FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File No. 0-22265
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FROST HANNA CAPITAL GROUP, INC.
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FLORIDA 65-0701248
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
327 PLAZA REAL, SUITE 319, BOCA RATON, FL 33432
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(Address of principal executive offices) (Zip Code)
(561) 367-1079
(Issuer's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $.0001 per share.
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year: $0.
As of March 24, 1998, the Company had a total of 2,657,202 shares (the
i.e. "Shares") of common stock, par value $.0001 per share (the "Common Stock")
outstanding. Additionally, as of such date Underwriter Options to purchase
110,020 shares of Common Stock (the "Underwriter Options") remain outstanding
and unexercised. Each Underwriter Option 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.
The aggregate market value of the voting stock held by non-affiliates*/
of the issuer based on the average bid and ask prices of such Common Stock, as
of March 23, 1998, is $7,607,611 based upon an average of $5.50 multiplied by
1,383,202 shares of Common Stock outstanding as of March 23, 1998 held by
non-affiliates.
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*/Affiliates for the purposes of this item refer to the officers, directors
and/or persons or firms owning 5% or more of the Company's common stock, both of
record and beneficially.
FROST HANNA CAPITAL GROUP, INC.
FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE
PART I ...................................................................................1
Item 1. Description of Business.........................................................1
Item 2. Description of Property.........................................................7
Item 3. Legal Proceedings...............................................................7
Item 4. Submission of Matters to a Vote of Security Holders.............................7
PART II ...................................................................................7
Item 5. Market for Common Equity and Related Stockholder Matters........................7
Item 6. Management's Discussion and Analysis or Plan of Operation.......................8
Item 7. Financial Statements............................................................9
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure........................................................9
PART III ...................................................................................9
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...............................9
Item 10. Executive Compensation.........................................................13
Item 11. Security Ownership of Certain Beneficial Owners and Management.................14
Item 12. Certain Relationships and Related Transactions.................................15
Item 13. Exhibits and Reports on Form 8-K...............................................15
SIGNATURES.................................................................................16
FINANCIAL STATEMENTS.......................................................................F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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
other 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 at an average price per share of
$.14 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 (the "SEC"). Pursuant
to the Registration Statement, the Company, in its initial public offering of
securities, offered and sold 1,100,202 shares of Common Stock, at a purchase
price of $6.00 per share (the "Offering") and received net proceeds of
approximately $5,875,079, after the payment of all expenses of the Offering (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. See
"Management's Discussion and Analysis or Plan of Operation."
The Company's objective is to seek to effect a Business Combination
with an Acquired Business, which the Company believes has growth potential. The
Company intends to utilize cash, equity, debt or a combination thereof in
effecting a Business Combination. While the Company may, under certain
circumstances, seek to effect Business Combinations with more than one Acquired
Business, it will not expend less than 80% of the Net Proceeds upon its first
Business Combination. Consequently, it is likely that the Company will have the
ability to effect only a single Business Combination. The Company may effect a
Business Combination with an Acquired Business which may be financially unstable
or in its early stage of development or growth. Although the Company has had
certain preliminary discussions with Acquired Business candidates regarding a
possible Business Combination, as of March 27, 1998 the Company has not entered
into any agreements, agreements in principle or understandings regarding a
Business Combination.
"BLANK CHECK" COMPANY
BACKGROUND. A Business Combination may involve the acquisition of, or
merger with, a company which does not need substantial additional capital but
which desires to establish a public trading market for its shares, without
undertaking a public offering itself, due to, among other things, the time
delays, significant expense, loss of voting control and other burdens (including
significant professional fees) associated with compliance with various Federal
and state securities laws in the context of an initial public offering.
UNSPECIFIED INDUSTRY AND ACQUIRED BUSINESS. The Company does not select
any particular industry in which to concentrate its Business Combination
efforts. However, in connection with seeking stockholder approval of a Business
Combination, the Company intends to furnish its shareholders with proxy
solicitation materials prepared in accordance with the Securities Exchange Act
of 1934 (the "Exchange Act"), which, among other matters, will include a
description of the operations of the Acquired Business candidate and audited
historical financial statements thereof. To the extent the Company effects a
Business Combination with a financially unstable company or an entity in its
early stage of development or growth (including entities without established
records of sales or earnings), the Company will become subject to numerous risks
inherent in the business and operations of financially unstable and early stage
or potential emerging growth companies. In addition, to the extent that the
Company effects a Business Combination with an entity in an industry
characterized by a high level of risk, the Company will become subject to the
currently unascertainable risks of that industry. An extremely high level
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of risk frequently characterizes certain industries which experience rapid
growth. In addition, although management will endeavor to evaluate the risks
inherent in a particular industry or Acquired Business, there can be no
assurance that the Company will properly ascertain or assess all significant
risk factors.
PROBABLE LACK OF BUSINESS DIVERSIFICATION. While the Company may, under
certain circumstances, seek to effect Business Combinations with more than one
Acquired Business, it will not expend less than 80% from the Net Proceeds upon
its first Business Combination. Consequently, it is likely that the Company will
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. Unlike certain entities which have the
resources to consummate several Business Combinations of entities operating in
multiple industries or multiple areas of a single industry, it is highly likely
that the Company will not have the resources to diversify its operations or
benefit from the possible spreading of risks or offsetting of losses. The
Company's probable lack of diversification may subject the Company to numerous
economic, competitive and regulatory developments, any or all of which may have
a substantial adverse impact upon the particular industry in which the Company
may operate subsequent to a Business Combination. In addition, by consummating a
Business Combination with only a single entity, the prospects for the Company's
success may become dependent upon the development or market acceptance of a
single or limited number of products, processes or services. Accordingly,
notwithstanding the possibility of capital investment in and management
assistance to the Acquired Business by the Company, there can be no assurance
that the Acquired Business will prove to be commercially viable. Prior to the
consummation of a Business Combination, the Company has no intention to purchase
or acquire a minority interest in any company.
