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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Security Exchange
Act of 1934 For the Quarterly period ended March 31, 1998.
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the Transition Period from ________ to _________ .
Commission file number: 0-25334
THE GREAT AMERICAN BACKRUB STORE, INC.
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(Exact name of Small Business Issuer as specified in the charter)
New York 13-3729043
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(State of Incorporation) (I.R.S. Employer Identification No.)
4500 140th Avenue No., Suite 221, Clearwater, Florida 33762
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(Address of principal executive offices)
(813) 532-4818
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required by Section 13 or 15 (d)
of the Securities Exchange Act during the past 12 months (or for such period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at May 14, 1998
- ----------------------------- ---------------------------
Common Stock, $.001 par value 15,154,354
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC.
Part I
FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
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Condensed Balance Sheet 3
Condensed Statement of Operations 4
Statement of Cash Flows 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
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Financial Condition and Results of Operations 10
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PART II
OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signature Page 14
Exhibit Index 15
Exhibit 11: Statement re: Computation of per share earnings 16
Exhibit 27: Financial Data Schedule 17
Page 2
<PAGE>
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
Part 1: Financial Information
Item 1: Financial Statements
ASSETS
Current assets
Cash $ 69,203
Other receivables, net 26,886
Prepaid expenses 1,145
Inventory 112,789
Capitalized loan costs, net of $26,301
accumulated amortization 48,699
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Total current assets 258,722
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Property and equipment, net
Real property 5,305,129
Furniture and fixtures 426,887
Leasehold improvements 849,649
Purchased lease, net of
accumulated amortization 86,724
Computer equipment 44,983
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6,713,372
Less accumulated depreciation (341,948)
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6,371,424
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Other assets
Notes receivable, net 100,000
Accrued interest receivable 19,250
Lease and equipment deposits 211,012
Other assets 24,171
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Total other assets 354,433
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Goodwill, net of $127,420 accumulated amortization 1,262,628
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Total assets $ 8,247,207
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 634,200
Accrued expenses 1,129,710
Accrued payroll and related expenses 91,459
Bridge notes 262,667
Note payable - related party, net 360,000
Deferred revenue 52,409
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Total current liabilities 2,530,445
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Deferred rent 176,364
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Commitments and contingencies --
Stockholders' equity
Series A convertible preferred stock, $0.001 par
value 15,000,000 shares authorized, none issued --
Common stock, par value $0.001, 20,000,000
shares authorized, 15,154,354 shares issued and
outstanding 15,154
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 on common stock to be issued 462,241
Accumulated deficit (1,915,496)
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5,623,648
Less subscriptions receivable 83,250
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5,540,398
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Total liabilities and stockholders' equity $ 8,247,207
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See accompanying notes to financial statements.
page 3
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THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
1998 1997
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Revenues
Services $ 621,891 $ --
Products 77,221 --
Royalties, franchise fees and other 7,075 --
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Total revenues 706,187 --
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Operating expenses
Salaries and wages 358,019 --
Costs of products sold 49,271 --
Rental expense 233,707 --
Advertising and promotion 26,792 --
General and administrative 477,268 --
Consulting fees -- 7,344
Depreciation 41,497 --
Amortization of goodwill 69,502 --
Management fees-related party -- 82,000
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Total operating expenses 1,256,056 89,344
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Net loss from operations (549,869) (89,344)
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Other income (expense)
Interest income 1,250 1,250
Interest expense (32,355) --
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Net loss $ (580,974) $ (88,094)
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Weighted average number of shares
outstanding during the period 15,154,354 2,409,021
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Net loss per common share and equivalents $ (0.04) $ (0.04)
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See accompanying notes to financial statements.
