<PAGE>
As filed with the Securities and Exchange Commission on February 5, 1998
Registration No. 333-11535
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post Effective
Amendment No. 2
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 9999 No. 59-2824411
- ---------------- ------------------- -------------------
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
477 Madison Avenue
14th Floor
New York, New York 10022
(212) 872-9684
-----------------------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Specialty Retail Group, Inc.
477 Madison Avenue
14th Floor
New York, New York 10022
(212) 872-9684
---------------------------------------------------------
(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.
<PAGE>
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
/ /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement 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.
- 2 -
<PAGE>
SPECIALTY RETAIL GROUP, INC.
Cross Reference to Information Required by Part I of Form SB-2
<TABLE>
<CAPTION>
Location or Caption in
Item in Form SB-2 Prospectus
- ------------------------------------------------------------------------------------------------
<S> <C>
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; Selling
Beneficial Owners and Management.............................. Stockholders; Certain
Transactions
Description of Securities..................................... Description of Capital Stock;
Plan of Distribution
Interests of Named Experts and Legal Matters
Counsel.......................................................
Disclosure of Commission Position Disclosure of Commission
on Indemnification for Securities Position on Indemnification for
Act Liabilities............................................... Securities Act Liabilities
Organization Within Last Five *
Years.........................................................
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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 Accountants........................................ Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure
</TABLE>
*Inapplicable or none.
- 4 -
<PAGE>
PROSPECTUS
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") relate to 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 registered 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 released to and sold
by the Selling Stockholders under certain conditions. As of the date hereof, the
Company has been advised that 325,000 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 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."
- 5 -
<PAGE>
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 January 26, 1998, the last reported sale price of
Common Stock was $.025 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 5, 1998.
- 6 -
<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. On April 13, 1993, the Company acquired all of the issued and
outstanding capital stock of Building Blocks, Inc. ("Building Blocks") for
shares of the Company's Common Stock. Thereafter, Building Blocks 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, and the Company established Building Blocks Franchise Corp.
("BBFC") as a second-tier wholly-owned subsidiary for that purpose.
Primarily as the result of continuing losses and negative cash
flow experienced by Building Blocks, the Company began experiencing a working
capital shortage in the spring of 1996. Despite a number of actions taken to
reduce operating expenses and to generate revenue from franchising, Building
Blocks and BBFC were not able to achieve profitability or to reverse the
negative cash flow by the end of calendar 1996.
Effective January 28, 1997 the outstanding capital stock of
BBFC was sold. The net proceeds from the sale ($43,224) were paid over to
Building Blocks pursuant to an agreement requiring the parent of BBFC to obtain
a general release from Building Blocks to BBFC. On January 31, 1997, Building
Blocks filed a petition for relief under Chapter 11 of Title 11 of the U.S.
Bankruptcy Code ("Chapter 11") in the U.S. Bankruptcy Court for the Southern
District of New York (Case No. 97-B-40684 (BRL)). The petition sought protection
from creditors while Building Blocks attempted 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 February 28, 1997, and pursuant to a Bankruptcy
Court order entered on that date, Building Blocks entered into an Agency
Agreement with a liquidator for the purpose of liquidating its retail inventory.
Building Blocks' ongoing operations include performance of its obligations under
the Agency Agreement; disposition of its furniture, fixtures and equipment, and
collection of receivables all as specified in the February 28, 1997 order; the
negotiation and prosecution of the "Plan" described below; the winding-down of
its retail toy store
- 8 -
<PAGE>
operations; and the general and administrative matters related to the
bankruptcy. On August 8, 1997, Building Blocks submitted a Chapter 11 Plan of
Reorganization (the "Plan") to the Bankruptcy Court which, if approved, would
have resulted in a discharge of Building Blocks from all claims of its
creditors, including the Company; a discharge of the Company from all claims of
Building Blocks and Building Blocks' creditors in exchange for the Company
satisfying Building Blocks' obligations under a store lease (which the landlord
has agreed to settle for $30,000); and the merger of Building Blocks with and
into the Company. The Official Committee of Unsecured Creditors (the
"Committee") in the Chapter 11 proceeding filed objections to certain aspects of
Building Blocks' Reorganization Plan on September 18, 1997. The Company and
Building Blocks are communicating with the Committee in an effort to resolve
these objections and to produce a mutually agreeable Chapter 11 Plan. It is
expected that a hearing on the disclosure statement regarding the Plan will be
convened by the Bankruptcy Court by the middle of February 1998 and the Plan, as
it may be revised, could be confirmed 25 days later.
The Company has only limited cash and had current liabilities
in excess of $600,000 at January 26, 1998. As part of the negotiated revisions
to the Plan, the Company will seek credit for funding the settlement of the
above-referenced store lease but may also agree to issue shares of its Common
Stock to settle additional creditor claims and/or to make payments to Building
Blocks and/or to the creditors of Building Blocks. The Company may also be
required, at some future date, to issue up to 213,333 shares of its Common Stock
to certain parties. See "Business-Settlement of Legal Proceedings." The Company
has recorded a non-current liability on its books in the amount of $80,000 in
connection with this obligation.
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 three
beneficial owners of its capital stock (the "Stockholders") in order to meet its
operating expenses and has been obtaining forbearances from its principal
creditors. At January 26, 1998, the advances from Stockholders aggregated
approximately $392,251, plus accrued interest thereon at 8% per annum. There are
no assurances as to the time or extent that the Stockholder advances and/or
forbearance will continue.
The foregoing raise substantial doubt about the Company's
ability to continue as a going concern. (See "Management's Discussion and
Analysis" and "Financial Statements.")
- 9 -
<PAGE>
The Company is attempting to attract an operating business
with which to effectuate a business combination. There is no assurance that any
business combination can ever be effectuated, and any such combination may
depend, among other things, upon the outcome of Building Blocks' Chapter 11
Petition and 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. (See "Risk Factors").
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 477
Madison Avenue, 14th Floor, New York, New York 10022. Telephone: (212) 872-9684.
The Offering
- ------------
Pursuant to the terms of a Settlement Agreement, the Company
issued an aggregate of 650,000 Shares to the Selling Stockholders (as defined
below) and reserved for issuance 213,333 Shares which are held by an escrow
agent (the "Escrow Agent"). 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 the Registration Rights Agreement, the Company filed
with the Securities and Exchange Commission a registration statement to permit
the transfer or resale of the shares issued and issuable pursuant to the
Settlement Agreement and agreed to maintain the effectiveness of the
registration statement until the earlier of the disposition of such shares or
the expiration of the applicable Rule 144 holding period. See "Business -
Settlement of Legal Proceedings," "Selling Stockholders," "Plan of
Distribution."
The following table sets forth the number of Shares originally
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, as of the date hereof, neither of the
Selling Stockholders owns any shares of Common Stock other than the 325,000
Shares issued to Howard Green pursuant to the settlement and 366 unrelated
shares of Common Stock owned of record by Peter Sayet.
- 10 -
<PAGE>
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 held by the escrow agent
secure the Company's obligations 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 all 325,000 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 beneficial owners of its capital stock to make advances to finance its
working capital needs and the forbearance of its unaffiliated creditors who, at
January 26, 1998, were owed in excess of $300,000. 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 of Financial Condition and Results of Operations" for a further
discussion of these factors.
- 11 -
<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 Building Blocks' retail toy stores have
been closed. Building Blocks continues 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.
Building Blocks 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; and has current
payables to non-affiliated creditors in excess of $300,000. The Company has been
receiving demand loans from the 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.
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 taxable income 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 OTC Bulletin
Board. It is likely that any attempt to sell a substantial number of shares in
that market will have an adverse effect on the bid price for the Common Stock.
- 12 -
<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 of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Statement of Operations Year Ended 13 Weeks Ended
---------------------------- ------------------------------
Data: June 29, 1997 June 30, 1996 Sept. 28, 1997 Sept. 29, 1996
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales................ $2,457,846 $7,126,444 $ 1 $1,247,293
Net loss................. (1,435,906) (3,378,668) (88,083) (757,648)
Net loss per share....... (.16) (.40) (.01) (.09)
Balance Sheet Data
(at end of period):
Cash..................... $32,156 $38,892
Working capital (464,937) (552,839)
(deficit)................
Total assets............. 53,318 49,323
Stockholders' (541,684) (629,767)
deficit..................
</TABLE>
- --------------------------
1 The Company currently does not have any revenue-producing operations. See
"Risk Factors."
- 13 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Set forth below is a discussion of (1) the Company's lack of
liquidity and capital resources, and (2) the significant factors affecting the
operating results of discontinued operations, including the items set forth
under "Other income (expenses)" in the Company's Annual and Interim Consolidated
Financial Statements appearing elsewhere herein. This discussion should be read
in conjunction with such Consolidated Financial Statements and notes thereto.
The reported results of operations are not indicative of
future results of operations or financial position of the Company. The Company
has no ongoing revenue-generating operations. The financial statements have been
prepared in accordance with generally accepted accounting principles applicable
to a going concern, which principles 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 Company's lack of capital resources or ongoing operations as
described below.
Annual Financial Statements
---------------------------
Liquidity and Capital Resources
- -------------------------------
Certain of 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 principal operating subsidiary of the Company during
Fiscal 1996 and Fiscal 1997 (through January 31, 1997) was Building Blocks,
which the Company acquired on April 13, 1993 and which thereafter operated a
chain of specialty retail toy stores. BBFC was organized subsequent to June 30,
1996, as a second-tier subsidiary, and was engaged in marketing and selling
franchises for Building Blocks stores.
Primarily as the result of continuing losses and negative cash
flow experienced by Building Blocks, the Company began experiencing a working
capital shortage in the spring of 1996. Despite a number of actions taken to
reduce operating expenses and to generate revenue from franchising, Building
Blocks and BBFC were not able to achieve profitability or to reverse the
negative cash flow by the end of calendar 1996.
