SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-KSB/A
(MARK ONE)
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT [X]
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE [ ]
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ____________
Commission file number 0-25334
The Great American BackRub Store, Inc.
(Name of small business issuer in its charter)
New York 13-3729043
(State of jurisdiction of (IRS employer
incorporation or organization) identification no.)
4500 140th Avenue North Suite 221, Clearwater, Florida 33762
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number (813) 532-4818
Securities registered under Section 12(g) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, $.001 par value Nasdaq Electronic Bulletin Board
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] yes [ ] no
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendments to
this Form 10-KSB. [ ]
The registrant's revenue for the year ended December 31, 1997 was $749,264
As of April 13, 1998, the aggregate value of the registrant's voting stock held
by non-affiliates was $ 590,047 (computed by multiplying the last reported sale
price on April 13, 1998 by the number of shares of common stock held by persons
other than officers, directors or by record holders of 10% or more of the
registrant's outstanding common stock. This characterization of officers,
directors and 10% or more beneficial owners as affiliates is for purposes of
computation only and is not an admission for any purposes that such person are
affiliates of the registrant).
The number of shares of Common Stock of the issuer outstanding as of March 31,
1998 is 14,932,354
Transition Small Business Disclosure Format (check one): Yes __ No _X_
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Certain matters discussed herein may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
as such may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in which
the Company operates, projections of future performance, perceived opportunities
in the market and statements regarding the Company's mission and vision. The
Company's actual results, performance, or achievements may differ significantly
from the results, performances or achievements expressed or implied on such
forward-looking statements. For discussion of the factors that might cause such
a difference, see "Item 6. Management's Discussion and Analysis or Plan of
Operations."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
The Company is engaged in the creation of a North American franchise chain
of stores under the name "The Great American BackRub, Inc." 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 and franchise
stores will also offer back rub services off-site, to corporate offices,
convention centers and tourist attractions. The Company currently owns and
operates eight retail stores in New York City, one in the Westchester Mall in
White Plains, New York, and one at the Woodfield Mall in Chicago metropolitan
area. The Company has a franchise operating at the Roosevelt Field Mall on Long
Island, New York. In addition, the Company recently entered into franchise
agreements for two locations, one at the Exchange Tower in Toronto, Canada, and
the other at Plaza of America in Dallas, Texas.
Cash flow from the Company's current corporate owned stores and the two
franchises are not sufficient to cover the Company's corporate overhead.
Therefore the Company's growth strategy is to market franchises throughout the
United States and Canada. During 1997 the Company had approximately 1,400
inquiries from individuals which were interested in considering purchasing a
franchise, but which were not pursued because of former management focus on
Company owned locations. When new management took over the Company on October
16, 1997, (See "Significant Acquisition"), the franchise offering circular was
updated to reflect the changes in the Company. The updating process was
completed in the month of January 1998. The Company then mailed a franchise
question and answer booklet which briefly described a "Great American BackRub"
franchise to all of the parties that had made franchise inquires. If the
individual was still interested the Company then sent to the individual a
confidential questionnaire. The questionnaire is to determine if the individual
is financially and personally qualified to own a franchise. After the
questionnaire is returned and the individual is deemed to be qualified an
offering circular is sent to the individual. There is a ten day cooling off
period where no contact can take place between the Company and the individual.
The Company is still pursuing the process described above, no franchise sales
have resulted and there can be no assurances that sales will result from the
process. The Company will also use traditional marketing techniques in the sale
of franchises to potential franchisees.
The Company intends to expand the franchise network on a regional basis.
The Company believes this approach will best utilize the Company's resources
both financially and personnel wise. The Company will review the responses from
the inquires of interested parties and determine which regions have the most
interest in them. The Company will then concentrate its resources in those
regions to create a franchise base that will allow the Company to create a
viable franchise network in that region. However there is no assurance that such
network can be built in regions.
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SIGNIFICANT ACQUISITION
On September 30, 1997 the Company entered into a Securities Exchange
Agreement (the "Securities Exchange Agreement"), to acquire (the "Acquisition")
100% of the issued and outstanding common stock of CARIBSUN, CORP. ("CARIBSUN")
from Ascot International Corp. ("Ascot") On October 16, 1997 the Acquisition
closed pursuant to the Securities Exchange Agreement and the Company initially
issued 11,000,000 shares of its Common Stock to Ascot in exchange for all of the
outstanding shares of CARIBSUN's Common Stock. Under the terms of the Securities
Exchange Agreement, the Company is obligated to issue an additional 5,930,752
shares of Common Stock to Ascot upon the approval of an amendment to the
Company's Certificate of Incorporation increasing its authorized common stock.
The Company's Board of Directors has adopted a plan to either reincorporate the
Company as a Delaware corporation or reverse split the outstanding common stock,
which is subject to shareholders approval at a special meeting of shareholders
scheduled for spring 1998. As a result of either the reincorporation into
Delaware or the one-for-four reverse stock split the Company will be obligated
to issue 1,482,688 shares to Ascot following shareholder approval. CARIBSUN,
through a wholly owned subsidiary Coconut Hall Resorts, Ltd. owns approximately
86 acres of vacant land in the island of Antigua for which if has obtained
government concessions and approvals to construct a hotel, condominiums, and
casino project. The development of the site will require substantial financing.
The Securities Exchange Agreement was attached to the Company's Form 8-K
dated September 30, 1997 as an exhibit which was filed via EDGAR with the
Securities and Exchange Commission. Further in formation concerning the
acquisition of CARIBSUN from Ascot can be found in the Company's Form 8-K Report
dated October 16, 1997. The description in this Information Statement of the
Securities Exchange Agreement and the respective exhibits and schedules thereto
and is not, and does not purport to be, complete.
As a result shares issued to Ascot at the Closing of the acquisition, Ascot
owns approximately 73% of outstanding Common Stock and all of the management of
the Company now consists of officers and directors (or individuals nominated by
such persons) of Ascot.
The Acquisition was approved by the Company's Board of Directors as it was
constituted prior to the Closing consisting of the following persons
(collectively referred to as "Prior Management"):
Name Position
William Zanker President, Chairman of the Board
Terrance C. Murray Chief Executive Officer, Director
Stephen Seligman Director
Andrew L. Hyams Director
Donald R. Fleischer Director
Prior Management resigned effective as of October 16, 1997 (except Mr.
Seligman, whose resignation was effective ten days following the mailing of a
statement to shareholders pursuant to Rule 14F-1 under the Securities Exchange
Act of 1934, as amended), and the following individuals (collectively referred
to as "New Management") were nominated to assume the position set forth next to
their names until the next annual meeting of shareholders:
Name Age Position
David S. Coia 42 Chairman of the Board
David Coia 65 President, Chief Executive Officer, and
Chief Operating Officer, Director
David L. West 39 Chief Financial Officer, Treasurer, Secretary
and Director
Kevin P. Stone 39 Director
Waylon E. McMullen 51 Director
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
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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 manufactures.
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.
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, Inc. is sensitive to
and addresses all these concerns. The pricing structure ($16.95, $28.95, $38.95,
and $49.95, respectively for 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
indicated 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 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 ant test the products on display. The
Company therefore believes that the combination of boutique retailer concept
with back rub services make The Great American BackRub Store an 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 stress reduction products in each of
its stores and franchises, including oils, bath salts, back supports and
electronic and mechanical stress reduction devices. Also the offering of back
rub services off-site, to corporate offices, corporate events, convention
centers and tourist attractions is a key part of the Company's growth strategy.
The focus of the Company's service business is a 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
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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 200 to 400 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 and franchise locations will typically be
staffed with a manager, an assistant manager, and between eight and twelve
part-time therapists, depending upon the size and volume of service of the
store.
The back rub services are provided by licensed or certified massage
therapists or licensed health care provider who, as employees, are paid a fixed
hourly wage plus commission. All therapists are required to wear the Company's
uniform. 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' accounting department. When a customer enters a
store, the receptionist greets the customer, answers any questions the customer
may have, and then prepares a prenumbered "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 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
Supercuts, Inc. retail 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 accounting office and is
available for management's review and use the following day.
INTENDED EXPANSION
Although no assurances can be given, the Company plans to open a minimum of
50 Franchised stores during the next two years. Management believes an important
element of "marketing" is the franchise's selection of prime locations with
heavy traffic patterns. During the initial expansion of franchise stores the
sites will be generally limited to high traffic locations such as malls, mini
malls, strip centers, busy specialty locations (e.g. airports, casinos and
convention centers) and locations that are in close proximity to business and
office centers.
The Company, in its franchise offering circular, estimates that the initial
investment required by a franchisee, including the initial franchise fee, is
approximately $118,000 to $188,500, depending upon a number of variables,
including leasehold related costs and improvements, store size, inventory,
equipment, training fees, staffing, initial advertising and working capital.
