U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
[ ] TRANSITION REPORT PURSUANT SECTION 13 OF 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 0-17941
SPECIALTY RETAIL SERVICES, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-2686442
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2300 NORTHLAKE PARKWAY, SUITE 200, TUCKER, GEORGIA 30084
(Address of principal executive offices)
(770)496-4565
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ____ No _X___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date:
13,867,018 SHARES OF COMMON STOCK, NO PAR VALUE
AS OF AUGUST 12, 1998
<PAGE>
SPECIALTY RETAIL SERVICES, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet dated June 30, 1998 3
Consolidated Statement of Operations 4
Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1997 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II. OTHER INFORMATION 8
PART I. - FINANCIAL INFORMATION
<TABLE>
SPECIALTY RETAIL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30,1998
(UNAUDITED)
<CAPTION>
(000's omitted)
June 30, December
30,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 0 $ 1
---------- ----------
Total current assets 0 1
Property:
Other assets:
Lease Rights 13,582 0
----------- ----------
TOTAL ASSETS: $ 13,582 $ 1
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and Accrued Expenses $ 0 $ 5
----------- ----------
Total current liabilities 0 5
----------- ----------
Commitments and contingencies
Stockholders' equity (deficiency):
Common stock, par value $.01 per share
Authorized 15,000,000 shares; issued and
Outstanding 13,867,018 shares 139 34
Additional Paid in Capital 19,201 5,724
Accumulated deficit (5,758) (5,762)
----------- ----------
Total stockholders' equity (deficiency) 13,582 (4)
----------- ----------
$ 13,582 $ 1
=========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
SPECIALTY RETAIL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<CAPTION>
(000's omitted) (000's omitted)
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $ 0 $ 0 $ 0 $ 0
-------- -------- -------- -------
Costs and Expenses
General and administrative (15) 2 (4) 6
Interest 40 80
-------- -------- -------- -------
(15) 42 (4) 86
-------- -------- -------- -------
Net Income (Loss) 15 (42) 4 (86)
======== ======== ======== =======
Net Income (Loss) Per Share
(Based on weighted average
shares of 3,425,351 and
648,529 shares) $ -- $ (.07) $ -- $ (.13)
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
SPECIALTY RETAIL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30
(UNAUDITED)
<CAPTION>
(000's omitted)
Six months ended
June 30,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 4 $ (87)
Decrease in accounts payable (5)
Increase in accrued interest 70
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (1) (17)
-------- --------
INVESTING ACTIVITIES
NET CASH USED IN INVESTING ACTIVITIES -- --
-------- --------
FINANCING ACTIVITIES
Decrease in subordinated notes payable (85)
Advances from related parties, net 102
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 17
-------- --------
DECREASE IN CASH (1) --
CASH AT BEGINNING OF PERIOD 1 1
-------- --------
CASH AT END OF PERIOD $ 0 $ 1
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SPECIALTY RETAIL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
inaccordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. The financial statements were derived from unaudited
financial financial statements unless otherwise indicated. Accordingly, the
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the full year.
For further information, refer to the financial statements of the Company as
of December 31, 1997, and the notes thereto, included in the Company's Form
10-K.
2. ACQUISITION OF EMISSION CONTROL, SDN
On June 26, 1998, Speciality Retail Services, Inc. (the "Company") entered
into an Agreement and Plan of Share Exchange (the "Agreement"), under which
the Company agreed to acquire all of the issued and outstanding common
stock of Emission Control, SDN, a Malaysian corporation ("EC"). The
Company completed the acquisition of EC on June 30, 1998.
Pursuant to the Agreement, the Company issued 10,000,000 shares of common
stock to the shareholders of EC to acquire all of its outstanding common
stock. In addition, seven controlling shareholders, who hold a total of
2,960,489 shares of common stock, granted the Company an option to
repurchase their shares for (a) $2.00 per share, if the option is exercised
during the first 180 days following the Effective Date, (b) $3.00 per
share, if the option is exercised between 181 and 360 days following the
Effective Date, (c) $4.00 per share, if the option is exercised between 361
and 540 days following the Effective Date, and (d) $5.00 per share, if the
option is exercised between 540 days and two years following the Effective
Date. In order to implement the option, the shares owned by said
shareholders were placed in escrow for a two year period. In addition, the
Company issued 500,000 shares of Common Stock to individuals unaffiliated
with either the Company or EC for services rendered in connection with the
Company's acquisition of EC.
