As filed with the Securities and Exchange Commission on February 5, 1997
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE GREAT AMERICAN BACKRUB STORE, INC.
(Name of small business issuer in its Charter)
New York 5999 13-3729043
- ------------------ ------------------------- ---------------------
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification
Incorporation or Code Number) Number)
Organization)
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425 Madison Avenue
Suite 605
New York, New York 10017
(212) 750-7046
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(Address and telephone number of Principal Executive Offices)
William Zanker, President
The Great American BackRub Store, Inc.
425 Madison Avenue
Suite 605
New York, New York 10017
(212) 750-7046
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(Name, Address and Telephone Number of Agent For Service)
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Copies of Communications to:
STEPHEN IRWIN, ESQ. MARK SCHWARZ, ESQ.
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP LAW OFFICES OF MARK SCHWARZ
505 PARK AVENUE 545 MADISON AVENUE - 16TH FLOOR
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
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If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please 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. / /
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================
Proposed Maximum
Title of each Class of Securities Aggregate Offering Amount of
to be Registered Price(1) Registration Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares of Series B Convertible $3,105,000 $940.91
Preferred Stock, $.001 par value
("Preferred Stock")(2)
- -------------------------------------------------------------------------------------------------
Shares of Common Stock, $.001 par -- --
value ("Common Stock"), issuable
upon conversion of the Preferred
Stock(3)
- -------------------------------------------------------------------------------------------------
Underwriter's Option to purchase (5)
Preferred Stock(4) $27.00
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Shares of Preferred Stock
underlying the Underwriter's
Option $270,000 $81.82
- -------------------------------------------------------------------------------------------------
Shares of Common Stock issuable -- --
upon conversion of the Preferred
Stock underlying the Under-
writer's Option(6)
- -------------------------------------------------------------------------------------------------
Total Registration Fee -- $1,022.73
=================================================================================================
</TABLE>
- ------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes up to 40,500 shares of Preferred Stock subject to the
Underwriter's over-allotment option from the Company.
(3) Pursuant to Rule 416, there also are being registered such additional
shares of Common Stock as may be required for issuance pursuant to the
anti-dilution provisions of the Preferred Stock.
(4) To be issued to the Underwriter at Closing.
(5) No registration fee required pursuant to Rule 457(g).
(6) Pursuant to Rule 416, there are also being registered such additional
shares of Common Stock as may be required for issuance pursuant to the
anti-dilution provisions of the Preferred Stock underlying the
Underwriter's Option.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
EXPLANATORY NOTE
The prospectus included in this Registration Statement (the
"Prospectus") is to be used in connection with the underwritten public offering
of 310,500 shares of Preferred Stock (including 40,500 shares of Preferred Stock
subject to the Underwriter's over-allotment option).
The Prospectus makes reference to the securities covered by a second
prospectus forming a part of another Registration Statement to be filed by the
Company on Form S-3. This second Prospectus is to be used in connection with the
sale from time to time by certain securityholders of the Company of 2,000,000
Redeemable Warrants which upon consummation of the underwritten public offering
will be issued to certain securityholders of the Company in exchange for
warrants (the "Bridge Warrants") issued in connection with the Company's recent
financing and up to 2,000,000 shares of Preferred Stock underlying such
Redeemable Warrants and up to 16,144,812 shares of Common Stock including up to
16,000,000 shares of Common Stock issuable upon conversion of the shares of
Preferred Stock issuable upon exercise of such Redeemable Warrants.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 5, 1997
PROSPECTUS
270,000 SHARES
THE GREAT AMERICAN BACKRUB STORE, INC.
SERIES B CONVERTIBLE PREFERRED STOCK
The Great American BackRub Store, Inc. (the "Company") is offering (the
"Offering") 270,000 shares of Series B Convertible Preferred Stock, $.001 par
value (the "Preferred Stock").
Dividends on the shares of Preferred Stock offered hereby will accrue
and be cumulative from the date of original issue and will be payable
semi-annually in arrears on April 1 and October 1 of each year, commencing
_______, 1997 in an amount equal to $.70 per share per annum payable at the
Company's option in cash or shares of Common Stock based on the average reported
closing price of the Common Stock, $.001 par value, of the Company (the "Common
Stock") for the 10 consecutive trading days ending upon the trading date next
preceding the record date for the dividend payment. See "Description of
Securities."
Each share of Preferred Stock is convertible at the option of the
holder thereof commencing _______, 1998 [12 months from the date of this
Prospectus] into four shares of Common Stock, subject to proportional increase
(to a maximum of eight shares) if and to the extent that the average closing
price of the Common Stock is less than $4.00 per share at the time of
conversion. See "Description of Securities."
The Preferred Stock is redeemable on or after (i) _________________,
1999 [two years from the date of this Prospectus] with the consent of Investors
Associates, Inc. (the "Underwriter") or upon the closing of a public offering of
equity securities of the Company, or (ii) ___________, 2002 [five years from the
date of this Prospectus]. When the Preferred Stock becomes redeemable, it shall
be redeemable at the option of the Company, in whole or in part, for cash,
initially at $__________ per share [105% of the public offering price per
Share], plus accrued and unpaid dividends to the redemption date. The Preferred
Stock will not be entitled to the benefit of any sinking fund. See "Description
of Securities."
The Company's Common Stock is publicly traded on the Nasdaq SmallCap
Market ("Nasdaq") under the symbol "RUBB". On ______, 1997, the last reported
bid price of the Common Stock on Nasdaq was $____. See "Market for Common Equity
and Related Shareholder Matters." Prior to the Offering, there has been a
limited public market for the Common Stock and no public market for the
Preferred Stock and there can be no assurance that such a market will develop
after the completion of the Offering or that, if developed, it will be
sustained. It is presently anticipated that the initial public offering price
will be $10.00 per share of Preferred Stock. For information regarding the
factors considered in determining the public offering price and terms of the
Preferred Stock, see "Risk Factors" and "Underwriting." Application has been
made for, and it is anticipated that upon the consummation of the Offering, the
Common Stock issuable upon conversion of the Preferred Stock will be approved
for quotation on Nasdaq under the symbol "RUBB". It is anticipated that the
Company will apply to have the Preferred Stock traded on the NASD OTC Bulletin
Board under the symbol " ".
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THE SECURITIES OFFERED HEREBY INVOLVE
A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION. SEE "RISK FACTORS," LOCATED AT PAGE 14, AND "DILUTION."
- -------------------------------------------------------------------------------
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.
<PAGE>
================================================================================
Underwriting
Commissions and Proceeds To
Price to Public Discounts(1) Company (2)
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Per share of Preferred $ $ $
Stock......................
- -------------------------------------------------------------------------------
Total (3)..................$ $ $
===============================================================================
(1) Does not include additional consideration to be received by the
Underwriter in the form of a non-accountable expense allowance. In
addition, see "Underwriting" for information concerning indemnification
and contribution arrangements with the Underwriter and other
compensation payable to the Underwriter.
(2) Before deducting expenses of the Offering estimated at $ payable by the
Company, including the non-accountable expense allowance.
(3) The Company has granted the Underwriter an option, exercisable within 30
days after the date hereof, to purchase up to 40,500 additional shares
of Preferred Stock upon the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting".
The Securities are being offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter, and subject
to approval of certain legal matters by its counsel and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
Offering and to reject any order in whole or in part. It is expected that the
delivery of the securities offered hereby will be made against payment, at the
offices of Investors Associates, Inc., 411 Hackensack Avenue, Hackensack, New
Jersey on or about _______, 1997.
INVESTORS ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS ________, 1997
-2-
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER- ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
PREFERRED STOCK AND THE COMMON STOCK AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
NOTICE TO CALIFORNIA INVESTORS
Each purchaser of Preferred Stock in California must meet one of the
following suitability standards: (i) any person who (a) has a net worth
(excluding home, furnishings and automobiles) of $250,000 or more and gross
annual income of $65,000 or more, or (b) has a net worth (excluding home,
furnishings and automobiles) of $500,000 or more; (ii) any person who is an
accredited investor within the meaning of Regulation D under the Securities Act
of 1933, as amended (the "Securities Act"); (iii) any entity that is a bank,
savings and loan association, trust company, insurance company, investment
company registered under the Investment Company Act of 1940, pension and profit
sharing trust, corporation or other entity, which together with the
corporation's or other entity's affiliates, has a net worth on a consolidated
basis according to its most recent regularly prepared statements (which shall
have been reviewed, but not necessarily audited, by outside accountants) of not
less that $14,000,000 and subsidiaries of the foregoing; or (iv) any person
(other than a person formed for the sole purpose of purchasing the Preferred
Stock being offered hereby) who purchases at least $1,000,000 aggregate amount
of the Preferred Stock hereby offered.
-3-
<PAGE>
AVAILABLE INFORMATION
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 periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed with the Commission may be
inspected and copied at the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, its Midwest Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and its Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of the
Commission at prescribed rates by writing to the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
The Common Stock is quoted on Nasdaq and such reports, proxy statements and
other information may also be inspected at the offices of Nasdaq, 1735 K Street,
N.W., Washington, D.C. 20006.
------------------------------------------------------------------------
The Company intends to furnish to its shareholders annual reports,
which will include statements audited by independent accountants, and such other
periodic reports as it may determine to furnish or as may be required by law,
including Sections 13(a) and 15(d) of the Exchange Act.
-4-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION HEREIN
ASSUMES (I) NO EXERCISE OF (A) THE UNDERWRITER'S OVER-ALLOTMENT OPTION, (B) THE
REDEEMABLE WARRANTS TO BE EXCHANGED FOR THE BRIDGE WARRANTS (BOTH AS HEREINAFTER
DEFINED) UPON CONSUMMATION OF THE OFFERING OR (C) THE UNDERWRITER'S OPTION AND
(II) NO CONVERSION OF THE PREFERRED STOCK. UNLESS OTHERWISE INDICATED, ALL SHARE
AND PER SHARE DATA IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO REFLECT A 1 FOR 8
REVERSE STOCK SPLIT EFFECTED ON FEBRUARY 23, 1995. EACH PROSPECTIVE INVESTOR IS
URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
The Company is a development stage company engaged in the creation of a
proposed national chain of owned and franchised stores under the name "The Great
American BackRub Store," which offer reasonably-priced back rubs to customers
while they are seated and fully clothed in a clean, open, non-threatening
environment. The back rubs currently offered by the Company are for 5, 10, 20,
30 or 45 minutes, priced at approximately $8.95, $16.95, $28.95, $38.95 and
$49.95, respectively. By design, The Great American BackRub Store is a specialty
interactive retailer offering a wide range of massage and stress reduction
products, including oils, bath salts, back supports and electronic and
mechanical stress reduction devices (priced generally from $4.95 to $250). The
Company believes that the combination of a boutique retail concept with back rub
services makes The Great American BackRub Store a unique shopping experience.
The Company currently owns and operates 11 retail stores in New York
City, one in The Westchester mall in White Plains, New York, and one at the
Woodfield Mall in the Chicago metropolitan area. In addition, the Company has
entered into franchise agreements for two locations, one at the Roosevelt Field
Mall on Long Island, New York and the other at the Cherry Creek Mall in Denver,
Colorado. The Company has also granted an option for a third franchise in the
Los Angeles, California metropolitan area. The Company plans to open
approximately 40 Company-owned and/or franchised stores within two years from
the date of this Prospectus, although there can be no assurance that the Company
will be successful in this plan. The Company intends to devote a substantial
portion of the net proceeds of the Offering to the construction of Company-owned
stores. The Company intends to place its stores in high traffic locations such
as malls, airports, urban sites and casinos.
The typical Great American BackRub Store location comprises
approximately 600 to 1,200 square feet, of which 300 to 600 square feet is used
as retail space. Customers are seated on a specially-
-5-
<PAGE>
designed chair which provides cushioned support for the chest, arms and head.
The Company's stores are designed to permit people both inside and outside the
store to view the back rub process and at the same time maintain the privacy of
the back rub customer. The Company's stores will also offer back rub services
off-site, to corporate offices, convention centers and tourist attractions. All
back rub services are provided by therapists who are either licensed (in states
where such licensing is required) or have completed training at a school
certified by a recognized trade association.
The Company's growth strategy is to be implemented primarily by
Terrance C. Murray, the Company's Chief Executive Officer, who previously served
as the executive vice president, operations of Supercuts, Inc. Supercuts, Inc.
is a hair care chain with in excess of 1,000 company-owned and franchised stores
in 43 states and Puerto Rico. The Company believes that the substantial national
retail and franchise experience of Mr. Murray will be an asset to the Company.
On December 27, 1996, the Company consummated a $266,666.68 financing
(the "Bridge Financing") (the net proceeds of which were approximately
$175,000), consisting of five and one-third investment units comprising an
aggregate of (i) $262,666.68 principal amount of promissory notes (the "Bridge
Notes") which bear interest at the rate of 10% per annum and are due and payable
upon the earlier of (a) consummation of the Offering or (b) December 27, 1997
and (ii) 4,000,000 warrants (the "Bridge Warrants"). Each Bridge Warrant
entitles the holder to purchase one share of Series A Preferred Stock of the
Company at an exercise price of $5.00 per share (subject to adjustment upon the
occurrence of certain events). Upon consummation of the Offering each Bridge
Warrant shall automatically, without any action by the holder thereof, be
converted into half a warrant (referred to herein as a "Redeemable Warrant" or
"New Warrant"), each New Warrant entitling the holder thereof to purchase one
share of the Series B Preferred Stock at an exercise price of $8.00 per share
(subject to adjustment upon the occurrence of certain events) commencing on
_____________, 1998 [12 months from the date of this Prospectus] until
______________, 2001 [four year from the date of this Prospectus]. See
"Description of Securities." The New Warrants and the underlying shares of
Preferred Stock issuable upon exercise of the New Warrants are being registered
under the Securities Act in the Registration Statement of which this Prospectus
is a part. The Company intends to use a portion of the proceeds of this Offering
to repay the entire principal amount of, and accrued interest on, the Bridge
Notes. See "Use of Proceeds" and "Concurrent Offering."
The Company was incorporated under the laws of the State of New York in
December 1992 under the name American Backrub Stores, Inc. The Company's
executive offices are located at 425 Madison
-6-
<PAGE>
Avenue, Suite 605, New York, New York 10017 and its telephone number is (212)
750-7046.
-7-
<PAGE>
THE OFFERING
Securities to be Offered........ 270,000 shares of Series B Convertible
Preferred Stock (the "Preferred Stock").
Dividends...................... Cumulative from the date of original issue
at the annual rate of $.70 per share,
payable; if, as and when declared by the
Company's Board of Directors in cash or
shares of Common Stock (at the Company's
election) in arrears on April 1 and
October 1 of each year. See "Description
of Securities --"Description of Preferred
Stock -- Dividend Rights."
Liquidation Preference.......... $10.00 per share, plus accrued and unpaid
dividends. See "Description of Securities
-- "Description of Preferred Stock --
Liquidation Preference."
Conversion Rights............... Each share of Preferred Stock is
convertible at the option of the holder
thereof at any time from and after
__________, 1998 [12 months from the date
of this Prospectus], unless previously
redeemed, into the greater of four shares
of Common Stock or a number of shares of
Common Stock equal to $16.00 divided by
the average of the last reported sale
price of the Common Stock for the 10
consecutive trading days ending on the
third trading day preceding the date of
conversion up to a maximum of eight
shares. See "Description of Securities --
"Description of Preferred Stock --
Conversion Rights."
Optional Redemption............ The Preferred Stock is redeemable on or
after (i) _________________, 1999 [two
years from the date of this
-8-
<PAGE>
Prospectus] with the consent of the
Underwriter or upon the closing of a
public offering of equity securities of
the Company, or (ii) _______, 2002 [five
years from the date of this Prospectus].
The Preferred Stock may be redeemed at the
option of the Company, in whole or in
part, at $______ [105% of the public
offering price per share] per share of
Preferred Stock, plus in each case accrued
and unpaid dividends to the redemption
date. See "Description of Securities
--"Description of the Preferred Stock --
Optional Redemption."
Voting Rights................. The holders of Preferred Stock will not be
entitled to vote on any matter except as
required by law. See "Description of
Securities -- "Description of Preferred
Stock -- Voting Rights."
Common Stock Outstanding
Prior to the Offering: 2,393,354 shares (1)
Preferred Stock Outstanding
Prior to the Offering: None
Preferred Stock to be
Outstanding after
the Offering: 270,000 shares
Redeemable Warrants to be
Outstanding After the Offering: 2,000,000 Redeemable Warrants (2)
Nasdaq SmallCap Market Symbol: Common Stock: RUBB
Proposed OTC Symbol: Preferred Stock:___________
Use of Proceeds: The net proceeds will be used for the
construction of Company-owned stores,
satisfaction of the Bridge Notes and
working capital. See "Use of Proceeds."
-9-
<PAGE>
Risk Factors: The purchase of the Preferred Stock
offered hereby involves a high degree of
risk and immediate and substantial
dilution. Prospective investors should
review carefully and consider the
information set forth under "Risk Factors"
and "Dilution."
- --------------------
(1) Does not include 370,000 shares of Common Stock reserved for issuance
upon exercise of certain outstanding options granted to the Company's
executive officers and a former officer, 75,000 shares of Common Stock
reserved for issuance pursuant to the Company's 1994 Employee Stock
Option Plan (the "Employee Plan") (8,500 of which options have been
granted to date), 110,000 shares of Common Stock reserved for issuance
upon exercise of certain warrants granted in connection with a previous
financing, an aggregate of 125,000 shares of Common Stock reserved for
issuance upon exercise of warrants granted to the representative of the
underwriters in connection with the Company's initial public offering,
an aggregate of 50,000 shares of Common Stock reserved for issuance
upon exercise of certain options issued to directors of the Company and
an aggregate of 148,500 shares of Common Stock reserved for issuance
upon exercise of outstanding options granted to consultants and a
former consultant to the Company. It is currently contemplated that
approval of an amendment to the Employee Plan increasing the number of
shares of Common Stock available for issuance thereunder will be sought
at the Company's next annual shareholders' meeting, which is expected
to occur in May 1997.
(2) Consists of 2,000,000 Redeemable Warrants covered by another prospectus
included in a separate registration statement filed by the Company. See
"Concurrent Offering."
-10-
<PAGE>
CERTAIN DEVELOPMENTS
FRANCHISE/FRANCHISE OPTION TERMINATIONS
The Company's first franchised store (the "Las Vegas Store") opened in
July 1994 in Las Vegas, Nevada. The Company entered into a franchise agreement
(the "Franchise Agreement") with its Las Vegas franchisee (the "Franchisee") on
June 1, 1994. Pursuant to the Franchise Agreement, the Franchisee paid the
Company an initial, non-recurring, non-refundable franchise fee of $10,000. In
addition, the Franchisee paid the Company a monthly royalty fee equal to 8% of
the Franchisee's gross monthly revenues (as such term is defined in the
Franchise Agreement). The Franchisee also paid to the Company an advertising and
sales promotion fee which is equal to the greater of 3% of the Franchisee's
gross monthly revenues or $1,000. On May 30, 1995, the Company and the
Franchisee entered into a franchise termination agreement whereby (i) the
Franchise Agreement and related sublease were terminated, (ii) the Company
purchased certain assets from the Franchisee and (iii) the Company and the
Franchisee provided for the mutual release of any obligations of each to the
other whether arising out of the Franchise Agreement, the sublease or otherwise.
The purchase price for the assets conveyed by the Franchisee to the Company was
$25,000 and 18,185 shares of Common Stock. Simultaneously with execution and
delivery of the Franchise Termination Agreement, the Company closed the Las
Vegas Store.
The Company entered into two option agreements (the "Bay Area Option
Agreements") with Bay Area Backs I, a California limited partnership (the
"Optionee"), on June 20, 1994 and June 21, 1994, respectively, for the opening
of two franchised stores in the San Francisco area. Pursuant to the Bay Area
Option Agreements, the Optionee paid to the Company $5,000 for each of two
options (the "Bay Area Options") to require the Company to enter into franchise
agreements with the Optionee. On May 30, 1995, the Company and the Optionee
entered into an option termination agreement whereby (i) the Bay Area Option
Agreements were terminated, (ii) the Company purchased certain assets from the
Optionee and (iii) the Company and the Optionee provided for the mutual release
of any obligations of each to the other whether arising out of the Bay Area
Option Agreements or otherwise. The purchase price for the assets conveyed by
the Optionee to the Company and the termination of the Bay Area Options was
$27,300.
Upon termination of the franchise and the options referred to above,
the Company suspended its franchise program and focused on developing its
Company-owned stores. In September 1996, the Company resumed the marketing of
its franchise program.
As of the date hereof, the Company has entered into two franchise
agreements, one for a location at Roosevelt Field Mall, Long Island, New York,
and the second for the Cherry Creek Mall, Denver, Colorado. Certain officers of
the Company hold an approximately 22% equity interest in the Roosevelt Field
Mall franchisee. See "Certain Transactions." Both locations are currently open.
In addition, the Company has entered into an option agreement (the "Franchise
Option Agreement") for a franchise location in the Los Angeles, California
metropolitan area. Under
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<PAGE>
the terms of both franchise agreements, the franchisee has paid the Company a
$12,500 initial, non-recurring, non-refundable, franchise fee and has agreed to
pay a monthly royalty equal to 6% of the franchise's gross monthly revenues (as
such term is defined in the Franchise Agreement). Under the terms of the
Franchise Option Agreement, the optionee has paid to the Company a
non-refundable fee of $5,000 (to be applied to the $12,500 franchise fee in the
event the optionee enters into a franchise agreement within 120 days of the date
of the Franchise Option Agreement) and the Company has given the optionee an
exclusive right to open a Great American BackRub franchise within Los Angeles
and Orange Counties, California for a period of 120 days. In the event that the
optionee identifies a site within those counties that is acceptable to both the
Company and the optionee, the Company and the franchisee will enter into a
Franchise Agreement with terms identical to those described above.
CONSULTING AGREEMENT
On February 8, 1996, the Company entered into a Financial Advisory and
Consulting Agreement (the "Financial Advisory Agreement") with the Underwriter.
The Financial Advisory Agreement expires on January 31, 1997. As compensation
for the services to be performed by the Underwriter to the Company pursuant to
the Financial Advisory Agreement, the Company paid to the Underwriter a
financial consulting fee of $100,000, and issued warrants to purchase 100,000
shares of Common Stock at an exercise price of $1.00 per share, exercisable to
and including January 31, 1997, and warrants to purchase 200,000 shares of
Common Stock at an exercise price of $2.50 per share, exercisable to and
including January 31, 1998 (all of which have been exercised). The Company has
registered for resale the shares of Common Stock issuable upon exercise of
warrants under the Securities Act.
During the term of the Financial Advisory Agreement, the Underwriter
will provide the Company with such regular and customary consulting advice as is
reasonably requested by the Company. The Underwriter's duties will include, but
will not necessarily be limited to (i) providing sponsorship and exposure in
connection with the dissemination of corporate information regarding the Company
to the investment community at large, (ii) arranging meetings with securities
analysts, (iii) assisting in the Company's financial public relations and (iv)
rendering advice regarding a future public or private offering of securities of
the Company or of any of its subsidiaries. In this regard, the Underwriter has
agreed to use its best efforts to assist the Company in arranging for a private
placement or public offering of securities with gross proceeds to the Company of
at least $2 million.
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<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus, which statements as
at and for the nine-month periods ended September 30, 1995 and 1996 are
unaudited. The summary financial information should be read in conjunction with
such financial statements, including the notes thereto.
<TABLE>
<CAPTION>
December 18, 1992
(Inception) to
September 30,
Year Ended December 31, Nine Months Ended September 30, 1996
--------------------------------- -------------------------------- ------------------
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues:
Services.......................... $ 525,898 $ 874,320 $ 535,977 $ 1,527,390 $ 2,993,245
Products.......................... 136,873 326,012 99,694 442,114 945,011
Royalties,
franchise
fees and
other........................... 44,949 1,609 2,035 --- 46,558
----------- ----------- ----------- ----------- -----------
Total
revenues.......................... 707,720 1,201,941 637,706 1,969,504 3,984,814
----------- ----------- ----------- ----------- -----------
Expenses:
General and
administrative.................... 589,076 1,521,672 868,473 1,356,342 3,577,615
Other expenses.................... 1,237,619 2,327,524 1,267,923 2,158,440 6,130,027
----------- ----------- ----------- ----------- -----------
Net loss............................ $(1,118,975) $(2,647,255) $(1,498,690) $(1,545,278) $(5,722,828)
============ ============ ============ ============
Net loss per
common
share and
equivalents....................... $(1.70) $(1.67) $(0.99) $(0.83) ---
Weighted average
number of
common
shares and
equivalents
outstanding
during the
period............................ 658,750 1,582,250 1,507,500 1,859,506 ---
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
BALANCE SHEET DATA: ACTUAL PRO FORMA(1) AS ADJUSTED
------ ------------ -----------
(1)(2)
------
<S> <C> <C> <C>
Current assets........................................... $1,826,405 2,001,405 $3,738,738
Total assets............................................. 3,136,922 3,311,922 5,049,255
Working capital.......................................... 1,377,331 1,552,331 3,289,664
Total liabilities........................................ 634,182 634,182 634,182
Total shareholders' equity............................... 2,502,740 2,677,740 4,415,073
Deficit accumulated during the development stage......... (5,722,828) (5,722,828) (5,985,495)
</TABLE>
- ------------------
(1) Gives effect to the consummation of the Bridge Financing (sale of
$262,667 of Bridge Notes for $262,667 and 4,000,000 Bridge Warrants for
$4,000) including the recording of $262,667 of loan discount as an
increase in additional paid-in capital and charging to additional
paid-in capital of financing expenses of $91,667 related to the Bridge
Financing.
(2) As adjusted to reflect: (i) the issuance of 270,000 shares of Series B
Convertible Preferred Stock offered by the Company hereby and the
anticipated use of proceeds to satisfy the $262,667 of Bridge Notes;
and (ii) the write-off of $262,667 of loan discount. See "Use of
Proceeds."
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<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS INHERENT IN, AND AFFECTING THE BUSINESS OF, THE COMPANY BEFORE MAKING AN
INVESTMENT DECISION.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CONTAINING AN EXPLANATORY
PARAGRAPH THAT INDICATES GOING CONCERN UNCERTAINTIES
The Company's independent certified public accountants have included an
explanatory paragraph in their report on the Company's Financial Statements
stating that the Financial Statements have been prepared based on the assumption
that the Company will continue as a going concern and that the Company's losses
from operations since inception raise substantial doubt about the ability of the
Company to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Financial
Statements.
DEVELOPMENT STAGE COMPANY; LIMITED OPERATING HISTORY AND REVENUES; HISTORICAL
AND
ANTICIPATED LOSSES; ACCUMULATED DEFICIT
The Company was organized in December 1992, commenced operations in
August 1993, opened its first Company-owned store in October 1993 and therefore
has a limited operating history upon which an evaluation of the Company's future
performance and prospects can be made. The Company's prospects must be
considered in light of the risks, expenses, delays, problems and difficulties
frequently encountered in the establishment of a new business in an emerging and
evolving industry. Since inception, the Company has generated limited revenues
and has incurred significant losses, including losses of $1,118,975, $2,647,255
and $1,545,278, respectively, for the years ended December 31, 1994 and 1995 and
the nine-month period ended September 30, 1996 resulting, at September 30, 1996,
in an accumulated deficit of $5,722,828. Losses are continuing through the date
of this Prospectus. Inasmuch as the Company will continue to have a high level
of operating expenses following the Offering and will be required to make
significant up-front expenditures in connection with its proposed expansion, the
Company anticipates that losses will continue for at least the next 12 months
and until such time, if ever, as the Company is able to generate sufficient
revenues to finance its operations and the costs of continuing expansion. Since
inception, the Company's operations have generated negative cash flow, as its
expenses have exceeded revenues, and the Company's ability to continue its
operations has been dependent upon debt and equity financings. There can be no
assurance that the Company will be able to generate significant revenues or
achieve profitable operations or that its operations will generate positive cash
flow. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Financial Statements.
NEW INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE
As is typically the case in an emerging industry, demand and market
acceptance for newly introduced services and products are subject to a high
level of uncertainty. The Company has not yet commenced significant marketing
activities or studies and currently has limited marketing experience in the
retail back rub business and limited financial, personnel and other resources to
undertake extensive marketing activities or studies. The Company does not intend
to conduct any formal marketing or other concept feasibility studies to
determine the potential commercial viability of its concept. Achieving market
acceptance for the Company's services and products will require substantial
marketing efforts and expenditure of significant funds to create awareness and
demand. The Company's success depends in large part on its ability to attract
suitable franchisees and will also be dependent on the level of acceptance and
usage of the Company's services and products by consumers. Because demand by
prospective franchisees and consumers may be interrelated, any lack or lessening
of demand by any one of these could adversely affect market acceptance for the
Company's services and products. In light of the relatively undeveloped and
emerging markets for retail back rubs, there can be no assurance that a
substantial market
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<PAGE>
for the Company's services and products will develop and grow. See "Business--
Intended Expansion."
RISKS ASSOCIATED WITH GROWTH STRATEGY AND RAPID EXPANSION
The Company has achieved only limited growth to date. Implementation of
the Company's proposed expansion will be substantially dependent on, among other
things, the Company's ability to identify and secure advantageous locations and
leases for its Company-owned and franchised stores on a timely basis and on
favorable terms; hire and retain skilled management, financial, marketing and
other personnel; and successfully manage growth (including monitoring
operations, controlling costs and maintaining effective quality, inventory and
service controls). The Company's prospects will also be significantly affected
by its ability to successfully develop and maintain relationships with
franchisees. The Company's growth strategy and plans are subject to change as a
result of a number of factors, including progress or delays in the Company's
marketing efforts, changes in market conditions and competitive factors. There
can be no assurance that the Company will be able to successfully implement its
business strategy or otherwise expand its operations. See "Use of Proceeds".
FRANCHISING
The Company's success will be dependent upon the development and
implementation of an effective franchise program, which would afford
unaffiliated parties the opportunity to own and operate Great American BackRub
Stores using the Company's concept. The Company's initial efforts to develop a
franchise program did not prove successful. One franchise store was opened in
July 1994, but the franchise agreement was subsequently terminated with the
Company's consent and the store closed, and options for two other franchise
stores have been terminated. Recently, the Company entered into franchise
agreements for two locations and granted an option for a third franchise.