- 14 -
<PAGE>
Effective January 28, 1997 the outstanding capital stock of
BBFC was sold. The net proceeds from the sale ($43,224) were paid over to
Building Blocks pursuant to an agreement requiring the parent of BBFC to obtain
a general release from Building Blocks to BBFC. On January 31, 1997, Building
Blocks filed a petition for relief under Chapter 11. The petition sought
protection from creditors while Building Blocks attempted 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 February 28, 1997, and pursuant to a Bankruptcy
Court order entered on that date, Building Blocks entered into an Agency
Agreement with a liquidator for the purpose of liquidating its retail inventory.
Building Blocks' ongoing operations include performance of its obligations under
the Agency Agreement; disposition of its furniture, fixtures and equipment, and
collection of receivables all as specified in the February 28, 1997 order; the
negotiation and prosecution of the Plan as described below; the winding-down of
its retail toy store operations; and the general and administrative matters
related to the bankruptcy. On August 8, 1997, Building Blocks submitted a
Chapter 11 Plan of Reorganization to the Bankruptcy Court which, if approved,
would have resulted in a discharge of Building Blocks from all claims of its
creditors, including the Company; a discharge of the Company from all claims of
Building Blocks and Building Blocks' creditors in exchange for the Company
satisfying Building Blocks' obligations under a store lease (which the landlord
has agreed to settle for $30,000); and the merger of Building Blocks with and
into the Company. The Official Committee of Unsecured Creditors (the
"Committee") in the Chapter 11 proceeding filed objections to certain aspects of
Building Blocks' Reorganization Plan on September 18, 1997. The Company and
Building Blocks are communicating with the Committee in an effort to resolve
these objections and to produce a mutually agreeable Chapter 11 Plan. It is
expected that a hearing on the disclosure statement regarding the Plan will be
convened by the Bankruptcy Court by the middle of February 1998 and, subject to
the outcome of this hearing, the Plan may be confirmed 25 days later.
The Company has only limited cash and had current liabilities
of approximately $515,000 at June 29, 1997. As part of the negotiated revisions
to the Plan the Company will seek credit for funding the settlement of the
above-referenced store lease but may also agree to issue shares of its Common
Stock to the creditors of Building Blocks and/or to settle additional creditor
claims and/or to make payments to Building Blocks. The Company may also be
required, at some future date, to issue up to 213,333 shares of its Common Stock
pursuant to the settlement agreement described in "Business - Settlement of
Legal Proceedings." In connection with this obligation, the Company has recorded
a non-current liability on its books in the amount
- 15 -
<PAGE>
of $80,000, measured by the difference between the settlement amount of $650,000
and the market value of the shares actually issued on August 22, 1996 as part of
the settlement. (See Note 7B to the Consolidated Financial Statements.)
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 the
Stockholders in order to meet its operating expenses and has been obtaining
forbearances from its principal creditors. At June 29, 1997 the advances from
the Stockholders (which are included in the current liabilities described above)
aggregated $154,251 plus accrued interest of $3,217 at the rate of 8% per annum.
There are no assurances as to the time or extent that the Stockholders' advances
and/or forbearance will continue.
As a result of these matters, the report of the Company's
independent auditor on the Company's June 29, 1997 financial statements contains
a "going concern" explanatory paragraph.
The Company is attempting to attract an operating business
with which to effectuate a business combination. There is no assurance that any
business combination can ever be effectuated, and any such combination may
depend, among other things, upon the outcome of Building Blocks' Chapter 11
Petition and upon the Company's ability to reach settlements of its outstanding
obligations.
Results of Discontinued Operations -- 52-week period ended
- ----------------------------------------------------------
June 29, 1997 compared with the corresponding period ended
- ----------------------------------------------------------
June 30, 1996
- -------------
Operations
- ----------
Net sales, substantially all of which were generated by
Building Blocks, were $2,457,846 for the 52-week period ended June 29, 1997, a
decrease of approximately 65% when compared with $7,126,444 for the
corresponding period ended June 30, 1996. This decrease in net sales was due
principally to the decreased number of stores operated by Building Blocks
through January 31, 1997, after which the results of Building Blocks' operations
are no longer consolidated with the Company, and the Company's lack of working
capital to purchase holiday season inventory.
Gross Profit as a percentage of net sales decreased from
approximately 42% for the 52-week period ended June 30, 1996 to approximately
35% for the 52-week period ended June 29, 1997. This is primarily the result of
price discounting associated with the closing of stores during the fiscal 1997
period.
- 16 -
<PAGE>
Selling, general and administrative expenses consist primarily
of payroll, occupancy and advertising expenses associated with the Building
Blocks stores. Such expenses were approximately 105% of net sales and
approximately 74% of net sales during the 52-week periods ended June 29, 1997
and June 30, 1996, respectively. This increase as a percentage of sales is
primarily due to the decline in revenue and the existence of fixed overhead
expenses.
Store Closing Costs and Related Expenses
- ----------------------------------------
For the fiscal years ended June 29, 1997 and June 30, 1996,
the Company recorded restructuring and other expense charges of $520,420 and
$660,767, respectively, for the disposition of fixed assets and other costs
related to the closing or expected closings of certain mall stores.
Other Income (Expenses)
- -----------------------
In fiscal 1997 the Company recorded a $44,406 gain on the sale
of its equity investment in CM Franchise Corp., an unaffiliated franchiser of
retail carpet stores. Such gain results from the Company transferring its rights
and interests in the investee's common stock with a recorded value of $179,744
in satisfaction of a $224,150 debt. In fiscal 1996 the Company recorded its
proportionate share of the investee's loss against the $224,150 original
acquisition cost of the investment. See "Certain Relationships and Related
Transactions" and Note 5 to the Consolidated Financial Statements.
Effective January 28, 1997 the outstanding stock of BBFC was
sold at a gain of $43,224.
The Company had interest income of $1,624 in 1997 and $110,437
in 1996, earned principally on interest-bearing cash accounts. In 1997, $3,333
of interest expense was incurred, principally on stockholder loans; none was
incurred in 1996.
Other income consisting of various items primarily
attributable to Building Blocks is not expected to recur.
The settlement of the guarantor obligation related to the
bankrupt subsidiary represents the amount payable by the Company to a landlord
in settlement of a Building Blocks store lease on which the Company was a
limited guarantor.
The legal settlement relates to the settlement in August 1996
of a litigation in which the Company, without admitting liability, issued an
aggregate of 650,000 shares of the Company's common stock with a market value of
$570,000 on the date of issuance to the plaintiff and his designee. The Company
also gave a limited guarantee of the realization by them of an average of $1 per
share and reserved for issuance and delivered
- 17 -
<PAGE>
to an escrow agent 213,333 of its common shares for such purpose. In fiscal
1997, the Company recorded an additional obligation and expense of $80,000
arising from such guarantee.
The $786,269 gain on the deconsolidation of Building Blocks
reflects the amount of Building Blocks' net deficit at the time of the Chapter
11 filing.
Loss Per Share
- --------------
The loss per share for the year ended June 30, 1996 has been
restated at $.01 higher than previously reported as the result of a correction
to the weighted average number of shares outstanding applicable to such period.
Interim Financial Statements and Subsequent Period
--------------------------------------------------
The following discussion should be read in conjunction with
the discussion of the Annual Financial Statements set forth above.
Liquidity and Capital Resources
- -------------------------------
The Company has only limited cash and had current liabilities
of approximately $599,000 at September 28, 1997. At September 28, 1997 the
advances from stockholders and accrued interest thereon (which are included in
said current liabilities) aggregated $249,321, plus accrued interest thereon at
8% per annum.
Period Subsequent to September 28, 1997
- ---------------------------------------
The Company has only limited cash and had current liabilities
of over $600,000 at January 26, 1998. At January 26, 1998, the advances from the
Stockholders (which are included in said current liabilities) aggregated
$392,251, plus accrued interest thereon at 8% per annum. There remain no
assurances as to the time or extent that the stockholder advances and/or
forbearance will continue.
It is now expected that a hearing on the disclosure statement
regarding the Plan will be convened by the Bankruptcy Court by the middle of
February 1998 and, subject to the outcome of this hearing, the Plan may be
confirmed 25 days later.
Results of Discontinued Operations
- ----------------------------------
The Company currently has no revenue-producing operations and
is attempting to attract an operating business with which to effectuate a
business combination. Such combination, in all likelihood, will be conditioned
upon the resolution of Building Blocks' Chapter 11 proceedings. Other
- 18 -
<PAGE>
than its involvement with these matters, the Company's only activities
subsequent to June 29, 1997 relate to its periodic reporting under the
Securities Exchange Act. The Company continues to incur general and
administrative expenses related to these endeavors.
- 19 -
<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. On April 13, 1993, the Company acquired all of the issued and
outstanding capital stock of Building Blocks for shares of the Company's Common
Stock. Thereafter, Building Blocks 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, and the Company
established BBFC as a second-tier wholly-owned subsidiary for that purpose.
Primarily as the result of continuing losses and negative cash
flow experienced by Building Blocks, the Company began experiencing a working
capital shortage in the spring of 1996. Despite a number of actions taken to
reduce operating expenses and to generate revenue from franchising, Building
Blocks and BBFC were not able to achieve profitability or to reverse the
negative cash flow by the end of calendar 1996.
Effective January 28, 1997 the outstanding capital stock of
BBFC was sold. The net proceeds from the sale ($43,224) were paid over to
Building Blocks pursuant to an agreement requiring the parent of BBFC to obtain
a general release from Building Blocks to BBFC. On January 31, 1997, Building
Blocks filed a petition for relief under Chapter 11 in the U.S. Bankruptcy Court
for the Southern District of New York (Case No. 97-B-40684 (BRL)). The petition
sought protection from creditors while Building Blocks attempted 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 February 28, 1997, and pursuant to a Bankruptcy
Court order entered on that date, Building Blocks entered into an Agency
Agreement with a liquidator for the purpose of liquidating its retail inventory.
