggressively pursue sales of Building Blocks-operated stores to franchisees.
Simultaneously, BBFC would pursue new franchise sales. It was intended by this
plan that all BBI-operated stores would be sold to franchisees and that the
Company's retail toy operations would thereafter be limited to franchising by
BBFC.
The Company's plan was 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.
97-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
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. 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.
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<PAGE>
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 as 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 are no understandings regarding a
business combination and 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. See "High Risk Factors" and
"Management's Discussion and Analysis."
As used herein, the "Company" refers to Specialty Retail Group, Inc.
and not to 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.
- 22 -
<PAGE>
Former Toy Store Operations
Building Blocks' merchandising focused on high quality educational and
developmental toys, a substantial portion of which are typically found in the
specialty toy segment rather than in the mass marketed toy segment.
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. The trademarks and servicemarks are owned by
BBFC, which was sold on January 28, 1997. BBI continues to use the "Building
Blocks" name and logo under a license agreement between it and BBFC.
Employees
As of February 9, 1997, the Company and BBI had an aggregate of 40
employees, 20 of whom were full-time. It is anticipated that the Company will
employ no more than four persons prior to the effectuation of a business
combination.
Properties
The Company leases approximately 2,500 square feet of executive office
space in Westport, Connecticut. This lease expired on November 30, 1996. The
Company's occupancy is on a month to month basis. Rent is approximately $3,700
per month.
As of February 11, 1997, Building Blocks was operating five store
locations as debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code
and it is expected that these stores will be sold or their inventories and
fixtures will be liquidated and the stores closed. These stores average
approximately 1,750 square feet. The store locations are as follows:
- 23 -
<PAGE>
Connecticut--
Stamford
Westport
Ridgefield
Greenwich
New York--
Third Ave., NYC
At February 9, 1997, Building Blocks was in default under leases for
locations of eight stores which were closed between June 1, 1996 and December
31, 1996. Claims with respect to three of these stores have been settled and
litigation is in process with respect to the other five. See "Other Legal
Proceedings." Building Blocks is also in arrears of one to two months rent for
the five stores now in operation.
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
- 24 -
<PAGE>
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 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 September 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.
- 25 -
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of February 7, 1997
concerning the directors and executive officers and key employees of the
Company.
Name Age Position
---- --- --------
Kevin R. Greene 37 Chairman of the Board
Seymour W. Zises 43 Director
Steven E. Glass 36 Manager of Operations of Building Blocks, Inc.;
Secretary of the Company
Directors are elected annually for a one-year term.
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., a registered broker-dealer, 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.
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 FH Capital Advisors, Inc., a merchant banking concern. Mr.
Zises is also a director of Disc Graphics, Inc., a specialty packaging and
printing 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 is a graduate
of New York University.
STEVEN E. GLASS has been associated with the Company as an employee or
consultant since September, 1995. He also served as President and Chief
Executive Officer of Building Blocks from July, 1996 until January 7, 1997 when
he ceased to be an officer of Building Blocks and assumed his present position.
From June 1993 until March 1995, Mr. Glass was Director of
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<PAGE>
Special Projects for EMI Records where he supervised strategic sales and
marketing projects for television, film and children's music, including the
implementation and direction of EMI's "Barney Music" division. Prior to joining
EMI Mr. Glass spent 13 years in municipal government, including his last
position as Special Assistant to the Borough President of Brooklyn, with
responsibility for various business and commercial development projects.
- 27 -
<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.
Recent Transactions
BBI has an employment agreement with Steven E. Glass which expires in
March, 1998 and provides for salary of $112,500 per annum through February 28,
1997 and $135,000 per
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<PAGE>
annum thereafter (the "Employment Agreement"). SRG has guaranteed this salary
under agreements which, among other things, provide the Company with the
right, under certain circumstances, to employ Mr. Glass on the same economic
terms as are provided in the Employment Agreement. In addition, the guarantee
terminates if Mr. Glass resigns without cause or if his employment is terminated
with cause by BBI or the Company (each a "Guarantee Termination Event"). The
Company's obligation under the guarantee is subject to offset for income earned
by Mr. Glass from other employment if his employment is terminated during the
guarantee period other than as a result of a Guarantee Termination Event. The
Employment Agreement also requires Building Blocks to provide Mr. Glass with a
leased vehicle and certain related automobile expenses at a cost not to exceed
$1,000 per month and reimbursement of all business related expenses.
Mr. Glass previously held options to purchase 110,000 shares of Common
Stock at $.75 per share and 20,000 shares of Common Stock at $1.00 per share.
