<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15 (d) of the Security
- --- Exchange Act of 1934 For the Quarterly period ended September 30, 1998.
- --- Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the Transition Period from _____ to ________ .
Commission file number: 0-25334
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
------------------------------------------
(Exact name of Small Business Issuer as specified in the charter)
New York 13-3729043
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
4500 140th Avenue No., Suite 221, Clearwater, Florida 33762
-----------------------------------------------------------
(Address of principal executive offices)
(727) 532-4818
--------------
(Issuer's telephone number)
THE GREAT AMERICAN BACKRUB STORE, INC.
--------------------------------------
(Former name)
Check whether the issuer: (1) filed all reports required by Section 13 or 15 (d)
of the Securities Exchange Act during the past 12 months (or for such period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at November 12, 1998
----- --------------------------------
Common Stock, $.001 par value 3,788,588
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE> 2
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
------------------------------------------
Part I
FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Balance Sheet 3
Condensed Statement of Operations 4
Statement of Cash Flows 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Financial Condition and Results of Operations 10
PART II
OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities and Use of Proceeds 14
Item 5 Other Events 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
Exhibit Index 16
Page 2
<PAGE> 3
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
(formerly known as) THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
AS OF September 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Part 1: Financial Information
Item 1: Financial Statements
ASSETS
<S> <C>
Current assets
Cash $ 32,589
Other receivables, net 3,290
Prepaid expenses 25,148
Inventory 84,499
Capitalized loan costs, net of $123,367 accumulated amortization 213,325
-----------
Total current assets 358,851
-----------
Property and equipment, net
Real property 5,305,129
Furniture and fixtures 426,887
Leasehold improvements 849,649
Computer equipment 44,983
-----------
6,626,648
Less accumulated depreciation (410,214)
-----------
6,216,434
-----------
Other assets
Notes receivable, net 100,000
Accrued interest receivable 21,750
Lease and equipment deposits 211,443
Other assets 206,167
-----------
Total other assets 539,360
-----------
Goodwill, net of $266,424 accumulated amortization 1,123,624
-----------
Total assets $ 8,238,269
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,656,508
Accrued expenses 1,006,857
Accrued payroll and related expenses 95,785
Bridge notes 262,667
Note payable - related party, net 732,645
Deferred revenue 138,519
-----------
Total current liabilities 3,892,981
-----------
Deferred rent 215,007
-----------
Commitments and contingencies --
Stockholders' equity
Series A convertible preferred stock, $0.001 par
value 15,000,000 shares authorized, none issued --
Common stock, par value $0.001, 25,000,000
shares authorized, 3,788,588 shares issued and
outstanding 3,788
Common stock to be issued, 1,764,979 shares, par
value $0.001 1,765
Additional paid-in capital 7,076,018
Additional paid-in on common stock to be issued 736,074
Accumulated deficit (3,595,114)
-----------
4,222,531
Less subscriptions receivable (83,250)
-----------
4,139,281
-----------
Total liabilities and stockholders' equity $ 8,247,269
===========
</TABLE>
See accompanying notes to financial statements.
page 3
<PAGE> 4
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
(formerly known as)
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30,
1998 1997 1998 1997
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Services $ 91,214 $ -- $ 1,054,476 $ --
Products 15,537 -- 135,232 --
Royalties, franchise fees and other 28,773 -- 55,517 --
----------- --------- ----------- ---------
Total revenues 135,524 -- 1,245,225 --
----------- --------- ----------- ---------
Operating expenses
Salaries and wages 164,807 -- 922,504 --
Costs of products sold 4,297 -- 80,061 --
Rental expense 197,579 -- 634,066 --
Advertising and promotion 69,078 -- 201,745 --
General and administrative 345,159 -- 1,198,362 --
Consulting fees -- -- -- 7,344
Depreciation 24,406 -- 107,400 --
Amortization of goodwill 69,502 -- 208,506 --
Management fees-related party -- 82,000 -- 246,000
----------- --------- ----------- ---------
Total operating expenses 874,828 82,000 3,352,644 253,344
----------- --------- ----------- ---------
Net loss from operations (739,304) (82,000) (2,107,419) (253,344)
----------- --------- ----------- ---------
Other income (expense)
Interest income 1,249 1,250 3,762 3,750
Interest expense (126,946) -- (197,346) --
----------- --------- ----------- ---------
Net loss $ (865,001) $ (80,750) $(2,301,003) $(249,594)
=========== ========= =========== =========
Weighted average number of shares
outstanding during the period 3,788,589 604,214 3,788,589 603,561
=========== ========= =========== =========
Net loss per common share and equivalents $ (0.23) $ (0.13) $ (0.61) $ (0.41)
=========== ========= =========== =========
</TABLE>
See accompanying notes to financial statements.