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.
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Since the only operating costs associated with this service are labor and
transportation the profit margin 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 promoted the gift
certificates for Valentine's Day. As a result of the success of this program,
the Company has expanded such promotions to include other holidays.
STORE DEVELOPMENT
The following table sets forth the number of stores opened, closed and
existing in each of the last three fiscal years:
1995 1996 1997
---- ---- ----
Stores Open at Beginning of the Year 5 8 13
Stores Opened 3 5 0
Stores Closed 0 0 3
Stores Open at end of Year 8 13 10
FRANCHISE DEVELOPMENT
The Company anticipates that the Company's growth will be through franchise
sales. Management has developed a franchising program which is based largely on
prior management's experience with Supercuts, Inc. and current management's
experience with hotel franchising. The franchise plan call for the sale of
individual unit franchises and certain limited territorial sales, to control the
respective sites and to limit the impact of a franchisee whose operating
standards are not acceptable to management. Although mostly anticipated to be
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 is $20,000 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 limitation 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 by the Company. The franchisee is required to pay
the Company a fee, of $2,500 for the training.
The Company's first franchised store (the "Las Vegas Store") opened on July
1994 in Las Vegas, Nevada. The Company entered into a franchise agreement 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 existing
Franchisee Agreement at that time). The Franchisee also paid to the Company an
advertising and sales promotion fee which is equal to the greater of 35 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
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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 the 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 Option 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. In November 1996, the Company 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 ex-executive officers and ex-directors of the Company have an interest
in the Roosevelt Mall franchise. See Item 12 (Certain Relationships and Related
Transactions). In addition, in November 1996, the Company entered into an option
agreement (the "Franchise Option Agreement") for a franchise location in the Los
Angels, 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 revenue (as such term is
defined in the franchise agreements). 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 the optionee located a site
within said counties that was acceptable to both the Company and the optionee ,
the Company and the franchisee would have entered into a franchise agreement
with terms identical to those described above. The Optionee did not located a
site within said counties within the specified time therefore the Franchise
Option Agreement expired.
In March 1998 the Cherry Creek Mall, Denver Colorado franchise store ceased
operations. The Company is currently negotiating a termination agreement with
the franchisee. The Company is a guarantor of the store lease, part of the
termination agreement will have to address the Company's relief from the
franchisee for the Company's guarantee. There can be no assurances that the
Company will get adequate relief from the franchisee and may have to seek a
settlement with the Mall owner.
During 1997 the Company entered into franchise agreements for two
additional locations, one at the Exchange Towers in Toronto, Canada and one at
the Plaza of America in Dallas, Texas. The franchise circular called for a
franchise fee of $12,500 and a 6% royalty fee based on gross sales of the
franchise stores. The circular also requires the franchisee to pay a 3%
marketing fee based on gross sales. The marketing fee goes into a trust account
to be used only for marketing. The Toronto and Dallas franchise stores are
scheduled to open in June of 1998. The two franchisee are not related parities
to the Company and have had no previous relationship with current management.
COMPETITION
Management knows of a limited number of other multi-unit retailer in the
business in which the Company operates. Management also does not know of any
multi unit franchises in existence offering
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fully clothed in-store back rubs. Competition currently consists of these
limited multi-unit retailers and 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 to grow, 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 substantial 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 Federal Trade Commission (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 "UFCC").
Effective is 1995, the FTC revised the disclosure requirements for a UFCC 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 UFCC for approval before
offering franchises in such states. These state UFCC must comply with the
applicable state laws, which vary from state to state. The Company is currently
registered in New York, California, Florida, Virginia, Maryland and Michigan.
When new management took over the Company on October 16, 1997 the UFCCs
were updated to reflect the changes in the Company and management. The updated
UFCCs were completed in mid January and were filed with the appropriate state
agencies. Not all states required filings, but the ones that did require filings
had UFCCs submitted.
The two states in which the Company currently operates, the States of
Illinois and New York, require the licensing of massage therapists. Also certain
states in which the Company plans to market the selling of franchises require
the licensing of massage therapists. The responsibility for that licensing will
fall to the prospective franchisee. The Company, prospective franchisees and its
massage therapists employees are and 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 tat current laws or regulations applicable to the
Company's business will not change. Any such new laws or regulations applicable
to 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.
EMPLOYEE; EMPLOYEE TRAINING
As of December 31, 1997, the Company had 115 employees, consisting of four
full-time members of management, three full-time administrative employees, 9
full-time managers, two-full time warehouse employees and 7 full time and 90
part-time in-store employees. Other than members of management and the stores'
managers 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 two
day training program as a condition to employment. The program includes
extensive training relating to the Company's 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 or are licensed health care provider.
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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 minimize 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 from one of
three 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 file in the
Trademark Office no earlier than the fifth anniversary and no later that the
sixth anniversary of the registration in order to avoid cancellation of the
registration. The registration give's 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.
DEVELOPMENT OF ANTIGUAN PROPERTY
The Company owns approximately 86 acres of vacant land on the island of
Antigua. The land is in close proximity of the international airport and runs
along the waterfront. The Company has already received from the Antiguan
government concessions (i.e. licensees to develop the land) to the develop the
property. The concessions allow for a 300 room hotel, casino, 48 house lots, 50
condominiums in the first phase, health club, tennis complex and a marina with a
yacht club. The Company has already received other concessions which they will
be to the Company's benefit during construction and operations.
The Company has a recent appraisal valuing the land at approximately
$10,000,000. The appraisal was performed by an international appraisal firm
which is not related to the Company. The Company has a proposal for a
feasibility study, on the land. The study will analyze the viability of the
development described above. The Company expects to have the study begin within
the next 45 days. Once the study is completed and the report issued, the Company
will make the final decision as to the type project to develop.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company as of December 31, 1997 had 8 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 on Schaumberg, Illinois near
Chicago. Together, these stores employ a total of approximately 97 full and
part-time employees. See Item 1 (description of Business-Employees, Employee
Training). In February 1998 one store located in New York City was closed due to
poor operating results and its close proximity to another New York City store.
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
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
2195 Broadway October 31, 2006
New York, New York
Woodfield Mall December 30, 2004
Schaumberg, Illinois
The Company's corporate office is leased and located at 4500 140th Avenue
North, Suite 221, Clearwater, Florida. The lease expires May 31, 1998. The
Company believes that securing an office space that is adequate for its current
and presently foreseeable needs is available within the Tampa Bay metropolitan
area at reasonable market rates.
The Company currently operates a warehouse/store administrative facility at
53 West 35th Street, Room 1202, New York, New York. The lease expires September
30, 1999. The Company believes that this space is adequate for its current needs
and if the Company would no longer needs the facility in the future the space
could be subleased.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is 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 is seeking past due rent of
$228,156.63 and possession of the premises. The Company believes it has
counter-claims against the land lord relating to the condition of the premises
and its tenancy and has made an offer to settle the action. The full amount of
the rent has been accrued although the Company has been making partial payments
to the landlord, accordingly the settlement, if accepted, will not materially
affect the Company's results of operations.
The Company is also party to several claims of vendors which are not
expected to have a material effect on the Company's operatins.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On February 28, 1995, the Common Stock was listed for quotation on Nasdaq
SmallCap Market under the symbol "RUBB". Prior to such listing, the Common Stock
had been traded in the OTC Bulletin Board since October 18, 1993. At the close
of business September 18,1997 the Company's securities (RUBB) was moved to
Nasdaq Electronic Bulletin Board. The following table sets forth, for the
periods indicated, the high and low bid for the Common Stock as reported for the
Common Stock on Nasdaq SmallCap Market until September 18, 1997 and Nasdaq
Electronic Bulletin Board after September 18, 1997. Quotations reflect prices
between dealers, without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
High Bid Low Bid
-------- -------
1996
1st Quarter ........................ $4.125 $3.06
2nd Quarter ........................ $6.63 $3.25
3rd Quarter ........................ $4.88 $2.50
4th Quarter ........................ $4.625 $3.25
1997
1st Quarter ........................ $4.9375 $2.50
2nd Quarter ........................ $2.8125 $0.6563
3rd Quarter ....................... $0.9375 $0.25
4th Quarter ....................... $0.8125 $0.1563
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 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 earnings, capital requirements and financial position of the Company,
general economic conditions and the other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
As described in Part I Item 1. Description of Business Significant
Acquisition, 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, 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 period of October 17, 1997 through December 31, 1997 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 operate 8 retail stores in New York City,
one in Westchester Mall in White Plains, New York, and one at the Woodfield Mall
in the Chicago metropolitan area. In addition, the Company has a franchisee
operating at the Roosevelt Field Mall on Long Island. The Company has entered
into franchise agreements for two additional locations, one at the Exchange
Towers in Toronto, Canada and one at the Plaza of America in Dallas, Texas.
