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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Security Exchange
Act of 1934 For the Quarterly period ended June 30, 1998.
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the Transition Period from ________ to _________ .
Commission file number: 0-25334
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
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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)
(727) 532-4818
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(Issuer's telephone number)
THE GREAT AMERICAN BACKRUB STORE, INC.
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(Former name)
Check whether the issuer: (1) filed all reports required by Section 13 or 15 (d)
of the Securities Exchange Act during the past 12 months (or for such period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
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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 August 10, 1998
- ----------------------------- ------------------------------
Common Stock, $.001 par value 3,788,588
Transitional Small Business Disclosure Format (check one):
Yes No X
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THE GREAT AMERICAN BACKRUB STORE, INC.
Part I
FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Balance Sheet 3
Condensed Statement of Operations 4
Statement of Cash Flows 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Financial Condition and Results of Operations 10
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 5. Other Events 14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 14
Signature Page 15
Exhibit Index 16
Page 2
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
(formerly known as)
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1998
(UNAUDITED)
Part 1: Financial Information
Item 1: Financial Statements
ASSETS
Current assets
Cash $ 44,126
Other receivables, net 26,886
Prepaid expenses 21,696
Inventory 87,802
Capitalized loan costs, net of $44,794 accumulated amortization 30,206
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Total current assets 210,716
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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 (383,445)
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6,329,927
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Other assets
Notes receivable, net 100,000
Accrued interest receivable 20,500
Lease and equipment deposits 139,424
Other assets 0
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Total other assets 259,924
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Goodwill, net of $196,922 accumulated amortization 1,193,126
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Total assets $ 7,993,693
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 824,213
Accrued expenses 1,276,611
Accrued payroll and related expenses 127,983
Bridge notes 262,667
Note payable - related party, net 584,116
Deferred revenue 52,409
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Total current liabilities 3,127,999
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Deferred rent 180,324
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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 (2,770,524)
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4,768,620
Less subscriptions receivable (83,250)
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4,685,370
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Total liabilities and stockholders' equity $ 7,993,693
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See accompanying notes to financial statements.
page 3
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
(formerly known as)
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues
Services $ 341,371 $ -- $ 963,262 $ --
Products 42,474 -- 119,695 --
Royalties, franchise fees and other 19,669 -- 26,744 --
------------ ------------ ------------ ------------
Total revenues 403,514 -- 1,109,701 --
------------ ------------ ------------ ------------
Operating expenses
Salaries and wages 399,678 -- 757,697 --
Costs of products sold 26,493 -- 75,764 --
Rental expense 202,780 -- 436,487 --
Advertising and promotion 105,875 -- 132,667 --
General and administrative 375,935 -- 853,203 --
Consulting fees -- -- -- 7,344
Depreciation 41,497 -- 82,994 --
Amortization of goodwill 69,502 -- 139,004 --
Management fees-related party -- 82,000 -- 164,000
------------ ------------ ------------ ------------
Total operating expenses 1,221,760 82,000 2,477,816 171,344
------------ ------------ ------------ ------------
Net loss from operations (818,246) (82,000) (1,368,115) (171,344)
------------ ------------ ------------ ------------
Other income (expense)
Interest income 1,263 1,250 2,513 2,500
Interest expense (38,045) -- (70,400) --
------------ ------------ ------------ ------------
Net loss $ (855,028) $ (80,750) $ (1,436,002) $ (168,844)
============ ============ ============ ============
Weighted average number of shares
outstanding during the period 15,154,354 2,409,012 15,154,354 2,412,937
============ ============ ============ ============
Net loss per common share and equivalents $ (0.06) $ (0.03) $ (0.09) $ (0.07)
============ ============ ============ ============
See accompanying notes to financial statements.
Page 4
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
(formerly known as)
THE GREAT AMERICAN BACKRUB STORE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
1998 1997
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Cash flows from operating activities:
Net loss $(1,436,002) $ (168,844)
Adjustments to reconcile net loss to net
cash (used in) operating activities
Amortization of goodwill 139,004 --
Depreciation and other amortization 119,595 --
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable - net -- --
Accrued interest receivable (11,500) (2,500)
Inventory, net 59,087 --
Prepaid expenses and other assets 62,578 --
Increase (decrease) in:
Accounts payable and accrued expenses 778,718 7,344
Deferred revenues and rent (132,548) --
Management fees payable -- 164,000
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Net cash used in operating activities (421,068) --
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Cash flows from financing activities
Net cash proceeds from the issuance of notes
payable 334,116 --
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Net cash provided by financing activities 334,116 --
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Net increase in cash and cash equivalents (86,952) --
Cash and cash equivalents, beginning of period 131,078 --
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Cash and cash equivalents, end of period $ 44,126 $ --
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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.