page 4
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THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
1998 1997
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Cash flows from operating activities:
Net loss ..................................... $(580,974) $ (88,094)
Adjustments to reconcile net loss to net
cash (used in) operating activities
Amortization of goodwill ..................... 69,502 --
Depreciation and other amortization .......... 59,254 --
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable - net .................. -- --
Accrued interest receivable ................ (10,250) (1,250)
Inventory, net ............................. 34,100 --
Prepaid expenses and other assets .......... (12,360) --
Increase (decrease) in:
Accounts payable and accrued expenses ...... 405,280 7,344
Deferred revenues and rent ................. (136,427) --
Management fees payable ...................... -- 82,000
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Net cash used in operating activities ............. (171,875) --
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Cash flows from financing activities
Net cash proceeds from the issuance of notes
payable ................................... 110,000 --
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Net cash provided by financing activities ......... 110,000 --
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Net increase in cash and cash equivalents ......... (61,875) --
Cash and cash equivalents, beginning of period .... 131,078 --
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Cash and cash equivalents, end of period .......... $ 69,203 $ --
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................. -- --
Income taxes .............................. -- --
See accompanying notes to financial statements.
page 5
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THE GREAT AMERICAN BACKRUB STORE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
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 relief related products. The Company,
incorporated in 1992, began operations in 1993. As of March 31, 1998, the
Company has nine retail stores in operation and one franchise store locations.
As discussed in Note 2 the Company acquired one hundred percent of the
outstanding common stock of CARIBSUN, CORP. ("CARIBSUN") from Ascot
International Corp. ("Ascot"), a previously unrelated company. CARIBSUN, formed
in 1995 under the laws of the State of Delaware, holds title to approximately 86
acres of real property in the Parish of Saint Peter, Antigua through a
wholly-owned subsidiary. On October 1, 1997 the real property was appraised by
an independent appraiser and their report dated October 14, 1997 opines that the
fair market value of the real property was $10,000,000. The Company intends to
develop the real property.
Change in Management
As a result of the reverse acquisition discussed in Note 2, the Company
underwent a change in management effective October 16, 1997. Management of the
Company consists of the officers and directors of Ascot.
Condensed Financial Statements
The condensed balance sheet as of March 31, 1998 and the condensed statements of
operations and cash flows for the three month period ended March 31, 1998 and
1997 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations,
changes in cash flows at March 31, 1998 and for all periods presented have been
made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto of the
Company as of December 31, 1997.
The results of operations for the three month period ending March 31, 1998 and
1997 are not necessarily indicative of the operating results for the full year.
Cash and Cash Equivalents
Cash and cash equivalents represent all amounts held in banks and money market
accounts and short term investments such as United States Treasury bills with
original maturities of less than three months.
Per Share Data
Net loss per common share for the three months ended March 31, 1998 and 1997 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 exercised of common share equivalents was not utilized
since the effect was anti-dilutive.
Note 2 - Reverse Acquisition
On September 30, 1997, as amended on October 16, 1997, the Company entered into
a Securities Exchange Agreement (the "Agreement") to acquire 100% of the issued
and outstanding common stock of CARIBSUN from Ascot in exchange for 17,097,416
shares of common stock of the Company. CARIBSUN owns approximately 86 acres of
land located in Parish of Saint Peter, Antigua.
page 6
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THE GREAT AMERICAN BACKRUB STORE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 2 - Reverse Acquisition, continued:
On October 16, 1997 the acquisition was consummated and the Company initially
issued 11,000,000 shares of its common stock to Ascot in exchange for 100% of
the issued and outstanding common stock of CARIBSUN. Due to a deficiency on the
Company's authorized shares of common stock on October 16, 1997, 6,097,416
shares of common stock of the Company remain to be issued to Ascot. Upon
shareholder approval and completion of an amendment to the Company's certificate
of incorporation increasing the authorized shares, the remaining 6,097,416
common shares will be issued. These unissued shares are presented in the balance
sheet as Common Stock to be issued and Additional paid-in capital on common
stock to be issued.
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 March 31, 1998 are
presented as follows: (1) the balance sheet consists of CARIBSUN's net assets as
historical cost, and the Company's net assets at fair market value in the date
of acquisition (acquired cost); and (2) the statement of operations includes
CARIBSUN's operations for the period presented and Company's operations from the
date of acquisition, October 16, 1997.
The purchase price consists of the 17,097,416 common shares issued to Ascot
multiplied by the average fair market value of the Company's common stock as
measured just before and after the agreement and announcement of the
acquisition, as adjusted for management's estimate of the fair market value
dilution effect of issuing those shares, plus acquisition costs. The entire
difference between the purchase prices and net assets of the Company acquired
was allocated to goodwill.