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
FISCAL YEAR ENDED DECEMBER 31, 1997
COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1996
After giving affect of the reverse acquisition for the year ended December
31, 1997, revenue from, services, products and franchising operations increased
to $749,264 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 1996
and only revenues of the Company were included for the period from October 17,
1997 through December 31, 1997. A clearer picture of changes in revenue is
contained in the pro-forma information contained in Note 3 of Notes to
Consolidated 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 year ended December 31, 1997 the pro-forma revenue, of
The Great American BackRub Store, Inc. and subsidiary, from services, products
and franchising operations (the Company's historical business) increased to
$3,595,220 compared to $3,045,937 for the comparable period in the prior year.
The net increase of $539,593 (17.7%) was primarily attributable to stores opened
in 1996 being opened in 1997 for a full twelve months.
12
<PAGE>
Service revenue was $2,857,812 for the year ended December 31, 1997 on a
proforma basis as compared to $2,140,304 for the comparable period in the prior
year. The increase is primarily attributable to stores opened in 1996 being
opened in 1997 for a full twelve months. Product sales were $701,871 for the
year ended December 31, 1997 as compared to $868,214 for the comparable period
in the prior year. The decrease can be directly attributable to the reduction of
working capital the Company experienced in 1997. The Company's stores carried a
very limited product quantity in 1997. Royalties and franchise fees were $35,537
for the year ended December 31, 1997 as compared to $27,419 for the comparable
period in the prior year. The increase is primarily attributable franchises
being opened in 1997 for the full twelve months. Management has recently taken
steps described in more detail below, to reduce the level of activity at the
Company's current locations and emphasis franchise operations. Accordingly it is
anticipated that aggregate revenues from store operations will decrease during
this fiscal year, but the component of revenue consisting of franchise fee
revenue will increase, as the revenue from services will decrease, as well as
revenue from training operations.
Operating expenses were $1,579,041 for the year ended December 31, 1997 as
compared to $336,000 for the comparable period in the prior year, an increase of
$1,243,041 (370.0%). The increase was due to the reverse acquisition that took
place on October 16, 1997. Operating expenses on a pro-forma basis were
$6,171,697 for the year ended December 31, 1997 as compared to $6,571,578 for
the comparable period in the prior year, a decrease of $399,881 (6.1%). This
decrease was primarily due to the closure of three stores during the year and a
reduction of corporate overhead.
On a pro-forma basis Salaries and Wages were $2,093,435 for the year ended
December 31, 1997 as compared to $1,495,274 for the comparable period in the
prior year. The increase is primarily attributable to stores opened in 1996
being opened in 1997 for a full twelve months. Cost of products sold, were
$458,085 for the year ended December 31, 1997 as compared to $611,919 for the
comparable period in the prior year. The decrease can be directly attributable
to the reduction of working capital the Company experienced in 1997. The
Company's stores carried very limited quantities of product in 1997. Rental
expense was $1,020,243 for the year ended December 31, 1997 as compared to
$734,588 for the comparable period in the prior year. The increase is primarily
attributable to stores opened in 1996 being opened in 1997 for a full twelve
months, and therefore incurring rental expense for a full twelve months as
opposed to a partial year in the year earlier period. Advertising and promotion
was $100,075 for the year ended December 31, 1997 as compared to $210,754 for
the comparable period in the prior year. The decrease can be directly
attributable to the reduction of working capital the Company experienced in
1997. Management elected to reduce advertising and promotion when faced with
limited working capital. Non-cash financial advisory fees were $43,750 for the
year ended December 31, 1997 as compared to $481,250 for the comparable period
in the prior year. The decrease was primarily due to the non-cash compensation
issued in 1996 to the underwriters of the canceled preferred stock offering that
was attempted in early 1997. Consulting fees were $236,982 for the year ended
December 31, 1997 as compared to $0 for the comparable period in the prior year.
The increase was due to the consulting contract issued to the former Chief
Executive Officer on the acquisition date, the contract was expensed in its
entirely in 1997. Bad debt expense was $236,982 for the year ended December 31,
1997 as compared to $0 for the comparable period in the prior year. The increase
was due to the reserving of receivables related to the franchises in Denver and
Long Island. The receivables were related to the Company's subsidizing build out
costs of the stares of the franchisees. The Company has no plans for future
franchisee's to be subsidized in this manner. Depreciation was $138,444 for the
year ended December 31, 1997 as compared to $128,876 for the comparable period
in the prior year. Amortization of Goodwill was $278,010 for the year ended
December 31, 1997 as compared to $278,010 for the comparable period in the prior
year. Goodwill is being amortized over a five year period. Management fees was
$246,000 for the year ended December 31, 1997 as compared to $336,000 for the
comparable period in the prior year. The Management fees were accrued for a full
twelve months in 1996 and only approximately nine months in 1997. The management
fees were charged by the former parent of CARIBSUN. General and administrative
was $1,429363 for the year ended December 31, 1997 as compared to $2,294,907 for
the comparable period in the prior year. The decrease was due to the reduced
working capital the Company experienced in 1997. Employees at the corporate
offices were reduced in 1997 as were related corporate expenses.
As a resulted of the decrease operating expenses, the pro-forma net loss
for the year ended December 31, 1997 decreased to $2,846,890 compared to
$3,435,322 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 corporate owned stores are sold to potential franchisee.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit as of December 31, 1997 of
($1,746,744), after giving effect to the reverse acquisition compared with a
working capital of $251,565 as of December 31, 1996 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.
13
<PAGE>
From inception to December 31, 1997, the Company has used cash for
operating activities of $7,382,756 and spent an additional $1,577,724 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
placement of common stock, aggregating $870,000, bridge notes and short-term
financing in the principal amount of $867,000, the Company's March 1995 public
offering of common stock resulting in net proceeds of approximately $5,000,000
and the issuance of common stock to warrant and option holders of approximately
$1,000,000. Also in November 1997 a related party, Oregon Properties d/b/a
Barclay Group loan the Company $250,000 and subsequent to year end another
$210,000 has been loaned to the Company.
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, as 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 preferred stock for approximately $2,700,000, which, if
successful, after commissions and fees, would provide 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.
In accordance with current management's plans, the Company has been in
discussions with several private lenders in the possibility of securing a loan
of up to $2,000,000. The Company would pledge its asset of land in Antigua as
collateral for the loan. Also a related party Oregon Properties d/b/a Barclay
Group is prepared under certain circumstances to provide additional real
property collateral and/or certain guaranties. 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.
Item 7. Financial Statements.
See Financial Statements at the end of this report.
Item 8. Changes in and Disagreements with Accountants on accounting and
financial disclosure.
(a) The Great American BackRub Store, Inc. (the "Company") dismissed BDO
Seidman LLP on January 28, 1998 as its principal independent auditor. The
decision to discharge BDO Seidman LLP was recommended by the Company's
management and approved by its Board of Directors on January 30, 1998. The
report of BDO Seidman LLP on the Company's financial statements for each of the
two fiscal years ended December 31, 1996 did not contain an adverse opinion or
disclaimer of opinion nor were such reports modified as to audit scope or
accounting principles. Such report did contain the following explanatory
paragraph:
"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 since its
inception and has an accumulated deficit of $7,001,507, which raises substantial
doubt about its ability to continue as a going concern. Management's plans
regarding 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."
There were no disagreements with BDO Seidman, LLP during the last two
fiscal years or the interim subsequent period ended January 30, 1998 on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to BDO Seidman LLP's
satisfaction, would have caused it to make reference to the subject matter of
the disagreement in connection with its report nor did BDO Seidman advise the
Company of any matters set forth in Item 304(a)(1)(4)(B) of Regulation S-B.
The Company provided BDO Seidman LLP with a copy of this disclosure and BDO
Seidman LLP furnished it with a letter addressed to the Securities and Exchange
Commission (the "Commission") stating that it agreed with the above statements
(a copy of the BDO Seidman LLP letter addressed to the Commission is filed as an
Exhibit to the Company's Form 8-K report dated January 30, 1998).
(b) On January 30, 1998, the Company engaged Weinberg & Company, P.A. as
its principal auditors for the year ended December 31, 1997. Weinberg & Company,
P.A. audited the balance sheet of Caribsun Corp. and Subsidiary as of December
31, 1996 and the consolidated statements of operations, stockholders equity and
cash flows of Caribsun Corp. for the years ended December 31, 1996 and 1995.