Page 4
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INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
(formerly known as)
THE GREAT AMERICAN BACKRUB STORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,301,003) $(249,594)
Adjustments to reconcile net loss to net
cash (used in) operating activities
Amortization of goodwill 208,506 --
Depreciation and other amortization 230,767 --
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable - net -- --
Accrued interest receivable (12,750) (3,750)
Inventory, net 62,390 --
Prepaid expenses and other assets -- --
Increase (decrease) in:
Accounts payable and accrued expenses 1,242,711 7,344
Deferred revenues and rent (11,755) --
Management fees payable -- 246,000
----------- ---------
Net cash used in operating activities (581,134) --
----------- ---------
Cash flows from financing activities
Net cash proceeds from the issuance of notes
payable 482,645 --
----------- ---------
Net cash provided by financing activities 482,645 --
----------- ---------
Net increase in cash and cash equivalents (98,489) --
Cash and cash equivalents, beginning of period 131,078 --
----------- ---------
Cash and cash equivalents, end of period $ 32,589 $ --
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest -- --
Income taxes -- --
</TABLE>
See accompanying notes to financial statements.
page 5
<PAGE> 6
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Description of Business
International Diversified Industries, Inc. and subsidiaries, formerly
known as The Great American BackRub Store, Inc., (the "Company") is an
owner\operator and franchisor of retail stores which provide seated, fully
clothed back rubs and sell back and stress relief related products. The Company,
incorporated in 1992, began operations in 1993. As of September 30, 1998, the
Company has two retail stores in operation and three franchise store locations.
As discussed in Note 2 the Company acquired one hundred percent of the
outstanding common stock of CARIBSUN, CORP. ("CARIBSUN") from Ascot
International Corp. ("Ascot"), a previously unrelated company. CARIBSUN, formed
in 1995 under the laws of the State of Delaware, holds title to approximately 86
acres of real property in the Parish of Saint Peter, Antigua through a
wholly-owned subsidiary. On October 1, 1997 the real property was appraised by
an independent appraiser and their report dated October 14, 1997 opines that the
fair market value of the real property was $10,000,000. The Company intends to
develop the real property.
Change in Management
As a result of the reverse acquisition discussed in Note 2, the Company
underwent a change in management effective October 16, 1997. Management of the
Company consists essentially of the officers and directors of Ascot.
Condensed Financial Statements
The condensed balance sheet as of September 30, 1998 and the condensed
statements of operations and cash flows for the nine month period ended
September 30, 1998 and 1997 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, changes in cash flows at September 30, 1998 and 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, 1997.
The results of operations for the nine month period ending September
30, 1998 and 1997 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 less than three months.
Per Share Data
Net loss per common share for the nine months ended September 30, 1998
and 1997 is computed by dividing composed by the weighted average common shares
outstanding during the year as defined by Financial Accounting Standards, No.
128, "Earnings per Share". The assumed exercised of common share equivalents was
not utilized since the effect was anti-dilutive.
Note 2 - Reverse Acquisition
On September 30, 1997, as amended on October 16, 1997, the Company
entered into a Securities Exchange Agreement (the "Agreement") to acquire 100%
of the issued and outstanding common stock of CARIBSUN from Ascot in exchange
for 17,097,416 shares of common stock of the Company. CARIBSUN owns
approximately 86 acres of land located in Parish of Saint Peter, Antigua.
page 6
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INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 2 - Reverse Acquisition, continued:
On October 16, 1997 the acquisition was consummated and the Company
initially issued 11,000,000 shares of its common stock to Ascot in exchange for
100% of the issued and outstanding common stock of CARIBSUN. Due to a deficiency
on the Company's authorized shares of common stock on October 16, 1997,
6,097,416 shares of common stock of the Company remain to be issued to Ascot.