EC owns the rights to mine gold in the State of Kelantan, Malaysia,
pursuant to seven leases covering 534.4 hectares of land. EC is in the
process of obtaining a mining certificate to commence actual mining of the
prospect, and plans to begin actual mining in the near future.
3. MALAYSIAN LEASES
The Company's principle asset consists of certain mining lease rights in the
State of Kelantan, Malaysia which were owned by EC at the time the Company
acquired EC. EC's lease rights arise out of an Agreement dated July 8, 1986
(the "1986 Agreement"), under which the State of Kelantan (the "State")
granted Nanpoh Shigen Co., Ltd. ("Nanpoh"), a Japanese corporation, and
Perkema Sdn. Bhd. ("Perkema"), a Malaysian corporation, the right to prospect
for mineral resources in the State. In the event the State determined, based
on the prospecting activities of Nanpoh and Perkema, that economically
exploitable quantities of minerals existed, the 1986 Agreement provided that
a Malaysian corporation (the "Mining Corporation") would be created to hold
the mining rights and conduct the actual mining operations. Under the 1986
Agreement, Nanpoh and Perkema are responsible for all costs associated with
prospecting for minerals in the State, and for contributing all capital to
the Mining Corporation which may be necessary to form the Mining Corporation
and for it to conduct actual mining operations.
The 1986 Agreement provides that ownership of the Mining Corporation will be
as follows: 10% by the State; 49% by Nanpoh; and 41% by Perkema. The 1986
Agreement specifies that the Mining Corporation will be governed by a Board
of Directors consisting of seven members, three of which will be nominated by
Nanpoh, two by Perkema, and two (including the Chairman) by the State. The
1986 Agreement also gives the State the option to purchase an additional 20%
of the Mining Corporation from Nanpoh or Perkema for the par value of the
shares of the Mining Corporation three years after the incorporation of the
Mining Corporation. The 1986 Agreement also provides that the Mining
Corporation must pay the State a 10% royalty based on gross sale proceeds in
addition to amounts which it may be due as a shareholder in the Mining
Corporation.
The parties to the 1986 Agreement concluded that gold existed in certain
parts of the State along the Sungai Galas river in economically exploitable
quantities. Consequently, in November 1990, the State agreed to grant the
Mining Corporation the right to mine gold along the Sungai Galas river for
ten years pursuant to seven leases totally 534.4 hectares of land. The leases
provide for the payment of certain rent immediately, which rent has been
paid. The leases further provide that their ten year term will commence when
a mining certificate is issued, which requires the completion of a survey of
the mining area.
Due to health problems of the principal of Nanpoh, very little was done to
commence mining operations pursuant to the 1986 Agreement. In particular,
the Mining Corporation was never formed and the mining certificates never
issued.
In the 1980's and 1990's, Sumiyoshi Omure and Hisao Edo made loans to the
principle of Nanpoh totalling 1.48 billion yen, much of which was believed
used by the principle to capitalize Nanpoh for use in honoring its
obligations under the 1986 Agreement. In December 1, 1997, Messrs. Omure and
Edo and the principle of Nanpoh entered into a settlement agreement whereby
the principle agreed to cause Nanpoh to assign any and all of its rights
under the 1986 Agreement to Messrs. Omure and Edo or their nominee in full
settlement and satisfaction of their claims against the principle. The
settlement agreement was conditioned on the approval of the State and Perkema
to the proposed assignment, the agreement by Perkema to assign its interest
in the 1986 Agreement to Messrs. Omure and Edo or their nominee, the approval
by the State to the assignment by Perkema, and the certification by the State
that there were no defaults under the leases.
Pursuant to the settlement agreement, Messrs. Omure and Edo formed EC to hold
the property and rights which they agreed to acquire under the settlement
agreement. On February 5, 1998, Nanpoh assigned all of its rights under the
1986 Agreement to EC. On March 24, 1998, Perkema assigned all of its rights
under the 1986 Agreement to EC, under which EC agreed to pay Perkema 500,000
Malaysian Ringgit, of which 200,000 is payable upon the earlier of the
commencement of mining operations or six months after obtaining the consent
of the State to the assignment, 150,000 three months after the first payment,
and the final 150,000 three months after the second payment. By a letter
dated July 20, 1998, the State gave its consent to the assigments to EC by
Nanpoh and Perkema.