Such audit report was rendered following the acquisition of Caribsun by the
Company on October 16, 1997 in a transaction accounted for as a "reverse
acquisition for financial accounting purposes." Prior to the appointment of
Weinberg & Company, P.A., the Company did not discuss any of the matters set
forth in paragraph (a) above with such accounting firm.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
As a result of shares issued to Ascot at Closing of the Acquisition
described in Part 1 Item 1, above, Ascot owns approximately 73% of the
outstanding Common Stock and all of the management of the Company now consists
of officers and directors (or individuals nominated by such persons) of Ascot.
The Acquisition was approved by the Company's Board of Directors as it was
constituted prior to the Closing consisting of the following persons
(collectively referred to as "Prior Management"):
NAME AGE POSITION
- ---- --- --------
William Zanker 43 Chairman of the Board, President
Terrance C. Murray 49 Chief Executive Officer and Director
Stephen Seligman 43 Director
Andrew L. Hyams 43 Director
Donald R. Fleisher 43 Director
Prior Management resigned effective as of October 16, 1997 (except Mr.
Seligman, whose resignation was effective ten days following the mailing of an
Information Statement Pursuant to Section 14(F) of the Securities Exchange Act
of 1934 and Rule 14F-1 Thereunder ("the Information Statement"). The Information
Statement was mailed on or about November 14, 1997 to the holders of record at
the close of business on November 12, 1997. The following individuals
(collectively referred to as "New Management") were nominated to assume the
positions set forth next to their names:
NAME AGE POSITION
- ---- --- --------
David S. Coia 42 Chairman of the Board
David Coia 65 Chief Executive Officers, President, Chief
Operating Officer and Director
David L. West 39 Chief Financial Officer, Treasurer,
Secretary and Director
Kevin P. Stone 39 Director
Waylon E. McMullen 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
Company plans to hold on annual meeting in September 1998. The officers of the
Company were elected by the Board of Directors at the first meeting after the
current board took their positions. The officers hold office until their death,
until they resign or until they have been removed form office.
The following is a brief summary of the background of each director and
executive officer of the Company:
David S. Coia is the son of David Coia and is the founder, principal
shareholder and chief executive officer of the Barclay Group. The Barclay Group
is a private real estate development firm which specializes in the development
of retail properties. It engages in all phases of the acquisition and
development of real estate properties and is currently developing projects
valued at $75 million, having experienced an annual growth rate of 20% during
the last 18 months. Representative clients include Walgreens, Home Depot and
Publix Supermarkets. Mr. Coia's business address is 1123 Overcash Drive,
Dunedin, Florida 34698.
15
<PAGE>
David Coia has served as Director, President and Chief Executive Officer of
Ascot since March 1995. Mr. Coia has served as a consultant to the Barclay Group
since February 1988. Mr. Coia founded, and was the President of Counsel Food
Services, Inc., a Florida pizza franchise company in Clearwater, Florida from
1988 to 1991. From 1975 to 1988 Mr. Coia served in various top managerial
positions, including Vice President of Development, and General Manager of
Operations for the Sheraton Hotels and Holiday Inn. In such capacity, Mr. Coia
was responsible for site selection, development and expansion of various hotel
sites and operations. Mr. Coia's business address is 4500 140th Avenue North,
Suite 221, Clearwater, Florida 33762.
David L. West has been Chief Financial Officer of Ascot since March 1995.
From July 1993 through December 1994 Mr. West was a Manager in the accounting
firm of Lewis, Birch & Ricardo, P.A. Mr. West served as Controller and Chief
Financial Officer of Bently Pharmaceuticals, Inc. from October 1991 through June
1993. From March 1984 through September 1991 Mr. West served in the audit
practice of KPMG Peat Marwick, LLP, leaving the firm at the level of manager.
Mr. West's business address is 4500 140th Avenue North, Suite 221, Clearwater,
Florida 33762.
Kevin P. Stone has been the President of Underwriting at Commonwealth
International Group, Ltd. since February 1996. Mr. Stone was the General
Manager/Special Risks Manager for Metropole Insurance Brokers, Toronto, from
1993 through 1996. Mr. Stone was the International Manager of South Western
Insurance Group from 1991 through 1993. Mr. Stone's business address is 338
Soudan Avenue, Toronto, Ontario, Canada.
Waylon E. McMullen is a licensed and practicing attorney in Dallas, Texas
and has been since 1971. In 1991 Mr. McMullen founded Waylon E. McMullen, P.C.,
a law firm, and currently serves as its President. From 1975 to 1991 Mr.
McMullen served as President of Akin & McMullen, P.C., a law firm in Dallas
Texas. Mr. McMullen served as a Director for Pizza Inn, a publicly traded
corporation traded on the American Stock Exchange from 1975 to 1987. Mr.
McMullen's business address is P.O. Box 795517, Dallas, Texas.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(A) of the Securities Exchange act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than 10% of the Common Stock, to file with the Commission
initial reports of beneficial ownership ("Form 3") and reports of changes in
beneficial ownership of Common Stock and other equity securities of the Company
("Form 4"). Officers, directors, and greater than 10% shareholders of the
Company are required by Commission regulations to furnish to the Company copies
of all Section 16(a) reports that they file. To the Company's knowledge, based
solely on a review of the copies of such reports furnished to the Company and
written representations that no other reports were required, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with for the fiscal year ended December 31,
1997, except all such reports were filed late.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the annual
compensation of the Company's current and former chief executive officer and the
other executive officers of the Company for service in all capacities to the
Company during the Company's last three fiscal years.
16
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
PAYOUTS
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------------------- ---------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL
PRINCIPAL BONUS COMPENSATION AWARDS OPTIONS/ PAYOUTS OTHER
POSITION YEAR SALARY($) ($) ($) ($) SARS(#) ($) COMPENSATION
--------- ---- ----------- ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Coia 1997 $ 27,692(1) 0 0 0 0/0 0 0
Chief Executive
Officer
William Zanker 1995 $108,308
Former Chairman 1996 $177,000
of the Board 1997 $101,538(2) 0 0 0 54,500/0 0 0
- --------
</TABLE>
* Mr. Coia was not employed by the Company in 1995 and 1996 and therefore did
not receive any compensation for those fiscal years.
(1) Mr. Coia first became an executive officer of the Company on October 1,
1997.
(2) Mr. Zanker resigned the position of Chairman of the Board on October 16,
1997.
Currently, Mr. David Coia serves as the Company's Chief Executive
Officer is being compensated at an annual rate of $125,000 and is paid an
automobile allowance annually of approximately $11,340. Mr. David L. West
serves as the Company's Chief Financial Officer and is being compensated at
an annual rate of $100,000. Mr. Ricardo Coia, the Company's Executive
Vice-President is being compensated at an annual rate of $100,000. Messrs.
West and Ricardo Coia currently do not receive an automobile allowance.
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------
None
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
COMPENSATION OF DIRECTORS
Each Directors who is not an employee of the Company receives $1,000 for
each Board or committee meeting attended. Employees of the Company receive no
additional compensation for service as a director. All directors are reimbursed
for their reasonable out-of-pocket expenses incurred in connection with the
attendance of board meetings including travel and hotel.
17
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The Company granted options to purchase 75,000 shares of Common Stock to
each of Messrs. David S. Coia, Stone and McMullen on December 17, 1997. The
options had a per share exercise price of $0.50 and vest immediately. The term
of the options are for 5 years.
COMMITTEES OF THE BOARD
The Board of Directors has authorized two standing committees: Audit
Committee, and Compensation Committee (which shall also function as the Stock
Option Committee). Members for both committees are David S. Coia, Kevin Stone,
and Waylon E. McMullen. Only non-officer directors will be appointed to the
Audit and Compensation Committees.
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 December 31, 1997,
options to purchase 8,500 shares of Common Stock were 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 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 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 expires, terminate or otherwise be annulled for any reason
without having been exercised shall be available for purposes of the Employee
Plan.
The Employee Plan is to be administered by a committee comprised of not
less the 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 to the
Employee Plan.
No Incentive Stock Option 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 froth 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.
18
<PAGE>
The Employee plan is intended to comply in all respects with Rule 16b-3
under the Exchange Act. Option grants with respect to 8,500 shares of Common
Stock have been awarded under the Employee Plan as of December 31, 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 became
exercisable in December 1996. In 1997 the Board of Directors changed the
exercise price of these options for Messrs. Zanker and Murray to $0.375 per
share. 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 199,
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 vested and became exercisable in July 1996 and options to
purchase an additional 5,000 shares vest and became exercisable in July 1997.