The following unaudited pro-forma information presents a summary of consolidated
results of operations of the Company as if the reverse acquisition had occurred
on January 1, 1996. These pro-forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future. The pro-forma results follow:
Three Months Ended March 31,
1998 1997
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Revenues ........................ $ 706,187 $ 1,107,259
Operating expenses .............. 1,256,056 1,737,677
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Net loss from operations ........ (549,869) (630,418)
Other income (expense) .......... (31,105) (145,229)
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Net Loss ........................ $ (580,974) $ (775,647)
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Weighted average number of shares
outstanding during the period 15,154,354 2,409,021
============ ============
Net loss per common share ....... $ (0.04) $ (0.32)
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Note 3 - Options, Stock Plans and Management Compensation.
At the Company's 1994 annual meeting of shareholders held on July 18, 1994, the
Company's shareholders approved the Employee Plan. The purpose of the Employee
Plan is to promote the success of the Company by providing a method whereby
eligible employees of the Company and its subsidiaries, as defined therein, may
be awarded additional remuneration for services rendered, thereby increasing aid
in attracting persons of suitable ability to become employees of the Company and
its subsidiaries. The plan covers an aggregate of 75,000 shares of the Company's
Common Stock. As of September 30, 1997, options to purchase 8,500 shares of
Common Stock were outstanding under the plan.
page 7
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THE GREAT AMERICAN BACKRUB STORE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
In December 1994, the Company granted ten year options to purchase 360,000
shares of Common Stock to executive officers of the Company. Such options are
exercisable at a price of $3.75 per share. One-third of such options became
exercisable in March, 1995, one-third became exercisable in December 1995 and
one-third became exercisable in December 1996. In July 1995, the Company granted
five-year options to purchase 100,000 shares of Common Stock to executive
officers of the Company. Such options are exercisable at a price of $1.875 per
share. All such options have been exercised. In July 1995, the Company granted
options to purchase 10,000 shares of Common Stock to executive officer of the
Company. Such options are exercisable at a price of $2.5625 per share. Options
to purchase 5,000 shares vest and became exercisable in July 1996 and options to
purchase an additional 5,000 shares vest and became exercisable in July 1997.
All options expire on the day before the five year anniversary of vesting. In
March 1995, the Company granted ten year options to purchase 100,000 shares of
Common Stock to a consultant to the Company. Such options are exercisable at a
price of $5.00 per share. All such options are currently exercisable. In July
1995, the Company granted five year options to purchase 25,000 and 40,000 shares
of Common Stock to consultants to the Company. Such options are exercisable at a
price of $4.00 per share. All options are currently exercisable. In August 1995,
the Company granted three year options to purchase 100,000 shares of Common
Stock to a consultant to the Company. Such options are exercisable at a price of
$2.375 per share. All such options have been exercised.
In 1996, the Company granted three year options to the Company's underwriter to
purchase 125,000 shares of common stock. Such options are currently exercisable
at a price of $6.00 per share and expires on February 2000.
Note 4 - Leases
The Company leases retail stores and office equipment. All of the retail stores
are leased under noncancelable agreements which expire at various dates through
the year of 2005. The agreements, which have been classified as operating
leases, require the Company to pay insurance, taxes and other maintenance costs.
Rent expense amounted to $233,707 and $280,854 for the three month periods ended
March 31, 1998 and 1997, respectively.
Note 5 - Financial advisory and consulting agreements
In February 1996, the Company entered into a financial advisory and consulting
agreement with an investment banking firm to advise it on the possible sale of
additional equity securities, as well as to introduce and assist in the
evaluation of potential merger and partnering opportunities.
The agreement was for a period of one year commencing on February 1, 1996 and
included a $100,000 retainer paid on the execution of the agreement and warrants
to purchase 100,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share exercisable from the date of the agreement to and including
January 31, 1997, all of which have been exercised and warrants to purchase
200,000 shares of common stock of the Company at an exercise price of $2.50 per
share exercisable from the date of the agreement to and including January 31,
1998 of all have been exercised.