However, no assurance can be given that the Company will open any additional
franchises or that the Company will be able to manage such a program
effectively, that its franchisees will have the ability or resources necessary
to successfully develop and operate their stores or that such franchisees'
stores will be well operated and promoted. In addition, the Company intends to
lease the space for any franchised stores directly from the landlord and
sublease to the franchisee. The Company will be primarily liable for any such
leases and may be required to pay the landlord directly if the franchisee fails
to do so. See "Business--Franchise Development."
DEPENDENCE ON OFFERING PROCEEDS TO FINANCE EXPANSION AND WORKING CAPITAL;
POSSIBLE NEED FOR ADDITIONAL FINANCING
To date the Company's operations have not generated positive cash flow.
The Company is dependent on the proceeds of this Offering or other financing to
implement its proposed expansion and to finance its working capital
requirements. The Company anticipates, based on currently proposed plans and
assumptions relating to its operations (including the costs associated with its
proposed expansion), that the net proceeds of this Offering will be sufficient
to satisfy its anticipated cash requirements for at least 12 months following
the consummation of this Offering. In the event that the Company's plans change,
its assumptions change or prove to be inaccurate or the proceeds of this
Offering prove to be insufficient to fund the Company's operations (due to
unanticipated expenses, delays, problems, difficulties or otherwise), the
Company will be required to seek additional financing sooner than anticipated to
implement its proposed expansion and to finance its working capital
requirements. The Company may determine, depending upon the opportunities
available to it, to seek additional debt or equity financing to fund the cost of
continuing expansion. To the extent that the Company incurs indebtedness or
issues debt securities, the Company will be subject to risks associated with
incurring substantial indebtedness, including the risks that interest rates may
fluctuate and cash flow may be insufficient to pay principal and interest on any
such indebtedness. The Company has no current arrangements with respect to, or
sources of, additional financing, and it is not anticipated that existing
shareholders will provide any portion of the Company's future financing
requirements. There can be no assurance that additional financing will be
available to the Company on commercially
-15-
<PAGE>
reasonable terms or at all. If the Company is unable to obtain additional
financing, its ability to meet its current obligations and current plans for
expansion could be materially adversely affected. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POTENTIAL LIABILITY; INSURANCE
The Company is engaged in a business which could expose it to possible
liability claims from others, including personal injury claims. The Company
maintains a general liability insurance policy that is subject to a $1,000,000
per occurrence limit with a $1,000,000 aggregate limit. Currently, the Company
requires all of its employee/therapists to obtain professional liability
insurance (in the minimum amount of $1,000,000) through one of two professional
massage organizations. In some cases, the Company is permitted under the
applicable policy to be named as an additional insured. In addition, the Company
has obtained a professional liability policy for an additional $1,000,000
covering all of its employees. There can be no assurance, however, that the
Company's insurance will be sufficient to cover potential claims or that an
adequate level of coverage will be available in the future at a reasonable cost.
A partially insured or completely uninsured successful claim against the Company
could have a material adverse effect on the Company.
REGULATION
Certain states in which the Company intends to operate, as well as the
States of Illinois and New York, in which the Company currently operates 13
Company-owned stores, require the licensing of massage therapists. The offer,
sale, termination or renewal of franchises in the United States is subject to
requirements established by the Federal Trade Commission (the "FTC"). In
addition to the requirements of the FTC, certain states require that franchisors
register in the state prior to offering franchises in such states. The Company
believes that it is in compliance with all applicable laws and regulations and
has all required licenses to conduct its business. However, no assurance can be
given that current laws or regulations applicable to the Company's business will
not change. Any such new laws or regulations or the Company's expansion into new
geographic areas could subject the Company to substantial costs in order to
comply with such applicable laws or regulations. Any failure by the Company to
comply with any new or existing laws or regulations could subject the Company to
substantial penalties. See "Business--Regulation."
COMPETITION
Management of the Company believes that no other multi-unit retailer is
in the business in which the Company operates. Competition consists of numerous
independent massage therapists, spas, salons and health clubs providing full
body massage and a limited number of massage therapists providing seated massage
in non-retail "off-site" environments. However, due to the relatively low cost
of, and lack of other barriers to, entry into the Company's business, no
assurance can be given that others will not develop multi-unit retail concepts
or stores similar to or competitive with the Company's concept and stores or
that the Company will successfully compete with any such competitors, some of
whom may have substantially greater financial and other resources than the
Company. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL; ATTRACTION AND RETENTION OF KEY PERSONNEL
The Company is dependent to a great extent, on the experience,
abilities and continued services of Mr. Zanker, the Company's Chairman of the
Board and President, and Mr. Murray, the Company's Chief Executive Officer.
While the Company's management has substantial national retail and franchise
experience, no assurance can be given that such prior experience will assure the
Company's success. In addition, the Company's management has no prior experience
with companies offering products and services similar to those offered by the
Company. The Company has entered into three-year employment agreements with each
of Messrs. Zanker and Murray. See "Management." The loss of the services of
Messrs.
-16-
<PAGE>
Zanker and Murray could have a material adverse effect on the Company. The
Company has obtained $2,000,000 of key man insurance on the lives of each of
Messrs. Zanker and Murray. The Company's success also depends upon its ability
to attract and retain qualified massage therapists and other additional
qualified personnel. While the Company believes there are numerous qualified
massage therapists currently available, competition for such personnel may
become intense. There can be no assurance that the Company will be able to
attract and retain qualified personnel.
DILUTION
If the Preferred Stock offered hereby were converted to Common Stock,
purchasers of the Preferred Stock would incur an immediate and substantial
dilution in the net tangible book value of such Common Stock. Such dilution
represents the difference between the public offering price for the Preferred
Stock sold hereby and the pro forma net tangible book value per share of Common
Stock after the Offering, assuming conversion of the Preferred Stock to Common
Stock. Additional dilution to future net tangible book value per share may occur
upon the exercise of the Redeemable Warrants, the Underwriter's Option and
certain options that may be issued or exercised under the Company's stock option
plans. If the Preferred Stock were converted, the immediate dilution per share
of Common Stock to purchasers of the Preferred Stock offered hereby would be
$8.68 per share.
SUBSTANTIAL PORTION OF NET PROCEEDS ALLOCATED FOR WORKING CAPITAL
Approximately 27% ($537,333) of the net proceeds received by the
Company in the Offering has been allocated to working capital purposes.
Management will have significant discretion as to how such proceeds will be
used. See "Use of Proceeds."
POSSIBLE ACQUISITIONS
It is currently anticipated that a portion of the Company's future
growth will result from acquisitions of other similar or complementary
businesses. The Company has no current plan or agreement to acquire any business
and there can be no assurance that any such transaction will be consummated or
will result in increased levels of profit for the Company. In addition, there
can be no assurance that the Company will be able to integrate or manage
successfully acquired businesses. Any such acquisitions may involve the use of
cash or the issuance of additional debt or equity securities which could have a
dilutive effect on the then outstanding capital stock of the Company, and may
result in accumulation of substantial goodwill and intangible assets, which
would result in amortization charges to the Company.
NO DIVIDENDS
The Company has never paid a dividend on its Common Stock and does not
intend to pay any dividends on its Common Stock in the foreseeable future. The
Company does not intend to pay dividends on the Preferred Stock prior to
redemption thereof, if any. The Company currently intends to reinvest earnings,
if any, in the development and expansion of its business. See "Dividend Policy."
NO PUBLIC MARKET; PRICE OF PREFERRED STOCK; POSSIBLE VOLATILITY OF MARKET
No public market exists for the Preferred Stock and there is only a
limited trading market for the Common Stock on Nasdaq. The Company does not
intend to apply for listing of the Preferred Stock on any securities exchange or
the Nasdaq National Market or SmallCap Market. Although it intends to apply for
quotation on the NASD OTC Bulletin Board, no assurance can be given that the
Preferred Stock will be accepted for listing on the NASD OTC Bulletin Board. The
initial public offering price and terms of the Preferred Stock have been
determined by negotiation between the Company and the Underwriter and do not
necessarily bear any relationship to the Company's assets, book value, results
of operations or other established criteria of valuation. See "Underwriting". In
addition, the market prices of the Preferred Stock and Common Stock may be
highly volatile as
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<PAGE>
has been the case with the securities of many emerging companies. Factors such
as the Company's operating results and announcements by the Company or its
competitors of new products or services may have a significant impact upon the
market price of the Company's securities. In addition, in recent years, the
stock market has experienced a high level of price and volume volatility and
market prices for the securities of many companies have experienced wide price
fluctuations not necessarily related to the operating performance of such
companies.
LACK OF EXPERIENCE OF UNDERWRITER
Although the Underwriter commenced operations in 1969, it does not have
extensive experience as an underwriter of public offerings of securities. Its
inexperience as a managing underwriter could have an adverse effect on its
ability to market the securities offered hereby.
UNDERWRITER'S POTENTIAL INFLUENCE ON THE MARKET
It is anticipated that a significant amount of the Preferred Stock will
be sold to customers of the Underwriter. Although the Underwriter has advised
the Company that it intends to make a market in the Preferred Stock and the
Common Stock, it will have no legal obligation to do so and, since it is a
relatively small firm, may be unable to do so. The Underwriter, if it becomes a
market maker, could be a dominating influence in the market for the Preferred
Stock if one develops and the Common Stock. The prices and the liquidity of the
Preferred Stock and the Common Stock may be significantly affected by the
degree, if any, of the Underwriter's participation in the market. No assurance
can be given that any market activities of the Underwriter, if commenced, will
be continued. See "Underwriting."
In addition, the Company has agreed to pay the Underwriter a warrant
exercise fee of 5% of the exercise price of each Redeemable Warrant exercised
after the first anniversary of the Effective Date. If the Underwriter is a
market maker of the Redeemable Warrants, the Preferred Stock or the Common Stock
at the time the Redeemable Warrants are exercisable, a decision by the
Underwriter to solicit the exercise of Redeemable Warrants and receive an
exercise fee may result in a distribution of the underlying Preferred Stock
issued upon the exercise of such Redeemable Warrants, depending on the amount of
such stock issuance. Rule 10b-6 under the Exchange Act would require that the
Underwriter cease its market-making activities during any such distribution, and
for two or nine business days preceding the commencement of the distribution,
depending on the price of the stock and size of its public float. If such a
cessation in the Underwriter's market-making activities occurs at a time when
there is no other broker-dealer making a market in such securities, the
liquidity in the market for such securities may be adversely affected during
such time.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS, COMPANY'S STOCK OPTION PLAN AND
REPRESENTATIVE'S WARRANTS; DILUTIVE EFFECTS
As of the date of this Prospectus, options and warrants to purchase an
aggregate of 518,500 shares of Common Stock are issued and outstanding, held by
the Company's executive officers, a former executive officer, consultants and a
former consultant to the Company and warrants to purchase 110,000 shares of
Common Stock are outstanding, granted in connection with a previous financing.
In connection with the Bridge Financing, the Company issued the Bridge Warrants
which the Company will exchange for 2,000,000 New Warrants which the Company is
registering pursuant to a separate Registration Statement. Each New Warrant will
be exercisable for one share of Preferred Stock. See "Concurrent Offering." In
addition, the Company may from time to time issue options under the Employee
Plan to purchase up to 75,000 shares of Common Stock. Options to purchase 8,500
shares of Common Stock are presently outstanding under such Plan. The Company
agreed with the underwriters of its initial public offering not to grant or
issue options to purchase more than 37,500 shares of Common Stock under the
Employee Plan prior to February 28, 1997. See "Management--1994 Employee Stock
Option Plan." The Company granted options to purchase an aggregate of 50,000
shares of Common Stock to directors of the Company. See "Management--
Compensation of
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<PAGE>
Directors." In connection with the Company's initial public offering, the
Company issued and sold to a representative of the underwriters (the
"Representative") for nominal consideration the Representative's Warrants which
entitle the Representative to purchase an aggregate of 125,000 shares of Common
Stock. The Representative's Warrants are exercisable through February 25, 2000,
at an exercise price of $6.00 per share. The holders of the options and warrants
presently outstanding, holders of any subsequently issued options and warrants
of the Company, as well as the Representative will have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership. Messrs. Murray and Dee who upon consummation of this Offering
will hold an aggregate of 449,600 New Warrants have agreed not to sell any New
Warrants, Preferred Stock issuable upon the exercise of New Warrants or Common
Stock into which Preferred Stock may be converted for 24 months from the date of
this Prospectus without the Underwriter's prior written consent. The sale of
Common Stock or other securities held by or issuable to any such holders, or
merely the potential of such sales, could have an adverse effect on the market
price of the Common Stock. The Company may find it more difficult to raise
additional equity capital, if it should be needed for the business of the
Company, while any of such securities are outstanding. At any time when the
holders thereof might be expected to convert or exercise them, the Company would
probably be able to obtain additional equity capital on terms more favorable
than those provided by such securities. To the extent that any such securities
are converted or exercised, as the case may be, the percentage of ownership
interest of the Company's shareholders will be diluted. See "Dilution,"
"Management--1994 Employee Stock Option Plan," "Management--Nonqualified Stock
Options," "Management--Compensation of Directors" and "Description of
Securities--Bridge Warrants."
SHARES ELIGIBLE FOR FUTURE SALE
Of the 2,393,354 shares of Common Stock outstanding, 144,812 shares are
"restricted securities" within the meaning of the Securities Act and the rules
and regulations promulgated thereunder, which are being registered pursuant to a
separate registration statement (see "Concurrent Offering") and 500,000 shares,
which represent shares of Common Stock sold by the Company in a private
placement in June 1993, are freely tradeable and not subject to lockup
restrictions. All of the Company's officers and directors (who own 154,812
shares of Common Stock in the aggregate) have agreed not to sell, assign or
transfer shares of Preferred Stock for a period of 36 months from the date of
this Prospectus (except for Messrs. Zanker, Murray and Dee who have agreed not
to sell any shares of the Preferred Stock or Common Stock for 24 months from the
date of this Prospectus) without the Underwriter's prior written consent. When
freed of these restrictions, sales of such shares by the Company's existing
shareholders could have a depressive effect on the price of the shares of Common
Stock in the public market. Such sales could also adversely affect the Company's
ability to raise capital at that time through the sale of its equity securities.
The holders of the Representative's Warrants and the Underwriter's Option have
certain registration rights with respect to the securities underlying such
Warrants and Option, commencing February 28, 1996 and respectively. See "Shares
Eligible for Future Sale."
In addition, the Company has agreed that without the consent of the
Underwriter, it will not sell or offer for sale any of its securities within 24
months (in the case of a public offering) or within 36 months (in the case of a
private placement) of the date of this Prospectus, except for securities issued
pursuant to outstanding options and warrants, up to 75,000 options under the
Employee Plan and up to 200,000 options to senior executives of the Company.
NO PUBLIC TRADING MARKET; POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET;
DISCLOSURE RELATING TO LOW PRICED STOCKS
Prior to the Offering, there has been no public trading market for the
Preferred Stock and no assurance can be given that such a market will develop
or, if developed, that it will continue to be maintained. In addition, there can
be no assurance that the Company will meet the maintenance criteria for
continued quotation of its Common Stock on Nasdaq. The continued quotation
criteria for
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<PAGE>
Nasdaq include, among other things, $2,000,000 in total assets, $1,000,000 in
capital and surplus, a public float of 100,000 shares with a market value equal
to $200,000, two market makers and a minimum bid price of $1.00 per share of
common stock. If an issuer does not meet the $1.00 minimum bid price standard,
it may, however, remain on Nasdaq if the market value of its public float is at
least $1,000,000 and the issuer has at least $2,000,000 in equity. In addition,
Nasdaq has recently proposed changes to the maintenance requirements which, if
adopted, would replace the total assets and total equity requirements with a
requirement of net tangible assets (total assets less liabilities and
intangibles) of $2,000,000 or net income of at least $500,000 in two of the last
three years or a market capitalization of at least $35,000,000. There can be no
assurance that the Company will continue to satisfy the maintenance criteria of
Nasdaq. If the Company became unable to meet the continued maintenance criteria
of Nasdaq and was removed therefrom, trading, if any, in the Common Stock would
thereafter have to be conducted in the over-the-counter market in the so-called
"pink sheets" or, if then available, Nasdaq's OTC Bulletin Board. As a result,
an investor would find it more difficult to dispose of, and to obtain accurate
quotations as to the value of, such securities.
In addition, if the trading price of the Preferred Stock is less than
$5.00 per share, or if the Common Stock is delisted from trading on Nasdaq and
the trading price of the Common Stock is less than $5.00 per share, trading in
the Preferred Stock or the Common Stock, as the case may be, would also be
subject to the requirements of Rule 15g-9 promulgated under the Exchange Act.
Under such rule, broker/dealers who recommend such low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosure in connection with any trades involving a stock defined as a penny
stock (generally, according to recent regulations adopted by the Commission, any
equity security not traded on an exchange or quoted on Nasdaq that has a market
price of less than $5.00 per share, subject to certain exceptions), including
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. Such
requirements could severely limit the market liquidity of the Preferred Stock
and the Common Stock and the ability of purchasers in the Offering to sell their
securities in the secondary market. There can be no assurance that the Common
Stock will not be delisted or that the Preferred Stock or the Common Stock will
not be treated as a penny stock.
DEPENDENCE ON TRADEMARKS
The trademark THE GREAT AMERICAN BACKRUB has been registered with the
United States Patent and Trademark Office. The Company presently intends to make
all appropriate filings and registrations and take all other actions necessary
to protect its intellectual property rights. There can be no assurance, however,
that the Company will be able to effectively protect such property rights. The
failure by the Company to protect such rights from unlawful and improper
appropriation may have a material adverse effect on the Company. If the Company
becomes involved in litigation to protect its intellectual property, it may
divert significant Company resources, which could have a material adverse effect
on the Company and its results or operations, and, if such a claim was
unsuccessful, the Company's business could be materially adversely affected. See
"Business--Trademark Protection."
FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act, which
are intended to be covered by the safe harbors created thereby. Investors are
cautioned that all forward-looking statements involve risks and uncertainty.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking
-20-
<PAGE>
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
-21-
<PAGE>
CONCURRENT OFFERING
The Company has filed a registration statement with respect to an
offering of 2,000,000 Redeemable Warrants (sometimes referred to herein as the
"New Warrants"), 2,000,000 shares of Preferred Stock underlying the New Warrants
and up to 16,144,812 shares of Common Stock consisting of up to 16,000,000
shares of Common Stock issuable upon conversion of the Preferred Stock
underlying the New Warrants and 144,812 shares of Common Stock, owned by certain
selling securityholders (the "Holders"). Such New Warrants, such shares of
Common Stock and such shares of Preferred Stock may be sold in the open market,
in privately negotiated transactions or otherwise, directly by the Holders. The
Company will not receive any proceeds from the sale of such Redeemable Warrants
or shares. Expenses of the Concurrent Offering, other than fees and expenses of
counsel to the Holders and selling commissions, will be paid by the Company.
Sales of such New Warrants or shares of Common Stock or Preferred Stock by the
Holders or the potential of such sales may have an adverse effect on the market
price of the securities offered hereby. See "Risk Factors - Effect of
Outstanding Options and Warrants, Company's Stock Option Plan and
Representative's Warrants; Dilutive Effects" and "Description of Securities -
Description of Bridge Warrants and New Warrants."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Preferred Stock offered hereby at an assumed public offering price of $10.00 per
Share, after deducting underwriting discounts and expenses payable by the
Company, are estimated to be $2,000,000 ($2,400,000 if the Underwriter's
over-allotment option is exercised in full). The Company presently intends to
use the net proceeds as follows:
APPLICATION OF NET APPROXIMATE PERCENTAGE OF
PROCEEDS AMOUNT NET PROCEEDS
-------- ------ ------------
Construction of Stores(1)........ $1,200,000 60
Satisfaction of Bridge
Notes(2)......................... 262,667 13
Working Capital(3)............... 537,333 27
--------- --
Total.......... $2,000,000 100%
========= ====
- ------------------
(1) Store construction cost is assumed to be $100,000 per store, including
pre-opening costs (such as brokerage, lease security deposits, etc.),
leasehold improvements, fixtures, promotion, equipment and store
inventory; assumes construction of 12 stores over the next two years.
The Company will incur these construction expenses directly for
Company-owned stores and, in order to facilitate the opening of certain
initial franchise locations, the Company may agree to loan to selected
franchisees a portion of the anticipated cost of opening a franchise
location. Currently, the Company does not anticipate offering such
financing for more than five franchise locations. In each case, the
maximum amount of any such loan would be $50,000. Terms are anticipated
to be interest only (at prime plus two points, adjusted annually) for a
period of two years with the balance fully amortized over the following
three years. All loans would be secured by the assets of the franchise
location and the franchise agreement itself.
(2) Represents satisfaction of Bridge Notes in the aggregate principal
amount of $262,667 issued by the Company in the Bridge Financing for
working
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<PAGE>
capital and general corporate purposes, which Bridge Notes bear
interest at the rate of 10% per annum and mature on the earlier to
occur of completion of the Offering or December 27, 1997.
(3) The Company may seek to utilize funds allocated to working capital for
business or product acquisitions. See "Business--Intended Expansion and
Marketing Strategy." The Company may seek to acquire, where feasible,
businesses that are compatible with those of the Company. The Company
does not currently have any agreements, commitments or arrangements
with respect to any proposed acquisitions, and no assurance can be
given that any acquisition opportunity will be consummated in the
future.
The allocation of the net proceeds of the Offering set forth above
represents the Company's best estimate based upon its present plans and certain
assumptions regarding general economic and industry conditions and the Company's
future revenues and expenditures. The Company reserves the right to reallocate
these proceeds within the above-mentioned categories or to other purposes if
management believes it is in the Company's best interests because of any
unpredictable factors such as possible delays in finding and opening suitable
Company-owned and franchised locations and variances in estimated costs relating
to the construction and opening of stores.
Any additional net proceeds realized from the exercise of the
Underwriter's over-allotment option (up to approximately $400,000) will be added
to the Company's working capital.
The Company will not receive any proceeds from the sale of up to
2,000,000 New Warrants, 2,000,000 shares of Preferred Stock or 8,144,812 shares
of Common Stock offered by the Holders in the Concurrent Offering. See
"Concurrent Offering."
Proceeds not immediately required for the purposes described above will
be invested principally in United States government securities, short-term
certificates of deposit, money market funds and interest-bearing savings and
management accounts.
DILUTION
At September 30, 1996, the net tangible book value of the Company was
$2,465,240 or $1.11 per share of Common Stock based on the 2,226,342 shares of
Common Stock then outstanding. Net tangible book value per share represents the
amount of the Company's total assets less the amount of intangible assets and
liabilities, divided by the number of shares of Common Stock outstanding. After
giving retroactive effect to the Pro Forma Adjustments (see footnote 1 of
Prospectus Summary - Summary Financial Information), the pro forma net tangible
book value of the Company at September 30, 1996 would have been $2,640,240 or
$1.19 per share of Common Stock. After also giving retroactive effect to the
receipt of net proceeds (estimated to be approximately $2,000,000) from the sale
of the Preferred Stock offered hereby at an assumed public offering price of
$10.00 per Share, and assuming that the 270,000 shares of Preferred Stock
included in the Offering were converted to 1,080,000 shares of Common Stock, the
pro forma net tangible book value of the Company at September 30, 1996 would
have been $4,377,573 or $1.32 per share of Common Stock, representing immediate
dilution of $8.68 per share to new investors (i.e., the difference between the
assumed public offering price per share of the Preferred Stock and the net
tangible book value of the Common Stock after giving effect to this Offering and
the assumed conversion of the Preferred Stock). The following table illustrates
the per share dilution:
-23-
<PAGE>
Assumed public offering price per share of
Preferred Stock........................... $10.00
Net tangible book value per share before Pro
Forma Adjustments......................... $1.11
Increase attributable to Pro Forma Adjustments..... .08
-----
Pro Forma net tangible book value before
offering.................................. 1.19
Increase attributable to new investors............. .13
-----
Adjusted pro forma net tangible book value
after offering............................ $1.32
=====
Dilution to new investors.......................... $8.68
=====
-24-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted to reflect the issuance and sale by the
Company of the Preferred Shares offered hereby at an assumed public offering
price of $10.00 per Share and satisfaction of the Bridge Notes with a portion of
the proceeds of this Offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------
AS
Actual Pro Forma(1) Adjusted(1)(2)
------ ------------ --------------
<S> <C> <C> <C>
Bridge Notes................................................ $ -0- $ -0- (3) $ -0-
---------- ---------- ----------
Shareholders' equity
Common Stock, 20,000,000 shares
authorized; 2,226,342 shares issued
and outstanding(3).................................... 2,226 2,226 2,226
Preferred Stock, $.001 par value,
15,000,000 shares authorized; as
adjusted, 270,000 shares 270
outstanding...........................................
Additional paid-in-capital............................ 8,223,342 8,398,342 10,398,072
Deficit...............................................(5,722,828) (5,722,828) (5,985,495)
----------- ----------- -----------
Total shareholders equity .................................. 2,502,740 2,677,740 4,415,073
--------- --------- ---------
Total capitalization........................................ $2,502,740 $2,677,740 $4,415,073
========== ========== ==========
</TABLE>
- -----------------------------
(1) Gives effect to the consummation of the Bridge Financing (issuance of
$262,667 of Bridge Notes for $262,667 and 4,000,000 Bridge Warrants for
$4,000) including the recording of $262,667 of loan discount as an
increase in additional paid-in capital and charging to additional
paid-in capital of financing expenses of $91,667 related to the Bridge
Financing.
(2) Adjusted to reflect: (i) the issuance of 270,000 shares of Series B
Convertible Preferred Stock offered by the Company hereby and the
anticipated use of proceeds to satisfy the $262,667 of Bridge Notes;
and (ii) the write-off of $262,667 of loan discount.
(3) Net of $262,667 of loan discount.
(4) Does not include 370,000 shares of Common Stock reserved for issuance
upon exercise of certain outstanding options granted to the Company's
executive officers and a former officer, 75,000 shares of Common Stock
reserved for issuance pursuant to the Company's 1994 Employee Stock
Option Plan (the "Employee Plan") (8,500 of which options have been
granted to date), 110,000 shares of Common Stock reserved for issuance
upon exercise of certain warrants granted in connection with a previous
financing, an aggregate of 125,000 shares of Common Stock reserved for
issuance upon exercise of warrants granted to the representative of the
underwriters in connection with the Company's initial public offering,
an aggregate of 50,000 shares of Common Stock reserved for issuance
upon exercise of certain options issued to directors of the Company, an
aggregate of 148,500 shares of Common Stock reserved for issuance upon
exercise of outstanding options granted to consultants and a former
consultant to the Company and an aggregate of 100,000 shares of Common
Stock reserved for issuance upon the exercise of outstanding warrants
granted to a consultant to the Company. See "Management--Nonqualified
Stock Options," "Management--1994 Employee Stock Option Plan,"
"Management--Compensation of Directors" and "Description of
Securities--Bridge Warrants."
-25-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and the related notes thereto included
elsewhere herein.
GENERAL
The Company's revenues are derived primarily from the service of seated
fully clothed back rubs and the sale of back related and stress reduction
products. The Company began operations in August 1993 and opened its first store
for business in October 1993. As of September 30, 1996, the Company had nine
Company-owned retail stores in New York City and one in The Westchester mall in
White Plains, New York.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of certain items included in the Company's Statement of Operations:
<TABLE>
<CAPTION>
December 18,
Nine Months Ended 1992
Year Ended December 31, September 30, (Inception) to
---------------------------- ----------------------- September 30,
1994 1995 1995 1996 1996
------------ -------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Services...................................... 74.31 72.74 84.05 77.55 75.12
Products...................................... 19.34 27.12 15.68 22.45 23.72
Royalties, franchise fees
and other............................... 6.35 0.14 0.32 - 1.16
------ ------ ------ ----- -----
Total revenues.................................. 100.00% 100.00% 100.00% 100.00% 100.00%
------- ------- ------- ------- -------
Operating Expenses:
Salaries and wages........................ 63.24 102.38 111.93 50.34 71.75
Cost of products sold,
buying and occupancy..................... 12.50 22.40 7.92 15.25 18.03
Rental Expense............................ 30.49 34.10 31.27 22.55 28.50
Advertising and
promotion................................ 5.24 13.20 11.91 3.75 9.43
General and
administrative........................... 83.24 126.60 136.19 87.63 98.50
Depreciation.............................. 2.92 5.43 2.25 3.13 3.80
Waived salaries........................... 45.22 2.50 4.70 - 8.78
----- ------ ------ ------ -----
Total expenses.................................. 242.85% 305.62% 306.17% 182.65% (238.85)%
------- ------- ------- ------- ---------
Net loss from operations........................ (142.85)% (205.62)% (206.17)% (82.65)% (138.85)%
--------- --------- --------- -------- ---------
Other Income (Expense):
Interest Income 0.00 12.45 20.35 4.19 5.83
Interest (Expense) (15.26) (26.10) (49.19) - (10.58)
------- ------- ------- ----- -------
Total Interest (Expense) (15.26)% (13.65)% (28.84)% 4.19% ( 4.75)%
-------- -------- -------- ------- ---------
Net loss (158.11)% (219.27)% (235.01)% (78.46)% (143.60)%
========= ========= ========= ======== =========
</TABLE>
The Company is in the development stage and has not had significant
revenues since the commencement of its retail store operations in October 1993.
From this time through September 30, 1996, the Company has generated cumulative
revenues of $3,984,814 while incurring cumulative net losses of $5,722,828. The
loss has been primarily due to the Company's establishment of a corporate and
administrative infrastructure to position itself to open additional retail
stores. The Company expects to incur operating losses for the next 12 months and
possibly longer as it embarks on its planned expansion.
-26-
<PAGE>
The Company presently sells services, in the form of its back rubs, and
products, in the form of a variety of massage and stress reduction products, in
its retail stores. Since inception, sales of services have accounted for 75% of
total revenue, products for 24% and the remaining 1% from other sources. Since
the Company is still a development stage enterprise, it is not clear whether
these percentages are indicative of future ratios in a larger operation.
RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1995
For the nine months ended September 30, 1996, revenues from services
and products at the company's stores increased 209% to $1,969,504 from the
corresponding 1995 period. This increase was mainly attributed to increased
traffic and the opening of additional stores as compared to the corresponding
1995 period. Operating expenses were $3,597,389 for the nine month period ended
September 30, 1996 as compared to $1,952,457 for the same period in the prior
year, an increase of 84%. This increase was primarily due to the development of
a management team, operational systems, marketing and design plans in the
implementation of the Company's expansion plans and non cash charges relating to
the issuance of options of approximately $350,000. As a result of the increased
operating expenses, net loss for the nine month period ended September 30, 1996
increased to $1,545,278 compared to $1,498,690 for the prior year. No provision
for income taxes was required during either period due to the Company's
incurrence of net operating losses.
While general and administrative expenses are expected to increase due
to the need for additional management and administrative support for the
Company's expanding operations, these expenses as a percentage of total revenue
are expected to decline as total revenue increases. Other expense items, such as
advertising and promotion, salaries and wages, cost of products, however, are
related to retail operations themselves and their relative percentages to total
revenues are likely to remain fairly constant in the near term but should
decrease as the Company streamlines it operations.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
For the year ended December 31, 1995, revenues from services and
products at the Company's stores increased to $1,201,941 compared to $707,720
for the prior year. This net increase of $494,221 (70%) was primarily
attributable to increased traffic and the opening of seven new stores. Operating
expenses were $3,685,191 for the year ended December 31, 1995 as compared to
$1,718,695 for the prior year, an increase of $1,966,496 (114%). This increase
was primarily due to the development of a management team, operational systems,
and marketing and design plans in the implementation of the Company's expansion
plans. As a result of the increased operating expenses, the net loss for the
year ended December 31, 1995 increased to $2,647,255 compared to $1,118,975 for
the prior year. No provision for income taxes was required during either year
due to the Company's incurrence of net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $1,377,331 in working capital as of September 30, 1996,
compared with working capital of $2,941,345 as of September 30, 1995. The
decrease is primarily due to amounts spent on property, equipment and leasehold
improvements to fund the Company's initial nine stores and amounts spent on
operations in the development of a corporate infrastructure in anticipation of
the Company's growth strategy.
From inception to September 30, 1996, the Company has used cash for
operating activities of $4,323,426 and spent an additional $1,186,577 for the
purchase of property, equipment, purchased leases, leasehold improvements and
investments. These expenditures have been offset by the net cash provided by
financing activities, principally from the Company's October 1993 private
-27-
<PAGE>
placement of Common Stock aggregating $870,000, the December 1994 bridge
financing in the principal amount of $275,000, the Company's March 1995 public
offering of common stock resulting in the net proceeds of approximately
$5,127,732 and the issuance of Common Stock to warrant and option holders of
approximately $848,447. Since the Company continues to have a high level of
operating expenses and will be required to make significant up-front
expenditures in connection with its proposed expansion, the Company anticipates
that losses will continue for at least the next 12 months and until such time,
if ever, as the Company is able to generate significant revenues or achieve
profitable operations. As a result, in their report of the Company's financial
statements as of December 31, 1995, the Company's independent certified public
accountants have included an explanatory paragraph that describes factors
raising substantial doubt about the Company's ability to continue as a going
concern.
INFLATION
The Company believes that inflation has not had a material effect on
its operations to date.
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, which are intended to be covered by the safe harbors created thereby.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. Factors that could cause actual results to differ from the results
discussed in the forward- looking statements include, but are not limited to,
those discussed in "Risk Factors." In light of the significant uncertainties
inherent in the forward- looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
PRICE RANGE OF COMMON STOCK
On February 28, 1995, the Common Stock was listed for quotation on
Nasdaq under the symbol "RUBB." Prior to such listing, the Common Stock had been
traded on the OTC Bulletin Board since October 18, 1993. The following table
sets forth, for the periods indicated, the high and low bid for the Common Stock
as reported by the OTC Bulletin Board (as adjusted to reflect the 1 for 8
reverse stock split effected on February 23, 1995), as well as the high and low
bid for the Common Stock on Nasdaq. Quotations reflect prices between dealers,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
High Bid Low Bid
---------- ------------
1994
1st Quarter............. $24.00 $ 9.52
2nd Quarter............. $24.00 $ 6.00
3rd Quarter............. $16.00 $ 3.50
4th Quarter............. $12.00 $ 4.00
1995
1st Quarter............. $ 9.00 $ 2.75
2nd Quarter............. $ 3.94 $ 1.84
3rd Quarter............. $ 2.94 $ 1.88
4th Quarter............. $ 4.00 $ 1.75
1996
1st Quarter............. $ 4.125 $ 3.06
-28-
<PAGE>
2nd Quarter............ $ 6.63 3.25
3rd Quarter............ $ 4.88 2.50
4th Quarter............ $ 4.625 3.25
On _________, 1997, the last reported sale price of the Common Stock on
Nasdaq was $_____.
As of January 7, 1997, the Company had 96 holders of record of its
Common Stock.
Application has been made to have the shares of Common Stock issuable
upon conversion of the Preferred Stock approved for quotation on Nasdaq under
the symbol "RUBB".
DIVIDEND POLICY
The Company has not declared or paid any dividends on the Common Stock
and does not intend to declare or pay any dividends on the Common Stock in the
foreseeable future. The Company currently intends to reinvest earnings, if any,
in the development and expansion of its business. The declaration of dividends
in the future will be at the election of the Board of Directors and will depend
upon the earnings, capital requirements and financial position of the Company,
general economic conditions and other relevant factors.
BUSINESS
OVERVIEW
The Company is a development stage company engaged in the creation of a
national chain of stores under the name "The Great American BackRub Store,"
which offer reasonably-priced back rubs to customers while they are seated and
fully clothed in a clean, open, non-threatening environment. The Company's
stores will also offer back rub services off-site, to corporate offices,
convention centers and tourist attractions. The Company currently owns and
operates 11 retail stores in New York City, one in The Westchester mall in White
Plains, New York, and one at the Woodfield Mall in the Chicago metropolitan
area. In addition, the Company recently entered into franchise agreements for
two locations, one at the Roosevelt Field Mall on Long Island, New York and the
other at the Cherry Creek Mall in Denver, Colorado, and granted an option for a
third franchise in the Los Angeles, California metropolitan area.
The Company's growth strategy is to be implemented primarily by
Terrance Murray, the Company's Chief Executive Officer, who previously served as
the executive vice president, operations of Supercuts, Inc. Supercuts, Inc. is a
hair care chain with in excess of 1,000 company-owned and franchised stores in
43 states and Puerto Rico. The Company believes that the substantial national
retail and franchise experience of Mr. Murray will be an asset to the Company.
INDUSTRY BACKGROUND
With the increasing awareness that health is a key factor in
determining worker productivity, a number of businesses have emerged to help
promote physical and mental well-being. This health consciousness movement has
led to the rapid expansion of businesses such as health clubs, spas, diet
centers/alternative education schools, health and fitness magazines and health
equipment manufacturers.
Back pain and stress have become increasingly serious health concerns
in modern society. The effects of poor posture, long hours at desks/keyboards,
and increased stress and work related pressures have all resulted in a society
that suffers from chronic backaches and muscular tension. The July 14, 1994
issue of THE NEW ENGLAND JOURNAL OF MEDICINE reported that backaches rank second
only to respiratory infections as the leading cause of work absences and are the
number one basis for worker's compensation claims and that over 80 percent of
the American adult population suffers from back pain on an occasional basis.
-29-
<PAGE>
In recent years, preventive health care has taken on new meaning, both
for the consumer and many employers. The December 25, 1994 issue of THE NEW YORK
TIMES reported that a small but growing number of corporations are including
massage in their employee health programs.
Although the number is increasing, only a small percentage of Americans
utilize massage on a regular basis. Management believes that this is so because
of the consumer's perception that the typical back rub is high priced, not
convenient to schedule or travel to, and requires the customer to be undressed.
The Company believes that The Great American BackRub Store is sensitive to and
addresses all of these concerns. The pricing structure ($8.95, $16.95, $28.95,
$38.95 and $49.95, respectively for 5, 10, 20, 30, and 45 minute back rubs) is
perceived by customers to be very reasonable. Stores are located in convenient
locations and no appointments are required. The customer remains fully clothed
during the entire back rub sequence and, because of the openness of the entire
location, is confident of the "safeness" of the experience.
Results from the Company's computerized point-of-sale (POS) system
indicate that repeat customers account for an average of 60% of the Company's
daily customers. A majority (60%) of the customers are women, with the typical
customer being between the ages of 25 and 50.
CONCEPT
By design, The Great American BackRub Store is a specialty interactive
retailer offering a wide range of massage and stress reduction products. In
addition to experiencing the hands-on interaction of the back rub, customers are
able to view the entire process from both the street and inside the store. Once
inside, customers are encouraged to sample and test the products on display. The
Company therefore believes that the combination of the boutique retailer concept
with back rub services makes The Great American BackRub Store a unique shopping
experience.
The Company's concept is to provide a clean, open, non-threatening
environment where people can enjoy the benefits of a back rub as a daily or
weekly stress relaxation technique without having to undress and without
incurring the time and expense of a conventional massage. Integral to the
Company's strategy is the sale of massage and stress reduction products in each
of its stores, including oils, bath salts, back supports and electronic and
mechanical stress reduction devices.
The focus of the Company's service business is a 5, 10, 20, 30 or 45
minute back rub that consists of an 18-step massage sequence of the back, neck,
shoulders, arms and hands conducted on the Company's specially designed back rub
chair. These areas represent eighty percent of the areas normally worked on
during a full body massage, without the space-consuming tables or necessity that
the customer undress. In the 20, 30 and 45 minute sequences, additional time is
spent on particular areas where either the customer or the therapist detects
stress or tension. The percentage of customers purchasing the 20, 30 and 45
minute sequences has increased to almost 50% of services. In addition, the
Company offers scalp massages and has designed a foot rub sequence which
involves the customer wearing a disposable sock during a reflexology treatment.
STORE DESIGN, OPERATIONS AND CONTROLS
The typical Great American BackRub Store location consists of
approximately 600 to 1,200 square feet, including 300 to 600 square feet of
retail space. Customers are seated on a specially-designed chair which provides
cushioned support for the chest, arms and head. The Company's stores are
designed to permit people both inside and outside the store to view the back rub
process and at the same time maintain the privacy of the back rub customer.
Each of the Company's stores will typically be staffed with a manager,
an assistant manager, and between ten and twenty part-time therapists, depending
upon the size of the store.
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<PAGE>
The Company's stores, as well as intended franchisee-operated stores,
will be located in leased facilities with high pedestrian traffic, including
metropolitan areas, shopping malls, popular tourist attractions and specialty
locations such as airports, casinos and convention centers. Stores will
generally be open seven days a week from early morning to late evening.
The back rub services are provided by licensed or certified massage
therapists who, as employees, earn between $10.00 and $16.00 per hour. All
therapists are required to wear the Company's standard uniform: Company shirt,
white pants and white athletic shoes. See "Employees; Employee Training."
Management has installed certain store-level internal controls which
minimize incidents of employee theft and maximize the flow of pertinent data
from the store to the Company's accounting department. When a customer enters a
store, the receptionist greets the customer, answers any questions the customer
may have, and then prepares a pre-numbered "ticket" on which the customer's name
and requested service(s) are printed. The next available therapist then takes
the ticket from the receptionist, leads the customer to the back rub area and
performs one of three back rub sequences. At the end of the back rub sequence,
the therapist verifies the ticket, escorts the customer to the receptionist and
returns the ticket. The receptionist collects the payment due and issues a
receipt to the customer. At no time does the therapist collect any payments from
the customer. At the end of the day, all pre-numbered tickets must be accounted
for, and cash deposits must balance with reports generated by the store's POS
system.
The POS system currently being used by management is that used in over
800 Supercuts stores. In addition to normal cash register functions, the system
generates a sophisticated array of reports and cross checks which provide
management with immediate access to sales data, labor scheduling, inventory
changes, cash shortages and employee productivity. The information is
automatically downloaded every night to the Company's office in New York and is
available for management's review and use the following day.
NEW YORK AND ILLINOIS LOCATIONS--COMPANY-OWNED STORES
The Company currently has 11 New York City Great American BackRub Store
locations, one location in The Westchester mall in White Plains, New York and
one location in the Woodfield Mall in Schaumberg, Illinois near Chicago.
Together, these stores employ a total of approximately 90 full and part-time
employees. See "Employees; Employee Training."
The location and lease expiration date of each of the Company's stores
are summarized below:
LOCATION LEASE EXPIRATION DATE
-------- ---------------------
958 Third Avenue August 31, 2003
New York, New York
323-5 Bleecker Street May 31, 2005
New York, New York
527 Third Avenue January 31, 2002
New York, New York
160 Spring Street February 28, 2005
New York, New York
1573 Second Avenue July 31, 2005
New York, New York
514 Columbus Avenue December 31, 2004
New York, New York
-31-
<PAGE>
2265 Broadway October 31, 2005
New York, New York
Westchester-Store Mall July 14, 2005
White Plains, New York
138 7th Avenue May 11, 2003
Brooklyn, New York
171 West 71st Street June 30, 2006
New York, New York
250 West 91st Street October 31, 2006
New York, New York
2195 Broadway October 31, 2006
New York, New York
Woodfield Mall December 30, 2004
Schaumberg, Illinois
The Company's corporate office is leased and is located at 425 Madison
Avenue, New York, New York. The Company believes that this office is adequate
for its current and presently foreseeable needs or that adequate replacement
space is available.
INTENDED EXPANSION
Although no assurance can be given, the Company plans to open a minimum
of 40 Company-owned and/or franchised stores during the next two years.
Management believes an important element of "marketing" is the selection of
prime locations with heavy traffic patterns. During the initial expansion of
both Company and franchised stores, sites will be generally limited to high
traffic locations such as malls, popular tourist attractions, and busy specialty
locations (e.g. airports, casinos and convention centers).
Management estimates that its current average cost to open a
Company-owned store location is approximately $100,000, including pre-opening
costs, leasehold improvements, fixtures, equipment and store inventory. The
Company, in its franchise offering circular, estimates that the initial
investment required by a franchisee, including the initial franchise fee, is
approximately $70,000 to $135,000, depending upon a number of variables,
including leasehold related costs and improvements, inventory, equipment,
training fees and staffing.
The Company supplements its retail operations with corporate or other
off-site service and intends to actively increase this portion of its business.
This service involves having one or more therapists taking portable massage
chairs to a place of business, convention center or tourist attraction. Since
the only operating costs associated with this service are labor and
transportation, the profit margins on such corporate and other offsite work are
significant.
To encourage repeat business, the Company has developed a "Frequent
Rub" program which rewards repeat customers with a free back rub after the
purchase of nine back rubs. The Company also actively promotes the sale of gift
certificates by giving a similar discount on the purchase of nine certificates.
As an extension of the gift certificate program, the Company tested a
Valentine's Day card which included a gift certificate. As a result of the
success of this program, the Company has expanded such program to include a line
of gift and holiday certificates.
The Company may also seek to acquire, where feasible, companies whose
business is compatible with that of the Company. The Company does not currently
have any agreements, commitments or arrangements with respect to any proposed
acquisitions, and no assurance can be given that any acquisition opportunity
will be consummated in the future. The Company is also considering the
development or
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<PAGE>
acquisition of a mail order catalog to sell products related to its retail
operations under The Great American BackRub name.
FRANCHISE DEVELOPMENT
The Company anticipates that a significant portion of the Company's
growth will be through franchising. Management has developed a franchising
program which is based largely on management's prior experience with Supercuts,
Inc. See "Management." The franchise plan calls for the sale of individual unit
franchises as opposed to territorial sales, to control the respective sites and
to limit the impact of a franchisee whose operating standards are not acceptable
to management. Although sold as individual units, the intention is to sell
multiple units within a market area to one franchisee in order to achieve
economies of scale.
Under the terms of the Company's current franchise agreement, the
franchise fee generally is $12,500 per unit. In all cases, the royalty fee is 6%
of gross revenues (both services and products) and 3% of gross revenues (both
services and products) which must be paid to a cooperative advertising fund. The
initial term of the franchise agreement is five years, with options (upon
payment of a fee) to extend the term for an additional five years. The franchise
agreement places strict limitations on the operations of the business and
requires the franchisee to conform to all operations standards established by
the Company. The franchise agreement also requires that all employees of the
franchisee attend and complete a training course conducted or approved by the
Company. In the event the Company conducts the training class, the franchisee is
required to pay the Company a fee for each employee trained.
The Company's first franchised store (the "Las Vegas Store") opened in
July 1994 in Las Vegas, Nevada. The Company entered into a franchise agreement
(the "Franchise Agreement") with its Las Vegas franchisee (the "Franchisee") on
June 1, 1994. Pursuant to the Franchise Agreement, the Franchisee paid the
Company an initial, non-recurring, non-refundable franchise fee of $10,000. In
addition, the Franchisee paid the Company a monthly royalty fee equal to 8% of
the Franchisee's gross monthly revenues (as such term is defined in the
Franchise Agreement). The Franchisee also paid to the Company an advertising and
sales promotion fee which is equal to the greater of 3% of the Franchisee's
gross monthly revenues or $1,000. On May 30, 1995, the Company and the
Franchisee entered into a franchise termination agreement whereby (i) the
Franchise Agreement and related sublease were terminated, (ii) the Company
purchased certain assets from the Franchisee and (iii) the Company and the
Franchisee provided for the mutual release of any obligations of each to the
other whether arising out of the Franchise Agreement, the sublease or otherwise.
The purchase price for the assets conveyed by the Franchisee to the Company was
$25,000 and 18,185 shares of Common Stock. Simultaneously with the Franchise
Termination Agreement, the Company closed the Las Vegas Store.
The Company entered into two option agreements (the "Bay Area Option
Agreements") with Bay Area Backs I, a California limited partnership (the
"Optionee"), on June 20, 1994 and June 21, 1994, respectively, for the opening
of two franchised stores in the San Francisco area. Pursuant to the Bay Area
Option Agreements, the Optionee paid to the Company $5,000 for each of two
options (the "Bay Area Options") to require the Company to enter into franchise
agreements with the Optionee. On May 30, 1995, the Company and the Optionee
entered into an option termination agreement whereby (i) the Bay Area Option
Agreements were terminated, (ii) the Company purchased certain assets from the
Optionee and (iii) the Company and the Optionee provided for the mutual release
of any obligations of each to the other whether arising out of the Bay Area
Option Agreements or otherwise. The purchase price for the assets conveyed by
the Optionee to the Company and the termination of the Bay Area Options was
$27,300.
Upon termination of the franchise and the options referred to above,
the Company suspended its franchise program and focused on developing its
Company- owned stores. Starting in September 1996, the Company resumed the
marketing of its franchise program.
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<PAGE>
As of the date hereof, the Company has entered into two franchise
agreements, one for a location at Roosevelt Field Mall, Long Island, New York,
and the second for the Cherry Creek Mall, Denver, Colorado. In addition, the
Company has entered into an option agreement (the "Franchise Option Agreement")
for a franchise location in the Los Angeles, California metropolitan area. Under
the terms of both franchise agreements, the franchisee has paid the Company a
$12,500 initial, non-recurring, non-refundable, franchise fee and has agreed to
pay a monthly royalty equal to 6% of the franchise's gross monthly revenues (as
such term is defined in the Franchise Agreement). Under the terms of the
Franchise Option Agreement, the optionee has paid to the Company a
non-refundable fee of $5,000 (to be applied to the $12,500 franchise fee in the
event the optionee signs a franchise agreement within 120 days of the date of
the Franchise Option Agreement) and the Company has given the optionee an
exclusive right to open a Great American BackRub franchise within Los Angeles
and Orange Counties, California for a period of 120 days. In the event that the
optionee locates a site within said counties that is acceptable to both the
Company and the optionee, the Company and the franchisee will enter into a
Franchise Agreement with terms identical to those described above.
COMPETITION
Management does not know of any other multi-unit retailer in the
business in which the Company operates. Competition currently consists of
numerous independent massage therapists, spas, salons and health clubs providing
full body massage, and a limited number of massage therapists providing seated
massage in non-retail "off-site" environments. As competition may be
anticipated, however, due to the relatively low cost of entry and absence of
substantial barriers into such business, no assurance can be given that the
Company will successfully compete with any such competitors, some of whom may
have substantially greater financial and other resources than the Company.
REGULATION
The sales of franchises in the United States is subject to certain
requirements established by the FTC. These requirements generally relate to the
disclosure of information regarding the franchisor and the rights, duties and
obligations of the prospective franchisee. These disclosures and explanations
are set forth in a document called a Uniform Franchise Offering Circular (which
is commonly referred to as a "UFOC"). Effective in 1995, the FTC revised the
disclosure requirements for a UFOC to require, among other things, "plain
English language" disclosures. The Company believes it is in compliance with
these changes.
In addition to the requirements of the FTC, certain states require that
franchisors register in the state and submit a modified UFOC for approval before
offering franchises in such state. These state UFOCs must comply with the
applicable state laws, which vary from state to state. The Company is currently
registered in New York, California and Illinois.
Certain states in which the Company intends to operate, including the
States of Illinois and New York, in which the Company currently operates 13
Company-owned stores, require the licensing of massage therapists. The Company
and its massage therapist employees will also be subject to various state and
local laws and ordinances.
The Company believes that it is in compliance with all applicable laws
and regulations and has all required licenses to conduct its business. However,
no assurances can be given that current laws or regulations applicable to the
Company's business will not change. Any such new laws or regulations or the
Company's expansion into new geographic areas could subject the Company to
substantial costs in order to comply with such applicable laws or regulations.
Any failure by the Company to comply with any new or existing laws or
regulations could subject the Company to substantial penalties.
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<PAGE>
EMPLOYEES; EMPLOYEE TRAINING
As of December 31, 1996, the Company had 130 employees, consisting of
three full-time members of management, 10 full-time managers, 60 full-time
employees and 57 part-time employees, which includes employees in the Company's
nine New York City store locations and one White Plains, New York location.
Other than members of management and the stores' manager who are salaried
employees, all full and part-time personnel are hourly employees.
The Company requires each new therapist to participate in the Company's
three to five day training program as a condition to employment. The program
includes extensive training relating to the Company's 5, 10, 20, 30 and 45
minute massage sequences, product knowledge and customer service. All back rub
services are provided by therapists who are either licensed (in states where
such licensing is required) or have completed training at a school certified by
a recognized trade association.
It is estimated by the American Massage Therapists Association that
there are over 120,000 licensed/certified massage therapists in the country. The
Company's experience has shown that most therapists are under-employed and are
seeking part-time employment to supplement their existing private clientele.
This need for part-time employment allows the Company to use flexible scheduling
and minimizes payroll and benefit costs associated with full-time employment.
Currently, the Company requires all of its employee/therapists to
obtain professional liability insurance in the minimum amount of $1,000,000
through one of two professional massage organizations. In some cases the Company
is permitted under the applicable policy to be named as an additional insured.
In addition, the Company has obtained a professional liability policy for an
additional $1,000,000 covering all of its employees.
All of the Company's employees are non-union. The Company considers its
relationship with its employees to be satisfactory.
TRADEMARK PROTECTION
The mark THE GREAT AMERICAN BACKRUB is the subject of U.S. Trademark
Registration No. 1,922,629, issued September 26, 1995. The registration includes
the statement that the Company does not claim exclusive rights to use of the
term "BACKRUB" alone, apart from the trademark as shown. The trademark
registration will remain in full force and effect for a term of ten years from
the date of issue. However, a declaration of continued use must be filed in the
Trademark Office no earlier than the fifth anniversary and no later than the
sixth anniversary of the registration in order to avoid cancellation of the
registration. The registration gives the company prima facie nationwide
exclusivity to the mark THE GREAT AMERICAN BACKRUB as against any third party
adopting a confusingly similar mark after the date of issue.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which, individually
or in the aggregate, are believed to be material to the Company's business.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages and
present positions with the Company are as follows:
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<PAGE>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
William Zanker 42 Chairman of the Board and President
Terrance C. Murray 47 Chief Executive Officer and Director
Keith Dee 39 Chief Financial Officer and
Secretary
Stephen Seligman 42 Director
Edward E. Faber 63 Director
Andrew L. Hyams 42 Director
Donald R. Fleischer 42 Director
Peter Hanelt 51 Director
All directors of the Company hold office until the next annual meeting
of the shareholders and until their successors have been elected and qualified.
The officers of the Company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's shareholders, and hold office
until their death, until they resign or until they have been removed from
office.
The following is a brief summary of the background of each director and
executive officer of the Company:
WILLIAM ZANKER founded the Company in December 1992 and has served as
the Chairman of the Board of Directors and President since that time. Prior to
founding the Company, Mr. Zanker was the founder and from 1980 to December 1991
the Chairman of the Board of Directors and Chief Executive Officer of The
Learning Annex, Inc., a national chain offering short, inexpensive educational
programs in a variety of subjects. In December 1991, an involuntary petition in
bankruptcy was filed against The Learning Annex, Inc. (Case No. 91-B-12582
(SDNY). From December 1991 to December 1992, Mr. Zanker was a consultant to The
Learning Annex, Inc.
TERRANCE C. MURRAY has been a director and Chief Executive Officer of
the Company since December 1993. From February 1993 through November 1993, Mr.
Murray was a management consultant. From May 1991 through January 1993, Mr.
Murray was Executive Vice President, Operations of Supercuts, Inc., a national
chain of company-owned and franchised hair care salons with headquarters in San
Francisco, California. From July 1985 through April 1991, Mr. Murray was an
attorney with the law firm Foley, McIntosh & Foley located in Albany,
California.
KEITH R. DEE has been the Company's Chief Financial Officer since July
1995. From January 1988 to June 1995, Mr. Dee was a partner in the certified
public accounting firm of Elwell, Cangiano, Zdon & Dee LLC. Prior to forming his
partnership, Mr. Dee was employed as a Certified Public Accountant at both
National and Regional accounting firms.
STEPHEN SELIGMAN has been a director of the Company since February
1994. He has been Chief Executive Officer of The Learning Annex - California
from January 1991 to the present. From October 1989 through December 1990, Mr.
Seligman was Chief Executive Officer of The Learning Annex - New York. From 1986
through September 1989, Mr. Seligman was Chief Operating Officer of Hema Systems
Limited, a blood service management company located in New York, New York.
EDWARD E. FABER became a director of the Company on March 7, 1995. Mr.
Faber was the President, Chief Executive Officer and Deputy Chairman of the
Board of Directors of Supercuts, Inc. from June 1991 until he retired from
active management in December 1992. During his tenure at Supercuts, Mr. Faber
had primary responsibility for franchise development and marketing. From 1976
through January 1990, he held various executive positions with ComputerLand,
including President from 1976 to 1983, President and Chief Executive Officer
from 1985 to 1986, Chairman and Chief Executive Officer from 1986 until
Computerland
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<PAGE>
was sold in 1987, and Vice Chairman from 1987 to January 1990. From February
1990 to April 1991, he was Chairman and Chief Executive Officer of Dataphaz, a
ComputerLand franchisee, which was sold to ComputerLand. Additionally, from 1957
to 1969, Mr. Faber held various positions with International Business Machines.
Mr. Faber also served as an officer in the United States Marine Corps.
ANDREW L. HYAMS became a director of the Company on March 7, 1995. Mr.
Hyams has been a strategic planner for the Boston Department of Health and
Hospitals since September 1992 and since June 1991 has been in private law
practice in health law and policy in Massachusetts. From September 1990 to May
1991, he attended the Harvard School of Public Health. From 1985 to August 1990,
he served as general counsel to the Massachusetts Board of Registration in
Medicine. Mr. Hyams has practiced law in New York and Massachusetts in both the
public and private sectors, specializing in health law and regulation and has
written and lectured in this field. Mr. Hyams is also a visiting lecturer at the
Harvard School of Public Health. Mr. Hyams holds law and public health degrees
from Harvard Law School and Harvard School of Public Health, respectively.
DONALD R. FLEISCHER became a director of the Company on March 7, 1995.
In 1981, Mr. Fleischer co-founded First Moments, Inc., an advertising firm which
is a leader in the marketing and delivery of sample kits to targeted groups, and
has served as its Executive Vice President since then. Mr. Fleischer is also
President of Additions, Inc., which specializes in direct marketing, contract
packaging and product fulfillment.
PETER HANELT became a director of the Company on March 7, 1995. Mr.
Hanelt has been Chief Operating Officer and Chief Financial Officer of Esprit de
Corp., an international women's apparel manufacturer and retailer, since October
1993, and was a consultant in the development of Esprit's turnaround strategy
between April and October 1993. During his nineteen-year career in operations
and finance, Mr. Hanelt has held a number of Chief Operating Officer and Chief
Financial Officer positions with such companies as Post Tool, Inc., a multi-
store, multi-state retail chain (from September 1990 to December 1992); Sam &
Libby, Inc., retailer and wholesaler of women's shoes (from February 1990 to
August 1990); and Manetti-Farrow, Inc., the exclusive U.S. wholesaler for Gucci,
Fendi and Mark Cross accessories and leather goods (from 1983 to January 1990).
In addition, Mr. Hanelt held executive financial positions at various San
Francisco hospitals, where he was responsible for a public bond refinancing and
negotiation of a hospital affiliation. He was a certified public accountant with
Deloitte & Touche in San Francisco from 1975 to 1979. Mr. Hanelt received his
undergraduate degree from the U.S. Military Academy at West Point in 1967, and
his M.B.A. from the University of California at Berkeley in 1975.
COMPENSATION OF DIRECTORS
Each Director who is not an employee of the Company will receive $1,000
for each Board or committee meeting attended. Employees of the Company receive
no additional compensation for service as a director. All directors will be
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with their duties to the Company.
The Company granted options to purchase 10,000 shares of Common Stock
to each of Messrs. Seligman, Faber, Hyams, Fleischer and Hanelt on March 7,
1995. The options have a per share exercise price of $5.00 and vest one-third
upon issuance, one-third on March 7, 1996 and one-third on March 7, 1997.