Mr. Dee resigned before July 1997 and therefore the additional 5,000 were not
vested or exercisable. 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 a consultant to the Company, 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, all of which have been exercised. On October 16,
1997, the Company entered into a Termination and Settlement Agreement whereby
the Company granted to Mr. Terrance Murray warrants to purchase 100,000 shares
of Common Stock of which 1/3 are exercisable at $0.50 per share, 1/3 are
exercisable at $0.75 per share and 1/3 are exercisable at $1.00 per share. Also
on October 16, 1997, the Company entered into a Settlement Agreement whereby the
Company granted to Mr. Keith Dee warrants to 90,000 shares of Common Stock of
which 1/3 are exercisable at $0.50 per share, 1/3 are exercisable at $0.75 per
share and 1/3 are exercisable at $1.00 per share.
The following table provides certain information regarding option exercises
and unexercised stock options held by each of the executive officers named in
the Summary Compensation Table as of and for the year ended December 31, 1997.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AND OPTIONS AND
ACQUIRED ON SARs AT FISCAL SARs AT FISCAL
EXERCISE OF VALUE YEAR END YEAR END
OPTIONS/REDEMPTION REALIZED EXERCISABLE/ EXERCISEABLE/
NAME OF SAR'S OPTIONS/SAR'S UNEXERCISABLE UNEXERCISABLE
---- ------------------ ------------- ------------- --------------
David Coia 0/0 0/0 0/0 0/0
William Zanker 365,000/0 $39,218/0 54,500/0 0/0
19
<PAGE>
EMPLOYMENT AGREEMENTS
Pursuant to the Securities Exchange Agreement, the Company and Mr. Zanker
mutually agreed to terminate the employment agreement with Mr. Zanker dated
November 1, 1994 and enter into a consulting agreement (the "Consulting
Agreement") with Mr. Zanker dated October 16, 1997.
The Consulting Agreement was effective until September 30, 1999 and
pursuant thereto Mr. Zanker is to, during normal business hours, provide advice
to the Company relating to financial affairs, marketing, personnel and similar
matters so as to assist New Management in operating the Company during the term
thereof. Mr. Zanker was to receive (i) $120,000 in equal monthly installments of
$10,000 commencing November 1, 1997 for the first twelve months of the
Consulting Agreement; (ii) $80,000 in equal monthly installments of $6,666.66
commencing November 1, 1998 for the second twelve months of the Consulting
Agreement; and (iii) five year warrants to acquire shares of the Company's
common stock as follows: 100,000 shares at $0.50 per share; 100,000 shares at
$0.75 per share and 100,000 share at $1.00 per share. The Consulting Agreement
contains a non-compete/non-interference provision during the term of the
Agreement.
In December 1997 the Company and Mr. Zanker agreed to terminate the
Consulting Agreement in exchange for the delivery to Mr. Zanker of the 300,000
common stock shares underlying the warrants. At the time of the termination
agreement all of the warrants were exercisable at prices well above the market
price of the Company's common shares.
20
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of the April 9, 1998 information
concerning ownership of the Company's securities by (I) each Director, (ii) each
executive officer, (iii) all Directors and executive officers as a group, and
(iv) each person known to the Company to be beneficial owner of more than five
percent of each class:
NAME AND AMOUNT
ADDRESS(1) AND NATURE PERCENT
OF BENEFICIAL OF BENEFICIAL OF
TITLE OF CLASS OWNER(2) OWNERSHIP CLASS
- -------------- ------------- ---------------- -------
Common Stock Ascot International Corp. 11,000,000(4) 73.6%
David S. Coia 150,000(5) 1.0%
1123 Overcash Drive
Dunedin, FL 34698
David Coia 11,000,000(4)(6) 73.6%
David L. West 11,000,000(4)(7) 73.6%
Kevin P. Stone 0 0%
338 Soudan Avenue
Toronto, Ontario,
Canada
Waylon E. McMullen 0 0%
P.O. Box 795517
Dallas, TX
All executive officers
and Directors as a
Group (5 persons) 11,150,000(8) 73.8%
- -----------
(1) Unless other wise indicated, the address of each beneficial owner is c/o
The Great American BackRub Store, Inc., 4500 140th Avenue North, Suite 221,
Clearwater, FL, 33762.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act and unless otherwise indicated, represents
securities for which the beneficial owner has sole voting and investment
power.
(3) Based upon 14,950,716 shares outstanding on April 15, 1998.
(4) Does not include up to 5,930,752 additional shares issuable to Ascot under
the terms of the Securities Exchange Agreement which is conditioned upon an
amendment to the Company's certificate of incorporation.
(5) Consists of 150,000 shares of Common Stock which the Company has agreed to
issue to a company controlled by David S. Coia as part consideration for a
one year loan of $250,000. David S. Coia is David Coia's son.
(6) Mr. Coia is an officer of Ascot and owns approximately 38% of the shares of
Ascot. He disclaims beneficial ownership of shares of the Company owned by
Ascot.
(7) Mr. West is an officer of Ascot and owns approximately 3% of the shares of
Ascot. He disclaims beneficial ownership of shares of the Company owned by
Ascot.
(8) See Notes 4,5,6 and 7 above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On November 15, 1996, the Company entered into a franchise agreement with
Roosevelt Field Partners. Certain former executive officers and directors of the
Company own, collectively, an approximately 40% equity interest on Roosevelt
Field Partners.
Certain executive officers of the Company participated in a bridge
financing by the Company which was consummated on December 27, 1996.
21
<PAGE>
In November 1997 a related party, Oregon Properties d/b/a Barclay Group
loaned the Company $250,000 and subsequent to December 31, 1997 another $210,000
has been loaned to the Company.
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 form independent third parties and will be approved by a
majority of disinterested directors of the Company.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibit No. Description I/B/R
- ----------- ----------- -----
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 1994 Employee Stock Option Plan. **
4.3 Nonqualified Option Agreement of Mr. Zanker. **
4.4 Nonqualified Option Agreement of Mr. Murray. **
4.5 Form of Option Agreement for Options to be issued to outside
Directors upon completion of the offering. **
10.1 Employment Agreement dated November 1, 1994 between
the Company and Mr. Zanker. **
22
<PAGE>
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 Franchise Agreement dated May 14, 1994 between