Such warrants resulted in a non-cash charge of $43,750 for the three month
period ended March 31, 1997.
Note 6 - Preferred Stock Offering
On February 5, 1997, the Company filed a registration statement to offer 270,000
shares of Series B Convertible Preferred Stock for approximately $2,700,000,
which if successful, after commissions and fees would have provided the Company,
with net proceeds of approximately $2,000,000. This offering was canceled due to
regulatory problems with the Company's former Investment Banker.
page 8
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THE GREAT AMERICAN BACKRUB STORE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 7 - Subsequent Events
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 shareholders meeting scheduled in June 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.
page 9
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's unaudited financial statements and the related notes thereto included
elsewhere herein.
General
As described in Note 2 - Reverse Acquisition of "Notes to Unaudited Financial
Statements", the Company acquired CARIBSUN on October 16, 1997. The transaction
was treated as a reverse acquisition for accounting purposes. Accordingly,
although the Company acquired CARIBSUN, CARIBSUN was treated as the acquiring
person for accounting purposes, 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 three months ended March 31, 1998 includes the combined activity of CARIBSUN
and the Company. As a result, even though the Company's revenues continue to be
derived primarily from the services of seated, fully clothed back rubs and the
sale of back-related products. The information presented in the Company's
financial statements makes it appear as though the Company was essentially
inactive until the acquisition. The Company began operations in August 1993, and
opened its first store for business in October 1993. The Company currently owns
and 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
Three Month Period Ended March 31, 1998 Compared to Three Month Period Ended
March 31, 1997
After giving affect of the reverse acquisition for the month period ended March
31, 1998, revenue from, services, products and franchising operations increased
to $706,187 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 forward. A clearer picture of changes in revenue is contained in the
pro-forma information contained in Note 2 of Notes to Unaudited Financial
Statements of the Company. The following is pro-forma information concerning
results of operations as if the acquisition occurred on January 1, 1996. For the
three month period the pro-forma revenue, of The Great American BackRub Store,
Inc. and subsidiary, from services, products and franchising operations (the
Company's historical business) decreased to $706,187 compared to $1,107,250 for
the comparable period in the prior year. The net decrease of $401,063 (36.2%)
was primarily attributable to the number of stores open in 1998 were less than
the number of stores opened for the comparable period in the prior year.
page 10
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Results of Operations - cont'd
Operating expenses were $1,256,056 for the three month period ended March 31,
1998 as compared to $89,344 for the comparable period in the prior year, an
increase of $1,243,041 (1,305.9%). The increase was due to the reverse
acquisition that took place on October 16, 1997. Operating expenses on a
pro-forma basis were $1,256,056 for the three month period ended March 31, 1998
as compared to $1,737,677 for the comparable period in the prior year, a
decrease of $481,621 (27.7%). 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 $358,019 for the three month
period ended March 31, 1998 as compared to $522,070 for the comparable period in
the prior year. The decrease is primarily attributable to stores opened in 1997
being closed in 1998 for a full three months. Cost of products sold, were
$49,271 for three month period ended March 31, 1998 as compared to $153,992 for
the comparable period in the prior year. The decrease can be directly
attributable to the reduction of working capital the Company experienced in
1998. The Company's stores carried very limited quantities of product in 1998.
Rental expense was $233,707 for the three month period ended March 31, 1998 as
compared to $280,854 for the comparable period in the prior year. The decrease
is primarily attributable to stores opened in 1997 being closed in 1998 for the
three month period. Advertising and promotion was $26,792 for the three month
period ended March 31, 1998 as compared to $39,075 for the comparable period in
the prior year. The decrease can be directly attributable to the reduction of
working capital the Company experienced in 1998. Management elected to reduce
advertising and promotion when faced with limited working capital. Non-cash
financial advisory fees was $0 for three month period ended March 31, 1998 as
compared to $43,750 for the comparable period in the prior year. The decrease
was primarily due to the non-cash compensation issued in 1997 to the
underwriters of the canceled preferred stock offering that was attempted in
early 1997. Depreciation was $41,497 for three month period ended March 31, 1998
as compared to $37,800 for the comparable period in the prior year. Amortization
of Goodwill was $69,502 for three month period ended March 31, 1998 as compared
to $69,502 for the comparable period in the prior year. Goodwill is being
amortized over a five year period. Management fees were $0 for the three month
period ended March 31, 1998 as compared to $82,000 for the comparable period in
the prior year. The management fees were accrued for a full three months in 1997
and none for the three months in 1998. The management fees were charged by the
former parent of CARIBSUN. General and administrative was $477,268 for three
month period ended March 31, 1998 as compared to $501,290 for the comparable
period in the prior year. The decrease was due to the reduced working capital
the Company experienced in 1998. Employees at the corporate offices were reduced
in 1998 as were related corporate expenses.