Upon shareholder approval and completion of an amendment to the Company's
certificate of incorporation increasing the authorized shares, the remaining
6,097,416 common shares will be issued. These unissued shares are presented in
the balance sheet as Common Stock to be issued and Additional paid-in capital on
common stock to be issued. See note 7 Subsequent Events, for information
concerning the adjustment of the number of shares issuable to Ascot as a result
of the change of domicile merger which took place on August 3, 1998.
The CARIBSUN acquisition and issuance of the Company's Common Stock to
Ascot resulted in Ascot obtaining approximately an 80% voting interest in the
Company. Generally Accepted Accounting Principles require that the company whose
shareholders retain the majority interest in the voting stock of the combined
business be treated as the acquirer for accounting purposes. As a result, the
acquisition is accounted for as a reverse acquisition for financial reporting
purposes and CARIBSUN is deemed to have acquired the Company. Accordingly, the
Company's financial statements at the acquisition date and at September 30, 1998
are presented as follows: (1) the balance sheet consists of CARIBSUN's net
assets as historical cost, and the Company's net assets at fair market value in
the date of acquisition (acquired cost); and (2) the statement of operations
includes CARIBSUN's operations for the period presented and Company's operations
from the date of acquisition, October 16, 1997.
The purchase price consists of the 17,097,416 common shares issued to
Ascot multiplied by the average fair market value of the Company's common stock
as measured just before and after the agreement and announcement of the
acquisition, as adjusted for management's estimate of the fair market value
dilution effect of issuing those shares, plus acquisition costs. The entire
difference between the purchase prices and net assets of the Company acquired
was allocated to goodwill.
The following unaudited pro-forma information presents a summary of
consolidated results of operations of the Company as if the reverse acquisition
had occurred on January 1, 1996. These pro-forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
the date indicated, or which may result in the future. The pro-forma results
follow:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Revenues $ 1,245,225 $ 2,845,956
Operating expenses 3,352,644 4,496,921
----------- -----------
Net loss from operations (2,107,419) (1,650,965)
Other income (expense) (193,584) (219,177)
----------- -----------
Net Loss $(2,301,003) $(1,870,142)
=========== ===========
Weighted average number of shares outstanding during the period 5,271,277 5,233,586
=========== ===========
Net loss per common share $ (0.44) $ (0.36)
=========== ===========
</TABLE>
Note 3 - Options, Stock Plans and Management Compensation
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 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, 1997, options to purchase
8,500 shares of Common Stock were outstanding under the plan.
page 7
<PAGE> 8
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 3 - Options, Stock Plans and Management Compensation, continued:
In December 1994, the Company granted ten year options to purchase
360,000 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 became 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 have been exercised. In July 1995, the
Company granted options to purchase 10,000 shares of Common Stock to 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 became exercisable in July 1996
and options to purchase an additional 5,000 shares vest and became exercisable
in July 1997. All options expire on the day before the five 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
25,000 and 40,000 shares of Common Stock to consultants to the Company. Such
options are exercisable at a price of $4.00 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 have been
exercised.
In 1996, the Company granted three year options to the Company's
underwriter to purchase 125,000 shares of common stock. Such options are
currently exercisable at a price of $6.00 per share and expires on February
2000.
Note 4 - Leases
The Company leases retail stores and office equipment. All of the
retail stores are leased under noncancelable agreements which expire at various
dates through the year of 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 $197,579 and $261,908 for the three month
periods ended September 30, 1998 and 1997, respectively.
Note 5 - Financial advisory and consulting agreements
In February 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 was 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, all of which have been exercised, 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 of all have been exercised.
Such warrants resulted in a non-cash charge of $43,750 for the six
month period ended June 30, 1997.
Note 6 - Preferred Stock Offering
On February 5, 1997, the Company filed a registration statement to
offer 270,000 shares of Series B Convertible Preferred Stock for approximately
$2,700,000, which if successful, after commissions and fees would have provided
the Company, with net proceeds of approximately $2,000,000. This offering was
canceled due to regulatory problems with the Company's former investment banker.
page 8
<PAGE> 9
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 7 - Common Stock
A Special Meeting of Shareholders held on June 22, 1998, the
shareholders of The Great American BackRub Store, Inc. (the "Company") approved
a proposal to reincorporate under the laws of the State of Delaware through the
merger of the Company with a Delaware subsidiary specifically formed for this
purpose (the "Merger").