Emerald Desert Rub and the Company. **
10.4 Lease Agreement dated August 25, 1993 between 175
East 57th Street, Inc. and the Company concerning the Third
Avenue Store. **
10.5 Lease Agreement dated February 1994 between Town Sports
International, Inc. and The Company concerning the East 86th
Street Store. **
10.6 Notice of Town Sports International, Inc. to the Company
terminating the East 86th Street Store Lease. **
10.6.1 Lease Extension dated February 27, 1995 relating to the 86th
Street Store Lease. **
10.7 Lease Agreement dated May 15, 1994 between Martin Cable
and the Company. **
10.8 Sublease Agreement dated May 31, 1994 between the
Company and Emerald Desert Rub. **
10.9 Commercial Lease and Deposit Receipt dated December 31,
1994 for the Company's San Rafael, California Office. **
10.10 Promissory Note dated April 5, 1994 issued to Colonial
Capital Corp. for $165,000. **
10.11 Substitute Promissory Note dated November 1, 1994 issued
to Colonial Capital Corp. for 165,000. **
10.12 Letter Agreement dated December 23, 1994 between the
Company Colonial Capital, Inc. **
23
<PAGE>
10.13 Promissory Note dated April 5, 1994 issued to Gary D. Lipson
for $50,000. **
10.14 Substitute Promissory Note dated November 1, 1994 issued
to Gary D. Lipson for $50,000. **
10.15 Promissory Note dated April 5, 1994 issued to Kipnis
Tescher Lippman Valinsky and Kain for $115,000. **
10.16 Substitute Promissory Note dated November 1, 1994 issued
to Kipnis Tescher Lippman Valinsky & Kain for $115,000. **
10.17 Letter Agreement dated December 28, 1994 between the
Company and Kipnis Tescher Lippman Valinsky and Kain. **
10.18 Letter of Understanding dated December 16, 1994 from
the Company to Colonial Capital, Inc. **
10.19 Purchase Agreement dated June 10, 1993 by and among the
Company, Michael Schub, Linda Amori, Ron Rodriguez,
Debbie Dworkin and William Zanker. **
10.20 Mutual Termination Agreement dated November 15, 1994 by
and among the Company, Michael Schub, Linda Amori,
Ron Rodriguez, Debbie Dworkin and William Zanker. **
10.21 Option Agreement dated June 20, 1994 between Bay Area
Backs I and the Company relating to a potential franchise
agreement. **
10.22 Option Agreement dated June 21, 1994 between Bay Area
Backs I and the Company relating to a potential franchise
agreement. **
10.23 Letter dated October 19, 1994 from the Company to Bay
Area Backs I extending the term of the Option Agreement. **
10.23.1 Letter dated February 13, 1995 from the Company to Bay
Area Backs I extending the term of the Option Agreement. **
10.24 Form of Bridge Note relating to December 1994 private
placement securities offering. **
10.25 The Company's Uniform Franchise Offering Circular dated
April 1, 1994. **
10.26 Letter of Intent dated June 9, 1994 between Brookstone, Inc.
and the Company. **
10.27 Letter of Intent dated October 6, 1994 between
Brookstone, Inc. and the Company. **
24
<PAGE>
10.28 Assignment of Patent Rights dated December 23, 1994
from William Zanker to the Company. **
10.29 Consulting Agreement dated March 9, 1995 between
the Company and A. Clinton Allen. **
10.30 Option Agreement dated March 9, 1995 between the Company
and A. Clinton Allen. **
10.31 Indemnification Letter dated March 9, 1995 from the Company
to A. Clinton Allen. **
10.32 Franchise Termination Agreement dated as of May 30,
1995, by and between the Company and Emerald Desert, Rub. ***
10.33 Option Termination Agreement dated as of May 30, 1995, by
and between the Company and Bay Area Backs I. ***
10.34 Franchise Agreement dated November 19, 1996 between the
Company and Roosevelt Field Partners, LLC. ****
10.35 Franchise Agreement dated November 20, 1996 between
the Company and Marion Holdings, Inc. ****
10.36 Option Agreement dated November 21, 1996 between
the Company and Marylou Garcia. ****
10.37 Agency Agreement dated November 22, 1996 between the
Company and Investors Associates, Inc., as amended
December 20, 1997. ****
10.38 Finders' Fee Agreement between the Company and Josh
Alexander Associates dated October 16, 1997 as amended
and supplemented. *****
10.39 Termination and Settlement Agreement between the
Company and Terrance Murray dated as of October 16, 1997. *****
10.40 Settlement Agreement between the Company and Keith Dee
dated October 28, 1997. *****
10.41 Satisfaction Agreement between the Company and Bernard
Wincig dated October 16, 1997. *****
11.1 Statement regarding Computation of Per Share Earnings. ***
16.1 Letter from BDO Seidman, LLP. ******
21.1 Subsidiaries of the Company. ***
25
<PAGE>
- ----------
* corporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 333-21203)
** Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 33-88052)
*** Incorporation by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1995 (File No. 0-25334).
**** Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1996 (File No. 0-25354).
***** Incorporated by reference to the Company's Form S-8 Registration
Statement dated November 24, 1997.
****** Incorporated by reference to the Company's Form 8-K/A Current Report
dated January 30, 1998.
(B) REPORTS ON FORM 8-K
Form 8-K dated January 30, 1998 as amended
26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the requirements of the Exchange
Act, the registrant has duly caused this amended report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Clearwater,
Florida, on the 26th day of May 1998.
THE GREAT AMERICAN BACKRUB STORE, INC.
By: /s/ David Coia
-----------------------------
David Coia
President
27
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONTENTS
PAGE 1 - 2 - REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
PAGE 3 - 4 - CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31,
1997
PAGE 5 - CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
PAGE 6 - CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
PAGE 7 - CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
PAGE 8 - 20 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of:
The Great American Backrub Store, Inc.
We have audited the accompanying consolidated balance sheet of The Great
American Backrub Store, Inc. and subsidiary as of December 31, 1997 and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the year then ended. We have also audited the
accompanying statements of operations, changes in stockholders' equity
(deficit), and cash flows of Caribsun Corp., the Company's legal subsidiary and
acquirer for accounting purposes under the reverse acquisition as discussed in
Note 3, for the year ended December 31, 1996. 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 did not audit the 1996 financial statements of The Great American Backrub
Store, Inc., the legal acquirer under the reverse acquisition as discussed in
Note 3, which statements reflected total assets of $3,578,661 as of December 31,
1996, and total revenues of $3,045,937 for the year then ended. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included in the Company's
financial statements for 1996 is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 uses 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. and subsidiary as of December 31, 1997 and the results of their
operations and their cash flows for the two years then ended in conformity with
generally accepted accounting principles.
<PAGE>
The accompanying 1997 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses since its inception and has an accumulated deficit of $1,334,522, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters also are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
April 13, 1998
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
CURRENT ASSETS
Cash $ 131,078
Other receivables, net of allowance of $103,310 26,886
Inventory 146,889
Prepaid expenses 25,148
Capitalized loan costs, net of $7,808
accumulated amortization 67,192
-----------
Total Current Assets 397,193
-----------
PROPERTY AND EQUIPMENT - NET
Real property 5,305,129
Furniture and fixtures 426,887
Leasehold improvements 849,649
Purchased lease, net of $30,276
accumulated amortization 89,724
Computer equipment 44,983
-----------
6,716,372
Less accumulated depreciation (303,835)
-----------
Net Property and Equipment 6,412,537
-----------
OTHER ASSETS
Notes receivable, net of allowance of $50,000 100,000
Accrued interest receivable 9,000
Lease and equipment deposits 198,550
-----------
Total Other Assets 307,550
-----------
GOODWILL, NET OF $57,918 ACCUMULATED
AMORTIZATION 1,332,130
-----------
TOTAL ASSETS $ 8,449,410
===========
See accompanying notes to financial statements.
3
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 476,212
Accrued expenses 435,177
Accrued payroll and related expenses 129,306
Management fees payable - related party 409,394
Bridge notes 262,667
Note payable - related party 250,000
Deferred revenue 181,181
-----------
Total Current Liabilities 2,143,937
-----------
OTHER LIABILITIES
Deferred rent 184,100
-----------
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $.001 par
value, 15,000,000 shares authorized, none issued
Common stock, par value $0.001, 20,000,000 shares
authorized, 15,154,354 shares issued
and outstanding 15,155
Common stock to be issued, 6,097,416 shares,
par value $0.001 6,097
Additional paid-in capital 7,055,652
Additional paid-in capital on
common stock to be issued 462,241
Accumulated Deficit (1,334,522)
-----------
6,204,623
Less Subscriptions Receivable 83,250
-----------
TOTAL STOCKHOLDERS' EQUITY 6,121,373
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,449,410
===========
See accompanying notes to financial statements.
4
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDARY
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
AS OF DECEMBER 31, 1997 AND 1996
See accompanying notes to financial statements
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK PREFERRED STOCK ADDITIONAL
TO BE ISSUED PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 100 $ 1 -- -- -- -- $ 6,513
Net Loss 1996 -- -- -- -- -- -- --
---------- ----------- --------- -------- ------- ----- -----------
Balance, December 31, 1996 100 1 6,513
Issuance of Preferred Stock 500,000 5,000 5,693,615
Changes in Equity Resulting
From Reverse Acquisition
Accounting Treatment 2,416,754 2,416 (500,000) (5,000) 156,767
Issuance of Common Stock To
Shareholders' Of Caribsun
Corp. Pursuant To Reverse
Acquisition 12,000,000 12,000 6,097,416 6,097 833,901
Issuance of Common Stock As
Acquisition Costs Pursuant
To Reverse Acquisition 1,000,000 1,000 75,809
Exercise Of Common Stock
Warrants 300,000 300 189,700
Exercise Of Common Stock 287,500 288 24,497
Options
Issuance Of Common Stock
As Loan Fee 150,000 150 74,850
Net Loss 1997
---------- ----------- --------- -------- ------- ----- -----------
BALANCE, DECEMBER 31,
1997 15,154,354 $ 15,155 6,097,416 $ 6,097 -- -- $ 7.055,652
========== =========== ========= ======== ======= ===== ===========
<CAPTION>
ADDITIONAL
PAID-IN CAPITAL
ON COMMON STOCK
STOCK TO BE ACCUMULATED SUBSCRIPTION
ISSUED DEFICIT RECEIVABLE TOTAL
--------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 -- $ (168,000) -- $ (161,486)
Net Loss 1996 -- (332,000) -- (332,000)
----------- ----------- ----------- -----------
Balance, December 31, 1996 (500,000) (493,486)
Issuance of Preferred Stock 5,698,615
Changes in Equity Resulting
From Reverse Acquisition
Accounting Treatment 154,183
Issuance of Common Stock To
Shareholders' Of Caribsun
Corp. Pursuant To Reverse
Acquisition 462,241 1,313,239
Issuance of Common Stock As
Acquisition Costs Pursuant
To Reverse Acquisition 76,809
Exercise Of Common Stock
Warrants 190,000
Exercise Of Common Stock (83,250) (58,465)
Options
Issuance Of Common Stock
As Loan Fee 75,000
Net Loss 1997 (834,522) (834,522)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1997 $ 462,241 $(1,334,522) $ (83,250) $ 6,121,373
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AS OF DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
REVENUES
Services $ 533,721 $ --
Products 200,481 --
Royalties, franchise
fees and other 15,062 --
------------ ------------
Total Revenues 749,264 --
------------ ------------
OPERATING EXPENSES
Salaries and wages 679,658 --
Costs of products sold 21,509 --
Rental expenses 296,227 --
Advertising and promotion 41,638 --
General and administrative 80,191 --
Consulting fees 144,712 --
Depreciation 11,188 --
Amortization of goodwill 57,918 --
Management fees-related
party 246,000 336,000
------------ ------------
Total Operating Expenses 1,579,041 336,000
------------ ------------
NET LOSS FROM OPERATIONS (829,777) (336,000)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 5,325 4,000
Interest expense (10,070) --
------------ ------------
Total Other Income
(Expense) (4,745) 4,000
------------ ------------
NET LOSS $ (834,522) $ (332,000)
============ ============
Weighted average number of
shares outstanding during
the period 18,357,014 17,097,416
============ ============
Net loss per common share
and equivalents $ (0.0455) $ (0.0194)
============ ============
See accompanying notes to financial statements.
