<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission File No. 0-23444
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FROST HANNA CAPITAL GROUP, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Florida 65-0701248
-------------------- -------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
</TABLE>
327 Plaza Real, Suite 319
Boca Raton, FL 33432
------------------------------------------------
(Address of principal executive offices)
(561) 367-1079
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
Yes X No
----- --------
Number of shares outstanding of each of the issuer's losses of common
equity:________
As of May 8, 1998, the Company had a total of 2,657,202 shares of Common
Stock, par value $.0001 per share (the "Common Stock"), outstanding.
Additionally, as of such date Underwriter Warrants to purchase 110,020 shares of
Common Stock (the "Underwriter Warrants") remained outstanding and unexercised.
Each Underwriter Warrant entitles the holder thereof to purchase one share of
Common Stock at a purchase price of $9.90 per share commencing October 16, 1998
and for a period of four years thereafter.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
<PAGE> 2
FROST HANNA CAPITAL GROUP, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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PART I
<S> <C> <C>
Item 1. Financial Statements............................................................................1
Item 2. Management's Discussion and Analysis or Plan of Operation.......................................1
PART II
Item 1. Legal Proceedings...............................................................................4
Item 2. Changes in Securities...........................................................................4
Item 3. Defaults Upon Senior Securities.................................................................4
Item 4. Submission of Matters to Vote of Security Holders...............................................4
Item 5. Other Information...............................................................................4
Item 6. Exhibits and Reports on Form 8-K................................................................4
SIGNATURES........................................................................................................5
FINANCIAL STATEMENTS............................................................................................F-1
</TABLE>
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<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
The unaudited, condensed financial statements included herein,
commencing at page F-1, have been prepared in accordance with the requirements
of Regulation S-B and supplementary financial information included herein, if
any, has been prepared in accordance with Item 310(b) of Regulation S-B and,
therefore, omit or condense certain footnotes and other information normally
included in financial statements prepared in accordance with generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
financial information for the interim periods reported have been made. Results
of operations for the three months ended March 31, 1998 and from inception
(February 2, 1996) to the period ended March 31, 1998, are not necessarily
indicative of the results for the year ending December 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Frost Hanna Capital Group, Inc. (the "Company"), was formed in February
1996 to seek to effect a merger, exchange of capital stock, asset acquisition or
similar business combination (a "Business Combination"), with an acquired
business (an "Acquired Business"). In connection with its initial
capitalization, the Company issued 1,557,000 shares of its Common Stock to its
officers, directors, and other shareholders for an aggregate sum of $216,613. On
September 22, 1997, the Company's Registration Statement on Form SB-2 (the
"Registration Statement"), was declared effective by the U.S. Securities and
Exchange Commission. Pursuant to the Registration Statement, the Company, in its
initial public offering of securities, offered and sold 1,100,202 shares of
Common Stock, par value $.0001 per share, at a purchase price of $6.00 per share
(the "Offering"), and received net proceeds of approximately $5,875,079 (which
amount, less estimated expenses of the Offering, is referred to herein as the
"Net Proceeds"). In addition, the Company issued Underwriter Options to purchase
110,020 shares of Common Stock. The Offering was a "blank check" offering.
Liquidity and Capital Resources/Plan of Operation
As of March 31, 1998 and December 31, 1997, respectively, the Company
had cash and cash equivalents of $689,823 and $776,067, restricted short-term
investments of $4,659,535 and $4,608,759, property and equipment of $17,669 and
$21,084 and prepaid expenses of $8,015 and $8,015. As of March 31, 1998
and December 31, 1997, respectively, the Company had total liabilities of
$21,170 and $20,750 and total stockholders' equity of $5,353,872 and $5,393,175.
Following the consummation of the Offering, eighty percent (80%) of the Net
Proceeds ($4,560,063) (the "Escrow Fund"), were delivered to Fiduciary Trust
International of the South, as Escrow Agent, to be held in escrow by such firm,
until the earlier of (i) written notification by the Company of its need for all
or substantially all of the Escrow Fund for the purpose of implementing a
Business Combination; or (ii) the exercise by certain shareholders of redemption
rights which will be offered (the "Redemption Offer") at the time the Company
seeks shareholder approval of any potential Business Combination. As of March
31, 1998, there was $4,659,535 in the Escrow Fund. The Escrow Fund is currently
invested in United States government-backed short-term securities.