Pursuant to the Merger, the name of the Company was changed to
"International Diversified Industries, Inc." ("IDII") and on August 3, 1998 (the
"Record Date"), each share of the Company's outstanding common stock, par value
$0.001 per share (the "Old Common Stock") was automatically converted into
one-fourth of a share of common stock, par value $0.001 per share (the "New
Common Stock"). As a result, holders of Old Common Stock became entitled to
receive one share of New Common Stock for each four shares of Old Common Stock
held by them on the Record Date. As a further result of the merger the number of
shares remaining to be issued to Ascot will be reduced to 1,524,354 shares of
New Common Stock.
No fractional shares of New Common Stock are being issued by the
Company in connection with the Merger. Instead, holders of Old Common Stock who
would otherwise be entitled to receive a fractional share of New Common Stock
will receive from the Company a cash payment from their fractional interest on
the basis of a price (after giving effect to the Merger) of $0.28 per New Share.
As a result of the Merger, the Number of outstanding shares of Common
Stock will be reduced to a number that will be approximately equal to the number
of shares of Old Common Stock outstanding immediately prior to the Merger
divided by four. With exception of such change, the rights and preferences of
the New Common Stock will be the same as those of the Old Common Stock.
Also the number of authorized shares of common stock for IDII was
increased from 20,000,000 to 25,000,000.
On July 10, 1998 the Board of Directors of the Company approved the
issuance to the a related party, Oregon Properties, Inc. and Slark Ventures,
Inc. d/b/a Barclay Group (the Barclay Group), 962,500 shares New Common Stock.
The issuance was to further compensate the related party for loans made to the
Company in the amount of $750,000. Since November 1997 the Barclay Group has
loaned the Company $731,635 through September 30, 1998. Since September 30, 1998
an additional $18,365 has been loaned to the Company by the Barclay Group. The
shares were accounted for as a loan fee to be amortized over the one year term
of the loans. The loan fee will be recorded in the third quarter of 1998 in the
amount of $269,500.
Note 8 - Subsequent Events
The Company has been in discussions with a private investor for the
possibility of placing preferred stock in the amount of $8,000,000. The
potential investor is a corporation, trust, estate benefit plan, partnership, or
other entity, which comes within a category of "accredited investor" as that
term is defined in Rule 501(a) of Regulation D under the Securities Exchange Act
of 1934. However, there can be no assurances that such financing can be obtained
upon reasonable terms or that it will be available in the near future.
page 9
<PAGE> 10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with International Diversified Industries, Inc. and subsidiaries', (the Company)
unaudited financial statements and the related notes thereto included elsewhere
herein.
General
As described in Note 2 - Reverse Acquisition of Notes to Unaudited
Financial Statements, the Company acquired CARIBSUN on October 16, 1997. The
transaction was treated as a reverse acquisition for accounting purposes.
Accordingly, although the Company acquired CARIBSUN, CARIBSUN was treated as the
acquiring person for accounting purposes, and the Consolidated Statements of
Operations and Cash Flows reflect only the activity of CARIBSUN from January 1,
1997 through October 16, 1997. The Consolidated Statements of Operations and
Cash Flows for the nine months ended September 30, 1998 includes the combined
activity of CARIBSUN and the Company. As a result, even though the Company's
revenues continue to be derived primarily from the services of seated, fully
clothed back rubs and the sale of back-related products. The information
presented in the Company's financial statements makes it appear as though the
Company was essentially inactive until the acquisition. The Company began
operations in August 1993, and opened its first store for business in October
1993. The Company currently owns and operates two retail stores in New York
City. In addition, the Company has a franchisee operating at the Roosevelt Field
Mall on Long Island. In the quarter ended June 30, 1998 the franchise store
located at the Exchange Towers in Toronto, Canada opened for business. Also the
franchise store located at the Plaza of Americas in Dallas, Texas opened for
business on July 28, 1998. The Company has also entered into a franchise
agreement for a store in the Los Angeles California area.
The Company plans to focus the Company's resources on franchise sales
in the future. The focus should allow the Company to shift its revenue mix away
from services of seated, fully clothed back rubs and the sale of back rub
related products to franchise fees and 6% royalty fees on the gross revenues of
franchisees. While there are no assurances that the Company can achieve the
revenue mix change it is seeking, management believes with the proper marketing
and franchise support the revenue mix change can be obtained.
