<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 September 30, 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)
Florida 65-0701248
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
327 Plaza Real, Suite 319
Boca Raton, FL 33432
----------------------------------------
(Address of principal executive offices)
(561) 367-1079
----------------------------------------------------
(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 classes of common equity:
As of November 11, 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 SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
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 September 30, 1998
and from inception (February 2, 1996) to the period ended September 30, 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 (sometimes referred to as, the "Public
Shares"), 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 September 30, 1998 and December 31, 1997, respectively, the Company
had cash and cash equivalents of $472,189 and $776,067, restricted short-term
investments of $4,771,967 and $4,608,759, property and equipment of $14,018 and
$21,084 and prepaid expenses of $11,809 and $8,015. As of September 30, 1998
and December 31, 1997, respectively, the Company had total liabilities of
$3,500 and $20,750 and total stockholders' equity of $5,266,483 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 September 30, 1998, there was $4,771,967 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 September 30, 1998 and
December 31, 1997, respectively, had $472,189 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
affiliated sources and unaffiliated sources including securities
broker-dealers, investment bankers, venture capitalists, bankers, and other
members of the financial community. 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, products or services, 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 entities, including other "blank check" companies, engaged in business
activities similar to those intended
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<PAGE> 5
to be conducted by the Company. Messrs. Frost and Hanna are each currently
directors of Continucare Corporation, a Florida corporation ("Continucare"),
which is engaged in the development and management of mental and physical
rehabilitation health care programs. Dr. Rosenberg is an investor in numerous
private enterprises that are 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.
-3-
<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 September 30, 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: 27 Financial Data Schedule (For SEC use only)
(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 report to be signed on its behalf by the
undersigned thereunto duly authorized.
FROST HANNA CAPITAL GROUP, INC.
Dated: November 11, 1998 By: /s/ Mark J. Hanna, President
------------------------------------
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, September 30,
ASSETS 1997 1998
------ ------------ --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents, including interest
bearing amounts of $745,048 in 1997 and
$450,392 in 1998 $ 776,067 $ 472,189
Restricted short-term investments 4,608,759 4,771,967
Prepaid expenses 8,015 11,809
----------- -----------
Total current assets 5,392,841 5,255,965
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $2,810 in 1997 and $8,287 in 1998 21,084 14,018
----------- -----------
Total assets $ 5,413,925 $ 5,269,983
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses $ 20,750 $ 3,500
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 100,000,000
shares authorized, 2,657,000 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) (537,183)
----------- -----------
Total stockholders' equity 5,393,175 5,266,483
----------- -----------
Total liabilities and stockholders' equity $ 5,413,925 $ 5,269,983
=========== ===========
</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 For the For the Inception
Three Months Three Months Nine Months Nine Months (February 2,
Ended Ended Ended Ended 1996) to
September 30, September 30, September 30, September 30, September 30,
1997 1998 1997 1998 1998
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES $ - $ - $ - $ - $ -
----------- ----------- ----------- ----------- -----------
EXPENSES:
Officers' salaries 6,600 66,000 50,600 198,000 385,000
General and administrative 27,548 43,020 203,683 132,382 415,394
----------- ----------- ----------- ----------- -----------
Total operating expenses 34,148 109,020 254,283 330,382 800,394
INTEREST INCOME 318 70,223 1,033 203,690 263,211
----------- ----------- ----------- ----------- -----------
Net loss $ (33,830) $ (38,797) $ (253,250) $ (126,692) $ (537,183)
=========== =========== =========== =========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.02) $ (0.01) $ (0.16) $ (0.05) $ (0.28)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 1,557,000 2,657,202 1,557,000 2,657,202 1,917,990
=========== =========== =========== =========== ===========
</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
Nine Months Nine Months (February 2,
Ended Ended 1996) to
September 30, September 30, September 30,
1997 1998 1998
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(253,250) $ (126,692) $ (537,183)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities-
Depreciation 4,267 5,477 8,287
Interest accretion on restricted short-term investments -- (177,082) (225,391)
Write-off of deferred registration costs 75,000 -- 75,000
Loss on disposal of fixed assets -- 1,589 1,589
Changes in assets and liabilities:
Increase in prepaid expenses (15,526) (3,794) (11,809)
Increase in accrued officers' salaries 50,364 -- --
Increase (decrease) in accrued expenses 50,600 (17,250) 3,500
--------- ------------ ------------
Net cash provided by (used in) operating activities (88,545) (317,752) (686,007)
--------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted short-term investments -- (23,070,849) (27,631,299)
Maturities of restricted short-term investments -- 23,084,723 23,084,723
Capital expenditures (18,728) -- (23,894)
--------- ------------ ------------
Net cash provided by (used in) investing activities (18,728) 13,874 (4,570,470)
--------- ------------ ------------
</TABLE>
(Continued)
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
Nine Months Nine Months (February 2,
Ended Ended 1996) to
September 30, September 30, September 30,
1997 1998 1998
------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net $ 72,501 $ -- $ 5,843,666
Redemption of common stock (40,000) -- (40,000)
Proceeds from officer loans 75,000 -- 75,000
Payment of officer loans -- -- (75,000)
Deferred registration costs (82,180) -- (75,000)
-------- --------- -----------
Net cash provided by financing activities 25,321 -- 5,728,666
-------- --------- -----------
Net increase (decrease) in cash (81,952) (303,878) 472,189
CASH AND CASH EQUIVALENTS, beginning of period 91,818 776,067 --
-------- --------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 9,866 $ 472,189 $ 472,189
======== ========= ===========
</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, as of the
date such determination is made, to waive their salaries prospectively until the
consummation by the Company of a Business Combination. Investors' funds may be
escrowed for an indefinite
F-5
<PAGE> 13
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 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 September 30, 1998, and the results of operations for the three and nine
months ended September 30, 1998 and 1997 and cash flows for the nine months
ended September 30, 1998 and 1997. The results of operations for the nine months
ended September 30, 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". 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
and warrants would be anti-dilutive.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income" which the Company adopted in the first
quarter of 1998. This statement establishes standards for 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. The Company does not have any material
comprehensive income items reported outside its statements of operations for the
three and nine months ended September 30, 1998 and 1997. Therefore, the
Company's net loss for the three and nine months ended September 30, 1998 and
1997, equals its comprehensive loss for the same time periods.
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in the
Company's first quarter of 2000. This statement establishes accounting and
reporting standards that require that every derivative instrument be recorded in
the balance sheet as either an asset or liability at its fair value.
The Company does not expect the adoption of SFAS Nos. 130 and 131 to have a
material impact on its reported financial position or results of operations 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 totaled $5,843,666.
F-8
<PAGE> 16
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
fair value of the Underwriter Options was recorded as a cost of the Offering.
4. COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of 100,000,000
shares of common stock. As of September 30, 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 employment
agreements will terminate on September 15, 1999 with automatic extensions for
additional one-year periods thereafter. Messrs. Frost's and Hanna's salaries
were paid through October 1996. Messrs. Frost and Hanna agreed that amounts due
under their employment agreements for the period from November 1, 1996 to the
consummation date of the Offering would be limited to $88,000, which amount was
paid to Messrs. Frost and Hanna on the date of closing of the Offering.
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.
F-9
<PAGE> 17
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.
6. RELATED-PARTY TRANSACTION
On July 13, 1998, Alan Freeman was appointed to the Board of Directors of the
Company to serve as a director. Alan Freeman is affiliated with Freeman,
Buczyner & Gero, the Company's internal accountants.
F-10
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