5
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Description of Business
International Diversified Industries, Inc. and Subsidiaries, formerly
known as The Great American BackRub Store, Inc.(the "Company") is an
owner\operator and 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 June 30, 1998, the Company
has four retail stores in operation and two 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 June 30, 1998 and the condensed
statements of operations and cash flows for the six month period ended June 30,
1998 and 1997 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations,
changes in cash flows at June 30, 1998 and for all periods presented have been
made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto of
the Company as of December 31, 1997.
The results of operations for the six month period ending June 30, 1998
and 1997 are not necessarily indicative of the operating results for the full
year.
Cash and Cash Equivalents
Cash and cash equivalents represent all amounts held in banks and money
market accounts and short term investments such as United States Treasury bills
with original maturities of less than three months.
Per Share Data
Net loss per common share for the six months ended June 30, 1998 and
1997 is computed by dividing composed by the weighted average common shares
outstanding during the year as defined by Financial Accounting Standards, No.
128, "Earnings per Share". The assumed exercised of common share equivalents was
not utilized since the effect was anti-dilutive.
Note 2 - Reverse Acquisition
On September 30, 1997, as amended on October 16, 1997, the Company
entered into a Securities Exchange Agreement (the "Agreement") to acquire 100%
of the issued and outstanding common stock of CARIBSUN from Ascot in exchange
for 17,097,416 shares of common stock of the Company. CARIBSUN owns
approximately 86 acres of land located in Parish of Saint Peter, Antigua.
page 6
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 2 - Reverse Acquisition, continued:
On October 16, 1997 the acquisition was consummated and the Company
initially issued 11,000,000 shares of its common stock to Ascot in exchange for
100% of the issued and outstanding common stock of CARIBSUN. Due to a deficiency
on the Company's authorized shares of common stock on October 16, 1997,
6,097,416 shares of common stock of the Company remain to be issued to Ascot.
Upon shareholder approval and completion of an amendment to the Company's
certificate of incorporation increasing the authorized shares, the remaining
6,097,416 common shares will be issued. These unissued shares are presented in
the balance sheet as Common Stock to be issued and Additional paid-in capital on
common stock to be issued. See note 7 Subsequent Events, for information
concerning the adjustment of the number of shares issuable to Ascot as a result
of the change of domicile merger which took place on August 3, 1998.
The CARIBSUN acquisition and issuance of the Company's Common Stock to
Ascot resulted in Ascot obtaining approximately an 80% voting interest in the
Company. Generally Accepted Accounting Principles require that the company whose
shareholders retain the majority interest in the voting stock of the combined
business be treated as the acquirer for accounting purposes. As a result, the
acquisition is accounted for as a reverse acquisition for financial reporting
purposes and CARIBSUN is deemed to have acquired the Company. Accordingly, the
Company's financial statements at the acquisition date and at June 30, 1998 are
presented as follows: (1) the balance sheet consists of CARIBSUN's net assets as
historical cost, and the Company's net assets at fair market value in the date
of acquisition (acquired cost); and (2) the statement of operations includes
CARIBSUN's operations for the period presented and Company's operations from the
date of acquisition, October 16, 1997.
The purchase price consists of the 17,097,416 common shares issued to
Ascot multiplied by the average fair market value of the Company's common stock
as measured just before and after the agreement and announcement of the
acquisition, as adjusted for management's estimate of the fair market value
dilution effect of issuing those shares, plus acquisition costs. The entire
difference between the purchase prices and net assets of the Company acquired
was allocated to goodwill.