OPPORTUNITY FOR STOCKHOLDER EVALUATION OR APPROVAL OF BUSINESS
COMBINATIONS. The shareholders will, in all likelihood, neither receive nor
otherwise have the opportunity to evaluate any financial or other information
which will be made available to the Company in connection with selecting a
potential Business Combination until after the Company has entered into an
agreement to effectuate a Business Combination. Such agreement to effectuate a
Business Combination, however, will be subject to stockholder approval. As a
result, shareholders will be almost entirely dependent on the judgment of
management in connection with the selection and ultimate consummation of a
Business Combination. In connection with seeking stockholder approval of a
Business Combination, the Company intends to furnish its shareholders with proxy
solicitation materials prepared in accordance with the Exchange Act, which,
among other matters, will include a description of the operations of the
Acquired Business candidate and audited historical financial statements thereof.
Under the Florida Business Corporation Act, certain forms of Business
Combinations may be effected without stockholder approval. In addition, the form
of Business Combination may have an impact upon the availability of dissenters'
rights (i.e., the right to receive fair payment with respect to the Company's
Common Stock) to shareholders disapproving the proposed Business Combination.
The Company will afford to shareholders the right to approve any Business
Combination, irrespective of whether or not such approval would be required
under applicable Florida law. In the event, however, that 30% or more of the
Shares held by those persons holding shares of Common Stock sold in the Offering
(the "Public Shareholders") vote against approval of any Business Combination,
the Company will not consummate such Business Combination. All of the officers
and directors of the Company, who own in the aggregate approximately 48% of the
Common Stock outstanding as of the date hereof, have agreed to vote their
respective shares of Common Stock in accordance with the vote of the majority of
the Shares held by the Public Shareholders with respect to any Business
Combination.
LIMITED ABILITY TO EVALUATE ACQUIRED BUSINESS'S MANAGEMENT. While the
Company's ability to successfully effect a Business Combination will be
dependent upon certain key personnel, the future role of such personnel in the
Acquired Business cannot presently be stated with any certainty. While it is
possible that certain of the Company's key personnel will remain associated in
some capacities with the Company following a Business
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Combination, it is unlikely that such key personnel will devote their full
efforts to the affairs of the Company subsequent thereto. Moreover, there can be
no assurance that such personnel will have any experience or knowledge relating
to the operations of the particular Acquired Business. Furthermore, although the
Company intends to closely scrutinize the management of a prospective Acquired
Business in connection with evaluating the desirability of effecting a Business
Combination, there can be no assurance that the Company's assessment of such
management will prove to be correct, especially in light of the inexperience of
current key personnel of the Company in evaluating businesses. Furthermore,
there can be no assurance that such future management will have the necessary
skills, qualifications or abilities to manage a public company intending to
embark on a program of business development. The Company may also seek to
recruit additional managers to supplement the incumbent management of the
Acquired Business. There can be no assurance that the Company will have the
ability to recruit such additional managers, or that such additional managers
will have the requisite skill, knowledge or experience necessary or desirable to
enhance the incumbent management.
SELECTION OF AN ACQUIRED BUSINESS AND STRUCTURING OF A BUSINESS
COMBINATION. Management anticipates that the selection of an Acquired Business
will be complex and risky because of competition for such business opportunities
among all segments of the financial community. The nature of the Company's
search for the acquisition of an Acquired Business requires maximum flexibility
inasmuch as the Company will be required to consider various factors and
divergent circumstances which may preclude meaningful direct comparison among
the various business enterprises, products or services investigated. The
possible lack of diversification among the Company's acquisitions may not permit
the Company to offset potential losses from one venture against profits from
another. Management of the Company will have virtually unrestricted flexibility
in identifying and selecting a prospective Acquired Business. In addition, in
evaluating a prospective Acquired Business, management will consider, among
other factors, the following:
o costs associated with effecting the Business Combination;
o equity interest in and opportunity for control of the Acquired
Business;
o growth potential of the Acquired Business and the industry in which it
operates;
o experience and skill of management and availability of additional
personnel of the Acquired Business;
o capital requirements of the Acquired Business;
o competitive position of the Acquired Business;
o stage of development of the product, process or service of the
Acquired Business;
o degree of current or potential market acceptance of the product,
process or service of the Acquired Business;
o proprietary features and degree of intellectual property or other
protection of the product, process or service of the Acquired
Business; and
o regulatory environment of the industry in which the Acquired Business
operates.
The foregoing criteria are not intended to be exhaustive; any
evaluation relating to the merits of a particular Business Combination will be
based, to the extent relevant, on the above factors as well as other
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considerations deemed relevant by management in connection with effecting a
Business Combination consistent with the Company's business objective. In
connection with its evaluation of a prospective Acquired Business, management
anticipates that it will conduct a due diligence review which will encompass,
among other things, meetings with incumbent management and inspection of
facilities, as well as review of financial or other information which will be
made available to the Company.