Other than the Escrow Fund, the Company, as of March 31, 1998 and
December 31, 1997, respectively, had $689,823 and $776,067 in cash,
substantially all of which was received from the Offering (other than interest
income earned thereon) (the "Operating Funds"). The Company believes the
Operating Funds will be sufficient for its cash requirements for at least the
next twelve months.
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<PAGE> 4
The expenses required to select and evaluate an Acquired Business
candidate (including conducting a due diligence review) and to structure and
consummate a Business Combination (including the negotiation of relevant
agreements and the preparation of requisite documents for filing pursuant to
applicable securities laws and state corporation laws) cannot be presently
ascertained with any degree of certainty. Pursuant to employment agreements, the
Company pays to each of Mr. Richard Frost, Chief Executive Officer and Chairman
of the Board of the Company, and Mr. Mark Hanna, President of the Company,
$10,000 monthly for salary and $1,000 monthly each for Messrs. Frost's and
Hanna's non-accountable expense allowance.
The Company anticipates that it will make contact with business
prospects primarily through the efforts of its officers, who will meet
personally with existing management and key personnel, visit and inspect
material facilities, assets, products and services belonging to such prospects
and undertake such further reasonable investigation as management deems
appropriate, to the extent of its limited financial resources. The Company
anticipates that certain Acquired Business candidates may be brought to its
attention from various unaffiliated sources, including securities
broker-dealers, investment bankers, venture capitalists, bankers, other members
of the financial community, and affiliated sources. While the Company does not
presently anticipate engaging the services of professional firms that specialize
in business acquisitions on any formula basis, the Company may engage such firms
in the future, in which event the Company may pay a finder's fee or other
compensation. In no event, however, will the Company pay a finder's fee or
commission to officers or directors of the Company or any entity with which they
are affiliated for such services.
As part of the Company's investigation of prospective enterprises,
products and services, management intends to request that current owners of a
prospective Acquired Business provide, among other things, written materials
regarding the current owner's business, product or service, available market
studies, as well as the assumptions upon which they are made, appropriate title
documentation with respect to the assets, products and services of the potential
Acquired Business, detailed written descriptions of any transactions between the
potential Acquired Business and any of its affiliates, copies of pleadings and
material litigation, if any, copies of material contracts and any and all other
information deemed relevant. Additionally, the Company may verify such
information, if possible, by interviewing competitors, certified public
accountants and other persons in a position to have independent knowledge
regarding the product or service as well as the financial condition of the
potential Acquired Business.
Key Man Insurance
The Company has obtained $1,000,000 "key man" term policies insuring
each of the lives of Messrs. Frost and Hanna. There can be no assurances that
such "key man" insurance will be maintained at reasonable rates, if at all. The
loss, incapacity or unavailability of any of Messrs. Frost or Hanna at the
present time or in the foreseeable future, before a qualified replacement was
obtained, could have a material adverse effect on the Company's operations. In
connection with the purchase by the Company of such policies, The Marshal E.
Rosenberg Organization, Inc., a firm in which Dr. Rosenberg, a director of the
Company, is an officer, director and sole shareholder, received a commission of
approximately $2,700 in 1996 and $4,464 in 1997. No further commissions are
contemplated to be earned in connection with the purchase of such "key man" life
insurance policies.
Conflicts of Interest
None of the Company's key personnel are required to commit their full
time to the affairs of the Company and, accordingly, such personnel may have
conflicts of interest in allocating management time among various business
activities. Certain of these key personnel may in the future become affiliated
with
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<PAGE> 5
entities, including other "blank check" companies, engaged in business
activities similar to those intended to be conducted by the Company. Messrs.
Frost and Hanna are each currently directors of Continucare Corporation, a
Florida corporation ("Continucare"), engaged in the development and management
of mental and physical rehabilitation health care programs. Dr. Rosenberg is an
investor in numerous private enterprises, engaged in, among other things, real
estate development and retail sales, which business interests may conflict with
those of an Acquired Business. Mr. Donald Baxter, a director of the Company, is
the President of Baxter Financial Corporation, an investment advisory firm, and
the President and Chairman of the Philadelphia Fund and Eagle Growth Shares,
mutual funds registered under the Investment Company Act of 1940. Mr. Charles
Fernandez, a director of the Company, is currently the Chairman of the Board,
President and Chief Executive Officer of Continucare. Certain activities which
may be performed by such individuals in connection with their other business
affiliations may be deemed competitive with the business of the Company.