The development of the Antiguan property is still in the preliminary
phases. The impact on the Company's current operations, except to the extent
that financing costs and general and administrative expenses are incurred as the
property is prepared for financing and development. Once the feasibility study
is completed and the decision is made as to the type of development best suited
to the property, financing for the project will be sought. There can be no
assurances the financing for the project can be secured and the development
begun.
Results of Operations
Three Month Period Ended September 30, 1998 Compared to Three Month Period Ended
September 30, 1997
After giving affect of the reverse acquisition for the three month
period ended September 30, 1998, revenue from, services, products and
franchising operations increased to $135,524 compared to $0 for the comparable
period in the prior year. The appearance of an increase was due solely to the
accounting for the reverse acquisition that took place on October 16, 1997.
CARIBSUN had no revenue in 1997 and only revenues of the Company were included
for the period from October 17, 1997 forward. A clearer picture of changes in
revenue is contained in the pro-forma information contained in Note 2 of Notes
to Unaudited Financial Statements of the Company. The following is pro-forma
information concerning results of operations as if the acquisition occurred on
January 1, 1996. For the three month period the pro-forma revenue, of
International Diversified Industries, Inc. and subsidiaries, from services,
products and franchising operations (the Company's historical business)
decreased to $135,524 compared to $808,061 for the comparable period in the
prior year. The net decrease of $672,537 (83.2%) was primarily attributable to
the number of stores open in 1998 were less than the number of stores opened for
the comparable period in the prior year.
page 10
<PAGE> 11
Results of Operations - cont'd
Operating expenses were $874,828 for the three month period ended
September 30, 1998 as compared to $82,000 for the comparable period in the prior
year, an increase of $792,828 (967%). The increase was due to the reverse
acquisition that took place on October 16, 1997. Operating expenses on a
pro-forma basis were $874,828 for the three month period ended September 30,
1998 as compared to $1,219,940 for the comparable period in the prior year, a
decrease of $345,112 (28.3%). This decrease was primarily due to the closure of
nine stores during the year and a reduction of corporate overhead.
On a pro-forma basis, salaries and wages were $164,807 for the three
month period ended September 30, 1998 as compared to $454,613 for the comparable
period in the prior year. The decrease is primarily attributable to stores
opened in 1997 being closed in 1998. Cost of products sold, were $4,297 for
three month period ended September 30, 1998 as compared to $112,413 for the
comparable period in the prior year. The decrease can be directly attributable
to the reduction of working capital the Company experienced in 1998 and less
stores being opened in 1998. The Company's stores carried very limited
quantities of product in 1998. Rental expense was $197,579 for the three month
period ended September 30, 1998 as compared to $261,908 for the comparable
period in the prior year. The decrease is primarily attributable to stores
opened in 1997 being closed in 1998. Advertising and promotion was $69,078 for
the three month period ended September 30, 1998 as compared to $11,273 for the
comparable period in the prior year. The decrease can be directly attributable
to the work performed by the marketing company retained by the Company. The
marketing company is responsible for the remaking of the image of The Great
American BackRub, Inc. a wholly owned subsidiary of the Company. Depreciation
was $24,406 for three month period ended September 30, 1998 as compared to
$131,030 for the comparable period in the prior year. Amortization of Goodwill
was $69,502 for three month period ended September 30, 1998 as compared to
$69,502 for the comparable period in the prior year. Goodwill is being amortized
over a five year period. Management fees were $0 for the three month period
ended September 30, 1998 as compared to $82,000 for the comparable period in the
prior year. The management fees were accrued for a full three months in 1997 and
none for the three months in 1998. The management fees were charged by the
former parent of CARIBSUN. General and administrative was $345,159 for three
month period ended September 30, 1998 as compared to $305,625 for the comparable
period in the prior year. The decrease was due to charges taken in 1998 relating
to the closing of corporate owned stores. Employees at the corporate offices
were reduced in 1998 as were related corporate expenses.
As a result of the decrease revenue, the pro-forma net loss for the
three month period ended September 30, 1998 increased to $865,001 compared to
$488,317 for the comparable period in the prior year. No provision for income
taxes was required during either period since the Company operated at a loss.
While general and administrative expenses are expected to increase due
to the need for additional management and administrative support for the
Company's expanding franchise marketing, sales and support, these expenses as a
percentage of total revenue are expected to decline as total revenue increases.