The time and costs required to select and evaluate an Acquired Business
candidate (including conducting a due diligence review) and to structure and
consummate the Business Combination (including negotiating relevant agreements
and preparing requisite documents for filing pursuant to applicable securities
laws and state corporation laws) cannot presently be ascertained with any degree
of certainty. Messrs. Frost and Hanna currently devote approximately 50% of
their working time to the affairs of the Company, Messrs. Baxter and Rosenberg
intend to devote approximately 10% of their working time to the affairs of the
Company and Mr. Fernandez does not intend to devote any time to the affairs of
the Company and, accordingly, consummation of a Business Combination may require
a greater period of time than if the Company's executive officers devoted their
full time to the Company's affairs. Any costs incurred in connection with the
identification and evaluation of a prospective Acquired Business with which a
Business Combination is not ultimately consummated will result in a loss to the
Company and reduce the amount of capital available to otherwise complete a
Business Combination.
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.
As a general rule, Federal and state tax laws and regulations have a
significant impact upon the structuring of business combinations. The Company
will evaluate the possible tax consequences of any prospective Business
Combination and will endeavor to structure the Business Combination so as to
achieve the most favorable tax treatment to the Company, the Acquired Business
and their respective shareholders. There can be no assurance that the IRS or
appropriate state tax authorities will ultimately assent to the Company's tax
treatment of a particular consummated Business Combination. To the extent the
IRS or state tax authorities ultimately prevail in recharacterizing the tax
treatment of a Business Combination, there may be adverse tax consequences to
the Company, the Acquired Business and their respective shareholders. Tax
considerations as well as other relevant factors will be evaluated in
determining the precise structure of a particular Business Combination, which
could be effected through various forms of a merger, consolidation or stock or
asset acquisition.
The Company may utilize cash, equity, debt or a combination of these as
consideration in effecting a Business Combination. Although the Company has no
commitments as of the date hereof to issue any additional shares of Common
Stock, the Company will, in all likelihood, issue a substantial number of
additional shares in connection with a Business Combination. To the extent that
such additional shares are issued, dilution to the interest of the Company's
shareholders will occur. Additionally, if a substantial number of shares of
Common Stock are issued in connection with a Business Combination, a change in
control of the Company may occur.
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If securities of the Company are issued as part of an acquisition, it
cannot be predicted whether such securities will be issued in reliance upon
exemptions from registration under applicable Federal or state securities laws
or will be registered for public distribution. When registration of securities
is required, substantial cost may be incurred and time delays encountered. In
addition, the issuance of additional securities and their potential sale in any
trading market which may develop in the Company's Common Stock, of which there
is no assurance, may depress the price of the Company's Common Stock in such
market or any other market which may develop in the Company's Common Stock.
The Company's operations may be limited by the Investment Company Act
of 1940. Unless the Company registers with the SEC as an investment company, it
will not, among other things, be permitted to own or propose to acquire
investment securities having a value, exclusive of government securities and
cash items, exceeding 40% of the value of the Company's total assets on an
unconsolidated basis. It is not anticipated that the Company will have a policy
restricting the type of investments it may make. While the Company will attempt
to conduct its operations so as not to require registration under the Investment
Company Act of 1940, there can be no assurances that the Company will not be
deemed to be subject to the Investment Company Act of 1940.
There are currently no limitations relating to the Company's ability to
borrow funds to increase the amount of capital available to the Company to
effect a Business Combination or otherwise finance the operations of the
Acquired Business. The amount and nature of any borrowings by the Company will
depend on numerous considerations, including the Company's capital requirements,
the Company's perceived ability to meet debt service on such borrowings and then
prevailing conditions in the financial markets, as well as general economic
conditions. There can be no assurance that debt financing, if required or
otherwise sought, would be available on terms deemed to be commercially
acceptable and in the best interests of the Company. The inability of the
Company to borrow funds for an additional infusion of capital into an Acquired
Business may have material adverse effects on the Company's financial condition
and future prospects. To the extent that debt financing ultimately proves to be
available, any borrowings may subject the Company to various risks traditionally
associated with incurring indebtedness, including the risks of interest rate
fluctuations and insufficiency of cash flow to pay principal and interest.
Furthermore, an Acquired Business may have already incurred debt financing and,
therefore, all the risks inherent thereto.
Because of the Company's small size, there may be business constraints
on its ability to raise additional capital when needed. Until such time as any
enterprise, product or service which the Company acquires generates revenues
sufficient to cover operating costs, it is conceivable that the Company could
find itself in a situation where it needs additional funds in order to continue
its operations. This need could arise at a time when the Company is unable to
borrow funds and/or when market acceptance for the sale of additional shares of
the Company's Common Stock does not exist.
