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 March 31, 1999 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 |X| No |_|
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 12
<PAGE>
SPECIALTY RETAIL GROUP, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Financial
Statements as of March 31, 1999 .......................................3
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998 ......................................3
Consolidated Statements of Operations for the periods
ended March 31, 1999 and March 29, 1998 (Unaudited) ....4
Consolidated Statements of Cash Flows for the
periods ended March 31, 1999 and
March 29, 1998 (Unaudited) .............................5
Notes to Consolidated Financial Statements (Unaudited) .........6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ....................................10
Signature ............................................................11
Page 2 of 13
<PAGE>
SPECIALTY RETAIL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1 9 9 9 1 9 9 8
------- -------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets
Cash $ -- $ 1,652
------------ ------------
Total current assets -- 1,652
Property and equipment, net -- 2,023
------------ ------------
TOTAL ASSETS $ -- $ 3,675
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 391,853 $ 363,999
Corporation taxes payable 2,557 2,007
Demand loans payable to stockholders 528,222 517,865
------------ ------------
Total current liabilities 922,632 883,871
Other liabilities:
Legal settlement 80,000 80,000
------------ ------------
Total liabilities 1,002,632 963,871
------------ ------------
Commitments and contingencies
STOCKHOLDERS' 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 9,325 9,325
Additional paid - in capital 11,573,570 11,573,570
Accumulated deficit (12,412,257) (12,369,821)
Treasury stock - 240,500 common shares, at cost (175,664) (175,664)
------------ ------------
Total stockholders' deficit (1,002,632) (960,196)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ -- $ 3,675
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 13
<PAGE>
SPECIALTY RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Thirteen Weeks
Ended Ended
----------- -----------
March 31, March 29,
1 9 9 9 1 9 9 8
----------- -----------
Results of discontinued operations:
Net sales $ -- $ --
Cost of sales -- --
----------- -----------
Gross profit -- --
Operating costs:
Selling, general and administrative expenses 32,079 66,076
----------- -----------
Loss from operations (32,079) (66,076)
----------- -----------
Other expenses:
Interest expense 10,357 8,400
Settlement of guarantor obligation related to
bankrupt subsidiary (Note D) -- 53,000
----------- -----------
Net loss $ (42,436) $ (127,476)
=========== ===========
Net loss per share $ -- $ (.01)
=========== ===========
Weighted average number of common shares
outstanding 9,084,238 9,084,238
=========== ===========
See accompanying notes to consolidated financial statements.
Page 4 of 13
<PAGE>
SPECIALTY RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Quarter Thirteen Weeks
Ended Ended
--------- ---------
March 31, March 29,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (42,436) $(127,476)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,023 180
Changes in:
Other current assets -- 11,714
Accounts payable 27,854 (14,893)
Corporation taxes payable 550 (4,620)
--------- ---------
Total adjustments 30,427 (7,619)
--------- ---------
Net cash used in operating activities (12,009) (135,095)
--------- ---------
Cash flows from financing activities:
Loans from stockholders 10,357 139,408
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,652) 4,313
Cash and cash equivalents, beginning of period 1,652 29,416
--------- ---------
Cash and cash equivalents, end of period $ -- $ 33,729
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 13
<PAGE>
SPECIALTY RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
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 quarter
ended March 31, 1999 and the thirteen weeks ended March 29, 1998, 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
transition period ended December 31, 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. 970-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.
At March 31, 1999 and December 31, 1998, the Company has $0 and $3,675,
respectively, of assets and $922,632 and $883,871, respectively 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 March 31, 1999 and December 31, 1998, such advances (which are
included in the liabilities described above) aggregated $467,251 plus accrued
interest of $60,971 and $50,614, respectively. 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.
Page 6 of 13
<PAGE>
SPECIALTY RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
NOTE B - GOING CONCERN (continued):
On February 25, 1999, the Company signed a letter of 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.
NOTE C - FISCAL YEAR:
The Company previously adopted 52/53 week fiscal year ending on the Sunday
closest to June 30. Fiscal year June 28, 1998 consisted of 52 weeks. The Company
changed its fiscal year to a twelve month reporting period and its year end to
December 31 resulting in a short period beginning June 29, 1998 and ended
December 31, 1998.
NOTE D - 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 non-cash expense of
$570,000 which appeared as "Legal Settlement, non-cash" in the
consolidated statements of operations for the 52 weeks ended June 30,
1996. Such non-cash 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.
Page 7 of 13
<PAGE>
SPECIALTY RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
(2) LEGAL SETTLEMENT - ISSUANCE OF COMMON STOCK (continued):
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 quarter ended March 31,
1999 or the thirteen weeks ended March 29, 1998, respectively.
Page 8 of 13
<PAGE>
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 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 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. Building Blocks Franchise
Corp. ("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.
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 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 no assets and had current liabilities of
approximately $922,632 at March 31, 1999. 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
Page 9 of 13
<PAGE>
obtaining forbearances from its principal creditors. At March 31, 1999, such
advances and interest accrued thereon (which are included in the current
liabilities described above) aggregated $528,222. At March 31, 1999 there were
no assurances as to the time or extent that the stockholder advances and/or
forbearance will continue.
The Company had no operations during the period ended March 31,
1999. All expenses during his period have been incurred in the administration of
the Company.
The Company had been attempting to attract an operating business
with which to effectuate a business combination. At March 31, 1999, no business
combination had been effectuated. As reported on Form 8-K filed March 9, 1999,
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
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, it is expected that
Company would have a capital infusion of between $10,000,000 and $20,000,000 and
the present stockholders would hold shares valued (using the capital infusion
price per share) at between $135,000 and $110,000 depending upon the amount of
its liabilities at the closing of the transactions.
Page 10 of 13
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) A report on Form 8-K was filed on March 9, 1999. No other reports on
Form 8-K were required to be filed during the fiscal quarter ended March 31,
1999.
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: May 14, 1999 By: /s/ SEYMOUR W. ZISES
--------------------------
Seymour W. Zises, Director
Page 11 of 13
<PAGE>
INDEX TO EXHIBITS
Number Exhibit Page
- ------ ------- ----
27 Financial Data Schedule 13
Page 12 of 13
<TABLE> <S> <C>
<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> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 62,552
<DEPRECIATION> 62,552
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 922,632
<BONDS> 0
9,325
0
<COMMON> 2,394
<OTHER-SE> (1,014,351)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,079
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,357
<INCOME-PRETAX> (42,436)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (42,436)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,456)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
