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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[Mark One]
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 27, 1998 or
[ ] Transition report under Section 13 or 15(d) of the Exchange Act for the
transition period from to ________ to ________
Commission File Number 0-18707
SPECIALTY RETAIL GROUP, INC.
(Exact Name of Small Business Issuer as specified in its charter)
FLORIDA 59-2824411
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
477 Madison Avenue, 14th Floor, New York, NY 10022
(Address of principal offices)
(212) 872-9600
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes / / No /X/
On April 1, 1999, there were 9,084,238 shares of the issuer's Common Stock
outstanding excluding 213,333 contingently issuable shares held by an escrow
agent.
The Index to Exhibits Appears on Page 13
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SPECIALTY RETAIL GROUP, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Financial Statements
as of September 27, 1998 .............................................3
Consolidated Balance Sheet at September 27, 1998
and June 30, 1998 (Unaudited) .....................................3
Consolidated Statements of Operations for the thirteen-week
periods ended September 27, 1998 and September 28, 1997
(Unaudited)........................................................4
Consolidated Statements of Cash Flows for the thirteen-week
periods ended September 27, 1998 and September 28, 1997
(Unaudited) .......................................................5
Notes to Consolidated Financial Statements as of September 27, 1998
(Unaudited)........................................................6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..................................11
Item 6 - Exhibits and Reports on Form 8-K............................11
Signature............................................................12
2
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SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 27, JUNE 28,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 1,644 4,924
Prepaid insurance -- 19,258
----------- -----------
Total current assets 1,644 24,182
Property & equipment, net 2,276 2,529
----------- -----------
3,920 26,711
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable 353,178 364,215
Corporation taxes payable 1,822 1,822
Demand loans payable to stockholders 507,906 495,947
----------- -----------
Total current liabilities 862,906 861,984
Other liabilities:
Legal settlement 80,000 80,000
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942,906 941,984
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Committments and contingencies
CAPITAL DEFICIT
Preferred stock; 15,000,000 shares authorized; $.001 par value
Series A-1 preferred stock: 10,000,000 shares authorized
2,394,130 shares issued and outstanding 2,394 2,394
Common stock; 100,000,000 shares authorized; $.001 par value
9,324,738 shares issued and outstanding 9,325 9,325
Additional paid-in capital 11,573,570 11,573,570
Accumulated deficit (12,348,611) (12,324,898)
Treasury stock, 240,500 common shares, at cost (175,664) (175,664)
----------- -----------
(938,986) (915,273)
----------- -----------
3,920 26,711
=========== ===========
</TABLE>
3
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SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 28
1998 1997
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<S> <C> <C>
Results of discontinued operations:
Operating costs:
Selling, general and administrative costs 13,762 84,256
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Loss from operations (13,762) (84,256)
Other income (expense):
Interest expense, net of income of $8 and $18 (9,951) (3,827)
---------- ----------
Net loss (23,713) (88,083)
========== ==========
Net loss per share:
Basic and diluted nil (0.01)
========== ==========
Weighted average number of common shares outstanding:
Basic and diluted 9,084,238 9,084,238
========== ==========
</TABLE>
4
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SPECIALTY RETAIL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
---------------------------
SEPTEMBER 27, SEPTEMBER 28
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss (23,713) (88,083)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 253 181
Changes in:
Other assets 19,258 10,550
Accounts payable (1,078) (3,912)
------- -------
Net cash used in operating activities (5,280) (81,264)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from stockholders 2,000 88,000
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NET DECREASE IN CASH AND CASH EQUIVALENTS (3,280) 6,736
Cash and cash equivalents, beginning of period 4,924 32,156
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD 1,644 38,892
======= =======
</TABLE>
5
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SPECIALTY RETAIL GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 27, 1998
NOTE A - 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 27, 1998 and September 28, 1997, 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 B, the only current operations of the Company and its
subsidiaries are the general and administrative costs related to maintaining a
business office.
These statements should be read in conjunction with the Company's financial
statements included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 28, 1998. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations promulgated by the Securities and Exchange Commission.
NOTE B - GOING CONCERN
The accompanying consolidated 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. Such petition was
confirmed on May 5, 1998. Effective January 28, 1997, the outstanding capital
stock of BBFC, which owned 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 was
paid 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 identify an
operating business with which to effectuate a business combination. At September
27, 1998 and June 28, 1998, the Company has $3,920 and $26,711, respectively, of
assets and $862,906 and $861,984, resepctively, of liabilities, excluding
$80,000 of liabilities which are payable through the issuance of 213,333 shares
of common stock. 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
6
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September 27, 1998 and June 28, 1998, such advances (which are included in the
liabilities described above) aggregated $467,251 and $465,251, respectively,
plus accrued interest of $40,655 and $30,696, respectively. There are no
assurances as to the time or extent that the stockholder advances and/or
forbearance will continue. Further, there is no assurance that any business
combination can ever be effectuated. Any such combination may depend upon the
Company's ability to reach settlements of its outstanding obligations. The
foregoing raise substantial doubt about the Company's ability to continue as a
going concern.