PAYMENT OF SALARIES OR CONSULTING FEES
In connection with the consummation of a Business Combination, the
Company may become obligated to pay to certain persons consulting fees or
salaries. The Company currently pays to each of Messrs. Frost and Hanna, $10,000
monthly for salary and $1,000 monthly for non-accountable expense allowance. No
other officers, directors or current shareholders shall be paid any consulting
fees or salaries by the Company for services delivered by such persons in
connection with a Business Combination. The Company shall reimburse its officers
and directors for any accountable reasonable expenses incurred in connection
with activities on behalf of the Company. The Escrow Fund (as hereinafter
defined) (including any interest earned thereon) will not be used for salaries
or benefits payable to Mr. Frost or Mr. Hanna or to reimburse the Company's
officers and directors for expenses incurred in connection with activities on
behalf of the Company. No funds (including any interest earned thereon) will be
disbursed from the Escrow Fund for reimbursement of expenses. Other than the
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foregoing, 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. In the
event the Company requires in excess of 20% of the Net Proceeds for operations,
Messrs. Frost and Hanna have undertaken to waive their salaries until the
consummation by the Company of a Business Combination. Subsequent to the
consummation of a Business Combination, to the extent the current officers,
directors and/or shareholders of the Company provide services to the Company,
such persons may receive from the Company consulting fees or salaries. The
Company has no present intention to pay to anyone any consulting fees or
salaries. The Company is not aware of any plans, proposals, understandings or
arrangements with respect to the sale of any shares of Common Stock of the
Company by any current shareholders. Further, there are no plans, proposals,
understandings or arrangements with respect to the transfer by the Company to
any of the current shareholders of any funds, securities or other assets of the
Company.
COMPETITION
The Company expects to encounter intense competition from other
entities having a business objective similar to that of the Company. Many of
these entities are well-established and have extensive experience in connection
with identifying and effecting business combinations directly or through
affiliates. Many of these competitors possess greater financial, technical,
personnel and other resources than the Company and there can be no assurance
that the Company will have the ability to compete successfully. Inasmuch as the
Company may not have the ability to compete effectively with its competitors in
selecting a prospective Acquired Business, the Company may be compelled to
evaluate certain less attractive prospects. There can be no assurance that such
prospects will permit the Company to meet its stated business objective.
UNCERTAINTY OF COMPETITIVE ENVIRONMENT OF ACQUIRED BUSINESS
In the event that the Company succeeds in effecting a Business
Combination, the Company will, in all likelihood, become subject to intense
competition from competitors of the Acquired Business. In particular, certain
industries which experience rapid growth frequently attract an increasingly
larger number of competitors, including competitors with increasingly greater
financial, marketing, technical and other resources than the initial competitors
in the industry. The degree of competition characterizing the industry of any
prospective Acquired Business cannot presently be ascertained. There can be no
assurance that, subsequent to a Business Combination, the Company will have the
resources to compete effectively, especially to the extent that the Acquired
Business is in a high-growth industry.
REDEMPTION RIGHTS
At the time the Company seeks stockholder approval of any potential
Business Combination, the Company will offer (the "Redemption Offer") each of
the Public Shareholders the right, for a specified period of time of not less
than 20 days, to redeem all, but not a portion of, their shares of Common Stock,
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 Shares
held by all of the Public Shareholders. The Redemption Offer will be described
in the disclosure documentation relating to the proposed Business Combination.
The Company's liquidation value will be equal to the Company's book value, as
determined by the Company and audited by the Company's independent public
accountants (the "Company's Liquidation Value") (which amount will be less than
the initial public offering price per Share in the Offering in view of the
expenses of the Offering and the anticipated expenses which will be incurred in
seeking a Business Combination), calculated as of the Record Date. In no event,
however, will the Company's Liquidation Value be less than the Escrow Fund (as
hereinafter defined), inclusive of any net interest income thereon. If the
holders of less than 30% of the Shares held by the Public Shareholders elect to
have their Shares
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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
Shares, based upon the Company's Liquidation Value, from those Public
Shareholders who requested such redemption and who voted against the Business
Combination. If the holders of 30% or more of the 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
Shares. Unless otherwise specified by such shareholder, a vote against the
proposed Business Combination will constitute a request by such shareholder for
redemption of his Shares. If the Company determines not to pursue a Business
Combination or if the Business Combination is not consummated for any other
reason, even if the holders of less than 30% of the Shares held by Public
Shareholders vote against approval of the potential Business Combination, no
Shares will be redeemed. Accordingly, in order for a stockholder to have his
Shares redeemed, (i) such stockholder must vote against approval of the Business
Combination and (ii) the Business Combination must be consummated. The Escrow
Fund will be released to shareholders voting against a Business Combination only
in connection with the consummation of a Business Combination.
EMPLOYEES
As of the date hereof, the Company's employees consist of its executive
officers, of whom Messrs. Frost and Hanna each devote approximately 50% of their
working time to the affairs of the Company and Messrs. Baxter and Rosenberg each
devote approximately 10% of their working time to the affairs of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently maintains, at a cost of $3,000 per month, its
executive offices in approximately 1,445 square feet of office space located at
327 Plaza Real, Suite 319, Boca Raton, Florida 33432. The Company considers this
space adequate for its current operations.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Report, no
matters were submitted to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal U.S. market in which the Company's Common Stock, $.0001
par value, is traded is the over-the-counter market under the symbol "FHAN." The
Common Stock commenced trading in the final week of October, 1997. The following
table shows the reported low bid and high bid quotations for the Common Stock
for the interim periods indicated below. The high and low bid prices for the
periods indicated are interdealer prices, without retail mark-up, mark-down or
commissions and may not necessarily represent actual transactions. These
quotations have been obtained from the OTC Bulletin Board (the "Bulletin
Board").
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LOW BID HIGH BID
(PER SHARE) (PER SHARE)
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September 22, 1997 - September 30, 1997 --(1) --
October 1, 1997 - December 31, 1997 $5.25 $5.50
January 1, 1998 - March 13, 1998 $5.125 5.625
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(1) No bid prices were reported in the third quarter of 1997.
The approximate number of holders of record of the Company's Common
Stock, as of March 24, 1998, amounts to 300, inclusive of those brokerage firms
and/or clearing houses holding the Company's shares of Common Stock for their
clientele (with each such brokerage house and/or clearing house being considered
as one holder).