In the course of their other business activities, including private
investment activities, Messrs. Frost, Hanna, Baxter, Rosenberg and Fernandez may
become aware of investment and business opportunities which may be appropriate
for presentation to the Company as well as the other entities with which they
are affiliated. Such persons may have conflicts of interest in determining to
which entity a particular business opportunity should be presented. In general,
officers and directors of corporations incorporated under the laws of the State
of Florida are required to present certain business opportunities to such
corporations. Accordingly, as a result of multiple business affiliations,
Messrs. Frost, Hanna, Baxter, Rosenberg and Fernandez may have similar legal
obligations relating to presenting certain business opportunities to the various
entities upon which they serve as directors. In addition, conflicts of interest
may arise in connection with evaluations of a particular business opportunity by
the Board of Directors with respect to the foregoing criteria. There can be no
assurances that any of the foregoing conflicts will be resolved in favor of the
Company. In order to minimize potential conflicts of interest which may arise
from multiple corporate affiliations, each of Messrs. Frost, Hanna, Baxter,
Rosenberg and Fernandez have agreed to present to the Company for its
consideration, prior to presentation to any other entity, any prospective
Acquired Business which is appropriate for the Company to consider and which
prospective Acquired Business participates in an industry dissimilar to any of
the industries to which such individuals have corporate affiliations. It should
be further noted, that the Company shall not consider Business Combinations with
entities owned or controlled by officers, directors, greater than 10%
shareholders of the Company or any person who directly or indirectly controls,
is controlled by or is under common control with the Company. The Company may
consider Business Combinations with entities owned or controlled by persons
other than those persons described above. There can be no assurances that any of
the foregoing conflicts will be resolved in favor of the Company.
Pursuant to an agreement among each of Messrs. Frost, Hanna, Baxter,
Rosenberg and Fernandez and the Company, such persons will not (i) actively
negotiate for or otherwise consent to the disposition of any portion of their
Common Stock at a per share price different than that offered with respect to
the Public Shares as a condition to or in connection with a Business Combination
or; (ii) cause any securities of the Company to be sold by any officers,
directors, greater than 10% shareholders or persons who may be deemed promoters
of the Company except as may otherwise be made in permitted market transactions
without affording all shareholders of the Company a similar opportunity.
Further, the Company shall not borrow funds to be used directly or indirectly to
(i) purchase any shares of the Company's Common Stock owned by management of the
Company; or (ii) make payments to the Company's promoters, management or their
affiliates or associates.
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<PAGE> 6
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently a party to any material
litigation, nor to the knowledge of management, is any such
litigation presently threatened.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 1998, no matters were
submitted to a vote of security holders of the Company,
through the solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
1. Financial Statements begin on page F-1.
2. Exhibits: None
(b) Reports on Form 8-K.
1. None
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<PAGE> 7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
FROST HANNA CAPITAL GROUP, INC.
Dated: May 15, 1998 By: /s/ Mark J. Hanna
------------------------------
Mark J. Hanna, President
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<PAGE> 8
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1997 1998
------ ------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including interest
bearing amounts of $745,048 in 1997 and
$684,958 in 1998 $ 776,067 $ 689,823
Restricted short-term investments 4,608,759 4,659,535
Prepaid expenses 8,015 8,015
----------- -----------
Total current assets 5,392,841 5,357,373
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $2,810 in 1997 and $4,636 in 1998 21,084 17,669
----------- -----------
Total assets $ 5,413,925 $ 5,375,042
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accrued expenses $ 20,750 $ 21,170
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 100,000,000
shares authorized, 2,657,202 shares
issued and outstanding in 1997 and 1998 266 266
Additional paid-in capital 5,803,400 5,803,400
Deficit accumulated during development stage (410,491) (449,794)
----------- -----------
Total stockholders' equity 5,393,175 5,353,872
----------- -----------
Total liabilities and stockholders' equity $ 5,413,925 $ 5,375,042
=========== ===========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these balance sheets.