COMMITTEES OF THE BOARD
The Board of Directors has authorized three standing committees:
Executive Committee, Audit Committee, and Compensation Committee (which shall
also function as the Stock Option Committee). The Audit Committee members are
Donald Fleischer, Peter Hanelt (Chairman) and Stephen Seligman. The Compensation
Committee members are Andrew Hyams (Chairman) and Edward Faber. The Executive
Committee members are William Zanker, Terrance Murray and Stephen Seligman. Only
independent directors will be appointed to the Audit and Compensation
Committees.
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<PAGE>
1994 EMPLOYEE STOCK OPTION PLAN
At the Company's 1994 annual meeting of shareholders held on July 18,
1994, the Company's shareholders approved the Employee Plan. The purpose of the
Employee Plan is to promote the success of the Company by providing a method
whereby eligible employees of the Company and its subsidiaries, as defined
therein, may be awarded additional remuneration for services rendered, thereby
increasing their personal interest in the Company. The Employee Plan is also
intended to aid in attracting persons of suitable ability to become employees of
the Company and its subsidiaries.
The Employee Plan provides that the maximum number of shares of Common
Stock reserved for awards thereunder shall be 75,000. As of the date of this
Prospectus, options to purchase 8,500 shares of Common Stock are outstanding
under the Employee Plan at a weighted average exercise price of $3.50 per share.
The Employee Plan provides for the grant of (i) options that are intended to
qualify as incentive stock options ("Incentive Stock Options") within the
meaning of Section 422A of the Internal Revenue Code of 1986, as amended, and
(ii) options not intended to so qualify. The exercise price of options granted
under the Employee Plan may be more than or equal to the fair market value of
such shares on the date of grant; provided, however, that the exercise price of
an Incentive Stock Option at the time of grant thereof shall (i), if such
Incentive Stock Option is being granted to a 10% shareholder, be at least 110%
of the fair market value on the date of grant and (ii), if such Incentive Stock
Option is being granted to any other person, be at least 100% of the fair market
value on the date of grant. The Company agreed with the underwriters of its
initial public offering not to grant or issue options to purchase more than
37,500 shares of Common Stock prior to February 28, 1997. Any options granted
under the Employee Plan that shall expire, terminate or otherwise be annulled
for any reason without having been exercised shall again be available for
purposes of the Employee Plan.
The Employee Plan is to be administered by a committee comprised of not
less than two persons. Each member of the committee shall be a member of the
Company's Board of Directors who during the one year period prior to service on
the committee was not, and during such service is not, granted or awarded any
equity securities pursuant to the Employee Plan or any other plan of the Company
if such grant or award or participation in such Employee Plan would prevent such
member from being a "disinterested person" with respect to the Employee Plan for
purposes of Rule 16b-3 under the Exchange Act. The committee will have the power
and authority to grant to eligible persons options to purchase shares of the
Company's Common Stock under the Employee Plan and to determine the
restrictions, terms and conditions of all such options granted as well as to
interpret the provisions of the Employee Plan, any agreements relating to awards
granted under the Employee Plan, and to supervise the administration of the
Employee Plan.
No Incentive Stock Options may be granted to any person for which the
"fair market value," as defined within the Employee Plan, determined as of the
time an Incentive Stock Option is granted to such person, of the Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by such person during any calendar year under all plans of the Company and its
subsidiaries, shall exceed $100,000.
Subject to the provisions of the Employee Plan with respect to death,
retirement and termination of employment, the term of each option shall be for
such period as the committee shall determine as set forth in the applicable
option agreement, but not more than (i) five years from the date of grant in the
case of Incentive Stock Options held by 10% or greater shareholders and (ii) ten
years from the date of grant in the case of all other Incentive Stock Options.
The Employee Plan is intended to comply in all respects with Rule 16b-3
under the Exchange Act. No option grants have been awarded under the Employee
Plan as of the date of this Prospectus.
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<PAGE>
It is currently contemplated that approval of an amendment to the
Employee Plan increasing the number of shares of Common Stock available for
issuance thereunder will be sought at the Company's next annual Shareholders'
Meeting which is expected to occur in May 1997.
NONQUALIFIED STOCK OPTIONS
In December 1994, the Company granted ten year options to purchase
120,000 shares of Common Stock to each of Messrs. Zanker, Murray and Steven
Thompson, then the Company's Chief Financial Officer. Such options are
exercisable at a price of $3.75 per share. One-third of such options became
exercisable in March 1995, one-third became exercisable in December 1995 and
one-third becomes exercisable in December 1996. In July 1995, the Company
granted five-year options to purchase 100,000 shares of Common Stock to each of
Messrs. Zanker and Murray, each exercisable at a price of $1.875 per share. All
such options have been exercised. In July 1995, the Company granted options to
purchase 10,000 shares of Common Stock to Mr. Dee. Such options are exercisable
at a price of $2.5625 per share. Options to purchase 5,000 shares vest and
become exercisable in July 1996 and options to purchase an additional 5,000
shares vest and become exercisable in July 1997. All such options expire on the
day before the 5-year anniversary of vesting. In March 1995, the Company granted
ten year options to purchase 100,000 shares of Common Stock to a consultant to
the Company. Such options are exercisable at a price of $5.00 per share. All
such options are currently exercisable. In July 1995, the Company granted
five-year options to purchase 65,000 shares of Common Stock to consultants to
the Company. Such options are exercisable at a price of $4.00 per share. All
such options are currently exercisable. In August 1995, the Company granted
three-year options to purchase 100,000 shares of Common Stock to a consultant to
the Company of which options to purchase 76,500 shares have been exercised. Such
options are exercisable at a price of $2.375 per share. All such options are
currently exercisable. In February 1996, the Company granted warrants to
purchase 300,000 shares of Common Stock to the Underwriter, 100,000 of which
were exercisable at a price of $1.00 per share, 200,000 of which were
exercisable at a price of $2.50 per share, and all of which have been exercised.
EMPLOYMENT AGREEMENTS
The Company has entered into an agreement with Mr. Zanker pursuant to
which he is employed full-time as the President of the Company for a term of
three years, commencing as of November 1, 1994. Mr. Zanker will be required to
devote substantially all of his business time and attention to the affairs of
the Company. Mr. Zanker will receive an annual base salary of $120,000 for the
first two years of the agreement. The salary for the third year will be set by
the Compensation Committee of the Company's Board of Directors. Mr. Zanker will
also be entitled to receive an annual bonus, if, when and as may be determined
by the Company's Board of Directors. In addition, Mr. Zanker will receive a
bonus ("Performance Bonus") of $100,000 payable anytime during the initial term
of the employment agreement upon (i) the opening of an aggregate of 40
Company-owned and/or franchised stores or (ii) the Common Stock trading at
$10.00 per share for 30 consecutive trading days at any time after August 28,
1995, or (iii) the Company's revenues for any of the years ended December 31,
1995, 1996 or 1997 equalling or exceeding $12.5 million, exclusive of revenues
from acquired companies. The employment agreement contains a non-compete
provision during the term of the agreement and for two years thereafter. In
addition, Mr. Zanker shall be entitled to receive such benefits as are generally
provided from time to time by the Company to its senior management employees, as
well as to participate in the Company's stock option plan as may from time to
time be in effect.
The Company has entered into a three-year employment agreement with Mr.
Murray similar to that of Mr. Zanker, commencing November 1, 1994, containing
generally the same terms and conditions as provided for above; provided,
however, that Mr. Murray shall be entitled to receive a Performance Bonus of
$130,000 payable on the achievement of the same performance criteria as
described above. Mr. Murray's employment agreement provides for Mr. Murray to be
employed as Chief Executive Officer.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual
compensation of the Company's chief executive officer and one other executive
officer for services in all capacities to the Company during the Company's last
three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------------
YEAR SALARY
---- ------
William Zanker 1993 *
Chairman of the Board 1994 *
1995 $108,308
Terrance C. Murray 1993 *
Chief Executive Officer 1994 *
1995 $108,308
- ------------------
* Messrs. Zanker and Murray received no compensation for either of fiscal
year 1993 or 1994.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock
option grants made to each of the named executive officers during the fiscal
year ended December 31, 1995.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Individual Grants for Option Term Stock Appreciation
---------------------------------------------------------------------------- ----------------------
Number of
Shares of
Common Stock % of Total
underlying Options/SARs
Options/ Granted to Exercise of
SARs Granted Employees in Base Price Expiration
Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
---- --------------- -------------- ------------ ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
William Zanker 100,000 21.5% $1.875 7/18/00 $51,500 $114,500
Terrance C. Murray 100,000 21.5% $1.875 7/18/00 $51,500 $114,500
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides information on options/SAR exercises in
1995 by the named executive officers and the value of such officers' unexercised
options/SARs at December 31, 1995.
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<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year, and Fiscal Year-End Option/SAR Value Table
- -------------------------------------------------------------------------------------------------
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs at in-the-Money
Fiscal Year End Options/SARs
Shares Acquired Value Realized Exercisable/ Exercisable/
on Exercise (#) ($) Unexercisable Unexercisable
NAME ------------------ -------------- ---------------- ---------------
- ----
<S> <C> <C> <C> <C>
William Zanker 0 0 140,000/80,000 $205,000/10,000
Terrance C. Murray 0 0 140,000/80,000 $205,000/10,000
</TABLE>
The Company has obtained individual term life insurance policies
covering Messrs. Zanker and Murray in the amount of $2,000,000 per person. The
Company is the sole beneficiary under these policies and the Company will keep
such policies in force for a minimum of three years from March 7, 1995.
CERTAIN TRANSACTIONS
In June 1993, the Company issued to Debbie Dworkin, the wife of the
Company's Chairman of the Board, William Zanker, 187,500 shares of Common Stock
for nominal consideration upon the founding of the Company. Ms. Dworkin has
transferred an aggregate of 105,188 of such shares to certain individuals,
including 34,375 shares sold to Terrance Murray and 21,875 shares sold to Steven
Thompson.
In December 1994, each of Messrs. Zanker and Murray waived their
respective salaries which had accrued since January 1994 in the aggregate amount
of $220,000 as of December 31, 1994 and worked without salary until March 1,
1995. Each has been subsequently compensated in accordance with the terms of
their respective employment agreements. See "Management."
On March 9, 1995, the Company entered into a consulting agreement with
A. Clinton Allen (the "Consulting Agreement"), pursuant to which Mr. Allen was
paid $3,000 per month, plus expenses. In addition, the Company granted to Mr.
Allen options to purchase 100,000 shares of Common Stock exercisable for a
period of 10 years at a price of $5.00 per share and was to grant to Mr. Allen
an option to purchase 25,000 shares of Common Stock at the beginning of each
calendar year during the term of the Consulting Agreement. Mr. Allen became a
director of the Company on March 9, 1995. On December 18, 1995, Mr. Allen
resigned from his position as a member of the Board of Directors of the Company
and the Consulting Agreement was terminated.
On December 7, 1995, the Company entered into an option agreement with
Laidlaw Equities, Inc. and Laidlaw Holdings, Inc. (collectively, "Laidlaw")
pursuant to which Laidlaw granted the Company options (the "Options") to
purchase an aggregate of 475,000 shares (the "Option Shares"). Such options were
exercisable at any time or from time to time prior to September 7, 1996 at an
exercise price of $4.00 per share.
On February 1, 1996, the Company engaged Horatio Management Services
Corp., an affiliate of the Underwriter, as the Company's management consultant
for a period of 24 months commencing February 1, 1996, at a fee of $5,000 per
month (exclusive of any accountable out-of-pocket expenses), $60,000 of which is
payable on the closing of the Offering and $60,000 of which is payable on the
first anniversary thereof.
On April 9, 1996, Laidlaw granted the Underwriter an option to purchase
100,000 of the Option Shares, exercisable at any time to and including May 9,
1996, for an exercise price of $3.00 per share and the Company simultaneously
released Laidlaw from the Options with respect to such shares. The Underwriter
exercised such option.
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On April 24, 1996, the Company granted certain individuals unaffiliated
with the Company (the "Grantees") the right (the "Right") to cause the Company
to assign the Options with respect to 375,000 of the Option Shares to them at
any time prior to June 7, 1996 (subsequently extended to September 7, 1996);
provided, however, that the exercise price with respect to such shares would be
$5.00 per share. The Underwriter purchased 50,000 of such shares from Laidlaw
and simultaneously therewith the Company released Laidlaw from the Options as to
such 50,000 shares and the Grantees released the Company from the Right as to
such 50,000 shares.
Except as described above, the Options expired unexercised on September
7, 1996.
On November 15, 1996, the Company entered into a franchise agreement
with Roosevelt Field Partners. See "Business - Franchise Development." Messrs.
Zanker, Murray and Dee own, collectively, an approximately 22% equity interest
in Roosevelt Field Partners.
On December 27, 1996, the Company consummated the Bridge Financing (the
net proceeds of which were approximately $175,000), consisting of five and
one-third investment units, each such unit comprising a Bridge Note in the
principal amount of $49,250 and 750,000 Bridge Warrants. In the Bridge
Financing, William Zanker, President of the Company, Terrance C. Murray, Chief
Executive Officer of the Company, and Keith R. Dee, Chief Financial Officer of
the Company, purchased an aggregate of one and one-third of the investment
units. On January 27, 1997, Mr. Zanker and the Company entered into an agreement
whereby Mr. Zanker rescinded his investment in the Bridge Financing, consisting
of .73387 investment units, and an equal number of units were sold by the
Company to another investor. See "Description of Securities--Description of
Bridge Warrants and New Warrants."
All future and ongoing transactions and loans with officers, directors
and principal shareholders of the Company will be on terms no less favorable
than could be obtained from independent third parties and will be approved by a
majority of the disinterested directors of the Company.
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of the date of this
Prospectus with respect to the beneficial ownership of the Common Stock by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the Company's outstanding Common Stock, (ii) each Director of the Company, (iii)
each executive officer of the Company, and (iv) all Directors and executive
officers as a group.
Amount and
Nature of
Beneficial Percent of
NAME AND ADDRESS(1) Ownership(2) Class(3)
--------------- -----------
Laidlaw Holdings, Inc........................ 157,652(4) 6.7
Laidlaw Equities, Inc........................ 149,564(4) 6.3
Debbie Dworkin............................... 63,562(5) 2.8
William Zanker............................... 143,562(6) 6.2
Terrance C. Murray........................... 139,375(7) 6.0
Stephen Seligman............................. 11,667(8) *
Andrew L. Hyams.............................. 8,542(9) *
Edward E. Faber.............................. 6,667(10) *
Donald R. Fleischer.......................... 22,292(11) *
Peter Hanelt................................. 6,667(10) *
Keith Dee.................................... 26,875(12) 1.2
Cumberland Associates........................ 130,000(13) 5.8
All executive officers and directors as a
group (8 persons)........................... 365,647(14) 8.8
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* Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
the Company, 425 Madison Avenue, New York, New York 10017.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act ("Rule 13d-3") and unless otherwise indicated,
represents shares for which the beneficial owner has sole voting and
investment power.
(3) The percentage of class is calculated in accordance with Rule 13d-3 and
assumes that the beneficial owner has exercised any options or other
rights to subscribe which are exercisable within sixty (60) days and
that no other options or rights to subscribe have been exercised by
anyone else.
(4) These shares consist of (i) 8,088 shares held by Laidlaw Holdings, Inc.
and (ii) 24,564 shares held by, and 125,000 shares issuable upon the
exercise of warrants held by, its subsidiary Laidlaw Equities, Inc. The
address for each of Laidlaw Equities, Inc. and Laidlaw Holdings, Inc.
is 100 Park Avenue, 28th Floor, New York, New York 10017.
(5) Debbie Dworkin is the wife of William Zanker, the Company's Chairman of
the Board and President.
(6) These shares consist of (i) 63,562 shares held by Debbie Dworkin, Mr.
Zanker's wife, and (ii) 80,000 shares issuable upon the exercise of
options. Mr. Zanker disclaims any beneficial ownership of the shares
held by Ms. Dworkin.
(7) Includes 80,000 shares issuable upon the exercise of options.
(8) These shares consist of (i) 5,000 shares held by Stephen Seligman and
his wife, Beth Greer, as joint tenants with right of survivorship and
(ii) 6,667 shares issuable upon the exercise of options.
(9) These shares consist of (i) 1,875 shares held by Mr. Hyams and his
wife, Tracey Hyams, as joint tenants with right of survivorship and
(ii) 6,667 shares issuable upon the exercise of options.
(10) Represents 6,667 shares issuable upon the exercise of options.
(11) These shares consist of (i) 3,125 shares held by Mr. Fleischer, (ii)
6,667 shares issuable upon the exercise of options and (iii) 12,500
shares issuable upon the exercise of certain warrants purchased by Mr.
Fleischer.
(12) Includes 5,000 shares issuable upon the exercise of options.
(13) The address for Cumberland Associates is 1114 Avenue of the Americas,
New York, New York 10036.
(14) Includes 198,335 shares issuable upon the exercise of options and
warrants.
DESCRIPTION OF SECURITIES
DESCRIPTION OF PREFERRED STOCK
GENERAL
The authorized capital stock of the Company includes 15,000,000 shares
of preferred stock, $.001 par value, to be issued from time to time in one or
more series. As of the date of this Prospectus, there were no shares of
preferred stock outstanding.
The Board of Directors is authorized, subject to any limitations
prescribed by New York law, to provide for the issuance of preferred stock in
one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the rights, preferences and privileges of
the shares of each wholly unissued series and any qualifications, limitations or
restrictions thereon, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding), without any further vote or action by shareholders. The Board of
Directors may authorize and issue preferred stock with voting or conversion
rights that could adversely affect the voting power or other rights of the
holders of Common Stock, because the terms of the preferred stock that might be
issued could conceivably prohibit the Company's consummation of any merger,
reorganization, sale of substantially all its assets, liquidation or other
extraordinary corporate transaction absent
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approval of the outstanding shares of preferred stock. Thus, the issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company.
RANKING
The Preferred Stock will rank prior to the Company's Common Stock.
DIVIDEND RIGHTS
The holders of the Preferred Stock offered hereby will be entitled to
receive, when, as and if declared by the Company's Board of Directors out of
funds of the Company legally available therefor (and subject to the limitation
described in the last sentence of this paragraph), cumulative dividends at the
rate of $.70 per annum per share, payable semi-annually on April 1 and October 1
in each year, either (at the option of the Company) in cash or in shares of
Common Stock based on the average closing price of the Common Stock for the 10
consecutive trading days ending on the last trading day prior to the record
date. Such dividends shall be cumulative from the date of issue of the Preferred
Stock. The Company will pay each such dividend to the holders of record of the
Preferred Stock as they appear on its stock register on the record date, which
shall not be more than 30 nor less than 10 days preceding the dividend payment
date. If a holder converts shares of Preferred Stock after the close of business
on the record date for a dividend and before the opening of business on the
payment date for such dividend, the holder will be required to pay to the
Company at the time of such conversion the amount of such dividend (unless the
shares were converted after the issuance of a notice of redemption with respect
to such shares, which shares will be entitled to such dividend). See
"--Conversion Rights" below.
If dividends are not paid in full, or declared in full and sums set
apart for the payment thereof, upon the Preferred Stock and any other preferred
stock ranking on a parity as to dividends with the Preferred Stock, all
dividends declared upon the Preferred Stock and any other preferred stock
ranking on a parity as to dividends will be paid or declared PRO RATA so that in
all cases the amount of dividends paid or declared per share on the Preferred
Stock and such other preferred stock will bear to each other the same ratio that
accumulated dividends per share, including dividends accrued or in arrears, if
any, on the Preferred Stock and such other preferred stock bear to each other.
Except as provided in the preceding sentence, unless cumulative dividends on the
Preferred Stock have been paid or declared in full and sums set aside for the
payment thereof, no dividends (other than dividends in Common Stock or other
shares of the Company's capital stock ranking junior to the Preferred Stock as
to dividends and liquidation preference) may be paid or declared and set aside
for the payment or other distribution made upon the Common Stock or, except as
provided above, on any other capital stock of the Company ranking junior to or
on parity with the preferred Stock as to dividends, nor may any Common Stock or
any other capital stock ranking junior to or on a parity with the Preferred
Stock as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment made to or available for a sinking fund for the
redemption of any shares of such stock) by the Company or any subsidiary of the
Company (except by conversion into or exchange for capital stock of the Company
ranking junior to the Preferred Stock as to dividends and liquidation
preference).
Dividends payable on the Preferred Stock for any period less than a
full semi-annual period will be computed on the basis of a 360-day year of
twelve 30- day months and the actual number of days elapsed in the period for
which payable.
CONVERSION RIGHTS
Holders of Preferred Stock will have the right, exercisable at any time
after ____________, 1998 [12 months from the date of this Prospectus], except in
the case of Preferred Stock called for redemption, to convert each share of
Preferred Stock into the greater of four shares of Common Stock or a number of
shares of Common Stock equal to $16.00 divided by average of the closing price
(or if there is no reported sale, the average of the closing bid and asked
prices) of the Common Stock for the 10 consecutive trading days ending on the
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third trading day preceding the date of conversion up to a maximum of eight
shares of Common Stock. In the case of the Preferred Stock called for
redemption, conversion rights will expire at the close of business on the
business day immediately preceding the date fixed for redemption. Notice of an
optional redemption must be mailed not less than 30 days and not more than 60
days prior to the redemption date. Upon conversion, adjustment or repayment will
be made for dividends, but if any holder surrenders a share of Preferred Stock
for conversion after the close of business on the record date for the payment of
a dividend and prior to the opening of business on the next dividend payment
date, then, notwithstanding such conversion, the dividend payable on such
dividend payment date will be paid to the registered holder of such share on
such record date. In such event, such share, when surrendered for conversion,
must be accompanied by payment of an amount equal to the dividend payable on
such dividend payment date on the share so converted (unless the share was
converted after the issuance of a notice of redemption with respect to such
share, which share will be entitled to such dividend). No fractional shares of
Common Stock will be issued upon conversion and, if the conversion results in a
fractional interest, an amount will be paid in cash equal to the value of such
fractional interest based on the market price of the Common Stock on the last
trading day prior to the date of conversion.
If the Company reclassifies or changes its outstanding Common Stock, or
consolidates with or merges into or transfers or leases all or substantially all
its assets to any person, or is a party to a merger that reclassifies or changes
its outstanding Common Stock, the Preferred Stock will become convertible into
the kind and amount of securities, cash or other assets which the holders of the
Preferred Stock would have owned immediately after the transaction if the
holders had converted the Preferred Stock immediately before the effective date
of the transaction.
Conversion of shares of Preferred Stock may be effected by delivering
certificates evidencing such shares, together with written notice of conversion
and a proper assignment of such certificates to the Company or in blank, to the
office or agency to be maintained by the Company for that purpose.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or otherwise, after payment or
provision for payment of the Company's debts and other liabilities, the holders
of Preferred Stock will be entitled to receive, out of the remaining net assets
of the Company, the amount of $10.00 in cash for each share of Preferred Stock,
plus an amount in cash equal to all dividends accrued and unpaid on each such
share up to the date fixed for distribution before any distribution is made to
the holders of Common Stock or any other capital stock of the Company ranking
(as to any such distribution) junior to the Preferred Stock. If upon any
liquidation, dissolution or winding up of the Company, the assets distributable
among the holders of shares of Preferred Stock and all other classes and series
of preferred stock ranking (as to any such distribution) on a parity with the
Preferred Stock are insufficient to permit the payment in full to the holders of
all such shares of all preferential amounts payable to all such holders, then
the entire assets of the Company thus distributable will be distributed ratably
among the holders of the Preferred Stock and of all classes and series of
preferred stock ranking (as to any such distribution) on a parity with the
Preferred Stock in proportion to the respective amounts that would be payable
per share if such assets were sufficient to permit payment in full.
For purposes of this section, a distribution of assets in any
dissolution, winding up or liquidation will not include (i) any consolidation or
merger of the Company with or into any other corporation, (ii) any dissolution,
liquidation, winding up or reorganization of the Company immediately followed by
reincorporation of another corporation or (iii) a sale or other disposition of
all or substantially all of the Company's assets to another corporation;
provided that, in each case, effective provision is made in the certificate of
incorporation of the resulting and surviving corporation or otherwise for the
protection of the rights of the holders of Preferred Stock.
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OPTIONAL REDEMPTION
The Preferred Stock may be redeemed at the option of the Company, in
whole or from time to time in part, at any time on and after (i)
_________________, 1999 [two years from the date of this Prospectus] with the
consent of the Underwriter or upon the closing of a public offering of equity
securities of the Company or (ii) ___________, 2002 [five years after the date
of this Prospectus], at a redemption price equal to $__________ per share [105%
of the public offering price per share], plus, in each case, all dividends
accrued and unpaid on the Preferred Stock up to the date fixed for redemption.
If fewer than all the outstanding shares of Preferred Stock are to be redeemed,
the shares to be redeemed will be determined pro rata or in such other manner as
prescribed by the Company's Board of Directors.
At least 30 days but not more than 60 days prior to the date fixed for
redemption, a written notice will be mailed to each holder of record of
Preferred Stock to be redeemed, notifying such holder of the Company's election
to redeem such shares, stating the date fixed for redemption thereof (the
"Preferred Stock Redemption Date") and calling upon such holder to surrender to
the Company on the Preferred Stock Redemption Date at the place designated in
such notice the certificate or certificates representing the number of shares
specified therein.
On or after the Preferred Stock Redemption Date, each holder of
Preferred Stock to be redeemed must present and surrender his certificate or
certificates for such shares to the Company at the place designated in such
notice and thereupon the redemption price of such shares will be paid to or on
the order of the person whose name appears on such certificate or certificates
as the owner thereof and each surrendered certificate will be canceled. Should
fewer than all the shares represented by any such certificate be redeemed, a new
certificate will be issued representing the unredeemed shares. From and after
the Preferred Stock Redemption Date (unless the Company defaults in payment of
the redemption price), all dividends on the shares of the Preferred Stock
designated for redemption in such notice will cease to accrue and all rights of
the holders thereof as shareholders of the Company, except the right to receive
the redemption price thereof (including all accrued and unpaid dividends up to
the Preferred Stock Redemption Date), will cease and terminate and such shares
will not thereafter be transferred (except with the consent of the Company) on
the Company's books, and such shares shall not be deemed to be outstanding for
any purpose whatsoever. At its election, the Company, prior to the Preferred
Stock Redemption Date, may deposit the redemption price of the shares of the
Preferred Stock so called for redemption in trust for the holders thereof with a
bank or trust company, in which case such notice to holders of the shares of the
Preferred Stock to be redeemed will (i) state the date of such deposit, (ii)
specify the office of such bank or trust company as the place of payment of the
redemption price and (iii) call upon such holders to surrender the certificates
representing such shares at such place on or after the date fixed in such
redemption notice (which may not be later than the Preferred Stock Redemption
Date), against payment of the redemption price (including all accrued and unpaid
dividends up to the Preferred Stock Redemption Date). Any moneys so deposited
which remain unclaimed by the holders of the Preferred Stock at the end of two
years after the Preferred Stock Redemption Date will be returned by such bank or
trust company to the Company.
VOTING RIGHTS
The holders of Preferred Stock shall not be entitled to vote on any
matter except as required by law.
PREEMPTIVE RIGHTS
No holder of Preferred Stock will have preemptive rights to subscribe
for or acquire any unissued shares of the Company or securities of the Company
convertible into or carrying a right to subscribe to or acquire shares.
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TRANSFER AGENT
The Registrar, Transfer Agent and Conversion Agent for the Preferred
Stock will be Continental Stock Transfer & Trust Company, New York, New York.
Continental Stock Transfer & Trust Company will also act as Paying Agent for the
Preferred Stock. Continental Stock Transfer & Trust Company is also the transfer
agent, warrant agent and registrar for the Common Stock and the Redeemable
Warrants.
DESCRIPTION OF COMMON STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
issuance of 20,000,000 shares of common Stock, $.001 par value (the "Common
Stock"). As of the date of this Prospectus, there were 2,393,354 shares of the
Common Stock issued and outstanding. All outstanding shares of Common Stock are,
and the shares offered hereby will be, validly issued, fully paid and
non-assessable. Holders of Common Stock are entitled to share ratably in such
dividends and distributions as may from time to time be declared by the Board of
Directors of the Company from funds legally available therefor and upon
liquidation will be entitled to share ratably in any assets of the Company
legally available for distribution to holders of the Common Stock. The Company's
Certificate of Incorporation, as amended, and By-Laws do not confer any
preemptive, subscription, redemption or conversion rights on the holders of
Common Stock. Holders of Common Stock are entitled to cast one vote for each
share held of record on each matter submitted to a vote of shareholders. There
is no cumulative voting, which means that holders of a majority of the voting
power may elect all of the directors.
DESCRIPTION OF BRIDGE WARRANTS AND NEW WARRANTS
On December 27, 1996, the Company consummated a financing (the "Bridge
Financing"), consisting of five and one-third investment units comprising an
aggregate of $266,666.67 principal amount of promissory notes (the "Bridge
Notes") and 4,000,000 warrants (the "Bridge Warrants"). The Bridge Notes bear
interest at the rate of 10% per annum and are due and payable upon the earlier
of (a) the consummation of a public financing of the Company through the sale of
securities or (b) December 27, 1997 (January 27, 1998 in the case of the New
Investor). Each Bridge Warrant entitles the holder to purchase one share of
Series A Preferred Stock at an initial exercise price of $5.00 (subject to
adjustment upon the occurrence of certain events) during the three-year period
commencing December 27, 1997 (January 27, 1998 in the case of the New Investor).
See "Certain Transactions." The net proceeds of approximately $175,000 from the
Bridge Financing were applied by the Company to reduce accounts payable and
accrued liabilities.