The Company has not paid or declared any dividends upon its Common
Stock since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not contemplate or anticipate paying
any dividends upon its Common Stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company was formed in February 1996 to seek to effect a Business
Combination with 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 was declared effective
by the SEC. 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 after the
payment of all expenses of the Offering (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 December 31, 1997, the Company had cash of $776,067 and prepaid
expenses of $8,015. As of December 31, 1997, the Company had total liabilities
of $20,750 and total shareholders' deficit of $410,491. Following the
consummation of the Offering, eighty percent (80%) of the Net Proceeds
($4,560,069) (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 a redemption offer.
Other than the Escrow Fund, the Company, as of December 31, 1997 had
$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.
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
-8-
corporation laws) cannot be presently ascertained with any degree of certainty.
Pursuant to employment agreements, the Company pays to each of Messrs. Frost and
Hanna $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.
NEW ACCOUNTING PRONOUNCEMENT
The Company follows 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
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.
CONTINGENCIES
The Company has assessed the impact of the Year 2000 Issue on its
reporting systems and operations. The Year 2000 Issue exists because many
computer systems and applications currently use two-digit date fields to
designate a year. As the century date occurs, date sensitive systems will
recognize the year 2000 as 1900 or not at all. The inability to recognize or
properly treat the year 2000 will not significantly impact the Company as it has
no current operations.
ITEM 7. FINANCIAL STATEMENTS
The 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(a) of Regulation S-B.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are not and have not been any disagreements between the Company
and its accountants on any matter of accounting principles, practices or
financial statement disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The current executive officers and directors of the Company are as follows:
-9-
NAME AGE POSITION
- ---- --- --------
Richard B. Frost 49 Chief Executive Officer,
Chairman of the Board of Directors
Mark J. Hanna 50 President, Director
Donald H. Baxter 54 Vice President, Secretary, Director
Marshal E. Rosenberg, Ph.D. 60 Vice-President, Treasurer, Director
Charles M. Fernandez 36 Director
- ----------
Richard B. Frost has been the Chief Executive Officer and Chairman of
the Board of Directors of the Company since its inception. Mr. Frost was the
Chief Executive Officer and Chairman of the Board of Directors of Frost Hanna
Mergers Group, Inc. ("Frost Hanna Mergers") from October 1993 until Frost Hanna
Mergers consummated a business combination with Pan American World Airways, Inc.
(the "Pan Am Business Combination") in September 1996. Mr. Frost remained a
member of the Pan Am Board of Directors until April 21, 1997. On February 26,
1998, Pan Am filed for Chapter 11 bankruptcy protection in the United States
Bankruptcy Court. Mr. Frost was the Chief Executive Officer and Chairman of the
Board of Directors of Frost Hanna Acquisition, Inc. ("Frost Hanna Acquisition")
from April 1993 until Frost Hanna Acquisition consummated a business combination
with Kids Mart, Inc. (the "Kids Mart Business Combination") in January 1996, at
which time Mr. Frost resigned from such positions. On January 10, 1997, Kids
Mart filed for Chapter 11 bankruptcy protection in the United States Bankruptcy
Court. From June 1992 to May 1994, Mr. Frost held similar positions at Frost
Hanna Halpryn Capital Group, Inc. ("Frost Hanna Halpryn") until such company's
business combination with Sterling Healthcare Group, Inc. and certain of its
affiliates (the "Sterling Business Combination"). From February 1992 through May
1992, Mr. Frost was Regional Director of GKN Securities Corp., a broker-dealer
("GKN"), where his responsibilities included the recruitment and training of GKN
brokerage personnel located or to be located in Florida. From May, 1982 through
February, 1992, Mr. Frost was a Vice President and Branch Manager of Dean Witter
Reynolds, a broker-dealer, where his responsibilities included the management
and day-to-day operations of the West Boca Raton and Lighthouse Point, Florida,
branch offices of such brokerage firm. Mr. Frost is currently a member of the
Board of Directors of Continucare, a Florida corporation ("Continucare") engaged
in the development and management of mental and physical rehabilitation health
care programs.
Mark J. Hanna has been the President and a member of the Board of
Directors of the Company since its inception. Mr. Hanna was the President and a
member of the Board of Directors of Frost Hanna Mergers from October 1993 until
the Pan Am Business Combination in September 1996. Mr. Hanna remained a member
of the Pan Am Board of Directors until April 21, 1997. On February 26, 1998, Pan
Am filed for Chapter 11 bankruptcy protection in the United States Bankruptcy
Court. Mr. Hanna was the President and a member of the Board of Directors of
Frost Hanna Acquisition from April 1993 until January 1996, whereupon Mr. Hanna
resigned from such positions following the Kids Mart Business Combination. On
January 10, 1997, Kids Mart filed for Chapter 11 bankruptcy protection in the
United States Bankruptcy Court. Mr. Hanna held similar positions at Frost Hanna
Halpryn from June 1992 until the Sterling Business Combination in May 1994. From
February, 1992 through May, 1992, Mr. Hanna was a registered representative with
GKN. From January, 1992 through February, 1992, Mr. Hanna was a registered
representative with Barron Chase Securities, Inc. From September, 1990 through
January, 1992, Mr. Hanna was a registered representative with Prudential Bache
Securities, Inc. From August, 1982 through June, 1985, Mr. Hanna was First Vice
President, Investments, at
-10-
the Fort Lauderdale office of Drexel Burnham Lambert Incorporated. From July,
1985 through September, 1990, Mr. Hanna was Chief Executive Officer and
principal shareholder of GGH Consulting, Inc., a firm engaged in providing
financial consulting services. From September, 1985 through December, 1988, Mr.