The following unaudited pro-forma information presents a summary of
consolidated results of operations of the Company as if the reverse acquisition
had occurred on January 1, 1996. These pro-forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
the date indicated, or which may result in the future. The pro-forma results
follow:
Six Months Ended June 30,
1998 1997
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Revenues $ 1,109,701 $ 2,037,895
Operating expenses 2,477,816 3,276,981
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Net loss from operations (1,368,115) (1,239,086)
Other income (expense) (67,887) (142,739)
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Net Loss $(1,436,002) $(1,381,825)
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Weighted average number of shares outstanding
during the period 21,251,770 21,116,975
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Net loss per common share $ (0.07) $ (0.07)
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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
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 3 - Options, Stock Plans and Management Compensation, continued:
In December 1994, the Company granted ten year options to purchase
360,000 shares of Common Stock to executive officers of the Company. Such
options are exercisable at a price of $3.75 per share. One-third of such options
became exercisable in March, 1995, one-third became exercisable in December 1995
and one-third became exercisable in December 1996. In July 1995, the Company
granted five-year options to purchase 100,000 shares of Common Stock to
executive officers of the Company. Such options are exercisable at a price of
$1.875 per share. All such options have been exercised. In July 1995, the
Company granted options to purchase 10,000 shares of Common Stock to executive
officer of the Company. Such options are exercisable at a price of $2.5625 per
share. Options to purchase 5,000 shares vest and became exercisable in July 1996
and options to purchase an additional 5,000 shares vest and became exercisable
in July 1997. All options expire on the day before the five year anniversary of
vesting. In March 1995, the Company granted ten year options to purchase 100,000
shares of Common Stock to a consultant to the Company. Such options are
exercisable at a price of $5.00 per share. All such options are currently
exercisable. In July 1995, the Company granted five year options to purchase
25,000 and 40,000 shares of Common Stock to consultants to the Company. Such
options are exercisable at a price of $4.00 per share. All options are currently
exercisable. In August 1995, the Company granted three year options to purchase
100,000 shares of Common Stock to a consultant to the Company. Such options are
exercisable at a price of $2.375 per share. All such options have been
exercised.
In 1996, the Company granted three year options to the Company's
underwriter to purchase 125,000 shares of common stock. Such options are
currently exercisable at a price of $6.00 per share and expires on February
2000.
Note 4 - Leases
The Company leases retail stores and office equipment. All of the retail
stores are leased under noncancelable agreements which expire at various dates
through the year of 2005. The agreements, which have been classified as
operating leases, require the Company to pay insurance, taxes and other
maintenance costs.
Rent expense amounted to $436,487 and $280,854 for the three month
periods ended June 30, 1998 and 1997, respectively.
Note 5 - Financial advisory and consulting agreements
In February 1996, the Company entered into a financial advisory and
consulting agreement with an investment banking firm to advise it on the
possible sale of additional equity securities, as well as to introduce and
assist in the evaluation of potential merger and partnering opportunities.
The agreement was for a period of one year commencing on February 1,
1996 and included a $100,000 retainer paid on the execution of the agreement and
warrants to purchase 100,000 shares of the Company's Common Stock at an exercise
price of $1.00 per share exercisable from the date of the agreement to and
including January 31, 1997, all of which have been exercised, and warrants to
purchase 200,000 shares of common stock of the Company at an exercise price of
$2.50 per share, exercisable from the date of the agreement to and including
January 31, 1998 of all have been exercised.
Such warrants resulted in a non-cash charge of $43,750 for the six month
period ended June 30, 1997.
Note 6 - Preferred Stock Offering
On February 5, 1997, the Company filed a registration statement to offer
270,000 shares of Series B Convertible Preferred Stock for approximately
$2,700,000, which if successful, after commissions and fees would have provided
the Company, with net proceeds of approximately $2,000,000. This offering was
canceled due to regulatory problems with the Company's former investment banker.
page 8
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 7 - Subsequent Events
A Special Meeting of Shareholders held on June 22, 1998, the
shareholders of The Great American BackRub Store, Inc. (the "Company") approved
a proposal to reincorporate under the laws of the State of Delaware through the
merger of the Company with a Delaware subsidiary specifically formed for this
purpose (the "Merger").
Pursuant to the Merger, the name of the Company was changed to
"International Diversified Industries, Inc." ("IDII") and on August 3, 1998 (the
"Record Date"), each share of the Company's outstanding common stock, par value
$0.001 per share (the "Old Common Stock") was automatically converted into
one-fourth of a share of common stock, par value $0.001 per share (the "New
Common Stock"). As a result, holders of Old Common Stock became entitled to
receive one share of New Common Stock for each four shares of Old Common Stock
held by them on the Record Date. As a further result of the Merger the number of
Shares remaining to be issued to Ascot will be reduced to 1,524,354 Shares of
New Common Stock.