Building Blocks' ongoing operations include performance of its obligations under
the Agency Agreement; disposition of its furniture, fixtures and equipment, and
collection of receivables, all as specified in the February 28, 1997 order; the
negotiation and prosecution of the "Plan" described below; the winding-down of
its retail toy store operations; and the general and administrative matters
related to the bankruptcy. On August 8, 1997, Building Blocks submitted to the
Bankruptcy Court the Plan which, if approved, would have resulted in a discharge
of Building Blocks from all claims of its creditors, including the Company; a
discharge of the Company from all claims of Building Blocks and Building Blocks'
creditors in exchange for the Company satisfying Building Blocks' obligations
under a store lease (which the Company and the landlord have
- 20 -
<PAGE>
agreed to settle for $30,000); and the merger of Building Blocks with and into
the Company. The Committee in the Chapter 11 proceeding filed objections to
certain aspects of Building Blocks' Reorganization Plan on September 18, 1997.
The Company and Building Blocks are communicating with the Committee in an
effort to resolve these objections and to produce a mutually agreeable Chapter
11 Plan. It is expected that a hearing on the disclosure statement regarding the
Plan will be convened by the Bankruptcy Court by the middle of February 1998
and, subject to the outcome of this hearing, the Plan may be confirmed 25 days
thereafter.
The Company has only limited cash and had current liabilities in excess
of $600,000 at January 26, 1998. As part of the negotiated revisions to the
Plan, the Company will seek credit for funding the settlement of the
above-referenced store lease but may also agree to issue shares of its Common
Stock to the creditors of Building Blocks and/or to settle additional creditor
claims and/or to make payments to Building Blocks. The Company may also be
required, at some future date, to issue up to 213,333 shares of its Common Stock
to certain parties. See "Settlement of Legal Proceedings." The Company has
recorded a non-current liability on its books in the amount of $80,000 in
connection with this obligation. (See Note 7B to the Consolidated Financial
Statements.)
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 the
Stockholders in order to meet its operating expenses and has been obtaining
forbearances from its principal creditors. At January 26, 1998, the advances
from the Stockholders (which are included in the current liabilities described
above) aggregated $392,251, plus accrued interest at the rate of 8% per annum.
There are no assurances as to the time or extent that the Stockholders' advances
and/or forbearance will continue.
The foregoing raise substantial doubt about the Company's
ability to continue as a going concern. (See "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
The Company is attempting to attract an operating business
with which to effectuate a business combination. There is no assurance that any
business combination can ever be effectuated, and any such combination may
depend, among other things, upon the Company's ability to obtain the release
from Building Blocks contemplated by the Plan, to reach settlements of its
outstanding obligations and the amount of its net operating loss which may be
preserved to offset future taxable income.
- 21 -
<PAGE>
The principal executive offices of the Company are located at
477 Madison Avenue, New York, New York. Telephone: (212) 872-9684.
Employees
- ---------
As of January 26, 1998, the Company had one employee.
Properties
- ----------
The Company occupies approximately 100 square feet of
executive office space in a suite of offices at 477 Madison Avenue, New York,
New York 10022 which is leased by an entity controlled by certain of the
Stockholders. This occupancy is on an at-will basis.
Settlement of Legal Proceedings
- -------------------------------
Peter Sayet v. Institute For Laboratory Medicine. Inc., ILM
-----------------------------------------------------------
Acquisition L.P., M.P. Partners L.P., ILM Acquisition Corporation, LSJM Partners
- --------------------------------------------------------------------------------
L.P., ILM N Corporation, Forest Hill Capital Corporation, Healthcare Venture
- ----------------------------------------------------------------------------
Management Corporation, Selig Zises, Glenn Meyers and Laurence Lurie.
- ---------------------------------------------------------------------
On August 22, 1996, the Company, the plaintiff (Sayet), and
the other parties entered into an Agreement of Settlement and Compromise (the
"Settlement Agreement") of the above-named lawsuit 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. Under the Settlement Agreement, the
Company issued an aggregate of 650,000 shares of its Common Stock to Sayet and a
designee of Sayet's and reserved for issuance 213,333 shares of its Common Stock
which are held by the Escrow Agent (the shares of Common Stock issued pursuant
to the Settlement Agreement, the "Shares"). Pursuant to the requirements of the
Settlement Agreement, the Company also entered into the Registration Rights
Agreement. Pursuant to the Registration Rights Agreement, the Company filed with
the Securities and Exchange 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 holders of the 650,000 Shares (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 the
- 22 -
<PAGE>
entire 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 either to pay the
Shortfall to the Selling Stockholders, up to the amount of the Price Protection
Pool, or to issue to the Selling Stockholders that number of the contingently
issuable shares which have a market value equal to the Shortfall, up to a
maximum of 213,333 Shares. The aforesaid 213,333 contingently issuable shares
have been reserved for issuance and registered in the name of an Escrow Agent.
The Company currently anticipates that its obligation under the guarantee would
be satisfied by the delivery of the required number of escrowed Shares which
delivery would be in complete satisfaction of the Company's obligation under the
Settlement Agreement. As of the date hereof, 325,000 of the Shares have been
sold. No shares have been sold for more than $1.00 per share and the Price
Protection Pool is at $160,000.
Other Legal Proceedings
- -----------------------
Building Blocks is a defendant in a number of legal
proceedings instituted by landlords of various former Building Blocks store
locations. These cases have been stayed by the bankruptcy proceeding and it is
expected that the underlying claims will be extinguished upon the completion of
the bankruptcy proceeding.
Of the aforementioned cases, the Company is a limited
guarantor in Fashion Mall Partners, L.L.P. v. Building Blocks, Inc., City Court
- - Westchester, New York, commenced September 26, 1996. This suit seeks $180,000
for rent arrearages under a lease to Building Blocks which was guaranteed by the
Company, which guaranteed up to $180,000 of rent payments under this lease. The
landlord subsequently filed a Proof of Claim with the Bankruptcy Court in the
amount of approximately $480,000. The Landlord has agreed to settle this claim
and the suit for a payment of $30,000.
- 23 -
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of
January 26, 1998 concerning the directors and executive officers of the Company.
Name Age Position
---- --- --------
Seymour W. Zises 44 Director
Steven E. Glass 37 Secretary
Seymour W. Zises has been a director of the Company since June
1991, and is currently President and Chief Executive Officer of Family
Management Corporation, a registered investment advisory firm in New York City
which he established in September 1989. Mr. Zises also serves as President and
Chief Executive Officer of Forest Hill Capital Corporation, a merchant banking
concern. Mr. Zises is also an officer and a director of RCL Capital Corp., Inc.,
a merchant banking concern, and Disc Graphics, Inc., a product packaging design
company. Prior to his founding Family Management, he was an independent
financial service representative licensed with Integrated Resources Equity
Corporation. Mr. Zises was one of several individual general partners or an
officer or shareholder of a corporate general partner of six real estate limited
partnerships which filed petitions for bankruptcy under Chapter 11 of the United
States Bankruptcy Code between 1990 and February 1993. Mr. Zises serves on the
Board of Trustees of Beth Israel Medical Center in New York City. Mr. Zises is a
graduate of New York University.
Steven E. Glass has been associated with the Company as an
employee or consultant since September, 1995 and was President and Chief
Operating Officer of Building Blocks from April 1, 1996 to January 7, 1997 and
has been Manager of Operations of Building Blocks since the latter date. He has
also been Secretary of the Company since April 1, 1996. From June 1993 until
March 1995, Mr. Glass was Director of Special Projects for EMI Records where he
supervised strategic sales and marketing projects for television, film and
children's music, including the implementation and direction of EMI's "Barney
Music" division. Prior to joining EMI Mr. Glass spent 13 years in municipal
government, including his last position as Special Assistant to the Borough
President of Brooklyn, with responsibility for various business and commercial
development projects.
- 24 -
<PAGE>
EXECUTIVE COMPENSATION
Except for Steven E. Glass, no person who was an operating
officer of the Company at June 29, 1997 received annual salary and bonus which,
in the aggregate, exceeded $100,000 for the fiscal year ended June 29, 1997.
<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>
Steven E. Glass June 29, 1997 $118,125 --- 430,000 ---
Manager of Operations of
Building Blocks and
Secretary of the Company
June 30, 1996 $ 36,779 $60,000 130,000* ---
July 2, 1995 N/A N/A N/A N/A
</TABLE>
- ---------------
* Restructured in fiscal
1997
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 29, 1997.
The following table sets forth certain information as to the
number and value of unexercised stock options held by the named officer at June
29, 1997.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-The-Money Options
Options at June 29, 1997 At June 29, 1997
------------------------ -----------------
Name Exercisable Unexercisable Exercisable* Unexercisable*
---- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Steven E. Glass 430,000 - 0 - --- ---
</TABLE>
* None of the foregoing options were in-the-money at June 29, 1997.
- 25 -
<PAGE>
Steven E. Glass was employed by Building Blocks pursuant to an
employment agreement which became effective April 1, 1996 and expires on
February 28, 1998. The agreement provided for a signing bonus of $10,000 and an
annual salary of $112,500 the first year and $135,000 thereafter, a bonus of 5%
of pre-tax profits before certain extraordinary items, an expenditure by the
Company of up to $1,000 a month to provide a leased vehicle and certain related
automobile expenses for Mr. Glass, and reimbursement of all business-related
expenses. The Company guaranteed Building Blocks' obligations under the
employment agreement.
In January, 1997, the Company and Steven E. Glass entered into
an agreement which, among other things, modified the Company's obligations under
its guarantee. As a result, the Company obtained the right, under certain
circumstances, to employ Mr. Glass on the same economic terms as were provided
in the employment agreement. In June, 1997, the Company exercised this right.
The Company's obligation under the employment agreement terminates if Mr. Glass'
employment is terminated (i) for "cause" as defined, (ii) by Mr. Glass'
withdrawal other than due to non-payment, or (iii) by virtue of Mr. Glass' death
or disability. In all other termination events, the Company will be liable for
Mr. Glass' salary, subject to offset for income earned by Mr. Glass from other
employment. The agreement provides for certain consulting services if required
by the Company subsequent to the expiration or other termination of employment.
In February, 1997, options to purchase 130,000 shares of
Common Stock previously held by Mr. Glass were restructured and he currently
holds an option to purchase up to 430,000 shares of Common Stock at $.05 per
share. Of such options, all of which are vested, 280,000 are exercisable through
January 31, 2003, and 150,000 are exercisable through June 30, 2003.