Hanna was a director of Biocontrol, Technology, Inc. (f/k/a Coratomic, Inc.), a
public company engaged at that time in the manufacture and sale of cardiac
pacemakers and heart valves ("Biocontrol"). From September, 1986 through March,
1987, Mr. Hanna was the Chief Operating Officer of Biocontrol. Mr. Hanna is
currently a member of the Board of Directors of Continucare.
Donald H. Baxter has been Vice President, Secretary and a member of the
Board of Directors of the Company since its inception. Mr. Baxter was the Vice
President, Secretary and a member of the Board of Directors of Frost Hanna
Mergers from October 1993 until the Pan Am Business Combination in September
1996. Mr. Baxter was the Vice President, Secretary and a member of the Board of
Directors of Frost Hanna Acquisition from April 1993 until the Kids Mart
Business Combination in January 1996. During the past five years, Mr. Baxter has
been the President of Baxter Financial Corporation, an investment advisory firm,
and President and Chairman of the Board of Directors of the Philadelphia Fund
and Eagle Growth, mutual funds which are registered under the Investment Company
Act of 1940. Mr. Baxter serves on the Board of Great Eastern Bank and Sunol
Molecular Corporation, both of which are located in Miami, Florida.
Marshal E. Rosenberg, Ph.D. has been a member of the Board of Directors
of the Company since its inception. Dr. Rosenberg was the Vice President,
Treasurer and a member of the Board of Directors of Frost Hanna Mergers from
October 1993 until the Pan Am Business Combination in September 1996. Dr.
Rosenberg was the Vice President, Secretary and a member of the Board of
Directors of Frost Hanna Acquisition from April 1993 until the Kids Mart
Business Combination in January 1996. Dr. Rosenberg was a director of Frost
Hanna Halpryn from June 1992 until shortly following the Sterling Business
Combination when he resigned in December 1994. During the past five years, Dr.
Rosenberg has been the President, Chairman and sole shareholder of The Marshal
E. Rosenberg Organization, Inc., Coral Gables, Florida, a firm engaged in the
sale of life, health and disability insurance. Dr. Rosenberg is an investor in
numerous private enterprises, engaged in, among other things, real estate
development and retail sales. He served as a member of the Board of Directors
and member of the Executive Committee of the former Intercontinental Bank,
Miami, Florida. In addition, Dr. Rosenberg is a member of the faculty at the
University of Miami School of Business.
Charles M. Fernandez, serves as Chairman of the Board, President and
Chief Executive Officer of Continucare, a leading developer and manager of
outpatient behavioral and physical rehabilitation programs and facilities. Mr.
Fernandez co-founded Continucare in February 1996, recognizing the future growth
potential in the outpatient healthcare services industry. Under his leadership,
Continucare now manages 33 healthcare services centers and provides a continuum
of healthcare services in five states: Florida, Tennessee, Texas, Illinois and
Missouri. Continucare recently announced an agreement with Bally Total Fitness
to provide comprehensive outpatient rehabilitation services at more than 100
Bally's fitness centers nationwide, and also made its first physician practice
acquisition: Norman Gaylis M.D., Inc., a rheumatology practice subsidiary of
Sheridan Healthcare, Inc. Prior to co-founding Continucare, Mr. Fernandez served
as Executive Vice President and Director of Heftel Broadcasting Corporation
(Nasdaq National Market: HBCCA), a Spanish language radio broadcasting company
in the United States which owns 17 radio stations in markets including Los
Angeles, New York, Miami, Chicago and Dallas/Fort Worth. He has also served as
an officer of Bally Entertainment Corporation. He received a Bachelor of
Business Administration from Florida International University.
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Directors receive no
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings. Officers are appointed by
the Board of Directors and serve at the discretion of the Board.
-11-
KEY-MAN INSURANCE
The Company has obtained $1,000,000 "key man" 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 of such policies, The Marshal E. Rosenberg Organization, Inc.,
a firm affiliated with Dr. Rosenberg, received a commission of approximately
$4,464 in 1997 and $2,700 in 1996.
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 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, Fernandez and Dr. Rosenberg
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, Fernandez and Dr. Rosenberg
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, Fernandez and Dr. Rosenberg
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.
-12-
Pursuant to an agreement among each of Messrs. Frost, Hanna, Baxter,
Fernandez and Dr. Rosenberg 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.
SIGNIFICANT EMPLOYEES
None.
FAMILY RELATIONSHIPS
None.