Upon consummation of the Offering each Bridge Warrant shall
automatically, without any action by the holder thereof, be converted into
one-half of a warrant (referred to herein as a "Redeemable Warrant" or "New
Warrant"), each New Warrant entitling the holder thereof to purchase one share
of the Series B Preferred Stock at an exercise price of $8.00 per share (subject
to adjustment upon the occurrence of certain events) commencing on
_____________, 1998 [12 months from the date of this Prospectus] until
____________, 2001 [four years from the date of this Prospectus]. Commencing 12
months after the date of this Prospectus (subject to the consent of the
Underwriter if notice of redemption is given prior to 24 months from the date of
this Prospectus), the Company shall have the right at any time to redeem all,
but not less than all, of the Redeemable Warrants at a redemption price of
$0.001 per Warrant, upon not less than 30 days' prior written notice, provided
that the closing price of the Common Stock for each of the 10 trading days
ending on the third trading day immediately prior to the notice of redemption,
equals or exceeds 120% of the then exercise price of the New Warrants. The New
Warrants, the shares of Preferred Stock issuable upon exercise of the New
Warrants and the shares of Common Stock into which such Preferred Stock may be
converted are being registered under the Securities Act pursuant to a separate
Registration Statement. The Company intends to use a portion of the proceeds of
this Offering to repay the entire principal amount of, and accrued interest on,
the Bridge Notes. See "Use of Proceeds."
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In connection with the Bridge Financing, the Company paid the
Underwriter, as placement agent, $26,666.67 in commissions and a nonaccountable
expense allowance of $8,000. The Company also paid the fees and disbursements of
the Underwriter's legal counsel.
INDEMNIFICATION OF DIRECTORS
As permitted by the New York Business Corporation Law ("NYBCL"), the
Company's Certificate of Incorporation, as amended, limits the personal
liability of directors of the Company or its stockholders for damages for any
breach of duty in such capacity. Liability is not eliminated for (i) the
liability of any director if a judgment or other final adjudication adverse to
him establishes that his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law or that he personally
gained in fact a financial profit or other advantage to which he is not legally
entitled or (ii) the liability of any director for any act or omission prior to
the adoption of a provision authorized by Section 402(b) of the NYBCL.
NEW YORK BUSINESS CORPORATION LAW
The Company is subject to the NYBCL. Section 1600 of the NYBCL, known
as the "Security Takeover Disclosure Act," applies to "takeover bids," generally
defined to mean the acquisition of or offer to acquire by an offeror from an
offeree, pursuant to a tender offer or request or invitations for tenders, any
equity security of a target company, if after acquisition thereof, the offeror
would, directly or indirectly, be a beneficial owner of more than 5% of any
class of the issued and outstanding equity securities of such target company.
No offeror shall make a takeover bid unless as soon as practicable on
the date of commencement on the takeover bid he files with the New York Attorney
General and delivers to the target company at its principal executive offices a
registration statement containing certain specified information as set forth in
Section 1603 of the NYBCL.
The foregoing discussion of certain provisions of the NYBCL is
qualified in its entirety by reference to those NYBCL provisions. The area of
state anti-takeover law has been rapidly changing in recent years. For example,
certain state statutes have been contested on the basis of federal preemption
and other theories. Moreover, the anti-takeover laws do not completely insulate
corporations from hostile takeovers and do not change existing law concerning
directors' fiduciary duties to shareholders. Shareholders are therefore urged to
consult their respective legal counsel regarding applicable antitakeover laws
and their effect on the Company and its shareholders.
TRANSFER AND WARRANT AGENT AND REGISTRAR
The Company has appointed Continental Stock Transfer & Trust Company,
New York, New York, as Transfer Agent and Registrar for the Common Stock and
Warrant Agent for the Redeemable Warrants.
LISTING ON NASDAQ
The Company's Common Stock is currently listed on Nasdaq under the
symbol "RUBB". Application has been made for, and it is anticipated that upon
consummation of the Offering, the Common Stock issuable upon conversion of the
Preferred Stock will be approved for quotation on Nasdaq under the symbol
"RUBB".
SHARES ELIGIBLE FOR FUTURE SALE
Of the 2,393,354 shares of Common Stock currently outstanding,
2,248,542 shares of Common Stock are freely transferable, without restriction,
under the Act, unless acquired by an affiliate (as that term is defined under
the Act) of the Company, who is subject to the resale limitations of Rule 144
under the Act. The remaining 144,812 shares are "restricted securities" within
the meaning of the Act, but all of such shares are being registered pursuant to
a separate
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Registration Statement. All of the Company's officers and directors (who own
154,812 shares of Common Stock in the aggregate) have agreed not to sell, assign
or transfer Preferred Stock for a period of 36 months from the date of this
Prospectus (except for Messrs. Zanker, Murray and Dee, who have agreed not to
transfer any shares of Preferred Stock or Common Stock for 24 months from the
date of this Prospectus) without the Underwriter's prior written consent. In
addition, Messrs. Murray and Dee (who upon consummation of the Offering will
hold an aggregate of 449,600 New Warrants) have agreed not to sell any New
Warrants, Preferred Stock issuable upon the exercise of New Warrants or Common
Stock into which Preferred Stock may be converted for 24 months from the date of
this Prospectus without the Underwriter's prior written consent.
There has been only an extremely limited public market for the Common
Stock. The Company cannot predict the number of shares of Common Stock which may
be sold in the future pursuant to the exercise of outstanding options and
warrants, registration rights, or pursuant to Rule 144 or other applicable
exemptions from the registration requirements of the Act because such sales will
depend on whether persons choose to exercise any registration rights they may
have, the market price of the Common Stock, the individual circumstances of
holders thereof and other factors. Nevertheless, there is the possibility that
substantial amounts of restricted or registrable shares may be resold in the
public market which may adversely affect prevailing market prices for the Common
Stock.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain United States federal
tax considerations relevant to the purchase, ownership and disposition of
Preferred Stock but does not purport to be a complete analysis of all the
potential tax effects thereof. The discussion is limited to United States
federal income tax matters. The discussion is based upon the Internal Revenue
Code of 1986, as amended (the "Code"). Treasury regulations, and Internal
Revenue Service ("IRS") rulings and judicial decisions now in effect, all of
which are subject to change at any time, possibly with retroactive effect, by
legislative, judicial or administrative action. Except as otherwise indicated,
references to Common Stock are to the Common Stock issuable upon conversion of
the Preferred Stock.
The information provided herein is directed to investors who will hold
the Preferred Stock and the Common Stock issuable upon the conversion thereof as
capital assets within the meaning of Section 1221 of the Code. In addition, the
tax consequences to a particular holder (including life insurance companies,
tax-exempt organizations, financial institutions, dealers in securities, foreign
corporation and nonresident alien individuals) may be affected by matters not
discussed herein.
This discussion has been reviewed by Olshan Grundman Frome & Rosenzweig
LLP, counsel to the Company, who has given their opinion that such discussion,
insofar as it concerns conclusions of law, is an accurate general description,
subject to the assumptions and limitations set forth therein, of the principal
United States federal income tax consequences of the purchase, ownership and
disposition of the Preferred Stock. The Company has not sought, nor does it
intend to seek, a ruling from the IRS as to any of the matters covered by the
discussion, and there can be no assurance that the IRS will not successfully
challenge certain of the conclusions reached in the discussion. BECAUSE THE
UNITED STATES FEDERAL TAX CONSEQUENCES DISCUSSED BELOW DEPEND UPON EACH HOLDER'S
PARTICULAR TAX STATUS, AND DEPEND FURTHER UPON UNITED STATES FEDERAL TAX LAWS,
REGULATIONS, RULINGS AND DECISIONS WHICH ARE SUBJECT TO CHANGE (WHICH CHANGES
MAY BE RETROACTIVE IN EFFECT), PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF AN INVESTMENT IN THE
PREFERRED STOCK INCLUDING, BUT NOT LIMITED TO, THE APPLICATION AND EFFECT OF ANY
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, AS WELL AS THE CONSEQUENCES OF ANY
RECENT, PENDING OR PROPOSED CHANGES IN THE APPLICABLE LAWS.
-49-
<PAGE>
DISTRIBUTIONS ON PREFERRED STOCK
Distributions by the Company with respect to the Preferred Stock will
be characterized as dividends taxable as ordinary income to the extent of the
Company's current or accumulated earnings and profits, if any, as determined for
United States federal income tax purposes. To the extent that a distribution on
the Preferred Stock to a holder exceeds the holder's allocable share of the
Company's current or accumulated earnings and profits, such distribution will
first be treated as a return of capital that will reduce the holder's adjusted
tax basis in such Preferred Stock, the excess will be taxed as a capital gain
and will be long-term capital gain if the holder's holding period for Preferred
Stock is more than one year.
The Company believes that it is likely that it has a deficit in
accumulated earnings and profits. Therefore, whether a distribution on the
Preferred Stock will be treated as a dividend generally will depend upon the
presence of current earnings and profits in any year. It is not possible to
predict whether the Company will have current or accumulated earnings and
profits in subsequent years. Thus, there can be no assurance that all or any
portion of a distribution of the Preferred Stock will be characterized as of
dividend for United States federal income tax purposes. Corporate stockholders
will not be entitled to claim the dividends-received deduction with respect to
distributions that do not qualify as dividends. See the discussion regarding the
dividends-received deduction below. For the remainder of this discussion, the
term "dividend" refers to a distribution paid entirely out of the Company's
current or accumulated earnings and profits.
A corporate holder will generally be entitled to a 70%
dividends-received deduction with respect to distributions that are treated as
dividends on shares of Preferred Stock that the corporate holder has held for at
least 46 days (91 days in the case of dividends attributable to a period or
periods aggregating more than 366 days). A taxpayer's holding period for these
purposes is reduced by periods during which the taxpayer's risk of loss with
respect to the shares is considered diminished by reason of the existence of
certain options, contracts to sell or other similar transactions. Also, the
dividends-received deduction may be reduced or eliminated if a corporation has
indebtedness "directly attributable to its investment" in portfolio stock (such
as the Preferred Stock).
A corporate holder is required to reduce its basis (but not below zero)
in stock by the non-taxed portion (generally the portion eligible for the
dividends-received deduction described above) of any "extraordinary dividend" as
defined in Code Section 1059, if the holder has not held such stock subject to a
risk of loss for more than two years before the Company declares, announces, or
agrees to, the amount or payment of such dividend, whichever is earliest. If any
part of the non-taxed portion of an extraordinary dividend has not been applied
to reduce basis as a result of the limitation on reducing basis below zero, such
part will be treated as gain from the sale or exchange of stock when such stock
is disposed of or sold.
In addition, for purposes of computing its alternative minimum tax
liability, a corporate holder may, in general, be required to include in its
alternative minimum taxable income a portion of any dividends-received deduction
allowed in computing regular taxable income.
Under certain circumstances, the operation of the conversion price
adjustment provisions of the Preferred Stock, or the failure to adjust fully the
conversion price for the Preferred Stock to reflect a distribution of stock,
stock warrants or stock rights with respect to the Common Stock, or a reverse
stock split, may result in the deemed receipt of a dividend by the holders of
the Preferred Stock or the Common Stock if the effect is to increase such
holders' proportionate interests in the Company. However, adjustments to reflect
nontaxable stock splits or distribution of stock, stock warrants or stock rights
will, generally, not be so treated. Any such constructive dividends may
constitute (and cause other dividends to constitute) extraordinary dividends to
corporate holders.
If the redemption price of preferred stock that is subject to optional
redemption by the issuer exceeds its issue price, and if such excess is not
-50-
<PAGE>
considered "reasonable", the entire amount of the redemption premium will be
treated as being distributed to the holder of such stock, on an economic accrual
basis, over the period from issuance of such stock until the date the stock is
first redeemable. In this respect, the regulations provide as a safe harbor that
a redemption premium not in excess of ten percent of the issue price of the
stock which is not redeemable for five years from the date of issue is
considered reasonable for this purpose. Even if the precise tests of the safe
harbor cannot be met, however, a call premium will be regarded as reasonable if
such premium is in the nature of a penalty for a premature redemption of the
preferred stock and such premium does not exceed the amount the issuer would be
required to pay for the right to make such premature redemption under the market
conditions existing at the time of issuance. Although the Company believes that
the premium it may pay upon a call of the Preferred Stock is equivalent to
premium rates presently payable on comparable stock paying comparable dividends,
there can be no assurance that such premium will not be deemed includible as a
constructive dividend in accordance with the general rule stated above.
Principles similar to the foregoing will apply to distributions with respect to
the Common Stock.
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK
No gain or loss will be recognized upon conversion of Preferred Stock
solely into shares of Common Stock. However, gain realized upon the receipt of
cash paid in lieu of fractional shares of Common Stock will be taxed
immediately. Except to the extent of cash paid in lieu of fractional shares of
Common Stock, the adjusted tax basis for the shares of Common Stock received
upon the conversion will be equal to the adjusted tax basis of the Preferred
Stock converted, and the holding period of the shares of Common Stock will
include the holding period of the Preferred Stock converted.
REDEMPTION OF PREFERRED STOCK
Gain or loss recognized by a holder on a redemption of the Preferred
Stock will be treated as a gain or loss from the sale or exchange of the
Preferred Stock (see "Other Disposition" below), if, taking into account stock
that is actually or constructively owned under the rules of Code Section 318 by
such holder, either (i) the holder's common and preferred stock interest in the
Company is completely terminated as a result of the redemption, (ii) such
holder's percentage ownership of the Company's Common Stock immediately after
the redemption is less than 80% of such percentage ownership immediately before
the redemption, or (iii) the redemption is "not essentially equivalent to a
dividend". Whether a redemption is not essentially equivalent to a dividend
depends on each holder's facts and circumstances, but in any event, requires a
"meaningful reduction" in such holder's interest in the Company.
If none of the above conditions is satisfied, the entire amount of the
cash received on a redemption of the Preferred Stock will be treated as a
dividend. The holder's basis in the redeemed Preferred Stock would, in such
case, be transferred to the holder's remaining shares of Company stock (if any).
The amount of cash received that is treated as a dividend will represent an
extraordinary dividend subject to Section 1059, with consequences as discussed
above, irrespective of the period of time that the holder has held the Preferred
Stock, if such redemption is not pro rata as to all shareholders.
OTHER DISPOSITION
Upon the taxable sale or exchange of shares of Preferred Stock, or of
shares of Common Stock acquired upon conversion of shares of Preferred Stock, a
holder will recognize capital gain or loss equal to the difference between the
amount realized on such sale or exchange and the holder's adjusted tax basis in
such stock. Any capital gain or loss recognized will generally be treated as
long-term capital gain or loss if the holder held such stock for more than one
year. For this purpose, the period for which the Preferred Stock was held would
be included in the holding period of the Common Stock received upon conversion.
-51-
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
A noncorporate holder of the Preferred Stock or the Common Stock
issuable upon conversion of the Preferred Stock who is not otherwise exempt from
backup withholding may be subject to backup withholding at the rate of 31% with
respect to dividends paid on, or the proceeds of a sale, exchange or redemption
of, the Preferred Stock or the Common Stock issuable upon conversion of the
Preferred Stock. Generally, backup withholding applies only when the taxpayer
(i) fails to furnish or certify his correct taxpayer identification number to
the payor in the manner requested, (ii) is notified by the IRS that he has
failed to report payments of interest or dividends properly, or (iii) under
certain circumstances, fails to certify that he has not been notified by the IRS
that he is subject to backup withholding for failure to report interest or
dividend payments. Any amounts withheld under the backup withholding rules from
a payment to a holder will be allowed as a credit against the holder's federal
income tax liability or as a refund, provided that the required information is
furnished to the IRS. Holders should consult their own tax advisors regarding
their qualification for exemption from backup withholding and the procedure for
obtaining any applicable exemption.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions
contained in the Underwriting Agreement (the "Underwriting Agreement") to
purchase from the Company, and the Company has agreed to sell to the Underwriter
on a firm commitment basis, 270,000 shares of Preferred Stock. The Underwriter
is committed to purchase all the Preferred Stock offered hereby, if any of the
Preferred Stock is purchased. The Underwriting Agreement provides that the
obligations of the Underwriter are subject to the conditions precedent specified
therein.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Preferred Stock to the public at the public offering price
set forth on the cover page of this Prospectus and that the Underwriter may
allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") concessions not in excess of $.50 per
share, of which amount a sum not in excess of $.30 per share may in turn be
reallowed by such dealers to other dealers. After the commencement of the
Offering, the public offering price, the concessions and the reallowances may be
changed.
The Company will pay to the Underwriter the underwriting commission set
forth on the cover page of this Prospectus upon payment for the shares of
Preferred Stock by the Underwriter. The Company has agreed to pay to the
Underwriter a non-accountable expense allowance equal to 3% of the gross
proceeds derived from the sale of the shares of Preferred Stock underwritten,
including the shares of Preferred Stock purchased pursuant to the over-allotment
option, $25,000 of which has been paid to date. The Underwriter will bear any
expenses incurred by it in excess of such allowance. If its expenses are less
than the allowance, the difference may be deemed underwriting compensation.
The Company has granted to the Underwriter an option, exercisable
within 30 days of the date of this Prospectus, to purchase from the Company at
the offering price less underwriting discounts and the non-accountable expense
allowance, up to an aggregate of 40,500 additional shares of Preferred Stock for
the sole purpose of covering over-allotments, if any.
The Company and the Underwriter have agreed to indemnify each other
against certain liabilities in connection with the Registration Statement of
which this Prospectus is a part, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be provided to officers, directors or persons controlling the Company, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy and is therefore unenforceable.
Upon the exercise of any Redeemable Warrants, and to the extent not
inconsistent with the guidelines of the NASD and the Rules and Regulations of
the
-52-
<PAGE>
Commission, the Company has agreed to pay a warrant exercise fee equal to 5% of
the aggregate exercise price of such Redeemable Warrants in connection with bona
fide services provided by the Underwriter relating to any warrant solicitation.
In addition, the individual must designate the firm entitled to payment of such
warrant solicitation fee. The Underwriter will be designated by the Company as
sole soliciting agent for the exercise of the Redeemable Warrants. However, no
compensation will be paid to the Underwriter in connection with the exercise of
the Redeemable Warrants if (i) the market price of the Common Stock is lower
than the exercise price, (ii) the Redeemable Warrants were held in a
discretionary account, or (iii) the Redeemable Warrants are exercised in an
unsolicited transaction. Unless granted an exemption by the Commission from its
Rule 10b-6 under the Exchange Act the Underwriter will be prohibited from
engaging in any market-making activities with regard to the Company's securities
for the period from 9 business days (or other such applicable periods as Rule
10b-6 may provide) prior to any solicitation of the exercise of the Redeemable
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right the Underwriter may have to
receive a fee. As a result, the Underwriter may be unable to continue to provide
a market for the Preferred Stock, Common Stock or Redeemable Warrants during
certain periods while the Redeemable Warrants are exercisable. If the
Underwriter has engaged in any of the activities prohibited by Rule 10b-6 during
the periods described above, the Underwriter undertakes to waive unconditionally
its rights to receive a commission on the exercise of such Redeemable Warrants.
Of the 2,393,354 shares of Common Stock to be outstanding upon
completion of the Offering, the holders of 144,812 shares of Common Stock have
agreed not to, directly or indirectly, issue, offer to sell, sell, grant an
option for the sale of, assign, transfer, pledge, hypothecate or otherwise
encumber or dispose of (collectively, a "Transfer") any securities issued by the
Company, including Common Stock or securities convertible into or exchangeable
for or evidencing any right to purchase or subscribe for any shares of Common
Stock for 24 months (and the holders of an additional 10,000 shares have agreed
not to Transfer any Preferred Stock for 36 months) from the date of this
Prospectus, without the prior written consent of the Underwriter and the
Company. In addition, the Company has agreed that without the consent of the
Underwriter, it will not sell or offer for sale any of its securities within 24
months (in the case of a public offering) or within 36 months (in the case of a
private placement) of the date of this Prospectus, except for securities issued
pursuant to outstanding options and warrants, up to 75,000 options under the
Employee Plan and up to 200,000 options to senior executives of the Company.
In connection with the Offering, the Company has agreed to grant to the
Underwriter, for nominal consideration, an option (the "Underwriter's Option")
to purchase from the Company 27,000 shares of Preferred Stock. The Underwriter's
Option is initially exercisable at a price of $____ [120% of the public offering
price] per share. The shares of Preferred Stock issuable upon exercise of the
Underwriter's Option are identical to those offered to the public. The
Underwriter's Option contains anti-dilution provisions providing for adjustment
of the number of shares and exercise price under certain circumstances. The
Underwriter's Option grants to the holder thereof certain rights of registration
of the securities issuable upon exercise of the Underwriter's Option.
For a period of five years from the date of this Prospectus, the
Company has agreed to recommend and use its best efforts to elect a designee of
the Underwriter, at the option of the Underwriter, either as a member of or a
non-voting advisor to its Board of Directors.
Further, the Company has engaged Horatio Management Services Corp., an
affiliate of the Underwriter, as the Company's management consultant for a
period of 24 months commencing February 1, 1996, at a fee of $5,000 per month
(exclusive of any accountable out-of-pocket expenses), $60,000 of which is
payable on the closing of the Offering and $60,000 of which is payable on the
first anniversary thereof.
The Company has agreed, subject to any required regulatory approvals,
to pay the Underwriter a finder's fee in the event that the Underwriter
originates
-53-
<PAGE>
within five years following the Effective Date a merger, acquisition, joint
venture or other transaction to which the Company is a party, in an amount equal
to 5% of the first $4,000,000, 4% of the next $1,000,000, 3% of the next
$1,000,000 and 2% of the excess, if any, over $6,000,000 of the consideration
actually received by the Company on such transaction.
In addition, during the five-year period following the date of this
Prospectus, the Underwriter has been granted the right to purchase for its own
account or to sell for the account of the Company's officers and directors any
securities sold pursuant to Rule 144. Each of the officers and directors of the
Company (the "144 Seller") has agreed to consult with the Underwriter with
regard to any such sales and will offer the Underwriter the exclusive
opportunity to purchase or sell such securities on terms at least as favorable
to the 144 Seller as he or she could secure elsewhere.
On February 8, 1996, the Company entered into a Financial Advisory and
Consulting Agreement (the "Financial Advisory Agreement") with the Underwriter.
The Financial Advisory Agreement expires on January 31, 1997. As compensation
for the services to be performed by the Underwriter for the Company pursuant to
the Financial Advisory Agreement, the Company paid to the Underwriter a
financial consulting fee of $100,000, and issued warrants to purchase 100,000
shares of Common Stock at an exercise price of $1.00 per share, exercisable to
and including January 31, 1997, and warrants to purchase 200,000 shares of
Common Stock at an exercise price of $2.50 per share, exercisable to and
including January 31, 1998. These warrants have been exercised.
During the term of the Financial Advisory Agreement the Underwriter
will provide the Company with such regular and customary consulting advice as is
reasonably requested by the Company. The Underwriter's duties will include, but
will not necessarily be limited to (i) providing sponsorship and exposure in
connection with the dissemination of information regarding the Company to the
investment community at large, (ii) arranging meetings with securities analysts,
(iii) assisting in the Company's financial public relations and (iv) rendering
advice regarding a future public or private offering of securities of the
Company or of any of its subsidiaries. In this regard, the Underwriter has
agreed to use its best efforts to assist the Company in arranging for a private
placement or public offering of securities with gross proceeds to the Company of
at least $2 million.
Prior to the Offering there has been a limited public market for the
Common Stock and no public market for the Preferred Stock, although the Common
Stock is currently traded on Nasdaq. Consequently, the initial public offering
price and terms of the Preferred Stock were determined by negotiation between
the Company and the Underwriter. The factors considered in determining such
price and terms, in addition to prevailing market conditions, included the
history of and the prospects for the industry in which the Company competes, the
market price of the Common Stock, an assessment of the Company's management, the
prospects of the Company, its capital structure and such other factors as were
deemed relevant. The offering price does not necessarily bear any relationship
to the assets, results of operations or net worth of the Company.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The legality of the securities offered hereby and certain other legal
matters will be passed upon for the Company by Olshan Grundman Frome &
Rosenzweig LLP, 505 Park Avenue, New York, New York 10022. Counsel for the
Underwriter in connection with this Offering is the Law Offices of Mark Schwarz,
545 Madison Avenue, 16th Floor, New York, New York 10022.
-54-
<PAGE>
EXPERTS
The financial statements included in this Prospectus have been audited
by BDO Seidman, LLP, independent certified public accountants, to the extent and
for the periods set forth in their report (which contains an explanatory
paragraph regarding uncertainties as to the ability of the Company to continue
as a going concern) appearing elsewhere herein, and is included in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Act with respect to the securities offered hereby (such
Registration Statement with all exhibits, and amendments thereto being referred
to hereinafter as the "Registration Statement"). This Prospectus, which is a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement. For further information with respect to the
Company and the securities hereby, reference is made to the Registration
Statement. The statements contained in this Prospectus as to the contents of any
contract or any other document in this Prospectus are not necessarily complete
and, in each instance, reference is made to the copy of such Registration
Statement, each such statement being qualified in any and all respects by such
reference. The Registration Statement, including exhibits, may be inspected
without charge and copied at the Commission's Public Reference Section located
at 450 Fifth Street, N.W., Washington, D.C. 20549, its Midwest Regional Office,
500 West Madison, Suite 1400, Chicago, Illinois 60661 and its Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048 upon payment
of the fees prescribed by the Commission.
CHANGE IN ACCOUNTANTS
On November 28,1994, the Company's prior auditors, Elwell, Cangiano,
Zdon & Dee, resigned. The resignation was tendered solely on the basis that the
Company had decided to pursue a public offering. On the same date, the Company
engaged BDO Seidman, LLP to audit its financial statements for the fiscal years
ended December 31, 1993 and December 31, 1994. The decision to change principal
accountants was made with the approval of the Company's Board of Directors.
The Company believes, and has been advised by Elwell, Cangiano, Zdon &
Dee that it concurs in such belief, that during the fiscal year ended December
31,1993 and through November 28,1994, the Company and Elwell, Cangiano, Zdon &
Dee did not have any disagreement on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Elwell, Cangiano, Zdon &
Dee, would have caused it to make reference in connection with its report on the
Company's financial statements to the subject matter of the disagreement.
No report of Elwell, Cangiano, Zdon & Dee on the Company's financial
statements for either of the past two fiscal years contained an adverse opinion,
a disclaimer of opinion or a qualification or was modified as to uncertainty,
audit scope or accounting principles. During such fiscal periods, there were no
"reportable events" within the meaning of Item 304(a)(1) of Regulation SB
promulgated under the Act.
-55-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants F-2
Balance Sheet as of December 31, 1995 F-3
Statements of Operations for the years ended December 31, 1994
and 1995 and December 18, 1992 (Inception) to December 31, 1995 F-4
Statements of Changes in Stockholders' Equity for the years ended
December 31 1994 and 1995 and December 18, 1992 (Inception) to
December 31 1995 F-5
Statements of Cash Flows for the years ended December 31, 1994
and 1995 and December 18, 1992 (Inception) to December 31, 1995 F-6
Summary of Accounting Policies F-7
Notes to Financial Statements F-9
Balance Sheet as of September 30, 1996 F-15
Statements of Operations for the nine month periods ended
September 30, 1996 and 1995 and December 18, 1992 (Inception)
to September 30, 1996 F-16
Statements of Cash Flows for the nine month periods ended
September 30, 1996 and September 30, 1995 and December 18,
1992 (Inception) to September 30, 1996 F-17
Notes to Financial Statements F-18
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
The Great American BackRub Store, Inc.
(a developmental stage company)
New York, New York
We have audited the accompanying balance sheet of The Great American BackRub
Store, Inc. (a development stage company), as of December 31, 1995 and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the two years in the period ended December 31, 1995, and for the
period from December 18, 1992 (date of inception) to December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Great American BackRub
Store, Inc. as of December 31, 1995, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1995, and
for the period from December 18, 1992 (date of inception) to December 31, 1995
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a deficit which raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to those matters also are
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/S/ BDO SEIDMAN, LLP
----------------
BDO Seidman, LLP
New York, New York
February 23, 1996
F-2
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF DECEMBER 31, 1995
ASSETS
Current assets:
Cash and cash equivalents $ 1,221,737
Certificate of deposit 1,000,000
Accounts receivable 9,054
Prepaid expenses 109,688
Inventory 217,709
-----------
Total current assets 2,558,188
Property and equipment:
Furniture and fixtures 253,195
Leasehold improvements 520,574
Purchased lease 120,000
Computer equipment 33,318
-----------
927,087
Less, Accumulated depreciation ( 61,196)
-----------
865,891
Other assets:
Lease and equipment deposits 164,813
-----------
Total assets $ 3,588,892
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 332,737
----------
Accrued expenses 305,663
Deferred revenue 160,193
-----------
798,593
-----------
Deferred rent 115,728
-----------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.001 per share,
10,000,000 shares authorized, 1,785,266 1,786
shares issued and outstanding at December 31, 1995
Additional paid in capital 6,848,980
Deficit accumulated during the development stage (4,176,195)
-----------
2,674,571
-----------
Total Liabilities and Stockholders' Equity $ 3,588,892
===========
See accompanying summary of accounting policies and
notes to financial statements.