These options were terminated in January 1997. Mr. Glass has been granted
options to purchase 430,000 shares of Common Stock at $.05 per share. An
aggregate of 280,00 of these options are vested and exercisable for a period of
six years from February 1, 1997; 75,000 shares vest in June 1997 if a Guarantee
Termination Event has not occurred and become exercisable for six years
thereafter; and 75,000 shares vest in June 1997 if Mr. Glass' employment has
terminated other than as a result of a Guarantee Termination Event, or in June
1998 if his employment terminates during the guarantee period other than as a
result of Guarantee Termination Event but only if the Company fails to perform
its obligation under the guarantee.
- 29 -
<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
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<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 September 29, 1996.
- 31 -
<PAGE>
As at February 10, 1997, Selig Zises had advanced $22,500 to the Company
and Cathy Zises has advanced $30,000 to the Company. The advances are payable on
demand with interest at the rate of 8% per annum.
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.
- 32 -
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of February 9,
1997, 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.
Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class(1)
- - -------------- ------------------- -------------------- --------
Common Stock Steven E. Glass(2) 283,000 2.9%
Common Stock Kevin R. Greene(3) 247,000(3) 2.5%
Common Stock Cathy Zises(4) 848,127 9.1%
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) 848,127 9.1%
Series A-1 ILM Acquisition L.P.(4) 2,394,130 100%
Preferred Stock 477 Madison Avenue
New York, New York 10022
Common Stock All directors and officers 1,378,127(2)(3)(4) 14%
as a group (3 persons)
- - ----------
(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 shares reported for Steven E. Glass include the shares of Common
Stock purchasable pursuant to currently exercisable options.
(3) The shares reported for Mr. Greene include 25,000 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
- 33 -
<PAGE>
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
For the periods prior to November 27, 1996 set forth below, the Common
Stock was quoted on the NASDAQ SmallCap System and traded under the symbol
"SRGC". The Common Stock has been traded in the over-the-counter market under
that symbol since November 27, 1996. The following table sets forth the high and
low bid prices on the NASDAQ SmallCap System or, after November 27, 1996, on the
NASDAQ OTC Bulletin Board, 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
------ ---- ---
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
July 1, 1996 - September 29, 1996 13/16 1/16
September 30, 1996 - December 29, 1996 1/4 1/50
On February 14, 1997, the high and low bid prices on the NASDAQ OTC
Bulletin Board were $.03 and $.02, respectively.
On January 1, 1997, there were 233 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.
- 34 -
<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(2) 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.
(2) As of the date hereof, the Company has been advised that 62,000 of Mr.
Sayet's Shares have been sold.
- 35 -
<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 in the Over the
Counter market, 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
- 36 -
<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.
- 37 -
<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
- 38 -
<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.
The Company has agreed to indemnify Steven E. Glass in respect of claims
against him arising from certain statements set forth in the Bankruptcy Petition
of Building Blocks which are based upon information provided to him by other
persons associated with the Company or Building Blocks.
- 39 -
<PAGE>
EXPERTS
The financial statements as at and for the fiscal year ended June 30,
1996, 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
Condensed Consolidated Balance Sheet
at December 29, 1996 (unaudited)......................................... F-1
Condensed Consolidated Statements of
Operations for the 26-week periods
ended December 29, 1996 and December 31, 1995 (unaudited)................ F-2
Condensed Consolidated Statements of
Cash Flows for the 26-week periods
ended December 29, 1996 and December 31, 1995 (unaudited)................ F-3
Notes to the Condensed Consolidated Financial
Statements as of December 29, 1996 (unaudited)........................... F-4
Report of Independent Certified Public Accountants
upon the Condensed Consolidated Financial Statements
as at and for the year ended June 30, 1996............................... F-7
Consolidated Balance Sheet as at June 30, 1996........................... F-8
Consolidated Statements of Operations for the 53 Weeks
ended July 2, 1995 and 52 Weeks ended June 30, 1996...................... F-9
Consolidated Statements of Stockholders'
Equity for the 53 Weeks ended July 2, 1995 and
52 Weeks ended June 30, 1996............................................. F-10
Consolidated Statements of Cash Flows for the 53 Weeks
ended July 2, 1995 and 52 Weeks ended June 30, 1996...................... F-11
Notes to Consolidated Financial Statements............................... F-12
- 40 -
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Balance Sheet
as at December 29, 1996
(Unaudited)
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, net --
Other assets, primarily security deposits 92,356
-----------
TOTAL ASSETS $1,331,816
===========
LIABILITY 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
F-1
<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 or 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
F-2
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
26 weeks ended 26 weeks ended
December 29, 1996 December 31, 1995
----------------- -----------------
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
=========== ===========
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 appears 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
F-3
<PAGE>
Specialty Retail Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
December 29, 1996
1. Basis of Presentation
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 bankruptcy filing by the
Company's Building Blocks, Inc. subsidiary, and the sale of the outstanding
capital stock of the Company's Building Blocks Franchise Corp. subsidiary,
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.