COMPLIANCE WITH SECTION 16(A)
To the Company's knowledge, for the fiscal year ended December 31,
1997, and for the period ended March 25, 1998, no person who was a director,
officer or beneficial owner of more than ten percent of the Company's
outstanding Common Stock or any other person subject to Section 16 of the
Exchange Act failed to file on a timely basis, reports required by Section 16(a)
of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to employment agreements, Messrs. Frost and Hanna each receive
$10,000 monthly for salary and $1,000 monthly for non-accountable expense
allowance. Further, all officers and directors of the Company receive
accountable reimbursement for any reasonable business expenses incurred in
connection with activities on behalf of the Company. The Escrow Fund (including
any interest earned thereon) shall not be used to pay salaries or benefits to
Mr. Frost or Mr. Hanna or reimburse the Company's officers and directors for
expenses incurred by such persons on behalf of the Company. No funds (including
any interest earned thereon) will be disbursed from the Escrow Fund for
reimbursement of expenses. Other than the foregoing, 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. In the event the Company requires in
excess of 20% of the Net Proceeds for operations, Messrs. Frost and Hanna have
undertaken to waive their salaries until the consummation of a Business
Combination. None of the Company's executive officers or directors or their
respective affiliates will receive any consulting or finder's fees in connection
with a Business Combination. Further, other than pursuant to the employment
agreements, none of such persons will receive any other payments or assets,
tangible or intangible, unless received by all other shareholders on a
proportionate basis.
The following summary compensation table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to Richard B. Frost, the Chief Executive Officer and Chairman of the Board
of Directors, and Mark J. Hanna, President of the Company. No other person
employed by the Company earned in excess of $100,000 during the fiscal year
ended December 31, 1997.
-13-
LONG-TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------- ------------- ---------------- --------------------------
RESTRICTED
OTHER ANNUAL STOCK LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------------ ---- ------ ----- ------------ ------------ -------------- -------- ------------
Richard B. Frost, 55,000 0 0 0 0 0 0
CEO
Mark J. Hanna 55,000 0 0 0 0 0 0
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 24, 1998, certain
information regarding the beneficial ownership of the Company's Common Stock by
(i) each person known by the Company to be the owner of more than 5% of the
Company's outstanding Common Stock; (ii) each director; and (iii) all officers
and directors of the Company as a group:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP CLASS (2)
-------------------- -------------------- ---------
Richard B. Frost 362,000 13.6%
327 Plaza Real
Suite 319
Boca Raton, FL 33432
Mark J. Hanna 362,000 13.6%
327 Plaza Real
Suite 319
Boca Raton, FL 33432
Marshal E. Rosenberg, Ph.D. 300,000 11.3%
2333 Ponce de Leon Blvd.
Suite 314
Coral Gables, FL 33134
Donald H. Baxter 100,000 3.8%
327 Plaza Real
Suite 319
Boca Raton, FL 33432
Charles M. Fernandez 150,000 5.6%
NationsBank Tower
100 S.E. 2nd Street, 36th Floor
Miami, FL 33131-2100
All Officers and Directors as a Group 1,274,000 48.0%
-14-
- ----------------
(1) Unless otherwise noted, all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them. No persons named in the table are acting as nominees for any
persons or are otherwise under the control of any person or group of
persons.
(2) Assumes no exercise of the Underwriter Options.
(3) Does not include 35,000 shares of Common Stock owned by Donald S.
Rosenberg, Dr. Rosenberg's brother, of which Dr. Rosenberg disclaims
beneficial ownership.
The shares of the Company's Common Stock owned by all of the executive
officers and directors of the Company have been placed in escrow with American
Stock Transfer & Trust Company, as escrow agent, until the occurrence of a
Business Combination. During such escrow period, such executive officers and
directors will not be able to sell, or otherwise transfer, their respective
shares of Common Stock, but will retain all other rights as shareholders of the
Company, including, without limitation, the right to vote such shares of Common
Stock.
Messrs. Frost, Hanna, Baxter, Fernandez and Dr. Rosenberg may be deemed
to be "promoters" and "parents" of the Company, as such terms are defined under
the Federal securities laws.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the fiscal year ended December 31, 1997, there were no material
transactions between the Company and any of its officers and/or directors which
individually involved $60,000 or more.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
1. Financial Statements begin on page F-1.
2. Financial Statements Schedules are not required.
3. Exhibits:
27 Financial Data Schedule (for SEC use only).
b. Reports on Form 8-K
1. None.
-15-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FROST HANNA CAPITAL GROUP, INC.
Date: March 30, 1998 By:/s/ MARK J. HANNA
---------------------------------
Mark J. Hanna, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant in the capacities
indicated.
Date: March 30, 1998 /s/ Richard B. Frost
------------------------------------------
Richard B. Frost, Chief Executive Officer,
Chairman of the Board of Directors
Date: March 30, 1998 /s/ Mark J. Hanna
------------------------------------------
Mark J. Hanna, President and Director
Date: March 30, 1998 /s/ Marshal E. Rosenberg, Ph.D.
------------------------------------------
Marshal E. Rosenberg, Ph.D.,
Vice President, Treasurer (Principal
Financial and Accounting Officer), Director
Date: March 30, 1998 /s/ Donald H. Baxter
------------------------------------------
Donald H. Baxter, Vice President
Secretary, Director
Date: March 30, 1998 /s/ Charles Fernandez
------------------------------------------
Charles Fernandez, Director
-16-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Frost Hanna Capital Group, Inc.:
We have audited the accompanying balance sheets of Frost Hanna Capital Group,
Inc. (a Florida corporation in the development stage) as of December 31, 1997
and 1996, and the related statements of operations, stockholders' equity and
cash flows for the year ended December 31, 1997 and the periods from inception
(February 2, 1996) to December 31, 1996 and 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frost Hanna Capital Group, Inc.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and for the periods from inception
(February 2, 1996) to December 31, 1996 and 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 3, 1998.