Other expense items, such as advertising and promotion, as they are related to
franchise marketing and franchise support, are expected to increase as the
franchise base increases. Advertising and promotion, salaries and wages, costs
of products, however, as they are related to retail operations themselves and
their relative percentage of total revenue are likely to decline over the next
year.
As part of the Company's plan to focus on franchise sales as opposed to
the operating of retail stores, management closed two of the four company owned
stores during the quarter ending September 30, 1998. As a result, revenues and
expenses related to the operation of retail stores will be significantly lower
in future periods. Revenue from franchise fees and training of franchisees is
expected to partially offset the loss of revenue from retail operations, but may
not have a significant effect until the first quarter of 1999.
page 11
<PAGE> 12
Results of Operations - cont'd
Nine Month Period Ended September 30, 1998 Compared to Nine Month Period Ended
September 30, 1997
After giving affect of the reverse acquisition for the nine month period ended
September 30, 1998, revenue from, services, products and franchising operations
increased to $1,245,225 compared to $0 for the comparable period in the prior
year. The appearance of an increase was due solely to the accounting for the
reverse acquisition that took place on October 16, 1997. CARIBSUN had no revenue
in 1997 and only revenues of the Company were included for the period from
October 17, 1997 forward. A clearer picture of changes in revenue is contained
in the pro-forma information contained in Note 2 of Notes to Unaudited Financial
Statements of the Company. The following is pro-forma information concerning
results of operations as if the acquisition occurred on January 1, 1996. For the
nine month period the pro-forma revenue, of International Diversified
Industries, Inc. and subsidiaries, from services, products and franchising
operations (the Company's historical business) decreased to $1,245,225 compared
to $2,845,956 for the comparable period in the prior year. The net decrease of
$1,600,731 (56.3%) was primarily attributable to the number of stores open in
1998 were less than the number of stores opened for the comparable period in the
prior year.
Operating expenses were $3,352,644 for the nine month period ended
September 30, 1998 as compared to $253,344 for the comparable period in the
prior year, an increase of $3,099,300 (1,323.4%). The increase was due to the
reverse acquisition that took place on October 16, 1997. Operating expenses on a
pro-forma basis were $3,352,644 for the nine month period ended September 30,
1998 as compared to $4,496,921 for the comparable period in the prior year, a
decrease of $1,144,277 (25.5%). This decrease was primarily due to the closure
of corporate owned stores during the year and a reduction of corporate overhead.
On a pro-forma basis, salaries and wages were $922,504 for the nine
month period ended September 30, 1998 as compared to $1,413,777 for the
comparable period in the prior year. Cost of products sold, were $80,061 for
nine month period ended September 30, 1998 as compared to $406,576 for the
comparable period in the prior year. The decrease can be directly attributable
to the reduction of working capital the Company experienced and closure of
corporate owned stores in 1998. The Company's stores carried very limited
quantities of product in 1998. Rental expense was $634,066 for the nine month
period ended September 30, 1998 as compared to $825,742 for the comparable
period in the prior year. The decrease is primarily attributable to stores
opened in 1997 being closed during 1998. Advertising and promotion was $201,745
for the nine month period ended September 30, 1998 as compared to $58,437 for
the comparable period in the prior year. The increase can be directly attributed
to the work performed by the marketing company retained by the Company. The
marketing firm is responsible for remaking the image of The Great American
BackRub, Inc. a wholly owned subsidiary of the Company. Non-cash financial
advisory fees was $0 for nine month period ended September 30, 1998 as compared
to $43,750 for the comparable period in the prior year. The decrease was
primarily due to the non-cash compensation issued in 1997 to the underwriters of
the canceled preferred stock offering that was attempted in early 1997.
Depreciation was $107,400 for nine month period ended September 30, 1998 as
compared to $139,748 for the comparable period in the prior year. Amortization
of Goodwill was $208,506 for nine month period ended September 30, 1998 as
compared to $208,506 for the comparable period in the prior year. Goodwill is
being amortized over a five year period. Management fees were $0 for the nine
month period ended September 30, 1998 as compared to $246,000 for the comparable
period in the prior year. The management fees were accrued for a full nine
months in 1997 and none for the nine months in 1998. The management fees were
charged by the former parent of CARIBSUN. General and administrative was
$1,198,362 for nine month period ended September 30, 1998 as compared to
$1,355,541 for the comparable period in the prior year. The decrease was due to
the reduced working capital the Company experienced in 1998. Employees at the
corporate offices were reduced in 1998 as were related corporate expenses.