F-1
<PAGE> 9
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Period From
For the For the Inception
Three Months Three Months (February 2,
Ended Ended 1996) to
March 31, March 31, March 31,
1997 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ -- $ -- $ --
----------- ----------- -----------
EXPENSES:
Officers' salaries 44,000 66,000 253,000
General and administrative 80,515 38,896 321,908
----------- ----------- -----------
Total operating expenses 124,515 104,896 574,908
INTEREST INCOME 561 65,593 125,114
----------- ----------- -----------
Net loss $ (123,954) $ (39,303) $ (449,794)
=========== =========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.08) $ (0.01) $ (0.25)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 1,492,000 2,657,202 1,781,170
=========== =========== ===========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-2
<PAGE> 10
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Period From
For the For the Inception
Three Months Three Months (February 2, 1996)
Ended Ended to
March 31, March 31, March 31,
1997 1998 1998
-------------- -------------- --------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (123,954) $ (39,303) $ (449,794)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation 455 1,826 4,636
Interest on restricted short-term investments -- (50,776) (99,466)
Write-off of deferred registration costs 35,000 -- 75,000
Loss on disposal of fixed assets -- 1,589 1,589
Changes in assets and liabilities:
Increase in prepaid expenses (26,360) -- (8,015)
Increase in accrued expenses 18,943 420 21,170
Increase in accrued officers' salaries 44,000 -- --
----------- ----------- -----------
Net cash used in operating activities (51,916) (86,244) (454,880)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of restricted short-term investments -- -- (4,560,069)
Capital expenditures (17,970) -- (23,894)
----------- ----------- -----------
Net cash used in investing activities (17,970) -- (4,583,963)
----------- ----------- -----------
(Continued)
</TABLE>
F-3
<PAGE> 11
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
For the
Period From
For the For the Inception
Three Months Three Months (February 2, 1996)
Ended Ended to
March 31, March 31, March 31,
1997 1998 1998
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<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net $ -- $ -- $ 5,843,666
Redemption of common stock -- -- (40,000)
Proceeds from officer loans 20,000 -- 75,000
Payment of officer loans -- -- (75,000)
Deferred registration costs (28,710) -- (75,000)
----------- ----------- -----------
Net cash (used in) provided by financing activities (8,710) -- 5,728,666
----------- ----------- -----------
Net (decrease) increase in cash (78,596) (86,244) 689,823
CASH AND CASH EQUIVALENTS, beginning of period 91,818 776,067 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 13,222 $ 689,823 $ 689,823
=========== =========== ===========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these statements.
F-4
<PAGE> 12
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. GENERAL
Frost Hanna Capital Group, Inc. (the "Company") was formed on February 2, 1996
to seek to effect a merger, exchange of capital stock, asset acquisition or
similar business combination (a "Business Combination") with an operating or
development stage business (an "Acquired Business"). The Company is currently in
the development stage and all efforts of the Company to date have been limited
to organizational activities.
As further discussed in Note 3, on October 16, 1997, the Company consummated an
initial public offering of its securities (the " Offering").
The Offering may be considered a "blank check" offering. Blank check offerings
are characterized by an absence of substantive disclosures related to the use of
the net proceeds of the offering. Although substantially all of the net proceeds
of the Offering are intended to be utilized to effect a Business Combination,
the net proceeds are not being designated for any more specific purpose.
Moreover, since the Company has not yet identified an acquisition target,
investors in the Offering will have virtually no substantive information
available for advance consideration of any Business Combination.
Upon completion of the Offering, 80% of the net proceeds therefrom were placed
in an interest bearing escrow account (the "Escrow Fund"), subject to release
upon the earlier of (i) written notification by the Company of its need for all
or substantially all of the Escrow Fund for the purpose of implementing a
Business Combination, or (ii) the exercise by certain shareholders of the
Redemption Offer (as hereinafter defined). Any interest earned on the Escrow
Fund shall remain in escrow and be used by the Company either (i) following a
Business Combination in connection with the operations of an Acquired Business
or (ii) in connection with the distribution to the shareholders through the
exercise of the Redemption Offer or the liquidation of the Company. In the event
the Company requires in excess of 20% of the Net Proceeds for operations,
Messrs. Richard B. Frost, Chief Executive Officer and Chairman of the Board of
Directors; and Mark J. Hanna, President and Director, have undertaken to waive
their salaries prospectively until the consummation by the Company of a Business
Combination. Investors' funds may be escrowed for an indefinite period of time
following the consummation of the Offering. Further, there can be no assurances
that the Company will ever consummate a Business Combination. In the event of
the exercise of the Redemption Offer, investors may
F-5
<PAGE> 13
only recoup a portion of their investment. The Company currently has no
expectation with regard to the Company's plans in the event a Business
Combination is not consummated by a certain date.