6
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
AS OF DECEMBER 31, 1997 AND 1996
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(834,522) $(332,000)
Adjustments to reconcile net
loss to net cash (used in)
operating activities
Amortization of Goodwill 57,918 --
Depreciation and other amortization 49,272 --
Consulting expense incurred for capital
stock 190,000 --
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable - net 3,110 --
Accrued interest receivable (5,000) (4,000)
Inventory, net 30,346 --
Prepaid expenses and other current
assets (14,621) --
Increase (decrease) in
Accounts payable and accrued
expenses 5,224 --
Accrued payroll and related 88,294 --
Deferred revenues and rent 69,253 --
Management fees payable 205,394 336,000
--------- ---------
Net cash used in operating activities (145,332) --
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Lease and equipment deposits and
other assets 11,847 --
--------- ---------
Net cash provided by investing
activities 11,847 --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash proceeds from the issuance
of common stock 24,563
Net cash proceeds from the issuance
of notes payable 250,000
---------
Net cash provided by financing
activities 274,563 --
--------- ---------
Net increase in cash and cash equivalents 131,078 --
Cash and cash equivalents-beginning -- --
--------- ---------
CASH AND CASH EQUIVALENTS-ENDING $ 131,078 $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 3,451 --
Income taxes -- --
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
As fully discussed in Note 3, the Company issued common stock in a business
combination accounted for as a reverse acquisition.
See accompanying notes to financial statements.
7
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Great American Backrub Store, Inc. and Subsidiary (the "Company") is an
owner\operator and franchiser of retail stores which provide seated, fully
clothed back rubs and sell back and stress related products. The Company,
incorporated in 1992, began operations in 1993. As of December 31, 1997, the
Company has ten retail stores in operation and two franchised store locations.
As discussed in Note 3 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 St. 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 3, the Company
underwent a change in management effective October 16, 1997. Management of the
Company consists of the officers and directors of Ascot.
Principle of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Caribsun. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
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 reported period. Actual results could differ
from those estimates.
8
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Cash and Cash Equivalents
Cash and cash equivalents represents 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.
Concentration of Credit Risk
There were no financial instruments which potentially subject the Company to
significant concentration of credit risk at December 31, 1997.
Inventory
Inventories, consisting of merchandise held for resale, are valued at the lower
of cost or market. The Company uses the retail inventory method.
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 life's 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. Sales of gift certificates are recognized when
redeemed or upon expiration. Royalties are recognized as income in the month is
which franchise services are rendered or products are sold by franchises. The
Company recognizes franchise revenue in accordance with SFAS No. 45. Deferred
revenues represent unredeemed and unexpired gift certificates.
9
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Per Share Data
Net loss per common share for the year ended December 31, 1997 and 1996 is
computed by dividing net loss by the weighted average common shares outstanding
during the year as defined by Financial Accounting Standards, No. 128, "Earnings
per Share". The assumed exercise of common share equivalents was not utilized
since the effect was anti-dilutive.
Long-Lived Assets
During 1995, Statement of Financial Accounting Standards No.121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
("SFAS 121"), was issued. SFAS 121 requires the Company to review long-lived
assets and certain identifiable assets related to those assets for impairment
whenever circumstances and situations change such that there is an indication
that the carrying amounts may not be recoverable. If the undiscounted future
cash flows of the enterprise are less than their carrying amounts, their
carrying amounts are reduced to fair value and an impairment loss is recognized.
The adoption of this pronouncement did not have a significant impact on the
Company's financial statements as of December 31, 1997 and 1996.
Stock Options
In October 1995, the FASB issued Statement of Financial Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows
companies to choose whether to account for stock-based compensation on the fair
value method or to continue to account for stock-based compensation under the
current Intrinsic Value method as prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company had adopted the disclosure
alternative under SFAS 123 during 1996 and will continue to follow the
provisions of APB Opinion No. 25.
10
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 2 - 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 accumulated a deficit of $1,334,522 at December 31, 1997.
Insomuch as the Company continues to have a high level of operating expenses and
will be required to make significant expenditures in connection with its
proposed franchising concept and development of the property owned by Caribsun,
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 assurances
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 is negotiating with lenders
for long term financing needs. However, no assurances can be given that the
Company will be successful in raising additional capital. Further, there is no
assurance, assuming the Company successfully raises additional funds that the
Company will achieve profitability or positive cash flow.
If the Company is unable to obtain adequate additional financing, or if the
existing operations do not meet projections, management will be required to
sharply curtail its plans and operations.
11
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 3 - 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. 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 in 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.
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 December 31, 1997
are presented as follows: (1) the balance sheet consists of Caribsun's net
assets at historical cost, and the Company's net assets at fair market value on
the date of acquisition (acquired cost); and (2) the statement of operations
includes Caribsun's operations for the periods presented and the 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 price and net assets of the Company acquired was
allocated to goodwill.
12
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 3 - REVERSE ACQUISITION - CONTINUED
Goodwill is being amortized over the expected useful life of five years. The
purchase price and goodwill computation follows:
Shares issued October 16, 1997
pursuant to reverse acquisition 17,097,416
Fair market value of common stock
as adjusted for dilution effect $ 0.08625
Fair market value of stock issued $ 1,474,652
Acquisition costs 108,750
-----------
Total purchase price $ 1,583,402
Less: Net assets acquired 193,354
-----------
Goodwill $ 1,390,048
-----------
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:
Year Ended December 31,
1997 1996
------------ ------------
Revenues $ 3,595,220 $ 3,045,937
Operating expenses 6,171,697 6,571,578
------------ ------------
Net loss from operations (2,576,477) (3,525,641)
Other income (expense) (270,513) 90,319
------------ ------------
Net loss $ (2,846,990) $ (3,435,322)
============ ============
Weighted average number of
shares outstanding during
the period 21,116,975 21,101,770
============ ============
Net loss per common share $ (0.1348) $ (0.1628)
============ ============
In connection with the reverse acquisition, warrants to purchase common stock
were issued to certain former officers and consultants of the Company. At
December 31, 1997, 270,000 of the warrants were unexercised and may be exercised
through October 15, 2002 at exercise prices ranging from $0.50 to $1.00.
13
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 4 - BRIDGE NOTES
On December 27, 1996, the Company issued 10% Bridge Notes in the principal
amount of $ 262,667, payable as to principal and interest at the earlier of the
closing of a public offering through the sale of equity securities or December
27, 1997. In connection with these notes, the Company also issued 4,000,000
warrants, each warrant representing the right to purchase one share of Series A
preferred stock at an exercise price of $5.00 per share. Upon consummation of
the offering, each bridge warrant was to automatically, without any action by
the bridge note holders, be converted into half of a redeemable warrant which
entitles the holder to purchase one-half share of a new Series B preferred
stock. The Series B preferred stock was never authorized by the Company's
shareholders, and in February 1997 the Offering was cancelled.
The Series A preferred stock warrants are exercisable at anytime during the
three-year period commencing on the first anniversary of the date of the
warrant, December 27, 1997. The Series A preferred stock is convertible into the
greater of (1) two shares of common stock or (2) the number of shares of common
stock equal to $8.00 divided by the average closing price of the common stock
for the 10 trading days ending on the third trading day preceding the date of
conversion. In connection with the issuance of the Bridge Notes an original
issue discount of $262,667 was recorded to be amortized over the lesser of the
expected term of the notes, or until consummation of the offering (3 months),
along with $91,743 of financing expenses. Interest expense amortization of the
original issue discount of $255,319 and $7,348 for the years ended December 31,
1997 and 1996, occurred prior to the reverse acquisition and reflects non-cash
financing costs related to such warrants.