No fractional shares of New Common Stock are being issued by the Company
in connection with the Merger. Instead, holders of Old Common Stock who would
otherwise be entitled to receive a fractional share of New Common Stock will
receive from the Company a cash payment from their fractional interest on the
basis of a price (after giving effect to the Merger) of $0.28 per New Share.
As a result of the Merger, the Number of outstanding shares of Common
Stock will be reduced to a number that will be approximately equal to the number
of shares of Old Common Stock outstanding immediately prior to the Merger
divided by four. With exception of such change, the rights and preferences of
the New Common Stock will be the same as those of the Old Common Stock.
Also the number of authorized shares of common stock for IDII was
increase from 20,000,000 to 25,000,000.
On July 10, 1998 the Board of Directors of the Company approved the
issuance to the a related party, Oregon Properties, Inc. and Slark Ventures,
Inc. d/b/a Barclay Group (the Barclay Group), 962,500 shares New Common Stock.
The issuance was to further compensate the related party for loans made to the
Company in the amount of $665,210. The New Common Stock issued to the Barclay
Group will be restricted under the rules and regulations of the United States
Securities and Exchange Commission. Since November 1997 the Barclay Group has
loaned the Company $584,710 through June 30, 1998. Since June 30, 1998 an
additional $80,500 has been loaned to the Company by the Barclay Group. The
shares were accounted for as a loan fee to be amortized over the one year term
of the loans. The loan fee will be recorded in the third quarter of 1998 in the
amount of $67,375.
The Company has been in discussions with a private investor for the
possibility of placing preferred stock in the amount of $8,000,000. The
potential investor is a corporation, trust, estate benefit plan, partnership
other entity, which comes within a category of "accredited investor" as that
term is defined in Rule 501(a) of Regulation D under the Securities Exchange Act
of 1934. However, there can be no assurances that such financing can be obtained
upon reasonable terms or that it will be available in the near future.
page 9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
International Diversified Industries, Inc. and Subsidiaries' (the Company)
unaudited financial statements and the related notes thereto included elsewhere
herein.
General
As described in Note 2 - Reverse Acquisition of Notes to Unaudited
Financial Statements, the Company acquired CARIBSUN on October 16, 1997. The
transaction was treated as a reverse acquisition for accounting purposes.
Accordingly, although the Company acquired CARIBSUN, CARIBSUN was treated as the
acquiring person for accounting purposes, and the Consolidated Statements of
Operations and Cash Flows reflect only the activity of CARIBSUN from January 1,
1997 through October 16, 1997. The Consolidated Statements of Operations and
Cash Flows for the six months ended June 30, 1998 includes the combined activity
of CARIBSUN and the Company. As a result, even though the Company's revenues
continue to be derived primarily from the services of seated, fully clothed back
rubs and the sale of back-related products. The information presented in the
Company's financial statements makes it appear as though the Company was
essentially inactive until the acquisition. The Company began operations in
August 1993, and opened its first store for business in October 1993. The
Company currently owns and operates 4 retail stores in New York City. In
addition, the Company has a franchisee operating at the Roosevelt Field Mall on
Long Island. In the quarter ended June 30, 1998 the franchise store located at
the Exchange Towers in Toronto, Canada opened for business. Also the franchise
store located at the Plaza of Americas in Dallas, Texas opened for business on
July 28, 1998. The Company has also entered into a franchise agreement for a
store in the Los Angeles California area.
The Company plans to focus the Company's resources on franchise sales in
the future. The focus should allow the Company to shift its revenue mix away
from services of seated, fully clothed back rubs and the sale of back rub
related products to franchise fees and 6% royalty fees on the gross revenues of
franchisees. While there are no assurances that the Company can achieve the
revenue mix change it is seeking, management believes with the proper marketing
and franchise support the revenue mix change can be obtained.
The development of the Antiguan property is still in the preliminary
phases. The impact on the Company's current operations, except to the extent
that financing costs and general and administrative expenses are incurred as the
property is prepared for financing and development. Once the feasibility study
is completed and the decision is made as to the type of development best suited
to the property, financing for the project will be sought. There can be no
assurances the financing for the project can be secured and the development
begun.