The Company, prior to the consummation of any Business Combination, will submit
such transaction to the Company's shareholders for their approval. In the event,
however, that the holders of 30% or more of the shares of the Company's common
stock sold in the Offering which are outstanding vote against approval of any
Business Combination, the Company will not consummate such Business Combination.
The shares of common stock sold in the Offering may sometimes be referred to as
the "Public Shares" and the holders (whether current or future) of the Public
Shares are referred to as "Public Shareholders". All of the officers and
directors of the Company, who owned in the aggregate approximately 82% of the
common stock outstanding prior to the Offering, have agreed to vote their
respective shares of common stock in accordance with the vote of the majority of
the Public Shares with respect to any such Business Combination.
At the time the Company seeks shareholder approval of any potential Business
Combination, the Company will offer (the "Redemption Offer") to each of the
Public Shareholders who vote against the proposed Business Combination and
affirmatively request redemption, for a twenty (20) day period, to redeem all,
but not a portion of, their Public Shares, at a per share price equal to the
Company's liquidation value on the record date for determination of shareholders
entitled to vote upon the proposal to approve such Business Combination (the
"Record Date") divided by the number of Public Shares. The Company's liquidation
value will be equal to the Company's book value, as determined by the Company,
calculated as of the Record Date. In no event, however, will the Company's
liquidation value be less than the Escrow Fund, inclusive of any net interest
income thereon. If the holders of less than 30% of the Public Shares held by
Public Shareholders elect to have their shares redeemed, the Company may, but
will not be required to, proceed with such Business Combination. If the Company
elects to so proceed, it will redeem the Public Shares, based upon the Company's
liquidation value, from those Public Shareholders who affirmatively requested
such redemption and who voted against the Business Combination. However, if the
holders of 30% or more of the Public Shares held by Public Shareholders vote
against approval of any potential Business Combination, the Company will not
proceed with such Business Combination and will not redeem such Public Shares.
If the Company determines not to pursue a Business Combination, even if the
Public Shareholders of less than 30% of the Public Shares vote against approval
of the potential Business Combination, no Public Shares will be redeemed.
As a result of its limited resources, the Company will, in all likelihood, have
the ability to effect only a single Business Combination. Accordingly, the
prospects for the Company's success will be entirely dependent upon the future
performance of a single business.
F-6
<PAGE> 14
The Company is in the development stage, has had no revenues to date and is
entirely dependent upon the proceeds of the Offering to commence operations
relating to selection of a prospective Acquired Business. The Company will not
receive any revenues, other than interest income, until, at the earliest, the
consummation of a Business Combination. In the event that the proceeds of the
Offering prove to be insufficient for purposes of effecting a Business
Combination, the Company will be required to seek additional financing. In the
event no Business Combination is identified, negotiations are incomplete or no
Business Combination has been consummated, and all of the proceeds of the
Offering other than the Escrow Fund have been expended, the Company currently
has no plans or arrangements with respect to the possible acquisition of
additional financing which may be required to continue the operations of the
Company. Furthermore, there is no assurance that the Company will be able to
successfully effect a Business Combination.