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 as to which the landlord has
commenced a suit against
F-4
<PAGE>
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. It is not expected that the Company
wil 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 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.
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.
F-5
<PAGE>
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 claims.
6. Writedown of Goodwill and Loss on Property and Equipment
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.
7. Subsequent Events
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.
F-6
<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-7
<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-8
<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-9
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
52 weeks ended June 30, 1996 and 53 weeks ended July 2, 1995
<TABLE>
<CAPTION>
Stock
Preferred stock Common stock subscription Retained
------------------- -------------------- Additional note and earnings
Number of Number of paid-in interest (accumulated
shares Amount shares Amount capital receivable deficit)
--------- -------- ---------- -------- ------------ ------------- -----------
<S> <C> <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) $ (1,637,396)
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 -- -- -- -- -- -- (5,499,339)
--------- -------- ------------ -------- ------------ ------------ ------------
Balance, July 2, 1995 2,394,130 2,394 8,674,738 8,675 11,004,220 -- (7,136,735)
Net loss -- -- -- -- -- -- (3,378,668)
--------- -------- ------------ -------- ------------ ------------ ------------
Balance, June 30,
1996 2,394,130 $ 2,394 8,674,738 8,675 $ 11,004,220 $ -- $(10,515,403)
========= ======== ============ ======== ============ ============ ============
</TABLE>
Total
Treasury stockholders'
stock equity
-------- -------------
Balance, July 3, 1994 $ -- $ 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)
---------- ------------
Balance, July 2, 1995 (175,664) 3,702,890
Net loss -- (3,378,668)
---------- ------------
Balance, June 30,
1996 $ (175,664) $ 324,222
========== ============
See accompanying notes to consolidated financial statements.
F-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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.
3. Property and
Equipment June 30, 1996
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-17
<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-18
<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-19
<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-20
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
6. Stock Transactions Effective June 29, 1995, the Company acquired
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 Plans In December 1991 and October 1994, the Company
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-21
<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-22
<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-23
<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
Disclosures of Cash for income taxes during the 52 weeks ended June
Flow Information 30, 1996 and the 53 weeks ended July 2, 1995,
respectively, and $28,000 for interest during the
53 weeks ended July 2, 1995.
10. Restructuring and As discussed in Note 1, the Company's policy is to
Other Expenses accrue store-closing expenses when the decision is
made 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.
F-24
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
11. Related Party Effective January 1, 1994, the Company entered
Transactions 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 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-25
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any securities
other than the securities offered by this Prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by any person in any jurisdiction
where such offer or solicitation is not authorized or is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
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 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 ...................................................... F-1
SPECIALTY RETAIL GROUP, INC.
863,333 Common Stock
(Par Value, $.001 per share)
---------
PROSPECTUS
---------
February ___, 1996
<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.
The Company has agreed to indemnify Steven E. Glass in respect of claims
against him arising from certain statements set forth in the Bankruptcy Petition
of Building Blocks which are based upon information provided to him by other
persons associated with the Company or Building Blocks.
Item 27. Exhibits
Exhibit
Number Description
- - ------- -----------
10.1 Stock Purchase Agreement among Building Blocks Holdings, Inc., James
L. Angel and Cheryl D. Angel, dated January 28, 1997 (incorporated
by reference to Exhibit 2.1 to Form 8-K dated February 7, 1997).
10.2 Amendment dated January 7, 1997 to Employment Agreement between
Building Blocks, Inc. and Steven E. Glass (incorporated by reference
to Exhibit 10.2 to Form 8-K dated February 7, 1997).
10.3 Letter Agreement dated January 24, 1997 between Registrant and
Steven E. Glass (incorporated by reference to Exhibit 10.3 to Form
8-K dated February 7, 1997).
10.4 Letter Agreement dated January 24, 1997 between Registrant and
Steven E. Glass (incorporated by reference to Exhibit 10.4 to Form
8-K dated February 7, 1997).
10.5 Option Agreement dated February 1, 1997 between Registrant and
Steven E. Glass (incorporated by reference to Exhibit 10.5 to Form
8-K dated February 7, 1997).
II-2
<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 Post Effective
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 February 20, 1997.
SPECIALTY RETAIL GROUP, INC.
By: /s/ STEVEN E. GLASS, as Secretary
------------------------------------
Steven E. Glass, Secretary
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/ KEVIN R. GREENE February 20, 1997
- - -----------------------------
Kevin R. Greene, Chairman of
the Board and Director
/s/ SEYMOUR W. ZISES February 20, 1997
- - -----------------------------
Seymour W. Zises, Director
II-3