Because of the cancellation of the Public Offering, the Notes were not converted
and became due on December 27, 1997. As of the date of this report, the Notes
are past due, and the Company is in negotiation with the noteholders.
NOTE 5 - OPTIONS, STOCK PLANS AND MANAGEMENT COMPENSATION
At the Company's 1994 annual stockholders meeting, the Company's shareholders
approved an Employee Plan under which 75,000 shares of stock were authorized for
grants. To date, 8,500 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. The Employee Plan is also
intended to aid in attracting persons of suitable ability to become employees of
the Company and its subsidiaries.
14
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 5 - 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. At December 31,
1997 240,000 of these options were exercised at $.375 per share and 120,000 are
still exercisable at $3.75 per share. In July 1995, the Company granted
additional five-year options to 100,000 shares of Common Stock to executive
officers of the Company. Such options are exercisable at a purchase price of
$2.5625 per share. 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. 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 for purchase 25,000 and 40,000 shares of Common Stock to
consultants of 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 share of Common Stock to a
consultant to the Company, of which options to purchase 76,500 shares had been
exercised in prior years. In January 1997 the balance of the options to purchase
23,500 shares were exercised. Such options were exercised at a price of $2.375
per share.
In 1996, the Company granted 3 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 expire in February 2000.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation costs for the Company's stock options plans had been
determined in accordance with the fair value-based method in FASB Statement 123.
As discussed in Note 3, the 1997 and 1996 statements of operations include the
net loss of The Great American Backrub Store, Inc. only for the period from
October 16, 1997 to December 31, 1997 and, therefore, only stock options granted
during this period would affect the results of operations. Since there were no
significant stock options granted during this period for compensation, the
pro-forma information required under FASB No. 123 is not presented.
15
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 5 - OPTIONS, STOCK PLANS, AND MANAGEMENT COMPENSATION - (CONTINUED)
Non-qualified stock option transactions during the years ended December 31, 1997
and 1996 are summarized below:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Exercise Price Weighted Average Exercise Price Weighted Average
Shares Range per Share Exercise Price Shares Range Per Share Exercise Price
------ --------------- -------------- ------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Options
at beginning of year 558,500 $2.375 - $5.00 $3.94 925,000 $1.875 - $5.00 $3.20
Options granted 328,500 0.375 - 6.00 2.08 300,000 $1.00 - $2.50 $2.00
Options exercised 311,000 0.375 - 2.375 0.521 576,500 $1.00 - $2.375 $2.01
Options forfeited 107,500 $2.50 2.50 90,000 $2.375 $2.375
------- ----- ---- ------ ------ ------
Outstanding options at
end of year 468,500 $0.375 - $6.00 $4.735 558,500 $2.375 - $5.00 $3.93
------- ------ ----- ------ ------- ------ ----- -----
Exercisable options at
end of year 468,500 $0.375 - $6.00 $4.735 553,500 $2.375 - $5.00 $3.94
------- ------ ----- ------ ------- ------ ----- -----
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 6 - 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 basis of assets and
liabilities and their financial reporting amounts at each year-end. Valuation
allowances have been established for all income tax benefits since their
realizability is uncertain.
For Federal tax purposes, the Company had available, at December 31, 1997, net
operating loss carryforwards of approximately $8,720,000, which expire through
2011 subject to certain perscribed rate annual limitations.
NOTE 7 - RELATED PARTY TRANSACTIONS
In December 31, 1997, the Company had a receivable due from one of its
franchisees totaling approximately $127,000. The franchise was closed during
1997. Certain former officers and directors of the Company prior to the reverse
acquisition owned an interest of approximately 40% in this franchise. This
receivable has been fully reserved at December 31, 1997, is due on demand and is
non-interest bearing.
On November 24, 1997, the Company obtained a $250,000 loan from a company
controlled by the Company's chairman. In connection with this loan the Company
issued 150,000 shares of common stock to the controlled company. The 150,000
shares were accounted for as a loan fee to be amortized over the one year term
of the loan. Amortization of these loan costs was $7,808 in 1997.
Under the terms of a management agreement that commenced on July 1, 1995 and
terminated on September 23, 1997, Caribsun had been charged management fees of
$246,000 and $336,000 in 1997 and 1996, respectively by Ascot prior to the
reverse acquisition for managerial and administrative services. Of this amount
$409,394 remains unpaid at December 31, 1997 and is shown in the accompanying
balance sheet as management fees payable.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
(a) 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 2006. The agreements, which have been classified as operating leases,
require the Company to pay insurance, taxes and other maintenance costs.
17
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 8 - COMMITMENTS AND CONTINGENCIES - CONTINUED
(a) Leases - Continued
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, 1997.
Year ending December 31, Net Minimum
Rentals
1998 $ 688,458
1999 695,348
2000 693,518
2001 711,049
2002 677,400
Thereafter 1,388,177
----------
$4,853,950
The rental expense, including deferred rent, under operating leases was $972,762
and $734,588 for the years ended December 31, 1997 and 1996, respectively.
Deferred rent results as the Company recognizes the costs of leases with free
rent periods and accelerating lease payments on a straight-line basis over the
term of the lease.
(b) Legal Proceedings
The Company is 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 is seeking past due rent of
$228,156 and possession of the premises. The Company believes it has
counter-claims against the landlord relating to the condition of the premises
during its tenancy and has made an offer to settle the action. An amount of
approximately $80,000 has been accrued although the Company has been making
partial payments to the landlord. Accordingly the settlement, if accepted, will
not materially affect the Company's results of operations.
18
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 9 - FINANCIAL ADVISORY AND CONSULTING AGREEMENT
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
includes a $100,000 retainer, paid on the execution of the agreement and
warrants to purchase 100,000 shares of the Company's 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 February 31,
1998, of which all have been exercised.
Such warrants resulted in a non-cash charge of $481,250 for the year ended
December 31, 1996 and resulted in a charge of approximately $50,000 for the year
ended December 31, 1997.
NOTE 10 - SUBSEQUENT EVENTS
Change of State of Incorporation and Amendments to
Certificate of Incorporation
On January 20, 1998, the Board of Directors approved actions to (1)
reincorporate the Company under the laws of the State of Delaware through merger
of the Company into a Delaware subsidiary formed specifically for this purpose;
and (2) amend the Company's certificate of incorporation to (a) change the name
of the Company to "Darco International Corp."; (b) reverse split the outstanding
shares of the Company's common stock one-for-four;, (c) increase the authorized
shares of the Company's common stock to 25,000,000 from 20,000,000; and (d)
permit shareholders to take action by written consent without a meeting. Ascot,
which holds approximately an 80% voting interest in the Company's common stock,
has approved these actions and will vote their shares in favor of these actions
at the next shareholder meeting scheduled in May 1998. Pursuant to the
provisions of New York corporate law and the Company's certificate of
incorporation, the reincorporation by merger requires the affirmative vote of
two thirds of the Company's outstanding shares of common stock and the other
amendments require the approval of a majority of such shares. Accordingly, the
vote of Ascot is sufficient to approve these actions.
19
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997
NOTE 10 - SUBSEQUENT EVENTS - CONTINUED
Letter of Intent for Acquisition of a Private Unaffiliated Company
In early 1998 the Company executed a letter of intent relating to a possible
acquisition of a private unaffiliated company. Under terms of the letter of
intent if the acquisition is completed, the Company will issue 350,000 pre-split
common shares of the Company's common stock in exchange for a controlling
interest in the private company.
20
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form 10-KSB Annual Report of The Great
American Backrub Store, Inc. for the year ended December 31, 1997, our report
dated April 13, 1998, relating to the financial statements of The Great American
Backrub Store, Inc. which appear in such Form 10-KSB.
WEINBERG & COMPANY, P.A.
Certified Public Accountants
Boca Raton, Florida
April 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Company's form 10-KSB for the twelve month period ended December 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 131,078
<SECURITIES> 0
<RECEIVABLES> 130,196
<ALLOWANCES> 103,310
<INVENTORY> 146,889
<CURRENT-ASSETS> 397,193
<PP&E> 6,716,372
<DEPRECIATION> 303,835
<TOTAL-ASSETS> 8,449,410
<CURRENT-LIABILITIES> 2,143,937
<BONDS> 0
0
0
<COMMON> 6,097
<OTHER-SE> 6,115,276
<TOTAL-LIABILITY-AND-EQUITY> 8,449,410
<SALES> 749,264
<TOTAL-REVENUES> 749,264
<CGS> 21,509
<TOTAL-COSTS> 1,579,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,070
<INCOME-PRETAX> (834,522)
<INCOME-TAX> 0
<INCOME-CONTINUING> (834,522)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (834,522)
<EPS-PRIMARY> (0.045)
<EPS-DILUTED> (0.045)
</TABLE>