The Company has agreed to indemnify Steve E. Glass in respect
of claims against him arising from certain statements set forth in the Chapter
11 Petition based upon information provided to him by other persons associated
with the Company or Building Blocks.
- 26 -
<PAGE>
CERTAIN TRANSACTIONS
In July 1996, pursuant to an agreement negotiated between
Selig A. Zises and Kevin R. Greene, the then 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.
During the period from December 23, 1996 through January 26,
1998, the Company borrowed an aggregate of $392,251 from Cathy Zises, Selig
Zises and Seymour Zises. All such loans are evidenced by demand promissory notes
bearing interest at 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.
- 27 -
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of
January 26, 1998, regarding the beneficial ownership of the Company's Common
Stock by (i) all persons known by the Company to own beneficially more than 5%
of its outstanding Common Stock or its outstanding Series A-1 Preferred Stock,
(ii) each director and officer of the Company, and (iii) all directors and
officers of the Company as a group. Unless otherwise stated, the Company
believes that the beneficial owners of the shares listed below have sole
investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address Beneficial Percent of
Title of Class of Beneficial Owner Ownership Class(1)
- -------------- ------------------- --------- --------
<S> <C> <C> <C>
Common Stock Cathy Zises 898,127(2) 9.9%
477 Madison Avenue
New York, New York 10022
Common Stock Lynn Zises 796,317 8.8
477 Madison Avenue
New York, New York 10022
Common Stock Nancy Zises 833,332 9.2
477 Madison Avenue
New York, New York 10022
Common Stock Seymour W. Zises 898,127(2) 9.9
477 Madison Avenue
New York, New York 10022
Common Stock Steven E. Glass 523,000(3) 5.5
477 Madison Avenue
New York, New York 10022
Series A-1 ILM Acquisition L.P. 2,394,130(2) 100.0
Preferred Stock 477 Madison Avenue
New York, New York 10022
Common Stock All directors and officers as a group 1,421,127(2)(3) 14.9
(2 persons)
</TABLE>
(1) Based upon 9,084,238 shares of Common Stock outstanding, which does not
include 213,333 contingently issued shares held by the 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 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
- 28 -
<PAGE>
directly or as custodian by Cathy Zises. Mr. Zises may be deemed the
beneficial owner of such shares. Mr. Zises disclaims such beneficial
ownership. Shares of Series A-l 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, may be deemed to be 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 of the Preferred Stock of the Company.
Nancy Zises is a sister-in-law of Seymour W. Zises and Lynn Zises is
the daughter of Selig Zises.
(3) Includes 430,000 shares of Common Stock purchasable pursuant to a
currently exercisable stock option.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock was quoted on the NASDAQ SmallCap System from
July 1, 1994 through November 26, 1996, and on the OTC Bulletin Board since
November 27, 1996 under the symbol "SRGC". The following table sets forth the
high and low sales prices on the NASDAQ SmallCap System and on the OTC Bulletin
Board as reported by NASDAQ and the OTC Bulletin Board, respectively, for the
periods indicated:
Period High Low
- ------ ---- ---
July 3, 1995 - October 1, 1995 7/8 1/4
October 2, 1995 - January 1, 1996 5/8 1/4
January 2, 1996 - March 31, 1996 31/32 5/16
April 1, 1996 - June 30, 1996 1 1/4 19/32
July 1, 1996 - September 29, 1996 13/16 1/4
September 30, 1996 - December 29, 1996 9/32 .02
December 30, 1996 - March 30, 1997 .07 .015
March 31, 1997 - June 29, 1997 .17 .02
June 30, 1997 - September 28, 1997 .08 .03
September 29, 1997 - December 28, 1997 .04 .01
On January 1, 1998, there were approximately 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.
- 29 -
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock 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.
<TABLE>
<CAPTION>
Percentage of
Name Number of Shares Outstanding Stock
---- ---------------- -----------------
<S> <C> <C>
Peter Sayet(1) 325,000(2) 3.6%
Howard Green(1) 325,000 3.6%
</TABLE>
- ---------------------
(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 all 325,000 of Mr.
Sayet's shares have been sold.
- 30 -
<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, 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
- 31 -
<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 Agreement, 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.
- 32 -
<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
- 33 -
<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.
- 34 -
<PAGE>
EXPERTS
The financial statements as of and for the fiscal year ended
June 29, 1997 included in this Prospectus have been audited by Jeffrey M. Brinn,
CPA, South Huntington, New York, independent certified public accountant, to the
extent and for the period set forth in his report appearing elsewhere herein,
which report contains an explanatory paragraph regarding an uncertainty 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 individual as an
expert in accounting and auditing.
The financial statements 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 period set
forth in their report appearing elsewhere herein, which report contains an
explanatory paragraph regarding an uncertainty 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 accounting and auditing.
LEGAL MATTERS
The validity of the securities offered hereby were passed upon
for the Company by Goodkind Labaton Rudoff & Sucharow LLP, New York, New York.
- 35 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report ................................................F-1
Report of Independent Certified Public Accountants...........................F-2
Consolidated Balance Sheet at June 29, 1997..................................F-3
Consolidated Statements of Operations for the Years Ended
June 29, 1997 and June 30, 1996.....................................F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended June 29, 1997 and June 30, 1996.................F-5
Consolidated Statements of Cash Flows for the Years Ended
June 29, 1997 and June 30, 1996.....................................F-6
Notes to Consolidated Financial Statements...........................F-7 to F-15
Condensed Consolidated Balance Sheet
at September 28, 1997 (Unaudited)..................................F-16
Condensed Consolidated Statements of Operations for the
13-week periods ended September 28, 1997
and September 29, 1996 (Unaudited).................................F-17
Condensed Consolidated Statements of Cash Flows for the
13-week periods ended September 28, 1997
and September 29, 1996 (Unaudited).................................F-18
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................F-19 to F-22
- 36 -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Director and Shareholders
Specialty Retail Group, Inc.
New York, New York
I have audited the accompanying consolidated balance sheet of Specialty Retail
Group, Inc. and Subsidiaries as of June 29, 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
52 weeks then ended. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Specialty Retail Group. Inc. and Subsidiaries, as of June 29, 1997 and the
consolidated results of their operations and cash flows for the 52 weeks then
ended in conformity with generally accepted accounting principles.
As discussed in the following paragraph and in Notes 1, 2 and 3 to the
accompanying consolidated financial statements, in accordance with generally
accepted accounting principles the consolidated reporting entity has been
changed, effective as of January 31, 1997, to exclude the accounts of the
Company's wholly-owned and last remaining operating subsidiary, Building Blocks,
Inc., which filed a petition in bankruptcy on such date.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As further discussed in Notes
1, 2 and 3 to the consolidated financial statements, pursuant to the Chapter 11
bankruptcy filing, the subsidiary has permanently ceased operations and
liquidated its operating assets. The Company has no remaining operating
businesses. None of the subsidiary's assets are expected to remain at the
conclusion of the bankruptcy proceedings. As set forth on the accompanying
consolidated balance sheet at June 29, 1997, the Company has total assets of
$53,318 and deficits in working and equity capital at such date of $464,937 and
$541,684, respectively. Such factors coupled with the lack of any revenue
producing operations raise substantial doubt about the Company's ability to
continue as a going concern. As also discussed in Note 2, management of the
Company is seeking a business combination with an operating company. There is no
assurance that management will be successful in such endeavor. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary in the event the Company
cannot continue in existence.
/s/ Jeffrey M. Brinn
---------------------------
Certified Public Accountant
South Huntington, New York
November 4, 1997
F-1
<PAGE>
Report of Independent Certified Public Accountants
To The Board of Directors and Stockholders of
Specialty Retail Group, Inc.