The accompanying information has been prepared to conform with Rule 419 of the
Securities and Exchange Commission, which was adopted to strengthen the
regulation of securities offered by "blank check" companies. A blank check
company is defined as (a) a development stage company that has no specific
business plan or has indicated that its business plan is to engage in a merger
or acquisition with an unidentified company and (b) a company which issues
securities that, among other things, (i) are not quoted in the NASDAQ system,
or, (ii) in the case of a company which has been in continuous operation for
less than three years, has net tangible assets of less than $5,000,000. Although
the Company is a "blank check" company, it does not believe that Rule 419 will
be applicable to it in view of the fact that its net tangible assets exceed
$5,000,000. Accordingly, investors in the Offering will not receive the
substantive protection provided by Rule 419. Additionally, there can be no
assurance that the United States Congress will not enact legislation which will
prohibit or restrict the sale of securities of "blank check" companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
In management's opinion, the accompanying unaudited interim financial statements
of the Company contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of March 31, 1998, and the results of operations and cash flows for the three
months then ended. The results of operations for the three months ended March
31, 1998 are not necessarily indicative of the results of operations or cash
flows which may be reported for the remainder of 1998.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE> 15
Recent Accounting Pronouncements
The Company follows Statements of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" which is effective for fiscal years ending after
December 15, 1997. SFAS No. 128 simplifies the current standards for computing
earnings per share ("EPS") under Accounting Principles Board ("APB") No. 15,
"Earnings Per Share", by replacing the existing calculation of primary EPS with
a basic EPS calculation. It requires a dual presentation, for complex capital
structures, of basic and diluted EPS on the face of the income statement and
requires a reconciliation of basic EPS factors to diluted EPS factors. This dual
presentation and reconciliation are not presented as basic and diluted EPS are
the same for the Company as it has been in a net loss position and all options
would be anti-dilutive.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income" which is required to be adopted in fiscal
1998. This statement establishes standards to reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in financial statements and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
statements of financial position. Comprehensive income is defined as the change
in equity during the financial reporting period of a business enterprise
resulting from nonowner sources.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which is required to be adopted in fiscal
1998. This statement requires that a public business enterprise report financial
and descriptive information about its reportable operating segments including,
among other things, a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets.
The Company does not expect the adoption of SFAS Nos. 130 and 131 to have a
material impact or require additional disclosure.
3. PUBLIC OFFERING OF SECURITIES
In the Offering, which closed on October 16, 1997, the Company sold to the
public 1,100,202 shares of its common stock, at a price of $6 per share. Net
proceeds before other offering expenses totaled $5,875,079.
In connection with the Offering, the Company has sold to the underwriter, at an
aggregate price of $110, warrants (the "Underwriter Options") to purchase up to
110,020 shares of the Company's common stock at an exercise price of $9.90 per
share. The Underwriter Options are exercisable for a period of four years
commencing October 16, 1998.
The Company has accounted for the Underwriter Options issued in 1997 in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", which
applies to transactions with non-employees. In accordance with SFAS No. 123, the
issuance of the Underwriter Options was recorded as a cost of the Offering.
F-8
<PAGE> 16
4. COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of 100,000,000
shares of common stock. As of March 31, 1998, there is a minimum of 97,232,798
(unaudited) authorized but unissued shares of common stock available for
issuance (after appropriate reserves for the issuance of common stock upon full
exercise of the Underwriter Options). The Company's Board of Directors has the
power to issue any or all of the authorized but unissued common stock without
shareholder approval. The Company currently has no commitments to issue any
shares of common stock other than as described in the Offering; however, the
Company will, in all likelihood, issue a substantial number of additional shares
in connection with a Business Combination. To the extent that additional shares
of common stock are issued, dilution of the interests of the Company's
shareholders participating in the Offering may occur.
In June 1997, the Company redeemed, at the original purchase price, 80,000
shares of its common stock from a third party.
5. COMMITMENTS AND CONTINGENCIES
The Company entered into employment agreements with Messrs. Frost and Hanna
commencing on September 15, 1996 and requiring monthly salaries of $10,000 each
plus monthly nonaccountable expense allowances of $1,000 each. The deferred
amounts due to Messrs. Frost and Hanna for the period from inception (February
2, 1996) to the date of closing of the public offering were paid upon the
closing.
The Company shall reimburse its officers and directors for any accountable
reasonable expenses incurred in connection with activities on behalf of the
Company. There is no limit on the amount of such reimbursable expenses, and
there will be no review of the reasonableness of such expenses by anyone other
than the Board of Directors, all of the members of which are officers.
Commencing on January 15, 1997, the Company moved its executive offices to a new
location pursuant to a three-year lease agreement at an approximate cost per
month of $3,000.
F-9
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