Results of Operations
Three Month Period Ended June 30, 1998 Compared to Three Month Period Ended June
30, 1997
After giving affect of the reverse acquisition for the three month
period ended June 30, 1998, revenue from, services, products and franchising
operations increased to $341,371 compared to $0 for the comparable period in the
prior year. The appearance of an increase was due solely to the accounting for
the reverse acquisition that took place on October 16, 1997. CARIBSUN had no
revenue in 1997 and only revenues of the Company were included for the period
from October 17, 1997 forward. A clearer picture of changes in revenue is
contained in the pro-forma information contained in Note 2 of Notes to Unaudited
Financial Statements of the Company. The following is pro-forma information
concerning results of operations as if the acquisition occurred on January 1,
1996. For the three month period the pro-forma revenue, of International
Diversified Industries, Inc. and Subsidiaries, from services, products and
franchising operations (the Company's historical business) decreased to $403,514
compared to $930,639 for the comparable period in the prior year. The net
decrease of $527,425 (56.7%) 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
Results of Operations - cont'd
Operating expenses were $1,221,760 for the three month period ended June
30, 1998 as compared to $82,000 for the comparable period in the prior year, an
increase of $1,139,760 (1,390%). The increase was due to the reverse acquisition
that took place on October 16, 1997. Operating expenses on a pro-forma basis
were $1,221,760 for the three month period ended June 30, 1998 as compared to
$1,539,304 for the comparable period in the prior year, a decrease of $317,544
(20.6%). This decrease was primarily due to the closure of seven stores during
the year and a reduction of corporate overhead.
On a pro-forma basis, salaries and wages were $399,678 for the three
month period ended June 30, 1998 as compared to $482,583 for the comparable
period in the prior year. The decrease is primarily attributable to stores
opened in 1997 being closed in 1998. Cost of products sold, were $26,493 for
three month period ended June 30, 1998 as compared to $139,491 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 $202,780 for the three month period ended June 30, 1998 as compared
to $290,890 for the comparable period in the prior year. The decrease is
primarily attributable to stores opened in 1997 being closed in 1998.
Advertising and promotion was $105,875 for the three month period ended June 30,
1998 as compared to $8,090 for the comparable period in the prior year. The
decrease can be directly attributable to the work performed by the marketing
company retained by the Company. The marketing company is responsible for the
remaking of the image of The Great American BackRub, Inc. a wholly owned
subsidiary of the Company. Depreciation was $41,497 for three month period ended
June 30, 1998 as compared to $64,748 for the comparable period in the prior
year. Amortization of Goodwill was $69,502 for three month period ended June 30,
1998 as compared to $69,502 for the comparable period in the prior year.
Goodwill is being amortized over a five year period. Management fees were $0 for
the three month period ended June 30, 1998 as compared to $82,000 for the
comparable period in the prior year. The management fees were accrued for a full
three months in 1997 and none for the three months in 1998. The management fees
were charged by the former parent of CARIBSUN. General and administrative was
$375,935 for three month period ended June 30, 1998 as compared to $401,290 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 decrease revenue, the pro-forma net loss for the
three month period ended June 30, 1998 increased to $855,028 compared to
$606,178 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 operating 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
1997.
page 11
Results of Operations - cont'd
Six Month Period Ended June 30, 1998 Compared to Six Month Period Ended June 30,
1997
After giving affect of the reverse acquisition for the six month period ended
June 30, 1998, revenue from, services, products and franchising operations
increased to $1,109,701 compared to $0 for the comparable period in the prior
year. The appearance of an increase was due solely to the accounting for the
reverse acquisition that took place on October 16, 1997. CARIBSUN had no revenue
in 1997 and only revenues of the Company were included for the period from
October 17, 1997 forward. A clearer picture of changes in revenue is contained
in the pro-forma information contained in Note 2 of Notes to Unaudited Financial
Statements of the Company. The following is pro-forma information concerning
results of operations as if the acquisition occurred on January 1, 1996. For the
six month period the pro-forma revenue, of International Diversified Industries,
Inc. and Subsidiaries, from services, products and franchising operations (the
Company's historical business) decreased to $1,109,701 compared to $2,037,895
for the comparable period in the prior year. The net decrease of $928,194
(45.5%) was primarily attributable to the number of stores open in 1998 were
less than the number of stores opened for the comparable period in the prior
year.