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Specialty Retail Group, Inc. and Subsidiary for the year ended
June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of the operations and cash flows
of Specialty Retail Group, Inc. and Subsidiary for the year ended June 30, 1996,
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. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
- --------------------
New York, NY
September 20, 1996
F-2
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 29, 1997
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash $ 32,156
Prepaid insurance 17,909
------------
Total current assets 50,065
Property and equipment, net (Notes 1F and 4) 3,253
------------
Total assets $ 53,318
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 312,164
Lease guarantee settlement payable (Note 3) 30,000
Corporation taxes payable 5,370
Demand loans payable to stockholders (Note 6A) 157,468
Due to unconsolidated subsidiary (Note 2) 10,000
------------
Total current liabilities 515,002
Other liabilities:
Legal settlement (Note 7B) 80,000
------------
Total liabilities 595,002
------------
Commitments and contingencies (Notes 2, 3, 7, 8 and 9)
Stockholders' deficit:
Series A-1 Preferred Stock; 10,000,000 shares authorized; $.001 par value;
issued and outstanding, 2,394,130 shares (Note 7A) 2,394
Common stock; 100,000,000 shares authorized; $.001 par value; 9,324,738
shares issued (Note 7B) 9,325
Additional paid-in capital 11,573,570
Accumulated deficit (11,951,309)
Treasury stock, 240,500 shares at cost (Note 1L) (175,664)
------------
Total stockholders' deficit (541,684)
Total liabilities and stockholders' deficit $ 53,318
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------
June 29, 1997 June 30, 1996
------------------ ----------------
<S> <C> <C>
Results of Discontinued Operations:
Net sales $ 2,457,846 $ 7,126,444
Cost of sales 1,602,663 4,136,490
----------- -----------
Gross profit 855,183 2,989,954
----------- -----------
Operating costs:
Selling, general and administrative expenses 2,587,603 5,302,821
Store closing costs and related expenses (Note 11) 520,420 660,767
----------- -----------
3,108,023 5,963,588
----------- -----------
Loss from operations (2,252,840) (2,973,634)
Other income (expenses):
Gain on sale of (loss attributable to) equity
investment (Notes 5 and 6B) 44,406 (44,406)
Gain on sale of franchising subsidiary (Note 2) 43,224 -
Interest income (expense), net of income of
$1,624 in 1997 (1,709) 110,437
Other income 54,744 124,955
Settlement of guarantor obligation related to
bankrupt subsidiary (Note 3) (30,000) -
Legal settlement, non-cash (Note 7B) (80,000) (570,000)
Gain on deconsolidation of bankrupt subsidiary
(Note 3) 786,269 -
----------- -----------
Loss before income taxes (1,435,906) (3,352,648)
Income tax expense (Notes 1K and 9) - 26,020
----------- -----------
Net loss $(1,435,906) $(3,378,668)
=========== ===========
Net loss per share (Note 1L) $ (.16) $ (.40)
----------- -----------
Weighted average number of common shares
outstanding (Note 1L) 8,991,635 8,434,238
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
SPECIALTY RETAIL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
52 WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------- -----------------
Additional Total
Number of Number of Paid-in Accumulated Treasury Stockholders'
Shares Amount Shares Amount Capital Deficit Stock Equity (Deficit)
--------- ------ --------- ------ ---------- ----------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
July 2, 1995 2,394,130 $2,394 8,674,738 $8,675 $11,004,220 $ (7,136,735) $(175,664) $ 3,702,890
Net loss - - - - - (3,378,668) - (3,378,668)
--------- ------ --------- ------ ----------- ------------ --------- -----------
Balance, June 30,
1996, 2,394,130 2,394 8,674,738 8,675 11,004,220 (10,515,403) (175,664) 324,222
Shares issued for
legal settlement
(Note 7B) - - 650,000 650 569,350 - - 570,000
Net loss (1,435,906) (1,435,906)
--------- ------ --------- ------ ----------- ------------ --------- -----------
Balance, June 29,
1997 2,394,130 $2,394 9,324,738 $9,325 $11,573,570 $(11,951,309) $(175,664) $ (541,684)
========= ====== ========= ====== =========== ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------
June 29, 1997 June 30, 1996
------------------ ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,435,906) $(3,378,668)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 47,674 307,248
Writeoff of goodwill 136,882 -
Loss on disposal of equipment and writeoff
of leasehold improvements 330,776 699,674
Loss (gain) attributable to equity investment (44,406) 44,406
Gain on sale of subsidiary (43,224) -
Gain on deconsolidation of bankrupt subsidiary (786,269) -
Legal settlement 80,000 570,000
Decrease (increase) in:
Inventory 846,777 120,099
Other current assets 86,863 (11,213)
Other assets 89,027 (45,116)
Increase (decrease) in:
Accounts payable and accrued liabilities (46,514) (496,330)
Lease guarantee settlement payable 30,000 -
----------- -----------
Total adjustments 727,586 1,188,768
----------- -----------
Net cash used in operating activities (708,320) (2,189,900)
----------- -----------
Cash flows from investing activities:
Cash of bankrupt subsidiary at date of
bankruptcy (64,541) -
Expenditures for property and equipment, net (3,614) (112,132)
Proceeds from sale of subsidiary, net 43,224 -
Equity investment (Note 5) - (224,150)
----------- -----------
Net cash used in investing activities (24,931) (336,282)
----------- -----------
Cash flows from financing activities:
Loans from stockholders 378,401 -
----------- -----------
Net cash provided by financing activities 378,401 -
----------- -----------
Net decrease in cash and cash equivalents (354,850) (2,526,182)
Cash and cash equivalents, beginning of year 387,006 2,913,188
----------- -----------
Cash and cash equivalents, end of year $ 32,156 $ 387,006
=========== ===========
Supplemental disclosure of cash flow information
(Note 10)
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization
Specialty Retail Group, Inc. (the "Company") is a holding company that
was engaged in the operation and franchising of retail specialty toy
stores. In July 1996, the Company capitalized a newly-formed
wholly-owned subsidiary, Building Blocks Holdings, Inc., ("BBHI"),
which formed and subsequently sold Building Blocks Franchise Corp.,
("BBFC"). Prior to its sale to unrelated parties in January 1997, BBFC
sold two Building Blocks retail store franchises.
As discussed in Notes 2 and 3, as of January 31, 1997 the Company had
sold or discontinued all business operations and its subsidiary,
Building Blocks, Inc., ("BBI"), filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. The only current operations are
the general and administrative costs related to the bankruptcy,
maintaining a business office and complying with its reporting
obligations as a publicly-owned company. The Company is seeking
opportunities for business combinations.
B. Basis of Consolidation and Financial Statement Presentation
The consolidated financial statements include the accounts of the
Company and its Subsidiaries, BBHI and SRG Management Corp., neither of
which has any present operations. The results of operations of BBFC and
BBI are included through the date of the sale of BBFC and BBI's
bankruptcy filing, respectively. All significant intercompany balances
and transactions have been eliminated in consolidation. The Company
recorded a gain of $786,269 upon the deconsolidation of BBI. (See Note
3). As discussed above, the Company has discontinued all of its
revenue-producing business operations. Except as specifically noted, no
adjustments have been made to revalue assets or liabilities. All
operations are reported as results of discontinued operations.
C. Cash Equivalents
Cash equivalents for purposes of reporting cash flows consisted
principally of treasury securities and highly liquid money market
accounts purchased with an original maturity of three months of less.
Such accounts were carried at cost plus accrued interest, which
approximated market.
D. Inventories
Inventories were stated at the lower of cost, determined by the retail
inventory method on the first-in, first-out (FIFO) basis.
E. Store Opening and Closing Costs
The Company had deferred store pre-opening costs, expensing such
amounts over a 12-month period. Unexpired store pre-opening costs were
written off and additional costs associated with a store closing were
accrued when the decision was made to close the location.
F. Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of 3 to 7
years. Leasehold improvements had been amortized over 10 years or the
related lease term, whichever was shorter. Applicable property and
equipment were written off as stores were closed and the assets were
abandoned or sold.
G. Goodwill
The excess of purchase price over the fair value of net assets acquired
was amortized on the straight-line method over 15 years. Due to BBI's
bankruptcy and the sale of BBFC, the Company determined that goodwill
had no future value and wrote off the balance of $136,882 at December
29, 1996.
F-7
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
H. Long-Lived Assets
Statement of Financial Accounting Standards No. 121 requires a review
of long-lived assets and certain identifiable assets related to those
assets for impairment whenever changed circumstances and situations
indicate that the carrying amounts may not be recoverable. If the
undiscounted future cash flows are less than the assets' carrying
amounts, their carrying amounts are reduced to fair value and an
impairment loss is recognized. Applicable write downs were recorded at
December 29, 1996.
I. Stock Options
The Company, consistent with generally accepted accounting principles,
accounts for stock options pursuant to the intrinsic value method
specified by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," whereunder compensation cost is not
recognized as long as the exercise price of the option equals or
exceeds the fair value of the underlying stock on the date of grant.
In October
1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires that the fair value of stock options be
measured on the date of grant using an applicable statistically-based,
market-sensitive, computerized financial model. However, this
pronouncement allows companies to continue to account for stock options
under the previous intrinsic value method as long as they disclose the
pro-forma effects as if the new method had been adopted. (See Note 8).
J. Revenue Recognition
Revenue from sales of the Company's products was recognized at the time
of sale.
K. Income Taxes
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes," which requires the use of the liability method.
Under this 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 or 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. (See Note 9).
L. 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 1997 and 1996
computations as their effect would be antidilutive during these
periods. The weighted average number of shares outstanding for fiscal
1996 has been restated to reflect the effect of 240,500 shares held in
the treasury throughout such period. Such shares were acquired during
fiscal 1995. The effect of 213,333 shares issuable pursuant to a
settlement of litigation in August 1996 is not reflected as it is also
antidilutive. (See Note 7B). It is not anticipated that the Company's
per share data will be materially affected by application of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share," issued
in February 1997 and effective for annual and interim periods ending
after December 15, 1997.
M. Fiscal Year
The Company has a 52/53 week fiscal year ending on the Sunday closest
to June 30. Fiscal 1997 and 1996 each consisted of 52 weeks.
F-8
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
N. Fair Value of Financial Instruments
The carrying amounts of cash, other current assets, accounts payable
and accrued liabilities approximate fair value because of the short
maturity of these items.
O. 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.
NOTE 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.
On January 31, 1997, BBI 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 sought protection from
creditors while BBI liquidated its inventory and fixtures. Effective January 28,
1997 the outstanding capital stock of BBFC, which owns the "Building Blocks"
trademarks, was sold by BBHI. The net proceeds from the sale were used first to
repay amounts owed by BBFC to the Company and BBI. The remainder of the proceeds
of approximately $10,000 is payable to BBI pursuant to an agreement under which
BBHI obtained a general release from BBI. The Company recognized a gain of
$43,224 on the sale of BBFC.
The Company, which has no other business operations, is seeking to locate an
operating business with which to effectuate a business combination. At June 29,
1997, the Company has $53,318 of assets and $515,002 of liabilities, excluding
$80,000 of liabilities which are payable through the issuance of 213,333 shares
of common stock. (See Note 7B). The Company has been receiving cash advances in
the form of demand loans from three of its stockholders in order to meet its
operating expenses and has been obtaining forbearances from its principal
creditors. At June 29, 1997 such advances (which are included in the liabilities
described above) aggregated $154,251 plus accrued interest of $3,217. 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
outcome of BBI's Chapter 11 reorganization plan and 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.
NOTE 3 - BANKRUPTCY OF BBI SUBSIDIARY
As discussed in Notes 1A and 2, BBI filed a petition for relief under Chapter 11
of the U.S. Bankruptcy Code on January 31, 1997. In a 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 filed by the debtor as of the date of the filing showed that
liabilities exceeded assets by approximately $800,000. Differences between
amounts shown by the debtor and claims filed by creditors are 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, is not presently determinable.
F-9
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BANKRUPTCY OF BBI SUBSIDIARY (continued)
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. BBI
rejected all of its leases and contracts other than an employment agreement with
one officer, which contract was assigned to, and assumed by the Company. 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. All assets of the debtor have
either been sold or written down to a realizable value. Based on such values,
both the Company and BBI have determined that none of BBI's assets will be
distributable to the Company.