F-3
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------- December 18, 1992
(Inception) to
1994 1995 December 31, 1995
---------------- ----------- ------------------
Revenues:
<S> <C> <C> <C>
Services $ 525,898 $ 874,320 $ 1,466,799
Products 136,873 326,012 501,954
Royalties, franchise fees and other 44,949 1,609 46,558
---------- ---------- -----------
Total 707,720 1,201,941 2,015,311
========== ========== ===========
Operating expenses:
Salaries and wages 447,588 1,230,531 1,744,631
Cost of products sold, buying and occupancy 88,498 269,261 377,564
Rental expense 215,797 409,850 671,804
Advertising and promotion 37,057 158,657 295,672
General and administrative 589,076 1,521,672 2,390,242
Depreciation 20,679 65,220 89,588
Waived salaries 320,000 30,000 350,000
---------- ---------- -----------
Total 1,718,695 3,685,191 5,919,501
---------- ---------- -----------
Net loss from operations ( 1,010,975) ( 2,483,250) ( 3,904,190)
---------- ---------- -----------
Other income (expense):
Interest income -- 149,691 149,691
Interest expense ( 108,000) ( 313,696) ( 421,696)
---------- ---------- -----------
Total ( 108,000) ( 164,005) ( 272,005)
---------- ---------- -----------
Net loss ($1,118,975) ($2,647,255) ($4,176,195)
========== ========== ==========
Weighted average number of shares outstanding during the
period 658,750 1,582,250
========== ==========
Net loss per common share and equivalents $ (1.70) (1.67)
========== =========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements
F-4
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional during the
Common Stock Paid-in Development
Shares Amount Capital Stage
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 18, 1992 (Inception) -- $ -- $ -- $ --
Initial issuance of common stock for
services, June 1993 375,000 375 2,625 --
Issuance of common stock in private
placement, October 1993, for cash at $8
per share, net of issuance costs 125,000 125 869,875 --
Net loss, year ended December 31, 1993 -- -- -- (409,965)
----------- ----------- ----------- -----------
Balance, December 31, 1993 500,000 500 872,500 (409,965)
Issuance of warrants to Bridge
Note Investors -- -- 106,000 --
Waived salaries -- -- 320,000 --
Net loss, year ended December 31, 1994 -- -- -- (1,118,975)
----------- ----------- ----------- -----------
Balance, December 31, 1994 500,000 500 1,298,500 (1,528,940)
Issuance of common stock in public offering,
March 1995, for $5 per share, net of
issuance costs 1,250,000 1,250 5,029,771 --
Issuance of warrants to Bridge
Note Investors -- -- 306,500 --
Waived salaries -- -- 30,000 --
Issuance of common stock for additional
costs in connection with the March 7, 1995
public offering 10,500 11 10,489 --
Options granted as compensation -- -- 106,830 --
Issuance of common stock to former
franchisee and consultant 24,766 25 66,890 --
Net loss, year ended December 31, 1995 -- -- -- (2,647,255)
----------- ----------- ----------- -----------
Balance, December 31, 1995 1,785,266 $ 1,786 $ 6,848,980 ($4,176,195)
=========== =========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 18, 1992
December 31, (Inception) to
1994 1995 December 31, 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($1,118,975) ($2,647,255) ($4,176,195)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 20,679 65,220 74,696
Salaries waived by officers 320,000 30,000 350,000
Warrant financing costs 106,000 306,500 412,500
Options granted as compensation -- 106,830 106,830
Common stock issued to former franchisee and
consultant -- 66,915 66,915
(Increase) decrease in:
Accounts receivable (11,066) 37,742 (9,054)
Prepaid expenses 13,195 (109,688) (109,688)
Inventory 3,717 (204,515) (217,709)
Other assets (131,070) 191,122 (164,813)
Increase (decrease) in:
Accounts payable and accrued expenses 293,778 495,749 638,400
Deferred revenues and rent 7,141 177,442 275,921
Accrued officer expenses 67,040 (67,040) --
----------- ----------- -----------
Total adjustments 689,414 1,096,277 1,423,998
----------- ----------- -----------
Net cash used by operating activities (429,561) (1,550,978) (2,752,197)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of certificate of deposit -- (1,000,000) (1,000,000)
Purchased lease -- (120,000) (120,000)
Purchase of property and equipment (41,223) (599,350) (807,087)
----------- ----------- -----------
Net cash used in investing activities (41,223) (1,719,350) (1,927,087)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from the issuance of common stock -- 5,031,021 5,901,021
Proceeds from issuance of bridge notes and short-term debt 275,000 -- 605,000
Payment of bridge notes and short-term debt -- (605,000) (605,000)
Payment of officer loan payable 15,000 (15,000) --
----------- ----------- -----------
Net cash provided by financing activities 290,000 4,411,021 5,901,021
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (180,784) 1,140,693 1,221,737
Cash and cash equivalents, beginning of period 261,828 81,044 --
----------- ----------- -----------
Cash and cash equivalents, end of period $ 81,044 $ 1,221,737 $ 1,221,737
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,696 $ 7,196 $ 20,892
=========== =========== ===========
Income taxes $ 1,375 $ 1,500 $ 2,875
=========== =========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-6
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Great American BackRub Store, Inc. (the "Company"), formally American
Pleasure, Inc., is and owner/operator of retail stores which provide seated,
fully clothed back rubs and sell back and stress related products. The Company,
incorporated on December 28, 1992, began operations in August, 1993 and opened
its first store for business in October, 1993. As of December 31, 1995, the
Company has eight retail stores in operation in the New York metropolitan area.
Management believes that the Company's planned principal operations, the
establishment of company-owned and franchised stores throughout the country,
have not yet commenced. The initial eight stores have been used to continue to
develop and modify the Company's retail concept. Accordingly, the accompanying
financial statements have been prepared as a development stage company, in
accordance with Statement of Financial Accounting Standards (SFAS) No. 7.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumption
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent all amounts held in banks and money market
accounts and short term investments such as United States Treasury bills with
original maturities of less than three months.
CERTIFICATE OF DEPOSIT
The Company has a certificate of deposit maturing in July, 1996 which is carried
at cost and approximates market value at December 31, 1995.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentration of credit risk consist primarily of $1,000,000 of cash in a money
market account and a $1,000,000 certificate of deposit maintained at one
financial institution.
INVENTORY
Inventories, consisting of merchandise held for resale, are valued at the lower
of cost or market. The Company uses the retail inventory method, on a first-in,
first-out(fifo) basis.
F-7
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures from maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lifes of the assets as follows:
Leasehold improvements The lesser of 10 years, or the remaining life of
the lease
Purchased lease The lesser of 10 years, or the remaining life of
the lease
Furniture and fixtures 5 - 10 years
Computer equipment 5 years
REVENUE RECOGNITION
The Company-owned store revenues are recognized when services are provided or
upon the sale of products. Sale of gift certificates are recognized when
redeemed or upon expiration. Royalties are recognized as income in the month in
which franchisee services are rendered or products are sold by franchisees. The
Company recognizes franchise revenue in accordance with SFAS No. 45. Deferred
revenues represent unredeemed and unexpired gift certificates.
PER SHARE DATA
Net loss per common share for the year ended December 31, 1995 is computed by
dividing net loss by the weighted average common shares outstanding during the
year. The assumed exercise of common share equivalents was not utilized since
the effect was anti-dilutive.
Net loss per common share for the year ended December 31, 1994 is computed by
dividing net loss by the weighted average number of common shares and common
share equivalents outstanding, adjusted for the effects of applying Securities
and Exchange Commission Staff Accounting Bulletin No. 83, using the treasury
stock method.
REVERSE STOCK SPLIT
In conjunction with the Public offering, on March 7, 1995 (see Note 2), the
Board of Directors declared a 1 for 8 reverse stock split effective as of the
business on February 23, 1995 (see Note 2). The accompanying financial
statements and all common shares and equivalents and per share data included in
the accompanying financial statements and footnotes have been restated to
reflect the reverse stock split for the year ended December 31, 1994.
F-8
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 1 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern; they do not include adjustments
relating to the recoverability of recorded asset amounts and classification of
recorded assets and liabilities. The Company has incurred losses since its
inception and has an accumulated deficit of $4,176,195 at December 31, 1995.
Insomuch as the Company continues to have a high level of operating expenses and
will be required to make significant up-front expenditures in connection with
its proposed expansion, the Company anticipates that losses will continue for at
least 12 months and until such time, if ever, as the Company is able to generate
sufficient revenues to finance its operations and the costs of continued
expansion. Since inception, the Company's operations have generated negative
cash flow, as its expenses have exceeded revenues, and the Company's ability to
continue its operations is dependent upon additional debt or equity financing.
There can be no assurance that the Company will be able to generate significant
revenues or achieve profitable operations or that its operations will generate
positive cash flow. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In accordance with management's plans, the Company has retained investment
banking counsel to advise it on the possible sale of equity securities, as well
to as introduce and assist in the evaluation of potential merge and partnership
opportunities. Management expects that these efforts will result in either an
additional equity infusion or an introduction to other parties with interests
and resources which may be compatible with that of the Company. However, no
assurances can be given that the Company will be successful in raising
additional capital or entering into a business alliance. Further, there is no
assurance, assuming the Company successfully raises additional funds or enters
into a business alliance, that the Company will achieve profitability or
positive cash flow.
The Company opened seven new stores in 1995. Based on current business trends
from these new stores, management projects that these operations will produce a
positive cash flow contribution to the Company during fiscal 1996 and is
expected to substantially reduce the Company's operating losses during 1996.
If the Company is unable to obtain adequate additional financing or enter into a
business alliance, or if the operating stores do not meet projections,
management will be required to sharply curtail its expansion plans and
operations.
NOTE 2 - INITIAL PUBLIC OFFERING
In an initial offering completed on March 7, 1995, the Company sold 1,250,000
shares of common stock for approximately $6,250,000 which, after commissions and
fees, provided the Company with net proceeds of approximately $5,000,000.
On January 4, 1995, the Board of Directors authorized a 1 for 8 reverse stock
split of the Company's common stock immediately prior to the completion of the
public offering. This action was approved at the shareholders meeting on January
31, 1995. The reverse stock split was effected on February 23, 1995.
F-9
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 3 - SHORT-TERM DEBT
As of December 31, 1994, short-term debt consisted of the following:
Notes payable $330,000
Bridge notes payable 275,000
--------
Total short-term debt $605,000
========
Obligation under short-term debt was fully satisfied from the proceeds of the
Company's initial public offering (Note 2) in March, 1995.
NOTES PAYABLE
At December 31, 1994, the Company had outstanding three notes payable amounting
to $330,000 which were issued as consideration for (i) legal assistance with the
Company's public offering (See Note 2) and (ii) other services. These notes were
non-interest bearing and were paid on completion of the Company's public
offering. In addition, certain holders of these notes, in the aggregate
principal amount of $280,000, agreed to give the Company a 10% discount on the
aggregate principal amount.
BRIDGE NOTES PAYABLE
Between October 1, 1994 and December 28, 1994, the Company had issued 12% Bridge
Notes in the principal amount of $275,000, which were paid upon the completion
of the Company's public offering (Note 2). In connection with these notes, the
Company also issued 137,500 warrants, each warrant representing the right to
purchase one share of common stock at one half the actual public offering per
share price. The warrants are exercisable for three years from March 7, 1995.
Interest expense of $106,000 and $306,500 for the years ended December 31, 1994
and 1995, respectively, reflects non-cash financing costs related to such
warrants.
NOTE 4 - STOCK PLANS AND MANAGEMENT COMPENSATION
The Company has employment agreements with two executive officers which expire
on October 31, 1997. The aggregate annual commitment for future salaries at
December 31, 1995, is $240,000. These agreements also provide for bonuses
aggregating $230,000 upon achievement of certain Company performance.
At the Company's 1994 annual meeting of shareholders held on July 18, 1994, the
Company's shareholders approved the Employee Plan under which 75,000 shares of
common stock are authorized for issuance. To date, none have been granted. The
purpose of the Employee Plan is to promote the success of the Company by
providing a method whereby eligible employees of the Company and its
subsidiaries, as defined therein, may be awarded additional remuneration for
services rendered, thereby increasing their personal interest in the Company.
The Employee Plan is also intended to aid in attracting persons of suitable
ability to become employees of the Company and its subsidiaries.
F-10
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 4 - STOCK PLANS AND MANAGEMENT COMPENSATION (CONT'D)
In December 1994, the Company granted ten year options to purchase 120,000
shares of Common Stock to executive officers of the Company. Such options are
exercisable at a price of $3.75 per share. One-third of such options became
exercisable in March, 1995, one-third became exercisable in December 1995 and
one-third becomes exercisable in December 1996. In July 1995, the Company
granted five-year options to purchase 100,000 shares of Common Stock to
executive officers of the Company. Such options are exercisable at a price of
$1.875 per share. All such options are currently exercisable. In July 1995, the
Company granted options to purchase 10,000 shares of Common Stock to an
executive officer of the Company. Such options are exercisable at a price of
$2.5625 per share. Options to purchase 5,000 shares vest and become exercisable
in July 1996 and options to purchase an additional 5,000 shares vest and become
exercisable in July 1997. All options expire on the day before the 5-year
anniversary of vesting. In December 1995, the Company granted options to
purchase 90,000 shares of Common Stock to an executive officer of the Company.
Such options are exercisable at a price of $2.375 per share. In addition, such
options resulted in non-cash charge of approximately $107,000 in 1995. Options
to purchase 45,000 shares are currently exercisable and options to purchase an
additional 45,000 shares vest and become exercisable in December 1996. All
options expire on the day before the 5-year anniversary of vesting. In March
1995, the Company granted ten year options to purchase 100,000 shares of Common
Stock to a consultant of the Company. Such options are exercisable at a price of
$5.00 per share. All such options are currently exercisable. In July 1995, the
Company granted five year options to purchase 25,000 and 40,000 shares of Common
Stock to consultants to the Company. Such options are exercisable at a price of
$4 per share. All options are currently exercisable. In August 1995, the Company
granted three year options to purchase 100,000 shares of Common Stock to a
consultant to the Company. Such options are exercisable at a price of $2.375 per
share. All such options are currently exercisable.
F-11
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 4 - STOCK PLANS AND MANAGEMENT COMPENSATION (CONT'D)
Non-qualified stock option transactions during the years ended December 31, 1994
and 1995 are summarized below:
December 31, 1994 December 31, 1995
----------------- -----------------
Grant Grant
Shares Price Shares Price
------- -------- ------- ------------
Outstanding
options at
beginning of year -- -- 360,000 $ 3.75
Options
granted 360,000 $ 3.75 565,000 $1.875-$5.00
Options
exercised -- -- -- --
Options
forfeited -- -- -- --
Outstanding
options at
end of year 360,000 $ 3.75 925,000 $1.875-$5.00
======= ======== ======= ============
Exerciseable
options at
end of year -- -- 345,000 $1.875-$5.00
======= ============
NOTE 5 - INCOME TAXES
Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Deferred income taxes are recorded to reflect the tax
consequences on future years differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end. Valuation
allowances are established for those income tax benefits whose reliability is
uncertain.
Reconciliation of the difference between income taxes computed at the Federal
statutory tax rates and the Company's effective tax rate are as follows:
Year ended December 31,
1994 1995
---- ----
Income tax benefit computed at Federal
statutory tax rates (34.0)% (34.0)%
Other .1 .1
Valuation allowance of net deferred tax asset 33.9 33.9
---- ----
Provision for income taxes -% -%
==== ====
F-12
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (CONT'D)
Deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
------------
1995
----
Net operating loss carryforward $1,405,400
Other, net (3,000)
----------
Net deferred tax asset 1,402,400
Valuation allowance (1,402,400)
-----------
$ --
===========
For Federal tax purposes, the Company had available, at December 31, 1995, net
operating loss carryforwards of $4,176,000, which expire through 2010 subject to
certain annual limitations.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company reimbursed expenses paid personally by a stockholder, amounting to
$20,000 for the year ended December 31, 1994 and $50,000 for the period from
December 18, 1992 (date of inception) to December 31, 1995.
A former officer of the Company owned a 12.5% limited partnership interest in a
franchise which opened July, 1994 and was terminated May, 1995. The Company
earned approximately $35,000 in franchise and related fees during 1994. As part
of the termination agreement, this limited partnership received $25,000 and
18,185 shares of Company stock with a market value of $55,000 on the date the
franchise termination agreement was executed.
At December 31, 1994, the Company had a non-interest bearing demand note payable
due to an officer of $15,000 and had amounts due to officers for unreimbursed
expenses of $67,040. These amounts were paid during the year ended December 31,
1995.
The Company's executive officers have waived payment of their respective
salaries for 1994 and 1995 aggregating $320,000 and $30,000, respectively. The
waived salaries are included in the statement of operations for the years ended
December 31, 1994 and 1995, and for the period from December 18, 1992 to
December 31, 1995 in accordance with SAB Topic 1:B
F-13
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 7 - COMMITMENTS
The Company leases retail stores and office equipment. All of the retail stores
are leased under noncancellable agreements which expire at various dates through
the year 2005. The agreements, which have been classified as operating leases,
require the Company to pay insurance, taxes and other maintenance costs.
The following is a schedule of future minimum rental payments which are required
under operating leases that have initial or remaining noncancellable lease terms
in excess of one year as of December 31, 1995.
YEAR ENDING DECEMBER 31, NET MINIMUM RENTALS
- ------------------------ -------------------
1996 $ 554,000
1997 573,000
1998 575,000
1999 576,000
2000 577,000
Thereafter 2,397,000
------------
Total $ 5,252,000
===========
The rental expense, including deferred rent, under operating leases was
$215,797, $409,850, and $671,804 for the years ended December 31, 1994 and 1995
and the period from December 18, 1992 (date of inception) to December 31, 1995.
Deferred rent results as the Company recognizes the cost of leases with free
rent periods and accelerating lease payments on a straight-line basis over the
term of the lease.
In addition, the Company is committed to pay future salaries under employment
agreements with two executive officers (See Note 4).
NOTE 8 - SUBSEQUENT EVENTS
On February 7, 1996, the Company entered into a financial advisory and
consulting agreement with an investment banking firm to advise it on the
possible sale of additional equity securities, as well as to introduce and
assist in the evaluation of potential merger and partnering opportunities.
The agreement is for a period of one year commencing on February 1, 1996 and
included a $100,000 retainer paid on the execution of the agreement and warrants
to purchase 100,000 shares of the Company's common stock at an exercise price of
$1.00 per share exercisable from the date of the agreement to and including
January 31, 1997 and warrants to purchase 200,000 shares of common stock of the
Company at an exercise price of $2.50 per share exercisable from the date of the
agreement to and including January 31, 1998.
Such warrants will result in a non-cash charge of approximately $475,000 for the
year ended December 31, 1996 and approximately $50,000 for the year ended
December 31, 1997.
F-14
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $ 1,239,465
Prepaid expenses 293,462
Inventory 293,478
-----------
Total current assets 1,826,405
Property and equipment:
Furniture and fixtures 356,258
Leasehold improvements 677,001
Purchased lease 120,000
Computer equipment 33,318
-----------
1,186,577
Less, Accumulated depreciation ( 122,896)
-----------
1,063,681
Other assets:
Deferred offering costs 37,500
Lease and equipment deposits 209,336
Total other assets 246,836
Total assets $ 3,136,922
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 120,305
Accrued expenses 279,324
Deferred revenue 49,445
-----------
Total current liabilities 449,074
Deferred rent 185,108
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.001 per share, 10,000,000
shares authorized 2,226
2,226,342 shares issued and outstanding
Additional paid in capital 8,223,342
Deficit accumulated during the development stage ( 5,722,828)
-----------
2,502,740
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,136,922
===========
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30, December 18, 1992
(Inception) to
1996 1995 September 30, 1996
---- ---- ------------------
<S> <C> <C> <C>
Revenues:
Services $ 1,527,390 $ 535,977 $ 2,993,245
Products 442,114 99,694 945,011
Royalties, franchise fees and other - 2,035 46,558
------------ ------------ --------------
Total 1,969,504 637,706 33,984,814
------------- ------------ --------------
Operating expenses:
Salaries and wages 991,435 713,770 2,859,272
Cost of products sold, buying and occupancy 300,252 50,495 718,446
Rental expense 463,798 199,420 1,135,589
Advertising and promotion 73,862 75,937 376,034
Non-cash financial advisory fees 350,000 -- 350,000
General and administrative 1,356,342 868,473 3,577,615
Depreciation 61,700 14,362 151,288
Waived salaries - 30,000 350,000
----------- ----------- -----------
Total 3,597,389 1,952,457 9,518,244
---------- ---------- ----------
Net loss from operations ( 1,627,885) ( 1,314,751) ( 5,533,430)
---------- ---------- ----------
Other income (expense):
Interest income 82,607 129,757 232,298
Interest expense -- ( 313,696) ( 421,696)
---------- ---------- ----------
Total 82,607 ( 183,939) ( 189,398)
---------- ---------- ----------
Net loss ($ 1,545,278) ($1,498,690) ($5,722,828)
----------- ---------- ----------
Weighted average number of shares
outstanding during the period 1,859,506 1,507,500
============ ============
Net loss per common share and equivalents $ (0.83) $ (0.99)
============ ============
</TABLE>
See accompanying notes to financial statements
F-16
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Nine months ended December 18, 1992
September 30, September 30, (Inception) to
1996 1995 September 30, 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($1,545,278) ($1,468,690) ($5,722,828)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 61,700 14,362 137,751
Salaries waived by officers - 30,000 350,000
Warrant financing costs - 306,500 412,500
Options granted as compensation 525,000 - 631,830
Common stock issued to former franchisee and
consultant - - 66,915
(Increase) decrease in:
Accounts receivable 9,054 9,641 -
Prepaid expenses ( 183,774) ( 181,130) ( 293,462)
Inventory ( 75,769) ( 136,438) ( 293,478)
Other assets ( 82,023) 146,873 ( 246,836)
Increase (decrease) in:
Accounts payable and accrued expenses ( 238,771) 135,701 399,629
Deferred revenues and rent ( 41,368) ( 4,134) 234,553
Accrued officer expenses - ( 67,040) -
------------ ------------ ------------
Total adjustments ( 25,951) 254,335 1,399,402
------------ ------------ ------------
Net cash used in operating activities ( 1,571,229) ( 1,214,355) ( 4,323,426)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of certificate of deposit - - ( 1,000,000)
Maturity of certificate of deposit 1,000,000 - 1,000,000
Purchased lease - - ( 120,000)
Purchase of property and equipment ( 259,490) ( 446,188) ( 1,066,577)
------------ ------------ ------------
Net cash used in investing activities 740,510 ( 446,188) ( 1,186,577)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from the issuance of common stock 848,447 5,127,732 6,749,468
Proceeds from issuance of bridge notes and short-term debt - - 605,000
Payment of bridge notes and short-term debt - ( 605,000) ( 605,000)
Payment of officer loan payable - ( 15,000) -
------------ ------------ ------------
Net cash provided by financing activities 848,447 4,507,732 6,749,468
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 17,728 2,847,189 1,239,465
Cash and cash equivalents, beginning of period 1,221,737 81,044 -
------------- ------------ ------------
Cash and cash equivalents, end of period $ 1,239,465 $2,928,233 $1,239,465
============= ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest - $ 13,696 $ 20,892
============= =========== ==========
Income taxes $ 1,500 $ 1,375 $ 12,686
============= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS
The Great American Backrub Store, Inc. (the "Company"), formerly American
Pleasure, Inc., is an owner/operator of retail stores which provide seated,
fully clothed back rubs and sell back related products. The Company,
incorporated on December 28, 1992, began operations in August, 1993 and opened
its first store for business in October, 1993. As of September 30, 1996, the
Company has ten locations, nine in New York City and one in White Plains, NY at
the "Westchester" mall.
Management believes that the Company's planned principal operations, the
establishment of Company-owned stores and franchised stores throughout the
country, have not yet commenced. The initial nine stores have been used to
continue to develop and modify the Company's retail concept. Accordingly, the
accompanying financial statements have been presented as a development stage
company, in accordance with Statement of Financial Accounting Standards (SFAS)
No. 7.
NOTE 1 - INITIAL PUBLIC OFFERING
In an initial public offering completed on March 7, 1995, the Company sold
1,250,000 shares of common stock for approximately $6,250,000 which, after
commissions and fees, provided the Company with net proceeds of approximately
$5,127,732.
NOTE 2 - CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of September 30, 1996 and the condensed
statements of operations and cash flows for the nine month periods ended
September 30, 1996 and 1995, and the period December 18, 1992 (inception) to
September 30, 1996 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and changes in cash flows at September 30, 1996 ad for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto of the
Company as of December 31, 1995.
The results of operations for the nine month periods ending September 30, 1996
and 1995 are not necessarily indicative of the operating results for the full
year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent all amounts held in banks and money market
accounts and short-term investments such as United States Treasury Bills with
original maturities of three months or less.
F-18
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 3 - EARNINGS PER SHARE
Net loss per common share for the nine month period ended September 30, 1996 is
computed by dividing net loss by the weighted average common shares outstanding
during the period. The assumed exercise of common share equivalents was not
utilized since the effect was anti-dilutive.
Net loss per common share for the nine month period ended September 30, 1995 is
computed by dividing net loss by the weighted average number of common shares
and common share equivalents outstanding, adjusted for the effects of applying
Securities and Exchange Commission Staff Accounting Bulletin No. 83, using the
treasury stock method.
NOTE 4 - STOCK OPTIONS
At the Company's 1994 annual meeting of shareholders held on July 18, 1994, the
Company's shareholders approved the Employee Plan. The purpose of the Employee
Plan is to promote the success of the Company by providing a method whereby
eligible employees of the Company and its subsidiaries, as defined therein, may
be awarded additional remuneration for services rendered, thereby increasing
their personal interest in the Company. The Employee Plan is also intended to
aid in attracting persons of suitable ability to become employees of the Company
and its subsidiaries. The plan covers an aggregate of 75,000 shares of the
Company's Common Stock. As of September 30, 1996, options to purchase 8,500
shares of Common Stock were outstanding under the plan.
In December 1994, the Company granted ten-year options to purchase 120,000
shares of Common Stock to each of Messrs. Zanker, Murray and Steven Thompson,
then the Company's Chief Financial Officer. Such options are exercisable at a
price of $3.75 per share. One-third of such options became exercisable in March,
1995, one-third became exercisable in December 1995 and one-third become
exercisable in December 1996. In July 1995, the Company granted five-year
options to purchase 100,000 shares of Common Stock to each of Messrs. Zanker and
Murray, each exercisable at a price of $1.875 per share. All such options have
been exercised. In July 1995, the Company granted options to purchase 10,000
shares of Common Stock to Mr. Dee. Such options are exercisable at a price of
$2.5625 per share. Options to purchase 5,000 shares vest and become exercisable
in July 1996 and options to purchase an additional 5,000 shares vest and become
exercisable in July 1997. All such options expire on the day before the 5-year
anniversary of vesting. In March 1995, the Company granted ten-year options to
purchase 100,000 shares of Common Stock to a consultant to the Company. Such
options are exercisable at a price of $5.00 per share. All such options are
currently exercisable. In July 1995, the Company granted five-year options to
purchase 65,000 shares of Common Stock to consultants to the Company. Such
options are exercisable at a price of $4.00 per share. All such options are
currently exercisable. In August 1995, the Company granted three-year options to
purchase 100,000 shares of Common Stock to a consultant to the Company, of which
options to purchase 76,500 shares have been exercised to date. Such options are
exercisable at a price of $2.375 per share. All such options are currently
exercisable. In February, 1996, the Company granted warrants to purchase 300,000
shares of Common Stock to a financial advisor and consultant to the Company,
100,000 of which are exercisable at a price of $1.00 per share, all of which
have been exercised, and 200,000 of which are exercisable at a price of $2.50
per share, of which 100,000 have been exercised.
F-19
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 5 - LEASES
The Company leases retail stores and office equipment. All of the retail stores
are leased under noncancellable agreements which expire at various dates through
the year 2005. The agreements, which have been classified as operating leases,
require the Company to pay insurance, taxes and other maintenance costs.
Rent expense amounted to $463,798 and $199,420 for the nine month periods ended
September 30, 1996 and 1995, respectively. Rent expense from December 18, 1992
(inception) to September 30, 1996 was $1,135,589.
NOTE 6 - FINANCIAL ADVISORY AND CONSULTING AGREEMENT
On February 7, 1996, the Company entered into a financial advisory and
consulting agreement with an investment banking firm to, among other things,
advise the Company on the possible sale of additional securities, as well as to
introduce and assist in the evaluation of potential merger and partnering
opportunities.
The agreement is for a period of one year commencing as of February 1, 1996 and
includes (i) a $100,000 retainer paid on the execution of the agreement, (ii)
warrants to purchase 100,000 shares of the Company's common stock at an exercise
price of $1.00 per share exercisable from the date of agreement to and including
January 31, 1997 (all of which have been exercised) and (iii) warrants to
purchase 200,000 shares of the Company's common stock at an exercise price of
$2.50 per share exercisable from the date of the agreement to and including
January 31, 1998 (100,000 of which have been exercised).
Such warrants have resulted in a non-cash charge of $350,000 for the nine month
period ended September 30, 1996.
F-20
<PAGE>
No dealer, salesperson or any other person is authorized in connection with any
offering made hereby to give any information or to make any representation not
contained in this Prospectus, and if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or any of the Underwriters. This Prospectus does not constitute an offer to sell
or the solicitation of an offer to buy any of the securities offered hereby by
anyone in any state in which such offer or solicitation is not authorized or in
which the person making the offer or solicitation is not qualified to do so or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall under any
circumstance create any implication that information contained herein is correct
as of any date subsequent to the date hereof.
TABLE OF CONTENTS
PAGE
Prospectus Summary..........................................................5
Risk Factors...............................................................14
Concurrent Offering........................................................22
Use of Proceeds............................................................22
Dilution...................................................................23
Capitalization.............................................................25
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................26
Price Range of Common Stock................................................28
Dividend Policy............................................................29
Business...................................................................29
Management.................................................................35
Certain Transactions.......................................................41
Principal Shareholders.....................................................42
Description of Securities..................................................43
Shares Eligible for Future Sale............................................48
Certain U.S. Federal Income Tax Consequences...............................49
Underwriting...............................................................52
Legal Matters..............................................................54
Experts....................................................................55
Additional Information.....................................................55
Change in Accountants......................................................55
Financial Statements......................................................F-1
270,000 SHARES OF SERIES B
CONVERTIBLE PREFERRED STOCK
THE GREAT AMERICAN
BACKRUB STORE, INC.
[COMPANY LOGO]
------------------------------------------------------
PROSPECTUS
------------------------------------------------------
INVESTORS ASSOCIATES, INC.