As a resulted of the decease revenues and charges taken in 1998
relating to store closings, the pro-forma net loss for the nine month period
ended September 30, 1998 increased to $2,301,003 compared to $1,871,142 for the
comparable period in the prior year. No provision for income taxes was required
during either period since the Company operated at a loss.
page 12
<PAGE> 13
Results of Operations - cont'd
Liquidity and Capital Resources
The Company had a working capital deficit as of September 30, 1998 of
($3,534,130), after giving effect to the reverse acquisition compared to a
working capital of ($774,918) as of September 30, 1997 prior to the reverse
acquisition. The decrease is primarily due to amounts spent on operations in the
development of a corporate infrastructure in anticipation of the Company's
former growth strategy of developing corporate owned stores.
Inasmuch as the Company continues to have a high level of operating
expenses and will be required to make certain up-front expenditures in
connection with its proposed franchise expansion, the Company anticipates that
losses will continue for at least the next nine months and until such time, if
ever, the Company is able to generate significant revenues or achieve profitable
operations. As a result, in their report on the Company's Financial Statements
as of December 31, 1997, 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.
On February 5, 1997, the Company filed a registration statement to
offer 270,000 shares of Series B Convertible Preferred Stock for approximately
$2,700,000, which, if successful, after commissions and fees, would have
provided the Company with net proceeds of approximately $2,000,000. The
principal underwriter ceased doing business before the offering was completed
and no securities were sold. Also in November 1997, a related party, Oregon
Properties, Inc. and Slark Ventures, Inc. d/b/a Barclay Group, loaned the
Company $250,000, and in the first nine months of 1998, Barclay Group funded an
additional $481,635. Since June 30, 1998 an additional $18,365 has been loaned
to the Company by Barclay Group.
In accordance with current management's plans, the Company has been in
discussions with a private investor in the possibility placing preferred stock
in the amount of $8,000,000. The potential investor is a corporation, trust,
estate benefit plan, partnership, or other entity, which comes within a category
of "accredited investor" as that term is defined in Rule 501(a) of Regulation D
under the Securities Exchange Act of 1934. However, there can be no assurances
that such financing can be obtained upon reasonable terms or that it will be
available in the near future or that parties relating to the Company will
continue to provide necessary financial accommodation. While management believes
that such financing will provide sufficient capital to fund the Company's growth
and pay the bridge notes, if it is not available, the Company will have to
substantially reduce its operations.
Forward Looking Statements
This report contains certain forward-looking statements that are based
on current expectations. In light of the important factors that can materially
affect results, including those set forth above and elsewhere in this report,
the inclusion of forward-looking information herein should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company may encounter competitive,
financial and business challenges making it more difficult than expected to
continue to develop its stores, franchises and real estate projects; necessary
financing may not be available or may only be available upon onerous terms;
competitive conditions within the industry may change adversely; the Company may
be unable to retain existing key management personnel; the Company's forecasts
may not accurately anticipate market demand; and there may be other material
adverse changes in the Company's operations or business. Certain important
factors affecting the forward-looking statements made herein include, but are
not limited to (i) accurately forecasting capital expenditures; and (ii)
obtaining new sources of external financing. Assumptions relating to budgeting,
marketing, and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revision based on actual
experience and business developments, the impact of which may cause the Company
to alter its capital expenditures or other budgets, which may in turn affect the
Company's financial position and results of operations.
page 13
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was a defendant in a landlord tenant action entitled
Fashion Mall Partners, L.P. v. The Great American BackRub Store, Inc. (Civil
Court of White Plains, State of New York) in which the landlord was seeking past
due rent of approximately $300,000 and possession of the premises. Fashion Mall
Partners, L.P. has received a judgment in the amount of approximately $300,000.
The Company has entered in negotiations for settlement of the judgment in an
amount significantly less than the judgment amount. The Company believes a
settlement will be reached shortly, however there can be no assurances that a
settlement will be reached.
The Company is also party to several claims of vendors which are not
expected to have a material effect on the Company's operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 3, 1998 The Company effected a change in domicile merger. As
a result of the merger each share of Old Common Stock is reduced to 1/4 of a
share of New Common Stock. See Item 5 Other Events.