Upon the filing of its Chapter 11 petition, the accounts of BBI were no longer
consolidatable with that of the Company. The Company recorded a gain on the
deconsolidation of $786,269, measured by the net deficit in the subsidiary at
the time of filing. The carrying value of the Company's investment in BBI had
previously been written down to zero. Subsequent to June 29, 1997 the Company
agreed to settle an obligation arising from its limited guarantee of a BBI lease
by agreeing to pay $30,000 to the claimant landlord in exchange for a complete
release of all claims by the landlord against BBI and the Company. Such claims
by the landlord totaled $478,000 against BBI, of which the Company was liable
for up to $180,000. The $30,000 liability payable to the landlord in
satisfaction of the Company's contingent obligation as limited guarantor has
been accrued at June 29, 1997. In addition, a release of all claims by BBI
against the Company is being sought in the bankruptcy proceedings. Bankruptcy
Court approval is required for releases given either to or from BBI. Further, as
part of negotiated revisions to BBI's plan of reorganization, the Company may
agree to settle other claims against BBI and/or make payments to or on behalf of
BBI and/or issue shares of the Company's common stock to BBI's creditors.
The proposed release by BBI of all claims it may have against the Company will
include a release of a possible claim which arose subsequent to the filing of
the bankruptcy petition by BBI. Such claim, if it is asserted by BBI's
Creditors' Committee, will have arisen in the Company's opinion from unaudited
financial information previously filed with the Bankruptcy Court. Such unaudited
financial information erroneously reported an intercompany receivable due from
the Company to BBI in the amount of $220,000. The Company has determined that
such receivable should not have been reported as outstanding in reports to the
Bankruptcy Court as it should properly have been offset by or deemed paid by
amounts in excess of $6,000,000 loaned to and/or invested in BBI by the Company.
The Company does not believe that the Court will uphold any such claim if one is
made against the Company by the Creditors' Committee.
The ultimate outcome of these matters are presently not determinable.
Capsule balance sheet information of BBI at June 29, 1997 is as follows:
Cash, including $262,919 in escrow $ 265,208
Due from affiliate (BBHI) 10,000
Other current assets 7,272
Security deposits 14,228
-----------
Total assets $ 296,708
===========
Accounts payable and accrued expenses $ 148,173
Liabilities subject to compromise 1,520,021
-----------
Total liabilities $ 1,668,194
===========
Stockholder's deficit $(1,371,486)
===========
F-10
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
This account consists of furniture, fixtures and equipment, net of accumulated
depreciation of $59,299.
NOTE 5 - 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 $224,150 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 $44,406 gain on this
transaction. (See Note 6B).
NOTE 6 - RELATED PARTY TRANSACTIONS
A. Demand Loans Payable to Stockholders
Since December 23, 1996, the Company has received cash advances in the
form of demand loans from three of its stockholders bearing interest at
8% per annum. The total amount due stockholders at June 29, 1997 was
$157,468, including accrued interest of $3,217.
B. Transfer of Equity Interest in Satisfaction of Stockholder Loan
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 which was subsequently repaid. (See Note 5).
C. Other
On November 17, 1995, the Company invested in a series of promissory
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
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. (See Note 7A).
NOTE 7 - COMMITMENTS AND CONTINGENCIES
A. Terms and Preferences of Preferred Stock
The Series A-1 Preferred Stock pays no dividends or interest and is not
convertible into common stock. It has a liquidation preference of $.001
per share, is redeemable at $.001 per share and votes on the basis of
one vote per share with the holders of the common stock, as a single
class, on all matters presented to stockholders.
F-11
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
B. Legal Settlement - Issuance of Common Stock
The Company was a party defendant in a lawsuit with a former officer,
director and shareholder of the Company's predecessor corporation 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 a termination payment of $1,400,000
pursuant to an employment agreement with the Company. In 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 accordingly recorded a
noncash expense of $570,000 which appears as "Legal Settlement,
non-cash" in the accompanying consolidated statement of operations for
the year ended June 30,1996. Such non-cash expense is based on the
market value of the Company's common stock at the time of issuance.
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 issuance to the holders of an additional 213,333 common shares
currently being held by an escrow agent. The agreement further provides
for the Company to receive 67% of the excess over $650,000, if any, of
proceeds received by the plaintiff and his designee from market sales
of the shares. For the year ended June 29, 1997, the Company has
recognized an additional obligation and expense of $80,000 related to
the settlement arising from its agreement to guarantee the shortfall.
C. Lease Commitments
The Company presently has no operating lease commitments. The Company
currently occupies office space on a month-to-month basis in premises
leased by an entity controlled by certain of the Company's principal
stockholders. Rent expense for store and office leases approximated
$596,000 and $1,214,000 for the fiscal years ended June 29, 1997 and
June 30, 1996, respectively.
D. Employment Agreement
The Company has an employment agreement with its sole officer/employee.
Such agreement is for the 23 months ending February 28, 1998. As of
June 29, 1997, base compensation payable for the remainder of the
employment term aggregates $90,000. The officer also receives an
automobile allowance of $1,000 per month, reimbursement of reasonable
expenses and fringe benefits of the type usually provided to corporate
officers. The agreement contains standard confidentiality covenants and
provides for certain consulting services if required by the Company
subsequent to the termination of employment. A related agreement
provides for the officer's indemnification under certain conditions.
NOTE 8 - 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 29, 1997, an aggregate
of 770,000 shares remain available for future grant of options under the Plans.
F-12
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK OPTION PLANS (continued)
Nonqualified stock option activity has been as follows:
<TABLE>
<CAPTION>
Number of Exercise price
shares per share
--------- --------------
<S> <C> <C>
Outstanding at July 2, 1995 560,000 $1.00 to $2.31
Granted 130,000 $. 75 to $1.00
Expired/canceled (100,000) $1.00 to $1.50
Exercised - -
-------- --------------
Outstanding at June 30, 1996, of
which 466,667 were exercisable 590,000 $ .75 to $2.31
-------- --------------
Granted:
Conditional, subsequently forfeited 80,000 $1.25 to $2.00
Fully vested at year-end 430,000 $ .05
Canceled and/or forfeited:
Outstanding, beginning of year (590,000) $ .75 to $2.31
Granted during year (80,000) $1.25 to $2.00
Exercised during year - -
-------- --------------
Outstanding and exercisable, June 29, 1997 430,000 $.05
======== ==============
</TABLE>
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 prior
to the 430,000 options exercisable at June 29, 1997 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.
On February 1, 1997, the Company granted non-qualifying options to purchase
430,000 shares, exercisable at $.05 per share, which price exceeded the market
price of the Company's shares at the date of grant. At June 29, 1997, all of
such options were fully vested. Of such options, all of which are held by the
Company's sole officer/employee, 280,000 may be exercised until January 31, 2003
and 150,000 may be exercised until June 30, 2003. Such exercise rights shall
survive the termination of the officer/employee's employment as well as the
merger, corporate reorganization or acquisition of the Company.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" requires use of option valuation
models that were not developed for use in valuing employee and compensatory
stock options. Under APB 25, because the exercise price of the Company's stock
option equals or exceeds the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Pro-forma information regarding
net income and earnings (loss) per share is required by Statement 123, and has
been determined as if the Company had accounted for its stock options under the
fair value method of that Statement. The fair value of non-conditional options
granted in fiscal 1997 and 1996 was estimated at the date of each grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
1997 1996
---- ----
Weighted average expected life of options 4.0 4.0
Risk free interest rate 6.0% 6.0%
Dividend yield 0.0% 0.0%
Volatility factor 160.0% 169.0%
F-13
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK OPTION PLANS (continued)
The conditional options granted in 1997, which were to vest incrementally in
proportion to the number of Building Blocks franchises sold by BBFC, were not
susceptible of fair value measurement due to the impossibility of quantifying
the likelihood of their being exercised; accordingly they are not considered to
be stock options giving rise to compensation expense as defined by the
Statement. Such options were forfeited in fiscal 1997 due to the termination of
their holders' employment. Under the Black-Scholes option pricing model used by
the Company, the 430,000 options granted on February 1, 1997 each had a fair
value of $.05.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options. However, if compensation cost had been determined on
the basis of the Statement for the non-conditional options issued in fiscal 1997
and 1996, net loss and loss per share (both primary and fully diluted) would
have changed as follows:
1997 1996
---------------------- ----------------------
Reported Pro-forma Reported Pro-forma
-------- --------- -------- ---------
Net loss $(1,435,906) $(1,457,406) $(3,378,668) $(3,467,768)
=========== =========== =========== ===========
Loss per share $ (.16) $ (.16) $ (.40) $ (.41)
=========== =========== =========== ===========
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
52 Weeks Ended
----------------------------------
June 29, 1997 June 30, 1996
------------- -------------
Currently payable:
Federal $ - $ -
State - 26,020
-------- --------
- 26,020
-------- --------
Deferred:
Federal - -
State - -
-------- --------
- -
-------- --------
Total $ - $ 26,020
======== ========
The Company files a consolidated federal tax return including all of its
subsidiaries. Consolidated taxable losses in fiscal 1997 and 1996 provided no
income tax benefits in either year. The Company has not yet filed its tax
returns for fiscal 1996. However, no federal income tax was incurred in 1996 and
virtually all of the state tax liabilities had been prepaid; any minor balances
payable were accrued as applicable.
At June 29, 1997, the Company has net operating loss carryforwards of
approximately $13,475,000 available for federal and state income tax purposes
expiring over the next five to fifteen years, depending on the jurisdiction.
Such loss carryforwards give rise to a deferred tax asset of $5,929,000 at June
29, 1997, all of which is offset by an equivalent valuation allowance. The
valuation allowance increased by $1,184,000 and $1,678,000 in fiscal 1997 and
1996, respectively.
F-14
<PAGE>
SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
In fiscal 1997 the Company had the following non-cash investing and financing
activities: Issued common stock with a fair value of $570,000 in partial
settlement of a liability; distributed an equity investment as repayment of a
$224,150 loan from a stockholder; and wrote off property and equipment with a
net book value of $330,776. The Company paid approximately $35,000 for income
taxes during the 52 weeks ended June 30, 1996. None was paid in fiscal 1997. The
Company paid interest expense of $3,333 in fiscal 1997.