As a result of the decreased operating expenses, the pro-forma net loss for
the three month period ended March 31, 1998 decreased to $580,974 compared to
$775,647 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 franchisees.
As part of the Company's plan to focus on franchise sales as opposed to the
operation of retail stores, management plans to close five of the nine company
owned stores during the quarter ending June 30, 1998. As a result, revenues and
expenses related to the operation of retail stores will be significantly lower
in future periods. Revenue from franchise fees and training of franchisees is
expected to partially offset the loss of revenue from retail operations, but may
not have a significant effect until the fourth quarter of 1998.
Liquidity and Capital Resources
The Company had a working capital deficit as of March 31, 1998 of
($2,271,723), after giving effect to the reverse acquisition compared to a
working capital of ($228,215) as of March 31, 1997 prior to the reverse
acquisition. The decrease is primarily due to amounts spent on operations in the
development of a corporate infrastructure in anticipation of the Company's
former growth strategy of developing corporate owned stores.
page 11
<PAGE>
Results of Operations - cont'd
Inasmuch as the Company continues to have a high level of operating
expenses and will be required to make certain up-front expenditures in
connection with its proposed franchise expansion, the Company anticipates that
losses will continue for at least the next nine months and until such time, if
ever, the Company is able to generate significant revenues or achieve profitable
operations. As a result, in their report on the Company's Financial Statements
as of December 31, 1997, the Company's independent certified public accountants
have included an explanatory paragraph that describes factors raising
substantial doubt about the Company's ability to continue as a going concern.
On February 5, 1997, the Company filed a registration statement to offer
270,000 shares of Series B Convertible Preferred Stock for approximately
$2,700,000, which, if successful, after commissions and fees, would 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. Also in November 1997, a related party, Oregon Properties d/b/a Barclay
Group, loaned the Company $250,000, and in the first three months of 1998,
Barclay Group funded an additional $110,000. Since March 31, 1998 an additional
$99,210 has been loaned to the Company by Barclay Group.
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.
Forward Looking Statements
This report contains certain forward-looking statements that are based on
current expectations. In light of the important factors that can materially
affect results, including those set forth above and elsewhere in this report,
the inclusion of forward-looking information herein should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company may encounter competitive,
financial and business challenges making it more difficult than expected to
continue to develop its stores, franchises and real estate projects; necessary
financing may not be available or may only be available upon onerous terms;
competitive conditions within the industry may change adversely; the Company may
be unable to retain existing key management personnel; the Company's forecasts
may not accurately anticipate market demand; and there may be other material
adverse changes in the Company's operations or business. Certain important
factors affecting the forward-looking statements made herein include, but are
not limited to (i) accurately forecasting capital expenditures; and (ii)
obtaining new sources of external financing. Assumptions relating to budgeting,
marketing, and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revision based on actual
experience and business developments, the impact of which may cause the Company
to alter its capital expenditures or other budgets, which may in turn affect the
Company's financial position and results of operations.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 1. 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 approximately $228,000 and possession of the premises. The Company believes
it has counter-claims against the landlord 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 operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11: Statement re: Computation of per share earnings
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
Dated January 30, 1998
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<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE GREAT AMERICAN BACKRUB STORE, INC.
--------------------------------------
Registrant
Date: May 29, 1998 /s/ David L. West
-----------------------
David L. West,
Chief Financial Officer
(duly authorized officer and
principal financial officer and
principal accounting officer)
Treasurer and Secretary
page 14