[LOGO]
_________, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 722 of the New York Business Corporation Law ("NYBCL") permits,
in general, a New York corporation to indemnify any person made, or threatened
to be made, a party to an action or proceeding by reason of the fact that he or
she was a director or officer of the corporation, or served another entity in
any capacity at the request of the corporation, against any judgment, fines,
amounts paid in settlement and reasonable expenses, including attorney's fees
actually and necessarily incurred as a result of such action or proceeding, or
any appeal therein, if such person acted in good faith, for a purpose he or she
reasonably believed to be in, or, in the case of service for another entity, not
opposed to, to the best interests of the corporation and, in criminal actions or
proceedings, in addition had no reasonable cause to believe that his or her
conduct was unlawful. Section 723 of the NYBCL permits the corporation to pay in
advance of a final disposition of such action or proceeding the expenses
incurred in defending such action or proceeding upon receipt of an undertaking
by or on behalf of the director or officer to repay such amount as, and to the
extent, required by statute. Section 721 of the NYBCL provides that
indemnification and advancement of expense provisions contained in the NYBCL
shall not be deemed exclusive of any rights to which a director or officer
seeking indemnification or advancement of expenses may be entitled, provided no
indemnification may be made on behalf of any director or officer if a judgment
or other final adjudication adverse to the director or officer establishes that
his or her acts were committed in bad faith or were the result of active or
deliberate dishonesty and were material to the cause of action so adjudicated,
or that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled.
Article Seventh of the Company's Certificate of Incorporation, as
amended, provides, in general, that the personal liability of the directors of
the Company is eliminated to the fullest extent permitted by the provisions of
paragraph (b) of Section 402 of the NYBCL, as the same may be amended and
supplemented. Section 402(b) of the NYBCL provides that the certificate of
incorporation of a New York corporation may set forth a provision eliminating or
limiting the personal liability of directors to the corporation or its
stockholders for damages for any breach of duty in such capacity, provided that
no such provision shall eliminate or limit (1) the liability of any director if
a judgment or other final adjudication adverse to him establishes that his acts
or omissions were in bad faith or involved intentional misconduct or a knowing
violation of law or that he personally gained in fact a financial profit or
other advantage to which he is not legally entitled or (2) the liability of any
director for any act or omission prior to the adoption of a provision authorized
by Section 402(b) of the NYBCL.
The underwriting agreement between the Company and the Underwriter
contains, among other things, provisions whereby the Underwriter agrees to
indemnify the Company, each officer and director of the Company who has signed
the Registration Statement and each person who controls the Company within the
meaning of Section 15 of the Act against any losses, liabilities, claims or
damages arising out of alleged untrue statements or alleged omissions of
material facts with respect to information furnished to the Company by the
Underwriter for use in the Registration Statement or Prospectus.
II-1
<PAGE>
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses (other than
underwriting discounts and commissions) which will be paid by the Registrant in
connection with the issuance and distribution of the securities being
registered. With the exception of the registration fee and NASD filing fee, all
amounts shown are estimates.
Registration fee.................................................. $1,022.73
NASD filing fee................................................... 3,200.00
Nasdaq listing expenses...........................................
Blue Sky fees and expenses (including legal and filing fees)......
Printing expenses (other than stock certificates).................
Printing and engraving of stock certificates......................
Transfer, Warrant Agent and Conversion Agent and register fees
and expenses......................................................
Legal fees and expenses (other than Blue Sky).....................
Accounting fees and expenses......................................
Miscellaneous expenses............................................ .
---------
TOTAL........................................... $ .
=========
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
(a) The following securities were issued by the Registrant since its
inception and prior to the date of filing of this Registration Statement. There
were no underwriting discounts or commissions paid in connection with the
issuance of any of these securities, except as otherwise noted:
Amount
Dates of Securities Offering
Sale Title Sold Price Purchaser
- ---------------- ------------ ------------- -------------- -------------
6/10/93 Common Stock 187,500 par value Debbie Dworkin
6/10/93 Common Stock 62,500 $166.67 Linda Amori
6/10/93 Common Stock 62,500 $166.67 Michael Schub
6/10/93 Common Stock 62,500 $166.67 Ron Rodriquez
1993 RULE 504 OFFERING
On June 15, 1993, the Company sold 125,000 shares of Common Stock in an
offering pursuant to Rule 504 at a price of $8.00 per share. The Company paid a
commission related to this Offering equal to $130,000.
II-2
<PAGE>
DECEMBER 1994 BRIDGE NOTES AND WARRANTS
Amount of
Securities Offering
Title Sold Price Purchaser
- -------------------------- ----------- ------------ -----------------
Promissory Note/Warrants $25,000/ $25,000 Michael Monroe
12,500
Promissory Note/Warrants $25,000/ $25,000 Fred Taylor Isquith
12,500
Promissory Note/Warrants $25,000/ $25,000 Michael Charney
12,500
Promissory Note/Warrants $25,000/ $25,000 Donald Fleischer
12,500
Promissory Note/Warrants $25,000/ $25,000 Maurice/Barbara
12,500 Kupritz
Promissory Note/Warrants $25,000/ $25,000 Glenn/Dawn James
12,500
Promissory Note/Warrants $50,000/ $50,000 John Davis
25,000
Promissory Note/Warrants $25,000/ $25,000 Robert Leeds
12,500
Promissory Note/Warrants $25,000/ $25,000 The Carnegie
12,500 Partners
Promissory Note/Warrants $12,500/ $12,500 Jules Leventhal
6,250
Promissory Note/Warrants $12,500/ $12,500 Private Label
6,250 Furniture
APRIL 1995 STOCK ISSUANCES
Amount of
Securities Offering
Title Sold Price Purchaser
- -------------------------- ----------- ------------ -----------------
Common Stock 7,500 * Olshan Grundman
Frome & Rosenzweig
Common Stock 2,800 * Stephen Irwin
Common Stock 200 * Jeffrey Spindler
- -----------
* In April 1995, the Company issued such shares in exchange for the
cancellation of an account payable in the approximate amount of
$45,000.
II-3
<PAGE>
OCTOBER 1995 STOCK ISSUANCES
Amount of
Securities Offering
Title Sold Price Purchaser
- -------------------------- ----------- ------------ -----------------
Common Stock 6,581 * Peter Forbes &
Associates, Inc.
Common Stock 3,637 ** Matthew Frazer
Common Stock 7,273 ** Robert Garff
Common Stock 3,637 ** W. Blair Garff
Common Stock 1,819 ** Alan Luther
Common Stock 1,819 ** Michael Luther
* In October 1995, the Company issued such shares in connection with the
provision of consulting services to the Company.
** In October 1995, the Company issued such shares in connection with the
buy-back of its Las Vegas franchise store.
DECEMBER 1996 AND JANUARY 1997 BRIDGE NOTES AND WARRANTS
(a) December 1996
<TABLE>
<CAPTION>
Amount of Securities Offering
Title Sold Price Purchaser
- ------------------------- --------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Promissory Note/Warrants $36,142.94/550,440 $36,693.34 William Zanker
Promissory Note/Warrants $19,115.57/291,100 $19,406.66 Terrance C. Murray
Promissory Note/Warrants $10,408.16/158,500 $10,566.67 Keith Dee
Promissory Note/Warrants $65,666.67/1,000,000 $66,666.67 Dune Holdings, Inc.
Promissory Note/Warrants $65,666.67/1,000,000 $66,666.67 RAASAY, S.A.
Promissory Note/Warrants $65,666.67/1,000,000 $66,666.67 HANDA, S.A.
</TABLE>
(b) January 1997
The purchase by William Zanker of the Promissory Note and Warrants
described in (a) above was rescinded and a Promissory Note and Warrants in equal
amount were purchased by Harold Hochberger for the same price.
(c) The sales set forth above are claimed to be exempt from
registration with the Securities and Exchange Commission pursuant to Section
4(2) of the Securities Act of 1933, as amended, as transactions by an Issuer not
involving any public offering. All certificates representing the shares issued
and currently outstanding by the Registrant herein have been properly legended.
Item 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO. DESCRIPTION
*1.1 Form of Underwriting Agreement between the Company and
Investors Associates, Inc.
*1.2.1 Form of Agreement Among Underwriters.
II-4
<PAGE>
*1.2.2 Form of Selected Dealer Agreement.
**3.1 Certificate of Incorporation of the Company, as amended.
3.2 Amendment of Certificate of Incorporation of the Company
(designating Series A Convertible Preferred Stock).
**3.3 Amended and Restated By-Laws of the Company.
**4.1 Specimen Certificate of the Company's Common Stock.
*4.2.1 Form of Underwriter's Preferred Stock Purchase Option
Agreement.
*4.2.2 Form of Underwriter's Preferred Stock Purchase Option
Certificate.
**4.3 1994 Employee Stock Option Plan.
**4.4 Nonqualified Option Agreement of Mr. Zanker.
**4.5 Nonqualified Option Agreement of Mr. Murray.
**4.6 Nonqualified Option Agreement of Mr. Thompson.
**4.7 Form of Option Agreement for Options to be issued to outside
directors upon completion of the Offering.
*4.8 Form of Warrant Certificate.
*4.9 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company.
*5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP as to the
legality of the securities.
**10.1 Employment Agreement dated November 1, 1994 between the Company
and William Zanker.
**10.1.1 Amendment dated February 1, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and William Zanker.
**10.1.2 Amendment No. 2 dated February 27, 1995 to the Employment
Agreement dated November 1, 1994 between the Company and
William Zanker.
**10.2 Employment Agreement dated November 1, 1994 between the Company
and Terrance C. Murray.
**10.2.1 Amendment dated February 1, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and Terrance C.
Murray.
**10.2.2 Amendment No. 2 dated February 27, 1995 to the Employment
Agreement dated November 1, 1994 between the Company and
Terrance C. Murray.
**10.3 Employment Agreement dated November 1, 1994 between the Company
and Steven J. Thompson.
**10.3.1 Amendment dated February 1, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and Steven J.
Thompson.
II-5
<PAGE>
**10.3.2 Amendment No. 2 dated February 27, 1995 to the Employment
Agreement dated November 1, 1994 between the Company and Steven
J. Thompson.
**10.4 Franchise Agreement dated May 14, 1994 between Emerald Desert
Rub and the Company.
**10.5 Lease Agreement dated August 25, 1993 between 175 East 57th
Street, Inc. and the Company concerning the Third Avenue Store.
**10.6 Lease Agreement dated February 1994 between Town Sports
International, Inc. and the Company concerning the East 86th
Street Store.
**10.7 Notice of Town Sports International, Inc. to the Company
terminating the East 86th Street Store lease.
**10.7.1 Lease Extension dated February 27, 1995 relating to the 86th
Street Store Lease.
**10.8 Lease Agreement dated May 15, 1994 between Martin Cable and the
Company.
**10.9 Sublease Agreement dated May 31, 1994 between the Company and
Emerald Desert Rub.
**10.10 Commercial Lease and Deposit Receipt dated December 31, 1994
for the Company's San Rafael, California office.
**10.11 Promissory Note dated April 5, 1994 issued to Colonial Capital
Corp. for $165,000.
**10.12 Substitute Promissory Note dated November 1, 1994 issued to
Colonial Capital Corp. for $165,000.
**10.13 Letter Agreement dated December 23, 1994 between the Company
and Colonial Capital, Inc.
**10.14 Promissory Note dated April 5, 1994 issued to Gary D. Lipson
for $50,000.
**10.15 Substitute Promissory Note dated November 1, 1994 issued to
Gary D. Lipson for $50,000.
**10.16 Promissory Note dated April 5, 1994 issued to Kipnis Tescher
Lippman Valinsky and Kain for $115,000.
**10.17 Substitute Promissory Note dated November 1, 1994 issued to
Kipnis Tescher Lippman Valinsky & Kain for $115,000.
**10.18 Letter Agreement dated December 28, 1994 between the Company
and Kipnis Tescher Lippman Valinsky and Kain.
**10.19 Letter of Understanding dated December 16, 1994 from the
Company to Colonial Capital, Inc.
**10.20 Purchase Agreement dated June 10, 1993 by and among the
Company, Michael Schub, Linda Amori, Ron Rodriguez, Debbie
Dworkin and William Zanker.
**10.21 Mutual Termination Agreement dated November 15, 1994 by and
among the Company, Michael Schub, Linda Amori, Ron Rodriguez,
Debbie Dworkin and William Zanker.
**10.22 Option Agreement dated June 20, 1994 between Bay Area Backs I
and the Company relating to a potential franchise agreement.
II-6
<PAGE>
**10.23 Option Agreement dated June 21, 1994 between Bay Area Backs I
and the Company relating to a potential franchise agreement.
**10.24 Letter dated October 19, 1994 from the Company to Bay Area
Backs I extending the term of the Option Agreements.
**10.24.1 Letter dated February 13, 1995 from the Company to Bay Area
Backs I extending the term of the Option Agreements.
**10.25 Form of Bridge Note relating to December 1994 private placement
securities offering.
**10.26 The Company's Uniform Franchise Offering Circular dated April
1, 1994.
**10.27 Letter of Intent dated June 9, 1994 between Brookstone, Inc.
and the Company.
**10.28 Letter of Intent dated October 6, 1994 between Brookstone, Inc.
and the Company.
**10.29 Assignment of Patent Rights dated December 23, 1994 from
William Zanker to the Company.
**10.30 Consulting Agreement dated March 9, 1995 between the Company
and A. Clinton Allen.
**10.31 Option Agreement dated March 9, 1995 between the Company and A.
Clinton Allen.
**10.32 Indemnification Letter dated March 9, 1995 from the Company to
A. Clinton Allen.
***10.33 Option Agreement dated December 7, 1995, by and among Laidlaw
Holdings, Inc., Laidlaw Equities, Inc. and the Company.
***10.34 Franchise Termination Agreement dated as of May 30, 1995, by
and between the Company and Emerald Desert Rub.
***10.35 Option Termination Agreement dated as of May 30, 1995, by and
between the Company and Bay Area Backs I.
***10.36 Financial Advisory and Consulting Agreement between the Company
and Investors Associates, Inc.
10.37 Consulting agreement dated February 1, 1996 between the Company
and Horatio Management Services Corp.
*10.38 Form of Warrant solicitation fee letter agreement between the
Company and Investors Associates, Inc.
*10.39 Form of mergers and acquisitions fee agreement between the
Company and Investors Associates, Inc.
***11.1 Statement regarding Computation of Per Share Earnings.
**16.1 Letter from Elwell, Cangiano, Zdon & Dee relating to change in
accountants.
***21.1 Subsidiaries of the Company.
*23.1 Consent of Olshan Grundman Frome & Rosenzweig LLP (included in
Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP, certified public accountants.
II-7
<PAGE>
24.1 Powers of Attorney (included on signature page to this
Registration Statement).
- -----------------
* To be filed by amendment.
** Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 33-88052).
*** Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1995 (File No. 0-25334).
II-8
<PAGE>
Item 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, 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 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 undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any Prospectus required by Section 10(a)(3) of the
Act;
(b) To reflect in the Prospectus any facts or events which,
individually or together represent a fundamental change in the information set
forth in the Registration Statement;
(c) To include any additional or changed material information on
the plan of distribution;
(2) That, for the purpose of determining any liability under the Act,
each post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this Registration
Statement to be signed on its behalf by the undersigned, the City of New York,
State of New York, on the 5th day of February, 1997.
THE GREAT AMERICAN BACKRUB STORE, INC.
By: /S/ William Zanker
------------------
William Zanker
Chairman of the Board and President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William Zanker, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or either of them or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/S/ WILLIAM ZANKER Chairman of the Board, February 5, 1997
- -------------------------- President and Director
William Zanker
/S/ TERRANCE C. MURRAY Chief Executive Officer February 5, 1997
- -------------------------- and Director (principal
Terrance C. Murray executive officer)
/S/ KEITH DEE Chief Financial Officer February 5, 1997
- -------------------------- and Secretary
Keith Dee (principal financial
and accounting officer)
/S/ STEPHEN SELIGMAN Director February 5, 1997
- --------------------------
Stephen Seligman
/S/ EDWARD E. FABER Director February 5, 1997
- --------------------------
Edward E. Faber
/S/ PETER HANELT Director February 5, 1997
- --------------------------
Peter Hanelt
/S/ DONALD R. FLEISCHER Director February 5, 1997
- --------------------------
Donald R. Fleischer
/S/ ANDREW L. HYAMS Director February 5, 1997
- ---------------------------
Andrew L. Hyams
II-10
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE GREAT AMERICAN BACKRUB STORE, INC.
(Exact name of issuer as specified in its charter)
================================================================================
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
*1.1 Form of Underwriting Agreement between the Company and
Investors Associates Inc.
*1.2.1 Form of Agreement Among Underwriters.
*1.2.2 Form of Selected Dealer Agreement.
**3.1 Certificate of Incorporation of the Company, as amended.
3.2 Amendment of Certificate of Incorporation of the Company
(designating Series A Convertible Preferred Stock).
**3.3 Amended and Restated By-Laws of the Company.
**4.1 Specimen Certificate of the Company's Common Stock.
*4.2.1 Form of Underwriter's Preferred Stock Purchase Option
Agreement.
*4.2.2 Form of Underwriter's Preferred Stock Purchase Option
Certificate.
**4.3 1994 Employee Stock Option Plan.
**4.4 Nonqualified Option Agreement of Mr. Zanker.
**4.5 Nonqualified Option Agreement of Mr. Murray.
**4.6 Nonqualified Option Agreement of Mr. Thompson.
**4.7 Form of Option Agreement for Options to be issued to outside
directors upon completion of the Offering.
*4.8 Form of Warrant Certificate.
*4.9 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company.
*5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP as to the
legality of the securities.
**10.1 Employment Agreement dated November 1, 1994 between the
Company and William Zanker.
**10.1.1 Amendment dated February 1, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and William Zanker.
**10.1.2 Amendment No. 2 dated February 27, 1995 to the Employment
Agreement dated November 1, 1994 between the Company and
William Zanker.
**10.2 Employment Agreement dated November 1, 1994 between the
Company and Terrance C. Murray.
**10.2.1 Amendment dated February 1, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and Terrance C.
Murray.
<PAGE>
**10.2.2 Amendment No. 2 dated February 27, 1995 to the Employment
Agreement dated November 1, 1994 between the Company and
Terrance C. Murray.
**10.3 Employment Agreement dated November 1, 1994 between the
Company and Steven J. Thompson.
**10.3.1 Amendment dated February 1, 1995 to the Employment Agreement
dated November 1, 1994 between the Company and Steven J.
Thompson.
**10.3.2 Amendment No. 2 dated February 27, 1995 to the Employment
Agreement dated November 1, 1994 between the Company and
Steven J. Thompson.
**10.4 Franchise Agreement dated May 14, 1994 between Emerald Desert
Rub and the Company.
**10.5 Lease Agreement dated August 25, 1993 between 175 East 57th
Street, Inc. and the Company concerning the Third Avenue
Store.
**10.6 Lease Agreement dated February 1994 between Town Sports
International, Inc. and the Company concerning the East 86th
Street Store.
**10.7 Notice of Town Sports International, Inc. to the Company
terminating the East 86th Street Store lease.
**10.7.1 Lease Extension dated February 27, 1995 relating to the 86th
Street Store Lease.
**10.8 Lease Agreement dated May 15, 1994 between Martin Cable and
the Company.
**10.9 Sublease Agreement dated May 31, 1994 between the Company and
Emerald Desert Rub.
**10.10 Commercial Lease and Deposit Receipt dated December 31, 1994
for the Company's San Rafael, California office.
**10.11 Promissory Note dated April 5, 1994 issued to Colonial Capital
Corp. for $165,000.
**10.12 Substitute Promissory Note dated November 1, 1994 issued to
Colonial Capital Corp. for $165,000.
**10.13 Letter Agreement dated December 23, 1994 between the Company
and Colonial Capital, Inc.
**10.14 Promissory Note dated April 5, 1994 issued to Gary D. Lipson
for $50,000.
**10.15 Substitute Promissory Note dated November 1, 1994 issued to
Gary D. Lipson for $50,000.
**10.16 Promissory Note dated April 5, 1994 issued to Kipnis Tescher
Lippman Valinsky and Kain for $115,000.
**10.17 Substitute Promissory Note dated November 1, 1994 issued to
Kipnis Tescher Lippman Valinsky & Kain for $115,000.
**10.18 Letter Agreement dated December 28, 1994 between the Company
and Kipnis Tescher Lippman Valinsky and Kain.
**10.19 Letter of Understanding dated December 16, 1994 from the
Company to Colonial Capital, Inc.
<PAGE>
**10.20 Purchase Agreement dated June 10, 1993 by and among the
Company, Michael Schub, Linda Amori, Ron Rodriguez, Debbie
Dworkin and William Zanker.
**10.21 Mutual Termination Agreement dated November 15, 1994 by and
among the Company, Michael Schub, Linda Amori, Ron Rodriguez,
Debbie Dworkin and William Zanker.
**10.22 Option Agreement dated June 20, 1994 between Bay Area Backs I
and the Company relating to a potential franchise agreement.
**10.23 Option Agreement dated June 21, 1994 between Bay Area Backs I
and the Company relating to a potential franchise agreement.
**10.24 Letter dated October 19, 1994 from the Company to Bay Area
Backs I extending the term of the Option Agreements.
**10.24.1 Letter dated February 13, 1995 from the Company to Bay Area
Backs I extending the term of the Option Agreements.
**10.25 Form of Bridge Note relating to December 1994 private
placement securities offering.
**10.26 The Company's Uniform Franchise Offering Circular dated April
1, 1994.
**10.27 Letter of Intent dated June 9, 1994 between Brookstone, Inc.
and the Company.
**10.28 Letter of Intent dated October 6, 1994 between Brookstone,
Inc. and the Company.
**10.29 Assignment of Patent Rights dated December 23, 1994 from
William Zanker to the Company.
**10.30 Consulting Agreement dated March 9, 1995 between the Company
and A. Clinton Allen.
**10.31 Option Agreement dated March 9, 1995 between the Company and
A. Clinton Allen.
**10.32 Indemnification Letter dated March 9, 1995 from the Company to
A. Clinton Allen.
***10.33 Option Agreement dated December 7, 1995, by and among Laidlaw
Holdings, Inc., Laidlaw Equities, Inc. and the Company.
***10.34 Franchise Termination Agreement dated as of May 30, 1995, by
and between the Company and Emerald Desert Rub.
***10.35 Option Termination Agreement dated as of May 30, 1995, by and
between the Company and Bay Area Backs I.
***10.36 Financial Advisory and Consulting Agreement between the
Company and Investors Associates, Inc.
10.37 Consulting agreement dated February 1, 1996 between the
Company and Horatio Management Services Corp.
*10.38 Form of Warrant solicitation fee letter agreement between the
Company and Investors Associates, Inc.
*10.39 Form of mergers and acquisitions fee agreement between the
Company and Investors Associates, Inc.
***11.1 Statement regarding Computation of Per Share Earnings.
<PAGE>
**16.1 Letter from Elwell, Cangiano, Zdon & Dee relating to change in
accountants.
***21.1 Subsidiaries of the Company.
*23.1 Consent of Olshan Grundman Frome & Rosenzweig LLP (included in
Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP, certified public accountants.
24.1 Powers of Attorney (included on signature page to this
Registration Statement).
- -------------
* To be filed by amendment.
** Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 33-88052).
*** Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1995 (File No. 0-25334).
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
THE CERTIFICATE OF INCORPORATION
OF
THE GREAT AMERICAN BACKRUB STORE, INC.
Under Section 805 of the Business Corporation Law
FIRST: The name of the corporation is The Great American
BackRub Store, Inc. (the "Corporation"). The name under which
the corporation was formed is American Backrub Stores, Inc.
SECOND: The certificate of incorporation (the "Certificate
of Incorporation") of the corporation was filed by the Department
of State on December 18, 1992.
THIRD: The amendment of the Certificate of Incorporation
effected by this certificate of amendment is as follows:
To add a provision stating the designation,
number and relative rights, preferences, privileges and restrictions of the
shares of Series A of preferred stock of the Corporation as fixed by the Board
of Directors of the Corporation (the "Board of Directors") pursuant to the
authorization contained in the Certificate of Incorporation.
FOURTH: To accomplish the foregoing amendment, the following
new Article, relating to the designation, number and relative rights,
preferences, privileges and restrictions of the Series A preferred stock is
inserted in the Certificate of Incorporation:
"FOURTH-A: DESIGNATION, NUMBER AND RELATIVE RIGHTS,
PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES A PREFERRED STOCK. The
designation, number and relative rights, preferences, privileges and
restrictions of the Series A Preferred Stock are as follows:
Section 1. DESIGNATION, NUMBER AND PAR
VALUE. A series of preferred stock of the Corporation (the "Preferred Stock") is
hereby designated as the Series A Convertible Preferred Stock (referred to
herein as the "Series A Preferred Stock"), and the number of shares of Preferred
Stock so
<PAGE>
designated is 4,000,000 shares. The par value of each share of Series A
Preferred Stock shall be $.001.
Section 2. DIVIDENDS.
(a) The holders of shares of the Series A
Preferred Stock will be entitled to receive, when, as and if declared by the
Board of Directors out of funds of the Corporation legally available therefor
(and subject to the limitation described in the last sentence of this
paragraph), cumulative dividends on the shares of the Series A Preferred Stock
at the rate of 7.0% (or $0.35) per annum per share of Series A Preferred Stock
outstanding, and no more, payable semi-annually on April 1 and October 1 in each
year. Such dividends shall be cumulative from the later of the date of issuance
of the Series A Preferred Stock or the most recent dividend payment date on
which dividends have been paid on the Series A Preferred Stock by the
Corporation. Dividends shall be payable either (at the Company's option) in cash
or in shares of Common Stock on the basis of the average Closing Prices (as
defined in Section 6(c)) of the Common Stock for the ten consecutive trading
days ending on the last trading day preceding the record date for the dividend
payment. Each such dividend shall be paid to the holders of record of the shares
of the Series A Preferred Stock as they appear on the stock records of the
Corporation on such record date, not more than 30 days nor less than 10 days
preceding the dividend payment date thereof, as shall be fixed by the Board of
Directors or a duly authorized committee thereof. If a holder converts a share
or shares of the Series A Preferred Stock after the close of business on the
record date for a dividend and before the opening of business on the payment
date for such dividend, then, pursuant to Section 6 hereof, the holder will be
required to pay to the Corporation at the time of such conversion the amount of
such dividend (unless the shares were converted after the issuance of a notice
of redemption with respect to such shares, in which event the holder of such
shares shall be entitled to the dividend payable thereon on such dividend
payment date).
(b) If dividends are not paid in full, or
declared in full and sums set apart for the payment thereof, upon the shares of
the Series A Preferred Stock and shares of any other preferred stock ranking on
a parity as to dividends with the Series A Preferred Stock, all dividends
declared upon shares of the Series A Preferred Stock and of any other preferred
Stock ranking on a parity as to dividends shall be paid or declared PRO RATA so
that in all cases the amount of dividends paid or declared per share on the
Series A Preferred Stock and such other shares of preferred stock shall bear to
each other the same ratio that accumulated dividends per share, including
dividends accrued or in arrears, if any, on the shares of the Series A Preferred
Stock and such other shares of preferred stock bear to each other. Except as
provided in the preceding sentence, unless cumulative
-2-
<PAGE>
dividends on the shares of the Series A Preferred Stock have been paid or
declared in full and sums set aside for the payment thereof, no dividends (other
than dividends in shares of Common Stock (as hereinafter defined) or in shares
of any other capital stock of the Corporation ranking junior to the Series A
Preferred Stock as to dividends and distribution of assets upon liquidation)
shall be paid or declared and set aside for payment or other distribution made
upon the Corporation's Common Stock, par value $.001 per share (the "Common
Stock"), or any other capital stock of the Corporation ranking junior to or on a
parity with the Series A Preferred Stock as to dividends, nor shall any shares
of Common Stock or shares of any other capital stock of the Corporation ranking
junior to or on a parity with the Series A Preferred Stock as to dividends be
redeemed, purchased or otherwise acquired for any consideration (or any payment
made to or available for a sinking fund for the redemption of any such shares)
by the Corporation or any subsidiary of the Corporation (except by conversion
into or exchange for shares of capital stock of the Corporation ranking junior
to the Series A Preferred Stock as to dividends and distribution of assets upon
liquidation). Holders of shares of the Series A Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or shares of
capital stock, in excess of full accrued and cumulative dividends as herein
provided. No interest or sum of money in lieu of interest shall be payable in
respect of any dividend payment or payments on the shares of the Series A
Preferred Stock that may be in arrears.
The terms "accrued dividends," "dividends
accrued" and "dividends in arrears," whenever used herein with reference to
shares of preferred stock shall be deemed to mean an amount which shall be equal
to dividends thereon at the annual dividend rates per share for the respective
series thereof from the date or dates on which such dividends commence to accrue
to the end of the then current quarterly dividend period for such preferred
stock (or, in the case of redemption, to the date of redemption), less the
amount of all dividends paid, or declared in full and sums set aside for the
payment thereof, upon such shares of preferred stock.
(c) Dividends payable on the shares of the
Series A Preferred Stock for any period less than a full quarterly dividend
period shall be computed on the basis of a 360-day year of twelve 30-day months
and the actual number of days elapsed in the period for which payable.
Section 3. OPTIONAL REDEMPTION.
(a) The shares of the Series A Preferred
Stock will be redeemable at the option of the Corporation by resolution of its
Board of Directors, in whole or from time to time in part, at any time on or
after the fifth anniversary of the date of original
-3-
<PAGE>
issuance (the "Warrant Issue Date") of Warrants to purchase Series A Preferred
Stock pursuant to a Confidential Private Offering Memorandum dated November 25,
1996, subject to the limitations set forth below, at a redemption price of $5.25
per share (the "Redemption Price"), plus all dividends accrued and unpaid on the
shares of the Series A Preferred Stock up to the date fixed for redemption, upon
giving notice as provided below.
(b) If less than all of the outstanding
shares of the Series A Preferred Stock are to be redeemed, the number of shares
to be redeemed shall be determined by the Board of Directors and the shares to
be redeemed shall be determined pro rata or by lot or in such other manner and
subject to such regulations as the Board of Directors in its sole discretion
shall prescribe.