NOTE 11 - STORE CLOSING AND OTHER EXPENSES
Store closing and other expenses consist of:
1997 1996
---- ----
Disposition of property and equipment
including related costs of $52,762 $212,712 $660,767
Write off of leasehold improvements 170,826 -
Write off of goodwill 136,882 -
-------- --------
Total $520,420 $660,767
======== ========
NOTE 12 - UNAUDITED QUARTERLY FINANCIAL INFORMATION
A. Restatement of March 30, 1997 Unaudited Financial Statements
The Company's unaudited financial statements as filed on its quarterly
Form 10-QSB report as of and for the 39 weeks ended March 30, 1997
included BBI's balance sheet at such date and its results of operations
for the entire period. The Company has filed a Form 10-QSB/A amending
its March 1997 quarterly report to deconsolidate BBI's balance sheet
and operations after the filing of its bankruptcy petition. The amended
unaudited consolidated balance sheet of the Company and its
consolidated subsidiaries reported on such Form 10-QSB/A at March 30,
1997 reflects current and total assets of $57,480 and $60,958,
respectively, and current and total liabilities of $421,288 and
$501,288, respectively. As a result of the deconsolidation,
stockholders' deficit was reduced from $1,741,760 to $440,330. The
related amended unaudited consolidated statements of operations for the
13 and 39 weeks then ended reflect quarterly net income of $698,540 and
a year-to-date net loss of $1,254,552, both after the deconsolidation
gain of $786,269. The Company originally reported net losses of
$812,274 and $2,765,366, or $.09 and $.29 per share, respectively, for
such periods. (See Note 12B).
B. Restatement of Prior Quarterly Earnings (Loss) Per Share Data -
(Unaudited) The Company has recalculated the weighted average number of
shares outstanding for each of the quarterly and year-to-date periods
in the year ended June 29, 1997 taking into account the 240,500
treasury shares and the shares actually issued on August 22, 1996. (See
Note 7B). Shown below are the revised weighted average shares for each
quarterly and year-to-date period through March 30, 1997 and the
restated earnings (loss) per share amounts applicable thereto. Loss per
share increased by $.01 for the first quarter and by $.02 for the six
months. The amounts reported for the periods ended March 30, 1997 also
reflect the deconsolidation of the bankrupt subsidiary. (See Note 12A).
<TABLE>
<CAPTION>
Weighted Average Earnings (Loss)
Outstanding Shares Per Share
---------------------------- ------------------------------
Quarterly Year-to-Date Quarterly Year-to-Date
Period Period Period Period
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Periods ended:
September 29, 1996 8,716,847 N/A $ (.09) N/A
December 29, 1996 9,084,238 8,900,542 $ (.13) $(.22)
March 30, 1997 9,084,238 8,960,880 $ .08 $(.14)
F-15
</TABLE>
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
Sept. 28, 1997 June 29, 1997
(Unaudited) *
<S> <C> <C>
ASSETS
Current Assets:
Cash $38,892 $32,156
Other current assets 7,359 17,909
-------- ---------
Total current assets 46,251 50,065
Property and equipment, net 3,072 3,253
-------- --------
TOTAL ASSETS $49,323 $53,318
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $305,149 $312,164
Lease guarantee settlement payable 30,000 30,000
Corporate taxes payable 4,620 5,370
Due to unconsolidated subsidiary 10,000 10,000
Demand loans payable to stockholders 249,321 157,468
-------- --------
Total current liabilities 599,090 515,002
Legal settlement 80,000 80,000
-------- --------
Total liabilities 679,090 595,002
------- -------
Commitments and contingencies (Note 5)
Stockholders' deficit:
Series A-1 Preferred Stock; 10,000,000 shares
authorized; $.001 par value; issued and
outstanding, 2,394,130 shares 2,394 2,394
Common stock; 100,000,000 shares authorized;
$.001 par value; 9,324,738 shares issued 9,325 9,325
Additional paid-in capital 11,573,570 11,573,570
Accumulated deficit (12,039,392) (11,951,309)
Treasury stock - 240,500 shares, at cost (175,664) (175,664)
------------ ------------
Total stockholders' deficit (629,767) (541,684)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $49,323 $53,318
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
* Condensed from audited financial statements.
F-16
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended
September 28, September 29,
1997 1996
<S> <C> <C>
Results of Discontinued Operations:
Net sales $ -- $ 1,247,293
Cost of sales -- 819,507
----------- -----------
Gross profit -- 427,786
Operating costs:
Selling, general and
administrative expenses 84,256 1,234,182
----------- -----------
Loss from operations (84,256) (806,396)
Other income (expense):
Interest income (expense), net (3,845) 786
Miscellaneous income 18 3,556
Gain on sale of equity investment
(Note 4) -- 44,406
----------- -----------
Net loss $ (88,083) ($ 757,648)
=========== ===========
Per share amounts:
Net income (loss): ($ .01) ($ .09)
=========== ===========
Weighted average number of
common shares outstanding 9,084,238 8,716,847
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-17
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended
Sept. 28, 1997 Sept. 29, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($88,083) ($757,648)
--------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 181 37,041
Gain on sale of equity investment -- (44,406)
Decrease in inventory -- 215,185
Decrease in other current assets 10,550 5,461
Increase in other assets -- (1,931)
Increase (decrease) in accounts payable
and accrued liabilities (3,912) 104,850
------- -------
Total adjustments 6,819 316,200
------ -------
Net cash used in operating activities (81,264) (441,448)
--------- ----------
Cash flows from investing activities:
Expenditures for property and equipment -- (3,219)
-------- ----------
Net cash used in investing activities -- (3,219)
-------- ----------
Cash flows from financing activities:
Loans from stockholders 88,000 224,150
------ ---------
Net cash provided by financing activities 88,000 224,150
------ ---------
Net increase (decrease) in cash and cash
equivalents 6,736 (220,517)
Cash and cash equivalents, beginning of period 32,156 387,006
------- ----------
Cash and cash equivalents, end of period $38,892 $166,489
======= ========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities:
On August 26, 1996, the Company issued 650,000 shares of its Common
Stock valued at $570,000 as part of a legal settlement. This item appeared as
"Legal settlement -- equity to be issued," in the Company's June 30, 1996
Consolidated Balance Sheet. Please refer to Note 5 in the accompanying notes for
a further discussion of this matter.
In 1996, the Company transferred its interest in an equity investment
as repayment of a $224,150 loan from a beneficial owner of the Company's
Preferred Stock.
See accompanying notes to consolidated financial statements
F-18
<PAGE>
Specialty Retail Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 28, 1997
1. Basis of Presentation
The accompanying unaudited consolidated financial statements
of Specialty Retail Group, Inc. 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 weeks ended September 28, 1997 and September 29,
1996, respectively, it is the Company's opinion that all necessary adjustments
(consisting of normal and recurring adjustments) have been included to present a
fair statement of results for the interim periods.
As discussed in Note 2, effective in the period ended March
30, 1997 the Company sold or discontinued all business operations and its
subsidiary, Building Blocks, Inc., 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. The only current operations are the general and
administrative costs related to the bankruptcy and maintaining a business
office. In accordance with generally accepted accounting principles, the Company
deconsolidated its Building Blocks, Inc. subsidiary as of the bankruptcy filing.
These statements should be read in conjunction with the
Company's audited financial statements as of June 29, 1997 and for the fiscal
years ended June 29, 1997 and June 30, 1996, included elsewhere herein. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in these interim financial statements 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 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
F-19
<PAGE>
(BRL)). The petition sought protection from creditors while Building Blocks
liquidated its inventory and fixtures. Effective January 28, 1997 the
outstanding capital stock of the Company's Building Blocks Franchise Corp.
subsidiary, which owns the "Building Blocks" trademarks, was sold by the
Company's Building Blocks Holdings, Inc. subsidiary.
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 approximately $49,000 of assets and has current
liabilities of approximately $599,000. 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 three beneficial owners of its Capital Stock in order to
meet its operating expenses and has been obtaining forbearances from its
principal creditors. At September 28, 1997 such advances and interest accrued
thereon (which are included in the liabilities described above) aggregated
$249,321. 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 outcome of Building Blocks' Chapter 11 petition and upon the
Company's ability to reach settlements of its outstanding obligations. See Note
3.
The foregoing raise substantial doubt about the Company's
ability to continue as a going concern.
3. Chapter 11 Petition of Debtor
In a Chapter 11 case, substantially all liabilities of the
Debtor, Building Blocks, 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 filed by
the Debtor as of the date of the Filing show liabilities exceed assets by
approximately $800,000. 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. Building Blocks elected to reject all of its leases and
contracts other than an employment agreement with Steven E. Glass. 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. All assets of the Debtor have
either been sold or written down to a realizable value. Based on such values,
the Company and Building
F-20
<PAGE>
Blocks have determined that none of Building Blocks' assets will be
distributable to the Company.
A release of all claims between the Company and Building
Blocks is being sought in the Chapter 11 Proceeding and, in addition to the
payment to settle a legal proceeding referred to under "Other Legal Proceedings
- - Leases" in Note 5, it is possible that the Company will settle additional
creditor claims and/or make a payment to Building Blocks and/or issue shares of
its common stock to creditors of Building Blocks in connection with the
definitive plan of reorganization. Ultimately, the adjustment of all claims and
liabilities of a debtor is subject to a Bankruptcy Court approved plan and,
accordingly, is not presently determinable.
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 $224,150 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 to the lender on
September 29, 1996. As a result, the Company recorded a $44,406 gain on this
transaction in the accompanying Condensed Consolidated Statements of Operations
for the 13 weeks ended September 29, 1996.
5. Commitments and Contingencies
Legal Settlement-Issuance of Common Stock
The Company was a party defendant in a lawsuit with a former
officer, director and shareholder of the Company's predecessor corporation 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.
In 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
F-21
<PAGE>
$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 satisfy the guarantee by a
cash payment or the issuance to the holders of up to 213,333 shares of its
common stock currently held by an escrow agent.
Other Legal Proceedings-Leases
Building Blocks is a defendant in a number of legal
proceedings instituted by landlords of various former Building Blocks store
locations. These cases have been stayed by the bankruptcy proceeding and it is
expected that the underlying claims will be extinguished upon the completion of
the bankruptcy proceeding.