NOTE C - COMMITMENTS AND CONTINGENCIES
[1] 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.
[2] LEGAL SETTLEMENT - ISSUANCE OF COMMON STOCK:
The Company was one of several defendants in a lawsuit with a former
officer, director and stockholder 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. Accordingly, the
Company recorded a noncash expense of $570,000 which appeared as "Legal
Settlement, noncash" in the consolidated statements of operations for
the 52 weeks ended June 30, 1996. Such noncash expense was based on the
market value of the Company's common stock at the time of issuance.
During the 52 weeks ended June 29, 1997, the Company recorded any
additional expense and liability for $80,000.
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. Such shares have been issued,
but are not included in the accompanying statements of changes in
capital deficit. 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.
[3] 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. There was no rent expense for the 13 weeks ended
September 27, 1998 or September 28, 1998.
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NOTE D - SUBSEQUENT EVENTS
On February 25, 1999, the Company signed a letter agreement ("Letter") by
which it would be the target in a reverse takeover acquisition. The Letter calls
for the payment, forgiveness or conversion to equity or stock purchase options
of substantially all of the Company's liabilities. Other provisions of the
Letter include a reverse stock split and revision of the corporate articles of
incorporation and by-laws. If the contemplated transaction is completed, the
federal net operating loss carryforward in any one year will be severely limited
in accordance with Internal Revenue Code Section 382 regarding changes in
ownership of more than 50%. As a result, any federal net operating loss
carryforwards and the benefits attributable to them will be insignificant.
8
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ITEM 2. 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 items set forth under "Other income
(expenses)" in the Consolidated Statements of Operations included in the
Company's financial statements. These discussions should be read in conjunction
with the financial statements and notes thereto.
The reported results of discontinued operations are not indicative of
future results of operations or financial position of the Company. The financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information applicable to a going concern,
which principles, except as otherwise disclosed, assume that assets will be
realized and liabilities will be discharged in the normal course of business.
The financial statements do not include
9
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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.
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 prior to February
1997 was Building Blocks, Inc., which the Company acquired on April 13, 1993 and
which operated a chain of specialty retail toy stores.
On January 31, 1997, Building Blocks filed a petition for relief under
Chapter 11. In March 1998, a Reorganization Plan in the Chapter 11 proceeding
was approved by creditors. Pursuant to the terms of the Plan, the Company has
been released from all claims of Building Blocks and its creditors and has
settled its liability as a guarantor of a Building Blocks store lease.
The Company had approximately $3,920 of assets and had current
liabilities of approximately $862,906 at September 27, 1998. The Company may be
required, at some future date, to satisfy a non-current liability carried on its
books in the amount of $80,000 by the issuance of 213,333 shares of its common
stock to certain parties pursuant to the settlement agreement described in Note
C(2) to the financial statements included herewith.
The Company did not receive any cash or other benefit (including any
right to utilize Building Blocks' net operating loss carryforwards) from
Building Blocks under the Plan. 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 27, 1998, such advances and interest
accrued thereon (which are included in the current liabilities described above)
aggregated $507,906. At September 27, 1998 there were no assurances as to the
time or extent that the stockhlder advances and/or forbearance will continue.
Through September 27, 1998 the Company has been attempting to attract
an operating business with which to effectuate a business combination. At
September 27, 1998, there was no assurance that any business combination could
ever be effectuated.
10
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PART II - OTHER INFORMATION
ITEM I - LEGAL PROCEEDINGS
Building Blocks was a defendant in a number of legal proceedings
instituted by landlords of various former Building Blocks store locations, and
the Company as a guarantor of one such lease was a defendant in the proceeding.
These cases have been settled or the underlying debts have been discharged in
the bankruptcy proceeding.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were required to be filed during the fiscal
quarter ended September 27, 1998.
11
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Company has caused this Report to be signed on its behalf by the
undersigned, thereto duly authorized.
SPECIALTY RETAIL GROUP, INC.
Date: April 28, 1999 By: /s/ SEYMOUR W. ZISES
------------------------------------
Seymour W. Zises, Director
12
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INDEX TO EXHIBITS
NUMBER EXHIBIT PAGE
27 Financial Data Schedule
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from Balance Sheet,
Statement of Operations, Statement of Cash Flows and Notes thereto incorporated
in Part I, Item 1 of this Form 10-QSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,644
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,644
<PP&E> 65,552
<DEPRECIATION> (60,276)
<TOTAL-ASSETS> 3,920
<CURRENT-LIABILITIES> 862,906
<BONDS> 0
9,325
0
<COMMON> 2,394
<OTHER-SE> 11,573,570
<TOTAL-LIABILITY-AND-EQUITY> (938,986)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,951
<INCOME-PRETAX> (23,713)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (23,713)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,713)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