(c) At least 30 days but not more than 60
days prior to the date fixed for the redemption of shares of the Series A
Preferred Stock, a written notice shall be mailed to each holder of record of
shares of the Series A Preferred Stock to be redeemed in a postage prepaid
envelope addressed to such holder at his post office address as shown on the
records of the Corporation, notifying such holder of the election of the
Corporation to redeem such shares, stating the date fixed for redemption thereof
(the "Redemption Date"), and calling upon such holder to surrender to the
Corporation on the Redemption Date at the place designated in such notice his
certificate or certificates representing the number of shares specified in such
notice of redemption. On or after the Redemption Date each holder of shares of
the Series A Preferred Stock to be redeemed shall present and surrender his
certificate or certificates for such shares to the Corporation at the place
designated in such notice and thereupon the redemption price of such shares
shall be paid to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. In case less than all the shares represented by
any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. From and after the Redemption Date (unless
default shall be made by the Corporation in payment of the redemption price),
all dividends on the shares of the Series A Preferred Stock designated for
redemption in such notice shall cease to accrue, and all rights of the holders
thereof as stockholders of the Corporation, except the right to receive the
redemption price of such shares (including all accrued and unpaid dividends up
to the Redemption Date) upon the surrender of certificates representing the
same, shall cease and terminate and such shares shall not thereafter be
transferred (except with the consent of the Corporation) on the books of the
Corporation, and such shares shall not be deemed to be outstanding for any
purpose whatsoever. At its election, the Corporation prior to the Redemption
Date may deposit the redemption price (including all accrued and unpaid
dividends up to the Redemption Date) of shares of the Series A
-4-
<PAGE>
Preferred Stock so called for redemption in trust for the holders thereof with a
bank or trust company (having a capital surplus and undivided profits
aggregating not less than $50,000,000) in the Borough of Manhattan, City and
State of New York, or in any other city in which the Corporation at the time
shall maintain a transfer agency with respect to such shares, in which case the
aforesaid notice to holders of shares of the Series A Preferred Stock to be
redeemed shall state the date of such deposit, shall specify the office of such
bank or trust company as the place of payment of the redemption price, and shall
call upon such holders to surrender the certificates representing such shares at
such place on or after the date fixed in such redemption notice (which shall not
be later than the Redemption Date) against payment of the redemption price
(including all accrued and unpaid dividends up to the Redemption Date). Any
interest accrued on such funds shall be paid to the Corporation from time to
time. Any moneys so deposited which shall remain unclaimed by the holders of
such shares of the Series A Preferred Stock at the end of two years after the
Redemption Date shall be returned by such bank or trust company to the
Corporation.
If a notice of redemption has been given
pursuant to this Section 3 and any holder of shares of this Series A Preferred
Stock shall, prior to the close of business on the last business day preceding
the Redemption Date, give written notice to the Corporation pursuant to Section
6 below of the conversion of any or all of the shares to be redeemed held by
such holder (accompanied by a certificate or certificates for such shares, duly
endorsed or assigned to the Corporation, and any necessary transfer tax payment,
as required by Section 6 below), then such redemption shall not become effective
as to such shares to be converted, such conversion shall become effective as
provided in Section 6 below and any moneys set aside by the Corporation for the
redemption of such shares of converted Series A Preferred Stock shall revert to
the general funds of the Corporation (unless such shares were converted after
the close of business on the record date for a dividend and before the opening
of business on the payment date for such dividend, in which event the holders of
such shares shall be entitled to the dividend payable thereon on such dividend
payment date).
(d) Shares of the Series A Preferred Stock
redeemed, repurchased or retired pursuant to the provisions of this Section 3 or
surrendered to the Corporation upon conversion or shall thereupon be retired and
may not be reissued as shares of the Series A Preferred Stock but shall
thereafter have the status of authorized but unissued shares of the Preferred
Stock, without designation as to series until such shares are once more
designated as part of a particular series of the Preferred Stock.
-5-
<PAGE>
Section 4. VOTING RIGHTS.
The holders of Series A Preferred Stock
shall not be entitled to vote on any matter except (i) as provided in Section 8
and (ii) as required by law.
Section 5. LIQUIDATION RIGHTS.
(a) In the event of any liquidation,
dissolution or winding up of the affairs of the Corporation, whether voluntary
or otherwise, after payment or provision for payment of the debts and other
liabilities of the Corporation, the holders of shares of the Series A Preferred
Stock shall be entitled to receive, in cash, out of the remaining net assets of
the Corporation, the amount of Five Dollars ($5.00) for each share of the Series
A Preferred Stock held by them, plus an amount equal to all dividends accrued
and unpaid on each such share up to the date fixed for distribution, before any
distribution shall be made to the holders of shares of Common Stock or any other
capital stock of the Corporation ranking (as to any such distribution) junior to
the Series A Preferred Stock. If upon any liquidation, dissolution or winding up
of the Corporation, the assets distributable among the holders of shares of the
Series A Preferred Stock and all other classes and series of preferred stock
ranking (as to any such distribution) on a parity with the Series A Preferred
Stock are insufficient to permit the payment in full to the holders of all such
shares of all preferential amounts payable to all such holders, then the entire
assets of the Corporation thus distributable shall be distributed ratably among
the holders of the shares of the Series A Preferred Stock and such other classes
and series of preferred stock ranking (as to any such distribution) on a parity
with the Series A Preferred Stock in proportion to the respective amounts that
would be payable per share if such assets were sufficient to permit payment in
full.
(b) For purposes of this Section 5, a
distribution of assets in any dissolution, winding up or liquidation shall not
include (i) any consolidation or merger of the Corporation with or into any
other corporation, (ii) any dissolution, liquidation, winding up or
reorganization of the Corporation immediately followed by reincorporation of
another corporation or (iii) a sale or other disposition of all or substantially
all of the Corporation's assets to another corporation; PROVIDED, HOWEVER, that,
in each case, effective provision is made in the certificate of incorporation of
the resulting and surviving corporation or otherwise for the protection of the
rights of the holders of shares of the Series A Preferred Stock.
(c) After the payment of the full
preferential amounts provided for herein to the holders of shares of the Series
A
-6-
<PAGE>
Preferred Stock or funds necessary for such payment have been set aside in trust
for the holders thereof, such holders shall be entitled to no other or further
participation in the distribution of the assets of the Corporation.
Section 6. CONVERSION.
(a) Holders of shares of the Series A
Preferred Stock shall have the right, exercisable at any time and from time to
time on or after the first anniversary of the Warrant Issue Date, except in the
case of shares of the Series A Preferred Stock called for redemption, to convert
all or any such shares of the Series A Preferred Stock into shares of the Common
Stock (calculated as to each conversion to the nearest 1/100th of a share) such
that each share of Series A Preferred Stock shall be converted into the greater
of (i) two shares of Common Stock (the "Base Conversion Rate"), subject to
adjustment as described below, or (ii) a number shares of Common Stock equal to
$8.00 divided by the average of the Closing Prices (as defined in Section 6(c)
per share of the Common Stock for the ten (10) consecutive trading days ending
on the third trading day preceding the Conversion Date (as defined in Section
6(b)). In the case of shares of the Series A Preferred Stock called for
redemption, conversion rights will expire at the close of business on the last
business day preceding the Redemption Date. Notice of an optional redemption
must be mailed not less than 30 days and not more than 60 days prior to the
Redemption Date. Upon conversion, no adjustment or payment will be made for
dividends, but if any holder surrenders a share of the Series A Preferred Stock
for conversion after the close of business on the record date for the payment of
a dividend and prior to the opening of business on the next dividend payment
date, then, notwithstanding such conversion, the dividend payable on such
dividend payment date will be paid to the registered holder of such share on
such record date. In such event, such share, when surrendered for conversion
during the period between the close of business on any dividend payment record
date and the opening of business on the corresponding dividend payment date,
must be accompanied by payment of an amount equal to the dividend payable on
such dividend payment date on the share so converted (unless such share was
converted after the issuance of a notice of redemption with respect to such
share, in which event such share shall be entitled to the dividend payable
thereon on such dividend payment date).
(b) Any holder of share or shares of the
Series A Preferred Stock electing to convert such share or shares thereof shall
deliver the certificate or certificates therefor to the principal office of any
transfer agent for the Common Stock, with the form of notice of election to
convert as the Corporation shall prescribe fully completed and duly executed and
(if so required by the Corporation or any conversion agent) accompanied
-7-
<PAGE>
by instruments of transfer in form satisfactory to the Corporation and to any
conversion agent, duly executed by the registered holder or his duly authorized
attorney, and transfer taxes, stamps or funds therefor or evidence of payment
thereof if required pursuant to Section 6(d). The conversion right with respect
to any such shares shall be deemed to have been exercised at the date (the
"Conversion Date") upon which the certificates therefor accompanied by such duly
executed notice of election and instruments of transfer and such taxes, stamps,
funds, or evidence of payment shall have been so delivered, and the person or
persons entitled to receive the shares of the Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of the Common Stock upon said date.
(c) No fractional shares of the Common Stock
or scrip representing fractional shares shall be issued upon conversion of
shares of the Series A Preferred Stock. If more than one share of the Series A
Preferred Stock shall be surrendered for conversion at one time by the same
holder, the number of full shares of the Common Stock which shall be issuable
upon conversion thereof shall be computed on the basis of the aggregate number
of shares of the Series A Preferred Stock so surrendered. Instead of any
fractional shares of the Common Stock which would otherwise be issuable upon
conversion of any shares of the Series A Preferred Stock, the Corporation shall
pay a cash adjustment in respect of such fraction in an amount equal to the same
fraction of the Closing Price (as defined below) for the Common Stock on the
last trading day preceding the date of conversion. The Closing Price for each
day shall be the last reported sale price regular way or, in case no such
reported sale takes place on such date, the average of the reported closing bid
and asked prices regular way, on the principal national securities exchange on
which Common Stock is listed or admitted to trading or, if not listed or
admitted to trading on any national securities exchange, the closing sale price
of Common Stock, or in case no reported sale takes place, the average of the
closing bid and asked prices, on the Nasdaq National Market or the Nasdaq
SmallCap Market (collectively, "NASDAQ"), the OTC Electronic Bulletin Board (the
"Bulletin Board") or any comparable system, or if the Common Stock is not quoted
on NASDAQ, the Bulletin Board or any comparable system, the closing sale price
or, in case no reported sale takes place, the average of the closing bid and
asked prices, as furnished by any two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Corporation for that
purpose.
(d) If a holder converts a share or shares
of the Series A Preferred Stock, the Corporation shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of Common Stock upon the
conversion. The holder, however, shall pay to the Corporation the amount of any
tax which is due
-8-
<PAGE>
(or shall establish to the satisfaction of the Corporation payment thereof) if
the shares are to be issued in a name other than the name of such holder and
shall pay to the Corporation any amount required by the last sentence of Section
6(a) hereof.
(e) The Corporation shall reserve and shall
at all times have reserved out of its authorized but unissued shares of the
Common Stock sufficient shares of the Common Stock to permit the conversion of
the then outstanding shares of the Series A Preferred Stock. All shares of
Common Stock which may be issued upon conversion of shares of the Series A
Preferred Stock shall be validly issued, fully paid and nonassessable. In order
that the Corporation may issue shares of the Common Stock upon conversion of
shares of the Series A Preferred Stock, the Corporation will endeavor to comply
with all applicable Federal and State securities laws and will endeavor to list
such shares of the Common Stock to be issued upon conversion on each securities
exchange on which the Common Stock is listed.
(f) The conversion rate in effect at any
time shall be subject to adjustment from time to time as follows:
(i) In case the
Corporation shall (1) pay a dividend in
shares of the Common Stock to holders of the
Common Stock, (2) make a distribution in
shares of the Common Stock to holders of the
Common Stock, (3) subdivide the outstanding
shares of the Common Stock into a greater
number of shares of the Common Stock or (4)
combine the outstanding shares of the Common
Stock into a smaller number of shares of the
Common Stock, the Base Conversion Rate shall
be adjusted to be equal to the Base
Conversion Rate immediately prior to such
event multiplied by a fraction of which the
numerator shall be the number of shares of
Common Stock outstanding immediately after
such event and of which the denominator
shall be the number of shares of Common
Stock outstanding immediately prior to such
event. An adjustment made pursuant to this
Section 6(f)(i) shall become effective
immediately after the record date in the
case of a dividend or distribution and shall
become effective immediately after the
effective date in the case of a subdivision
or combination.
(ii) In case the
Corporation shall issue rights or warrants
to all holders of the Common Stock entitling
them (for a period commencing no earlier
than the record date for the determination
of holders of Common Stock entitled to
receive such rights or warrants and expiring
not more than 45 days after such record
date) to subscribe for or purchase shares of
the Common Stock (or securities convertible
into shares of the Common Stock) at a price
per share less than the current
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<PAGE>
market price (as determined pursuant to
Section 6(f)(iv)) of the Common Stock on
such record date, the Base Conversion Rate
shall be adjusted so that the same shall be
equal to Base Conversion Rate immediately
prior to such record date multiplied by a
fraction of which the numerator shall be the
number of shares of the Common Stock
outstanding on such record date plus the
number of additional shares of the Common
Stock offered (or into which the convertible
securities so offered are convertible), and
of which the denominator shall be the number
of shares of the Common Stock outstanding on
such record date, plus the number of shares
of the Common Stock which the aggregate
offering price of the offered shares of the
Common Stock (or the aggregate conversion
price of the convertible securities so
offered) would purchase at such current
market price. Such adjustments shall become
effective immediately after such record
date.
(iii) In case the
Corporation shall distribute to all holders
of the Common Stock shares of any class of
capital stock other than the Common Stock,
evidence of indebtedness or other assets
(other than cash dividends out of current or
retained earnings), or shall distribute to
substantially all holders of the Common
Stock rights or warrants to subscribe for
securities (other than those referred to in
Section 6(f)(ii)), then in each such case
the Base Conversion Rate shall be adjusted
so that the same shall be equal to the Base
Conversion Rate immediately prior to the
date of such distribution multiplied by a
fraction of which the numerator shall be the
current market price (determined as provided
in Section 6(f)(iv)) of the Common stock on
the record date mentioned below, and of
which the denominator shall be such current
market price of the Common Stock, less the
then fair market value (as determined by the
Board of Directors, whose determination
shall be conclusive evidence of such fair
market value) of the portion of the assets
so distributed or of such subscription
rights or warrants applicable to one share
of the Common Stock. Such adjustment shall
become effective immediately after the
record date for the determination of the
holders of the Common Stock entitled to
receive such distribution. Notwithstanding
the foregoing, in the event that the
Corporation shall distribute rights or
warrants (other than those referred to in
Section 6(f)(ii), ("Rights") pro rata to
holders of the Common Stock, the Corporation
may, in lieu of making any adjustment
pursuant to this Section 6(f)(iii), make
proper provision so that each holder of a
share of Series A Preferred Stock who
converts such share after the
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<PAGE>
record date for such distribution and prior
to the expiration or redemption of the
Rights shall be entitled to receive upon
such conversion, in addition to the shares
of the Common Stock issuable upon such
conversion (the "Conversion Shares"), a
number of Rights to be determined as
follows: (i) if such conversion occurs on or
prior to the date for the distribution to
the holder of Rights of a separate
certificate evidencing such Rights (the
"Distribution Date"), the same number of
Rights to which a holder of a number of
shares of the Common Stock equal to the
number of Conversion Shares is entitled at
the time of such conversion in accordance
with the terms and provisions of and
applicable to the Rights; and (ii) if such
conversion occurs after the Distribution
Date, the same number of Rights to which a
holder of the number of shares of the Common
Stock into which a share of the Series A
Preferred Stock so converted was convertible
immediately prior to the Distribution Date
would have been entitled on the Distribution
Date in accordance with the terms and
provisions of and applicable to the Rights.
(iv) The current market
price per share of the Common Stock on any
date shall be deemed to be the average of
the daily closing prices for thirty
consecutive trading days commencing
forty-five trading days before the day in
question. The closing price for each day
shall be the last reported sale price
regular way or, in case no such reported
sale takes place on such date, the average
of the reported closing bid and asked prices
on the principal national securities
exchange on which the Common Stock is listed
or admitted to trading or, if not listed or
admitted to trading on any national
securities exchange, the closing sale price
of Common Stock, or in case no reported sale
takes place, the average of the closing bid
and asked prices, on the Nasdaq National
Market or the Nasdaq SmallCap Market
(collectively, "NASDAQ"), the OTC Electronic
Bulletin Board (the "Bulletin Board") or any
comparable system, or if the Common Stock is
not quoted on NASDAQ, the Bulletin Board or
any comparable system, the closing sale
price or, in case no reported sale takes
place, the average of the closing bid and
asked prices, as furnished by any two
members of the National Association of
Securities Dealers, Inc. selected from time
to time by the Corporation for that purpose.
(v) In any case in which
this Section 6 shall require that an
adjustment be made immediately following a
record date, the Corporation may elect to
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<PAGE>
defer (but only until five business days
following the mailing of the notice
described in Section 6(j)) issuing to the
holder of any share of the Series A
Preferred Stock converted after such record
date the shares of the Common Stock and
other capital stock of the Corporation
issuable upon such conversion over and above
the shares of the Common stock and other
capital stock of the Corporation issuable
upon such conversion only on the basis of
the conversion rate prior to adjustment;
and, in lieu of the shares the issuance of
which is so deferred, the Corporation shall
issue or cause its transfer agents to issue
due bills or other appropriate evidence of
the right to receive such shares.
(g) No adjustment in the Base Conversion
Rate shall be required until cumulative adjustments result in a concomitant
change of 1% or more of the Base Conversion Rate as in effect prior to the last
adjustment of the Base Conversion Rate; PROVIDED, HOWEVER, that any adjustments
which by reason of this Section 6(g) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. No adjustment to the
conversion rate shall be made for cash dividends.
(h) In the event that, as a result of an
adjustment made pursuant to Section 6(f), the holder of any share of the Series
A Preferred Stock thereafter surrendered for conversion shall become entitled to
receive any shares of capital stock of the Corporation other than shares of the
Common Stock, thereafter the number of such other shares so receivable upon
conversion of any shares of the Series A Preferred Stock shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in this
Section 6.
(i) The Corporation may make such increases
in the conversion rate, in addition to those required by Sections 6(f)(i), (ii)
and (iii), as it considers to be advisable in order than any event treated for
Federal income tax purposes as a dividend of stock or stock rights shall not be
taxable to the recipients thereof.
(j) Whenever the conversion rate is
adjusted, the Corporation shall promptly mail to all holders of record of shares
of the Series A Preferred Stock a notice of the adjustment and shall cause to be
prepared a certificate signed by a principal financial officer of the
Corporation setting forth the adjusted conversion rate and a brief statement of
the facts requiring such adjustment and the computation thereof; such
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<PAGE>
certificate shall forthwith be filed with each transfer agent for the shares of
the Series A Preferred Stock.
(k) In the event that:
(1) the Corporation
takes any action
which would require
an adjustment in the
Base Conversion
Rate,
(2) the Corporation
consolidates or
merges with, or
transfers all or
substantially all of
its assets to,
another corporation
and stockholders of
the Corporation must
approve the
transaction, or
(3) there is a
dissolution or
liquidation of the
Corporation,
the Corporation shall mail to holders of shares of the Series A Preferred Stock
a notice stating the proposed record or effective date of the transaction, as
the case may be. The Corporation shall mail the notice at least 10 days before
such date; however, failure to mail such notice or any defect therein shall not
affect the validity of any transaction referred to in clauses (1), (2) or (3) of
this Section 6(k).
(l) If any of the following shall occur,
namely: (i) any reclassification or change of outstanding shares of the Common
Stock issuable upon conversion of shares of the Series A Preferred Stock (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), (ii) any
consolidation or merger to which the Corporation is a party other than a merger
in which the Corporation is the continuing corporation and which does not result
in any reclassification of, or change (other than a change in name, or par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination) in, outstanding shares of the
Common Stock or (iii) any sale or conveyance of all or substantially all of the
property or business of the Corporation as an entirety, then the Corporation, or
such successor or purchasing corporation, as the case may be, shall, as a
condition precedent to such reclassification, change, consolidation, merger,
sale or conveyance, provide in its certificate of incorporation or other charter
document that each share of the Series A Preferred Stock shall be convertible
into the kind and amount of shares of capital stock and other securities and
property (including cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
the Common Stock deliverable upon conversion of such share of the Series A
Preferred Stock immediately prior to such reclassification, change,
consolidation, merger, sale or
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<PAGE>
conveyance. Such certificate of incorporation or other charter document shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. The foregoing,
however, shall not in any way affect the right a holder of a share of the Series
A Preferred Stock may otherwise have, pursuant to clause (ii) of the last
sentence of Section 6(f)(iii), to receive Rights upon conversion of a share of
the Series A Preferred Stock. If, in the case of any such consolidation, merger,
sale or conveyance, the stock or other securities and property (including cash)
receivable thereupon by a holder of the Common Stock includes shares of capital
stock or other securities and property of a corporation other than the successor
or purchasing corporation, as the case may be, in such consolidation, merger,
sale or conveyance, then the certificate of incorporation or other charter
document of such other corporation shall contain such additional provisions to
protect the interests of the holders of shares of the Series A Preferred Stock
as the Board of Directors shall reasonably consider necessary by reason of the
foregoing. The provisions of this Section 6(1) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
Section 7. RANKING. With regard to rights to
receive dividends and distributions upon dissolution of the Corporation, the
Series A Preferred Stock shall rank prior to the Common Stock and on a parity
with any other Preferred Stock issued by the Corporation, unless the terms of
such other Preferred Stock provide otherwise and, if applicable, the
requirements of Section 8 hereof have been complied with.
Section 8. LIMITATIONS. In addition to any
other rights provided by applicable law, so long as any shares of the Series A
Preferred Stock are outstanding, the Corporation shall not, without the
affirmative vote, or the written consent as provided by law, of the holders of a
majority of the outstanding shares of the Series A Preferred Stock, voting as a
class,
(a) create, authorize or
issue any class or series of capital stock,
or rights to subscribe to or to acquire, or
any security convertible into, any class or
series of capital stock ranking as to
payment of dividends, distribution of assets
upon liquidation or voting rights, prior to
the Series A Preferred Stock; or
(b) amend, alter or
appeal, whether by merger, consolidation or
otherwise, any of the provisions of the
Certificate of Incorporation (including this
Certificate of Designation) that would
change the preferences, rights or powers
with respect to the Series A Preferred Stock
so as to affect the Series A Preferred Stock
adversely;
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<PAGE>
but (except as otherwise required by applicable law) nothing herein contained
shall require such a vote or consent (i) in connection with any increase in the
total number of authorized shares of the Common Stock, or (ii) in connection
with the authorization or increase of any class or series of capital stock
ranking, as to dividends and distribution of assets upon liquidation, junior to
or on a parity with the Series A Preferred Stock; PROVIDED, HOWEVER, that no
such vote or written consent of the holders of the shares of the Series A
Preferred Stock shall be required if, at or prior to the time when the issuance
of any such shares ranking prior to the Series A Preferred Stock is to be made
or any such change is to take effect, as the case may be, provision is made for
the redemption of all the then outstanding shares of the Series A Preferred
Stock.
Section 9. NO PREEMPTIVE RIGHTS. No holder
of shares of the Series A Preferred Stock will possess any preemptive rights to
subscribe for or acquire any unissued shares of capital stock of the Corporation
(whether now or hereafter authorized) or securities of the Corporation
convertible into or carrying a right to subscribe for or acquire shares of
capital stock of the Corporation.
FIFTH: This Certificate of Amendment has been authorized by
the Board of Directors of the corporation pursuant to authority granted to the
Board of Directors in the certificate of incorporation.
IN WITNESS WHEREOF, we have subscribed this
document on December 24, 1996 and do hereby affirm, under penalties of perjury,
that the statements contained therein have been examined by us and are true and
correct.
/s/ William Zanker
----------------------------------------
Name: William Zanker
Title: President
/s/ Keith Dee
----------------------------------------
Name: Keith Dee
Title: Secretary
-15-
THE GREAT AMERICAN BACKRUB STORE, INC.
425 MADISON AVENUE
NEW YORK, NY 10017
February 1, 1996
Horatio Management Services Corp. (the "Consultant")
411 Hackensack Avenue, Lobby Level
Hackensack, NJ 07601
Attn: Mr. Herman Epstein,
Chairman
Ladies and Gentlemen:
This is to confirm the mutual understanding between the
Consultant and The Great American BackRub Store, Inc. (the "Company") as
follows:
The Company is in the business of creating a national chain of
company-owned and franchised retail stores (the "Stores") under the name "The
Great American BackRub Store" which offer reasonably priced backrubs to
customers while they are seated and clothed in a clean, safe and non-threatening
environment. In such connection, the Company is owner and holder of lease and
sublease positions relating to the Stores.
The Consultant is experienced in the retail industry,
including management, operation, leasing and financing of real and personal
property and is willing to render such services to Company.
The Company has previously employed and is desirous of
continuing to obtain the services of Consultant to assist in various functions
relating to the Stores as more fully described below.
A. CONSULTANT SERVICES.
Consultant agrees during the term hereof to render the
following services as and when the same may be requested by Company;
(a) to advise and report upon the operation of the Stores and
in connection therewith to assist the Company in evaluating the performance of
any management company or personnel responsible for the day-to-day management of
the Stores, to review the monthly management reports and other reports prepared
by such day-to-day manager and to make recommendations to the Company with
respect to the manner of the operation and management of the Stores;
<PAGE>
(b) to supervise and inspect repairs, replacements and
maintenance done at the Stores;
(c) to advise upon prospective lease locations for future
Stores and to assist the Company in lease negotiations to obtain the most
favorable lessor concessions;
(d) to advise in connection with proposed acquisitions of
existing message therapy, retail and educational school operations, including
analysis of the target company's operations, fitness expertise, financials and
structure;
(e) to assist in the preparation of, and review and make
recommendations with respect to, budgets prepared by or on behalf of the Company
in connection with the future operations of the Stores;
(f) to assist in the preparation of marketing brochures and to
seek contracts and relationships with professional and trade organizations to
foster the business of the Company;
(g) to consult with the Company and its personnel to
facilitate and expedite filings with and presentations to the
state gaming authorities;
(h) to consult with the Company regarding alternative
marketing strategies such as overseas message and backrub stores, and use of
informercials, catalogues and radio and TV marketing;
(i) to seek sources of lending commitments, and
(j) to render such further advice and reports as may be
reasonable and appropriate under the circumstances in connection with the
ownership, management or financing of the Stores.
Consultant shall furnish the foregoing services through its
officers and employees from time to time as may be requested by Company and
shall be rendered in New York City or other areas in which the Stores are
located, or at the Consultant's offices in Bergen County, New Jersey, as
required, in which former cases Consultant shall be reimbursed for actual
out-of-pocket travel expenses (not to exceed $1,000 per trip) incurred in
connection with requests by Company hereunder.
B. CONSULTANT'S COMPENSATION.
In consideration of the services to be performed by Consultant
pursuant to Paragraph A hereof, Company shall pay to Consultant a fee (the
"Agent's Fee") of $5,000 per month in advance (but in no event less than $60,000
payable upon the next ensuing closing of an offering of the Company's equity
securities, and an additional $60,000 upon the first anniversary
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<PAGE>
thereof) by good check made payable to Consultant to be delivered to Consultant
as herein provided. The Agent's Fee shall be deemed earned upon execution and
delivery hereof and will be nonrefundable, but represents Consultant's sole and
exclusive compensation by reason of this transaction or otherwise in respect of
the Stores, except as herein expressly provided.
C. TERM AND TERMINATION.
This agreement will remain in full force and effect until
January 31, 1998. In the event Consultant shall default hereunder, Company's
sole and exclusive remedy shall be to notify Consultant and in the event
Consultant shall fail to cure the default within 90 days following receipt of
such notice, Company may make an application for arbitration of the dispute as
below provided. In the event the panel shall rule in favor of Company, Company
shall have the option to terminate this agreement on 30 days' notice to
Consultant.
D. GENERAL
Consultant is an independent contractor, and this agreement
will not be construed in any way as creating a joint venture or employment
between the Company and Consultant. Consultant acknowledges and agrees that with
respect to its employees it is solely responsible for withholding, collecting,
and paying employment taxes, filing information returns, and performing all
other duties imposed upon employers under applicable Federal, state, and local
laws, rules, and regulations.
Any notice or other communication under, in connection with or
pursuant to this agreement shall be in writing and signed, and will be deemed to
be given when personally delivered or three days after the day when sent by
certified or registered mail, postage prepaid with return receipt requested, and
addressed to the respective parties at their above addresses or to any other
addresses to which either party may notify the other.
This agreement constitutes a personal services contract and,
accordingly, may not be assigned, except as to an affiliate or successor in
interest, and any purported assignment in violation of this provision shall be
void, and shall constitute an event of default hereunder.
This agreement will be governed by the laws of the State of
New York without giving effect to the choice of law or conflict of laws
provisions thereof.
This agreement (i) sets forth the entire understanding of the
parties with respect to the subject matter hereof; (ii) incorporates and merges
any and all previous agreements, understandings and communications, oral or
written, and (iii) may
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<PAGE>
not be modified, amended or waived except by a specific written instrument duly
executed by the party against whom such modification amendment or waiver is
sought to be enforced.
The headings of the sections of this agreement are for the
convenience of reference only and will not affect the meaning or operation of
this agreement.
In the event that any provision of this agreement will be
considered void, voidable, illegal, or invalid for any reason such provision
will be of no force and effect only to the extent that it is so declared void,
voidable, illegal, or invalid. All of the provisions of this agreement not
specifically found to be so deficient will remain in full force and effect.
Any controversy or claim arising under this agreement shall be
submitted to arbitration in New York City in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitration(s) may be entered in any court having
jurisdiction thereof, costs to be borne equally.
Please confirm that the foregoing is in accordance with your
understanding by signing and returning to us the enclosed duplicate of this
agreement.
Sincerely yours,
THE GREAT AMERICAN BACKRUB STORE, INC.
By: /S/ WILLIAM ZANKER
------------------------------------------------
William Zanker
President
Confirmation acknowledged:
HORATIO MANAGEMENT SERVICES CORP
By: /S/ HERMAN EPSTEIN
- ------------------------------------
Herman Epstein
Chairman
-4-
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Great American BackRub Store, Inc.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated February 23, 1996,
relating to the financial statements of The Great American BackRub Store, Inc.,
which is contained in that Prospectus. Our report contains an explanatory
paragraph regarding uncertainties as to the Company's ability to continue as a
going concern.
We also consent to the reference to us under the caption "Experts" and "Change
in Accountants" in the Prospectus.
By: /s/ BDO Seidman, LLP
------------------------------
BDO SEIDMAN, LLP
New York, New York
January 31, 1997