ITEM 5. OTHER EVENTS
A Special Meeting of Shareholders held on June 22, 1998, the
shareholders of The Great American BackRub Store, Inc. (the "Company") approved
a proposal to reincorporate under the laws of the State of Delaware through the
merger of the Company with a Delaware subsidiary specifically formed for this
purpose (the "Merger").
Pursuant to the Merger, the name of the Company was changed to
"International Diversified Industries, Inc." ("IDII") and on August 3, 1998 (the
"Record Date"), each share of the Company's outstanding common stock, par value
$0.001 per share (the "Old Common Stock") was automatically converted into
one-fourth of a share of common stock, par value $0.001 per share (the "New
Common Stock"). As a result, holders of Old Common Stock became entitled to
receive one share of New Common Stock for each four shares of Old Common Stock
held by them on the Record Date. As a further result of the merger the number of
shares remaining to be issued to Ascot will be reduced to 1,524,354 shares of
New Common Stock.
No fractional shares of New Common Stock are being issued by the
Company in connection with the Merger. Instead , holders of Old Common Stock who
would otherwise be entitled to receive a fractional share of New Common Stock
will receive from the Company a cash payment from their fractional interest on
the basis of a price (after giving effect to the Merger) of $0.28 per New Share.
As a result of the Merger, the Number of outstanding shares of Common
Stock will be reduced to a number that will be approximately equal to the number
of shares of Old Common Stock outstanding immediately prior to the Merger
divided by four. With exception of such change, the rights and preferences of
the New Common Stock will be the same as those of the Old Common Stock.
Also the number of authorized shares of common stock for IDII was
increased from 20,000,000 to 25,000,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11: Statement re: Computation of per share
earnings
Exhibit 27: Financial Data Schedule (for SEC use
only)
(b) Reports on Form 8-K
Dated January 30, 1998
page 14
<PAGE> 15
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
------------------------------------------
Registrant
Date: August 16, 1998 David L. West
--------------------------------------------
David L. West, Chief Financial Officer (duly
authorized officer and principal financial
officer and principal accounting officer)
Treasurer and Secretary
page 15
<PAGE> 16
EXHIBIT INDEX
-------------
Exhibits Description
- -------- -----------
11 Statement re: Computation of per share earnings
27 Financial Data Schedule (for SEC use only)
page 16
<PAGE> 1
EXHIBIT 11
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- ---------------------------
1998 1997 1998 1997
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Balance, January 1, 3,788,589 598,339 3,788,589 598,339
Shares issued upon exercise of
options and warrants - 5,875 - 5,222
--------- ------- --------- -------
Common stock and equivalents 3,788,589 604,214 3,788,589 603,561
========= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
Three months Nine months
Weighting factor Weighting factor
(in months) (in months)
-------------------------- ------------------------
1998 1997 1998 1997
----- ----- ----- ----
<S> <C> <C> <C> <C>
Balance, January 1, 3 3 9 9
Shares issued upon exercise of
options and warrants N/A See Below N/A See Below
</TABLE>
Computation of weighted average number of shares issued upon exercise of options
and warrants:
<TABLE>
<CAPTION>
Period ended September 30, Three months Nine months
weighting factor weighting factor
Shares (in days) (in days)
------ ---------------- ----------------
Date Issued 1997 1997
---- ------ ---------------- ----------------
<S> <C> <C> <C>
01/31/97 5,875 5,875 5,222
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 32,589
<SECURITIES> 0
<RECEIVABLES> 130,196
<ALLOWANCES> 103,310
<INVENTORY> 87,802
<CURRENT-ASSETS> 358,851
<PP&E> 6,626,648
<DEPRECIATION> 410,214
<TOTAL-ASSETS> 8,238,269
<CURRENT-LIABILITIES> 3,892,981
<BONDS> 0
0
0
<COMMON> 5,553
<OTHER-SE> 4,207,978
<TOTAL-LIABILITY-AND-EQUITY> 8,238,269
<SALES> 1,245,225
<TOTAL-REVENUES> 1,245,225
<CGS> 80,061
<TOTAL-COSTS> 3,352,644
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (193,584)
<INCOME-PRETAX> (2,301,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,301,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,301,003)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