Operating expenses were $2,477,816 for the six month period ended June
30, 1998 as compared to $171,334 for the comparable period in the prior year, an
increase of $2,306,482 (1,346.2%). The increase was due to the reverse
acquisition that took place on October 16, 1997. Operating expenses on a
pro-forma basis were $2,477,816 for the six month period ended June 30, 1998 as
compared to $3,276,981 for the comparable period in the prior year, a decrease
of $799,162 (24.4%). 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 $757,697 for the six month
period ended June 30, 1998 as compared to $617,591 for the comparable period in
the prior year. Cost of products sold, were $75,764 for six month period ended
June 30, 1998 as compared to $292,731 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 $436,487 for the six
month period ended June 30, 1998 as compared to $576,999 for the comparable
period in the prior year. The decrease is primarily attributable to stores
opened in 1997 being closed during 1998. Advertising and promotion was $132,667
for the six month period ended June 30, 1998 as compared to $47,165 for the
comparable period in the prior year. The increase can be directly attributed to
the work performed by the marketing company retained by the Company. The
marketing firm is responsible for remaking the image of The Great American
BackRub, Inc. a wholly owned subsidiary of the Company. Non-cash financial
advisory fees was $0 for six month period ended June 30, 1998 as compared to
$43,750 for the comparable period in the prior year. The decrease was primarily
due to the non-cash compensation issued in 1997 to the underwriters of the
canceled preferred stock offering that was attempted in early 1997. Depreciation
was $82,994 for six month period ended June 30, 1998 as compared to $103,144 for
the comparable period in the prior year. Amortization of Goodwill was $139,004
for six month period ended June 30, 1998 as compared to $139,004 for the
comparable period in the prior year. Goodwill is being amortized over a five
year period. Management fees were $0 for the six month period ended June 30,
1998 as compared to $164,000 for the comparable period in the prior year. The
management fees were accrued for a full six months in 1997 and none for the six
months in 1998. The management fees were charged by the former parent of
CARIBSUN. General and administrative was $855,203 for six month period ended
June 30, 1998 as compared to $901,683 for the comparable period in the prior
year. The decrease was due to the reduced working capital the Company
experienced in 1998. Employees at the corporate offices were reduced in 1998 as
were related corporate expenses.
As a resulted of the decease revenues, the pro-forma net loss for the
six month period ended June 30, 1998 increased to $1,436,002 compared to
$1,381,825 for the comparable period in the prior year. No provision for income
taxes was required during either period since the Company operated at a loss.
page 12
Results of Operations - cont'd
Liquidity and Capital Resources
The Company had a working capital deficit as of June 30, 1998 of
($2,917,283), after giving effect to the reverse acquisition compared to a
working capital of ($465,755) as of June 30, 1997 prior to the reverse
acquisition. The decrease is primarily due to amounts spent on operations in the
development of a corporate infrastructure in anticipation of the Company's
former growth strategy of developing corporate owned stores.
Inasmuch as the Company continues to have a high level of operating
expenses and will be required to make certain up-front expenditures in
connection with its proposed franchise expansion, the Company anticipates that
losses will continue for at least the next nine months and until such time, if
ever, the Company is able to generate significant revenues or achieve profitable
operations. As a result, in their report on the Company's Financial Statements
as of December 31, 1997, the Company's independent certified public accountants
have included an explanatory paragraph that describes factors raising
substantial doubt about the Company's ability to continue as a going concern.
On February 5, 1997, the Company filed a registration statement to offer
270,000 shares of Series B Convertible Preferred Stock for approximately
$2,700,000, which, if successful, after commissions and fees, would 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, Inc. and Slark
Ventures, Inc. d/b/a Barclay Group, loaned the Company $250,000, and in the
first six months of 1998, Barclay Group funded an additional $334,710. Since
June 30, 1998 an additional $80,500 has been loaned to the Company by Barclay
Group.
In accordance with current management's plans, the Company has been in
discussions with a private investor in the possibility placing preferred stock
in the amount of $8,000,000. The potential investor is a corporation, trust,
estate benefit plan, partnership, or other entity, which comes within a category
of "accredited investor" as that term is defined in Rule 501(a) of Regulation D
under the Securities Exchange Act of 1934. However, there can be no assurances
that such financing can be obtained upon reasonable terms or that it will be
available in the near future or that parties relating to the Company will
continue to provide necessary financial accommodation. While management believes
that such financing will provide sufficient capital to fund the Company's growth
and pay the bridge notes, if it is not available, the Company will have to
substantially reduce its operations.