Of the aforementioned cases, the Company is a limited
guarantor in Fashion Mall Partners, L.L.P. v. Building Blocks, Inc., City Court
- - Westchester, New York, commenced September 26, 1996. This suit seeks $180,000
for rent arrearages under a lease to Building Blocks which was guaranteed by the
Company, which guaranteed up to $180,000 of rent payments under this lease. The
landlord subsequently filed a Proof of Claim with the Bankruptcy Court in the
amount of approximately $480,000. The landlord has agreed to settle the
guarantee and the underlying claim for $30,000. This amount is reflected in the
accompanying balance sheet.
F-22
<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................................. 8
Risk Factors......................................... 11
Use of Proceeds.................................... --
Summary Selected Financial Data ..................... 13
Management's Discussion and Analysis ................ 14
Business............................................. 20
Directors and Executive Officers.................... 24
Executive Compensation............................... 25
Certain Transactions................................. 27
Principal Stockholders............................... 28
Market For Common Equity and Related
Stockholder Matters................................ 29
Description of Capital Stock......................... 30
Selling Stockholders................................. 30
Plan of Distribution................................. 31
Disclosure of Commission Position on
Indemnification For Securities Act Liabilities....... 33
Experts............................................. 35
Legal Matters....................................... 35
Index to Financial Statements....................... 36
Financial Statements .................................. F-1
================================================================
================================================================
SPECIALTY RETAIL GROUP, INC.
863,333 Common Stock
(Par Value, $.001 per share)
__________
PROSPECTUS
__________
February 5, 1998
=======================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
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.
EXHIBITS
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 regarding options (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).
10.6 Form of Promissory Notes from the Registrant to Selig Zises,
Seymour Zises and Cathy Zises and list of notes issued through
January 15, 1998.
II-2
<PAGE>
10.7 Indemnity Agreement dated January 30, 1997 between Registrant
and Steven E. Glass (incorporated by reference to Exhibit 10.9
to Form 10-KSB dated November 25, 1997).
23(a) Consent of BDO Seidman, LLP
23(b) Consent of Jeffrey M. Brinn, CPA
II-3
<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 New York, State of New
York, on February 4, 1998.
SPECIALTY RETAIL GROUP, INC.
By: /s/ STEVEN E. GLASS
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/ SEYMOUR W. ZISES February 4, 1998
- --------------------------
Seymour W. Zises, Director
/s/ STEVEN E. GLASS February 4, 1998
- --------------------------
Steven E. Glass, Secretary
II-4
<PAGE>
EXHIBIT 10.6
$________________ ________ __, 1997
DEMAND NOTE
FOR VALUE RECEIVED, SPECIALTY RETAIL GROUP, INC., a Florida
corporation (the "Payor") hereby promises to pay to the order of ______________
(the "Payee"), ON DEMAND, the principal amount of _______________
($______________) Dollars, together with interest on the unpaid principal
balance from the date hereof at the rate of 8% per annum.
Payments of principal and interest shall be made at
__________________, New York ______, or at such other place or to such other
payee as the holder of this Note may from time to time designate.
The holder may demand partial payment of this Note from time to time,
and the undersigned may prepay this Note, in whole or in part, at any time or
from time to time, without premium or penalty. Any such partial payment or
prepayment shall be applied first to interest and then to principal.
The Borrower shall reimburse the holder of this Note, on demand, for
all costs and expenses, including, without limitation, reasonable attorney's
fees, which may be incurred by the holder to enforce this Note or to collect any
indebtedness evidenced hereby. The holder shall have the right to apply any
payment or prepayment of any nature first to the reimbursement of such expenses.
The Borrower hereby assents to any indulgence or any extension of the
time for payment of the indebtedness evidenced hereby. Any failure to exercise
or any delay in exercising any right hereunder shall not be construed as a
waiver of such right or any other right.
The Borrower hereby waives presentment, demand, protest, notice of
dishonor, notice of nonpayment, notice of maturity, notice of protest, diligence
in collection, and the benefit of any exemption or insolvency laws.
This Note shall be governed by, and construed in accordance with, the
laws of the State of New York, applicable to instruments made and to be
performed wholly within said State. The provisions of this Note are severable
and the invalidity or unenforceability of any provision shall not alter or
impair the remaining provisions hereof.
II-5
<PAGE>
IN WITNESS WHEREOF, the Borrower has duly executed and delivered this
Note as of the date first above written.
SPECIALTY RETAIL GROUP, INC.
By: _________________________
Authorized Representative
II-6
<PAGE>
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DEMAND NOTES ISSUED -- as at 1/26/98
- -------------------------------------------------------------------
Date Amount Lender
- -------------------------------------------------------------------
12/23/96 $3,750.28 Seymour Zises
- -------------------------------------------------------------------
1/15/97 10,000.00 Cathy Zises
- -------------------------------------------------------------------
1/15/97 10,000.00 Selig Zises
- -------------------------------------------------------------------
1/24/97 3,750.28 Seymour Zises
- -------------------------------------------------------------------
1/28/97 12,500.00 Selig Zises
- -------------------------------------------------------------------
1/28/97 12,500.00 Cathy Zises
- -------------------------------------------------------------------
2/11/97 6,000.00 Selig Zises
- -------------------------------------------------------------------
2/26/97 10,000.00 Selig Zises
- -------------------------------------------------------------------
2/26/97 5,000.00 Cathy Zises
- -------------------------------------------------------------------
3/04/97 4,000.00 Cathy Zises
- -------------------------------------------------------------------
3/04/97 4,000.00 Selig Zises
- -------------------------------------------------------------------
3/17/97 5,000.00 Selig Zises
- -------------------------------------------------------------------
4/16/97 7,500.00 Cathy Zises
- -------------------------------------------------------------------
5/02/97 7,500.00 Selig Zises
- -------------------------------------------------------------------
5/21/97 7,500.00 Cathy Zises
- -------------------------------------------------------------------
6/03/97 12,500.00 Selig Zises
- -------------------------------------------------------------------
6/03/97 12,500.00 Cathy Zises
- -------------------------------------------------------------------
6/10/97 6,500.00 Cathy Zises
- -------------------------------------------------------------------
6/10/97 6,250.00 Selig Zises
- -------------------------------------------------------------------
6/25/97 3,750.00 Cathy Zises
- -------------------------------------------------------------------
6/27/97 3,750.00 Selig Zises
- -------------------------------------------------------------------
7/10/97 5,000.00 Cathy Zises
- -------------------------------------------------------------------
7/23/97 10,000.00 Selig Zises
- -------------------------------------------------------------------
7/23/97 5,000.00 Cathy Zises
- -------------------------------------------------------------------
7/31/97 6,000.00 Cathy Zises
- -------------------------------------------------------------------
8/01/97 6,000.00 Selig Zises
- -------------------------------------------------------------------
8/18/97 8,000.00 Cathy Zises
- -------------------------------------------------------------------
8/25/97 8,000.00 Cathy Zises
- -------------------------------------------------------------------
9/04/97 10,000.00 Selig Zises
- -------------------------------------------------------------------
9/15/97 7,500.00 Cathy Zises
II-7
<PAGE>
- ---------------------------------------------------------------------
9/15/97 7,500.00 Selig Zises
- ---------------------------------------------------------------------
9/24/97 5,000.00 Cathy Zises
- ---------------------------------------------------------------------
9/24/97 5,000.00 Cathy Zises
- ---------------------------------------------------------------------
9/25/97 5,000.00 Selig Zises
- ---------------------------------------------------------------------
10/16/97 $3,000.00 Selig Zises
- ---------------------------------------------------------------------
10/16/97 $3,000.00 Cathy Zises
- ---------------------------------------------------------------------
10/23/97 $4,000.00 Cathy Zises
- ---------------------------------------------------------------------
10/24/97 $4,000.00 Selig Zises
- ---------------------------------------------------------------------
11/03/97 $4,000.00 Selig Zises
- ---------------------------------------------------------------------
11/03/97 $4,000.00 Cathy Zises
- ---------------------------------------------------------------------
11/18/97 $5,000.00 Selig Zises
- ---------------------------------------------------------------------
11/18/97 $5,000.00 Cathy Zises
- ---------------------------------------------------------------------
11/26/97 $3,000.00 Selig Zises
- ---------------------------------------------------------------------
11/26/97 $3,000.00 Cathy Zises
- ---------------------------------------------------------------------
12/02/97 $9,500.00 Seymour Zises
- ---------------------------------------------------------------------
12/04/97 $9,500.00 Selig Zises
- ---------------------------------------------------------------------
12/10/97 $5,000.00 Cathy Zises
- ---------------------------------------------------------------------
12/10/97 $5,000.00 Selig Zises
- ---------------------------------------------------------------------
12/23/97 $7,500.00 Cathy Zises
- ---------------------------------------------------------------------
12/30/97 $7,500.00 Selig Zises
- ---------------------------------------------------------------------
12/31/97 $58,000.00 Cathy Zises
- ---------------------------------------------------------------------
1/15/98 $5,000.00 Selig Zises
- ---------------------------------------------------------------------
1/15/98 $5,000.00 Selig Zises
=====================================================================
II-8
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Specialty Retail Group, Inc.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement Number 333-11535 on Form SB-2 of our report dated
September 20, 1996, relating to the consolidated financial statements of
Specialty Retail Group, Inc. for the year ended June 30, 1996. Our report
contains an explanatory paragraph regarding uncertainties as to the ability of
the Company to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
New York, New York
February 4, 1998
II-9
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANT
Specialty Retail Group, Inc.
New York, New York
I hereby consent to the inclusion by reference in the Prospectus constituting a
part of Registration Statement Number 333-11535 on Form SB-2 of my report dated
November 4, 1997, relating to the consolidated financial statements of Specialty
Retail Group, Inc. as of and for the year ended June 29, 1997.
I also consent to the reference to me as an "Expert" in the Prospectus forming
part of Registration Statement Number 333-11535.
/s/ JEFFREY M. BRINN, CPA
Jeffrey M. Brinn, CPA
February 2, 1998
II-10