The lease rights have been recorded at EC's cost to acquire the lease rights
under the settlement agreement, and therefore such cost may not be indicative
of the fair market value of the lease rights. The company is currently
arranging in a private placement to fund the cost of commencing mining
operations in Malaysia.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
GENERAL
Through October 1991, the principal businesses of Specialty Retail Services,
Inc. (the "Company"), through its wholly-owned subsidiaries, was the
manufacturing, distribution and marketing of professional beauty products.
Since then the Company has had no principal business activities.
RESULTS OF OPERATIONS
The Company had no operations for the six months ended June 30, 1998 or the
six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had no working capital on June 30, 1998 as compared to a working
capital deficit of $5,000 at the beginning of the year. The Company was
funded by an affiliate of a director of the Company through June 30, 1998.
The Company anticipates that it will need substantial capital to obtain a
mining certificate to mine gold on its leases in Malaysia, and finance the
commencement of operations in Malaysia. The Company is currently in
negotiations to raise the necessary funds in a private placement, as well as
additional funds which the Company intends to use to finance one or more
acquisitions which the Company is considering.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards of approximately $1,610,000
which will expire in the year 2003. The amount of net operating loss
carryforwards that can be used in any given year will be limited by the
applicable tax laws which are in effect at the time such carryforward can be
utilized. A valuation allowance of $580,000 has been established to offset
any benefit from the net operating loss carryforwards. It can not be
determined when or if the Company will be able to utilize the net operating
losses. The Company's ability to utilize its net operating loss
carryforwards may be severely limited as a result of its acquisition of EC.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report are "forward-looking
statements" intended to qualify for the safe harbors from liability
established by Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
forward looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates", "expects", or words of similar import. Similarly, statements
that describe the Company's future plans, objectives or goals are also
forward-looking statements. Such statements may address future events and
conditions concerning, among other things, the Company's results of
operations and financial condition; the consummation of acquisition and
financing transactions and the effect thereof on the Company's business;
capital expenditures; litigation; regulatory matters; and the Company's plans
and objectives for future operations and expansion. Any such forward-looking
statements would be subject to risks and uncertainties that could cause
actual results of operations, financial condition, acquisitions, financing
transactions, operations, expenditures, expansion and other events to differ
materially from those expressed or implied in such forward-looking
statements. Any such forward-looking statements would be subject to a number
of assumptions regarding, among other things, future economic, competitive
and market conditions generally. Such assumptions would be based on the facts
and conditions as they exist at the time such statements are made as well as
predictions as to future facts and conditions, the accurate prediction of
which may be difficult and involve the assessment of events beyond the
Company's control. Further, the Company's business is subject to a number of
risks that would affect any such forward-looking statements. These risks and
uncertainties could cause actual results to the Company to differ materially
from those projected or implied by such forward-looking statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material legal proceedings to which the Company is a party
which have not been disclosed in previous filings with the Securities and
Exchange Commission. There are no material developments to be reported in
any previously reported legal proceeding.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
REGULATION
S-B NUMBER EXHIBIT
27 Financial Data Schedule
(b) The Company filed the following reports on Form 8-K for the
quarter ended June 30, 1998:
1) Form 8-K dated June 30, 1998 reporting in Item 2 of the
acquisition by the Company of Emission Control, SDN, a Malaysian corporation,
in Item 6 of the resignation of three directors of the Company, and in Item 7
of financial statements and exhibits relating to the acquisition of Emission
Control, SDN.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SPECIALTY RETAIL SERVICES,INC.
August 13, 1998 \s\ John Ranko Lozo
Date John Ranko Lozo
Vice President
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,582
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 19,340
<OTHER-SE> (5,758)
<TOTAL-LIABILITY-AND-EQUITY> 13,582
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (15)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15
<INCOME-TAX> 0
<INCOME-CONTINUING> 15
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>*Less than $.01 per share
</FN>
</TABLE>