Forward Looking Statements
This report contains certain forward-looking statements that are based
on current expectations. In light of the important factors that can materially
affect results, including those set forth above and elsewhere in this report,
the inclusion of forward-looking information herein should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company may encounter competitive,
financial and business challenges making it more difficult than expected to
continue to develop its stores, franchises and real estate projects; necessary
financing may not be available or may only be available upon onerous terms;
competitive conditions within the industry may change adversely; the Company may
be unable to retain existing key management personnel; the Company's forecasts
may not accurately anticipate market demand; and there may be other material
adverse changes in the Company's operations or business. Certain important
factors affecting the forward-looking statements made herein include, but are
not limited to (i) accurately forecasting capital expenditures; and (ii)
obtaining new sources of external financing. Assumptions relating to budgeting,
marketing, and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revision based on actual
experience and business developments, the impact of which may cause the Company
to alter its capital expenditures or other budgets, which may in turn affect the
Company's financial position and results of operations.
page 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was a defendant in a landlord tenant action entitled Fashion
Mall Partners, L.P. v. The Great American BackRub Store, Inc. (Civil Court of
White Plains, State of New York) in which the landlord was seeking past due rent
of approximately $300,000 and possession of the premises. Fashion Mall Partners,
L.P. has received a judgment in the amount of approximately $300,000. The
Company has entered in negotiations for settlement of the judgment in an amount
significantly less than the judgment amount. The Company believes a settlement
will be reached shortly, however there can be no assurances that a settlement
will be reached.
The Company is also party to several claims of vendors which are not
expected to have a material effect on the Company's operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 3, 1998 The Company effected a change in domicile merger. As a
result of the merger each share of Old Common Stock is reduced to 1/4 of a share
of New Common Stock. See Item 5 Other Events.
ITEM 5. OTHER EVENTS
A Special Meeting of Shareholders held on June 22, 1998, the
shareholders of The Great American BackRub Store, Inc. (the "Company") approved
a proposal to reincorporate under the laws of the State of Delaware through the
merger of the Company with a Delaware subsidiary specifically formed for this
purpose (the "Merger").
Pursuant to the Merger, the name of the Company was changed to
"International Diversified Industries, Inc." ("IDII") and on August 3, 1998 (the
"Record Date"), each share of the Company's outstanding common stock, par value
$0.001 per share (the "Old Common Stock") was automatically converted into
one-fourth of a share of common stock, par value $0.001 per share (the "New
Common Stock"). As a result, holders of Old Common Stock became entitled to
receive one share of New Common Stock for each four shares of Old Common Stock
held by them on the Record Date. As a further result of the merger the number of
shares remaining to be issued to Ascot will be reduced to 1,524,354 shares of
New Common Stock.
No fractional shares of New Common Stock are being issued by the Company
in connection with the Merger. Instead, holders of Old Common Stock who would
otherwise be entitled to receive a fractional share of New Common Stock will
receive from the Company a cash payment from their fractional interest on the
basis of a price (after giving effect to the Merger) of $0.28 per New Share.
As a result of the Merger, the Number of outstanding shares of Common
Stock will be reduced to a number that will be approximately equal to the number
of shares of Old Common Stock outstanding immediately prior to the Merger
divided by four. With exception of such change, the rights and preferences of
the New Common Stock will be the same as those of the Old Common Stock.
Also the number of authorized shares of common stock for IDII was
increased from 20,000,000 to 25,000,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
---------------------------------
(a) Exhibits:
Exhibit 11: Statement re: Computation of
per share earnings
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
Dated January 30, 1998
page 14
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL DIVERSIFIED INDUSTRIES, INC.
Registrant
Date: August 14, 1998 DAVID L. WEST
--------------------------------------------
David L. West, Chief Financial Officer (duly
authorized officer and principal financial
officer and principal accounting officer)
Treasurer and Secretary
page 15
EXHIBIT INDEX
Exhibits Description
- -------- -----------
2.1 Certificate of Merger
11 Statement re: Computation of per share earnings
27 Financial Data Schedule
page 16