F-1
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
------ ----------- -----------
CURRENT ASSETS:
Cash and cash equivalents, including interest
bearing amounts of $745,048 and $87,516 in
1997 and 1996, respectively $ 776,067 $ 91,818
Prepaid expenses 8,015 --
Restricted short-term investments 4,608,759 --
----------- -----------
Total current assets 5,392,841 91,818
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $2,810 and $212 in 1997 and
1996, respectively 21,084 2,968
DEFERRED REGISTRATION COSTS -- 129,785
----------- -----------
Total assets $ 5,413,925 $ 224,571
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accrued expenses $ 20,750 $ 14,118
Accrued registration costs -- 94,785
Accrued officers' salaries -- 44,000
----------- -----------
Total current liabilities 20,750 152,903
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 1
and 6)
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 100,000,000
shares authorized, 2,657,202 and 1,492,000
shares issued and outstanding in 1997 and
1996, respectively 266 149
Additional paid-in capital 5,803,400 183,963
Deficit accumulated during development stage (410,491) (112,444)
----------- -----------
Total stockholders' equity 5,393,175 71,668
----------- -----------
Total liabilities and stockholders' equity $ 5,413,925 $ 224,571
=========== ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-2
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
STATEMENTS OF OPERATIONS
For the Year For the Period From Inception
Ended (February 2, 1996) to
December 31, December 31,
1997 1996 1997
----------- ----------- -----------
REVENUES $ -- $ -- $ --
----------- ----------- -----------
EXPENSES:
Officers' salaries 110,000 77,000 187,000
General and administrative 246,703 36,309 283,012
----------- ----------- -----------
Total operating expenses 356,703 113,309 470,012
INTEREST INCOME 58,656 865 59,521
----------- ----------- -----------
Net loss $ (298,047) $ (112,444) $ (410,491)
=========== =========== ===========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.17) $ (0.08) $ (0.25)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 1,783,153 1,492,000 1,643,905
=========== =========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
F-3
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE PERIOD FROM INCEPTION (FEBRUARY 2, 1996)
TO DECEMBER 31, 1996
Deficit
Accumulated
Common Stock Additional During the
------------------------ Paid-In Development
Shares Amount Capital Stage Total
----------- ----------- ----------- ----------- -----------
Sale of common stock to promoters 1,124,000 $ 112 $ -- $ -- $ 112
Sale of common stock 368,000 37 183,963 -- 184,000
Net loss for the period from inception
(February 2, 1996) to December 31, 1996 -- -- -- (112,444) (112,444)
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1996 1,492,000 149 183,963 (112,444) 71,668
Sale of common stock 145,000 15 72,486 -- 72,501
Initial public offering of common stock, net 1,100,202 110 5,586,943 -- 5,587,053
Redemption of common stock (Note 7) (80,000) (8) (39,992) -- (40,000)
Net loss for the year ended December 31, 1997 -- -- -- (298,047) (298,047)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 2,657,202 $ 266 $ 5,803,400 $ (410,491) $ 5,393,175
=========== =========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
F-4
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
STATEMENTS OF CASH FLOWS
For the Year For the Period From Inception
Ended (February 2, 1996) to December 31,
December 31, ----------------------------------
1997 1996 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (298,047) $ (112,444) $ (410,491)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation 2,598 212 2,810
Interest on restricted short-term investments (48,690) -- (48,690)
Write-off of deferred registration costs 35,000 -- 35,000
Changes in assets and liabilities:
Increase in prepaid expenses (8,015) -- (8,015)
Increase in accrued expenses 6,632 14,118 20,750
Increase (decrease) in accrued officers' salaries (44,000) 44,000 --
----------- ----------- -----------
Net cash used in operating activities (354,522) (54,114) (408,636)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of restricted short-term investments (4,560,069) -- (4,560,069)
Capital expenditures (20,714) (3,180) (23,894)
----------- ----------- -----------
Net cash used in investing activities (4,580,783) (3,180) (4,583,963)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 5,659,554 184,112 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) -- (75,000)
Deferred registration costs -- (35,000) (35,000)
----------- ----------- -----------
Net cash provided by financing activities 5,619,554 149,112 5,768,666
----------- ----------- -----------
Net increase in cash 684,249 91,818 776,067
(Continued)
F-5
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
STATEMENTS OF CASH FLOWS
(Continued)
For the Year For the Period From Inception
Ended (February 2, 1996) to December 31,
December 31, ----------------------------------
1997 1996 1997
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, beginning of period $ 91,818 $ -- $ --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 776,067 $ 91,818 $ 776,067
============= ============= =============
The accompanying notes to financial statements are an integral part of
these statements.
F-6
FROST HANNA CAPITAL GROUP, INC.
(A Development Stage Corporation)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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-7
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-8
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
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.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three months
or less as of the date of purchase to be cash equivalents. As of December 31,
1997, the balance in the Escrow Fund was $4,608,759, at amortized cost which
approximated fair value. The Escrow Fund is currently invested in United States
government-backed short-term securities. The Company intends to hold the
securities in the Escrow Fund to maturity.
F-9
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard ("SFAS") No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. Cash and cash equivalents, restricted short-term
investments, accrued expenses, accrued registration costs, and accrued officers'
salaries are reflected in the financial statements at their approximate fair
value.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets ranging from 3 to 5 years.
INCOME TAXES
The Company is in a loss position for both financial reporting and tax purposes.
The Company follows SFAS No. 109, "Accounting for Income Taxes", which requires,
among other things, recognition of future tax benefits measured at enacted rates
attributable to deductible temporary differences between financial statement and
income tax bases of assets and liabilities and to tax net operating loss
carryforwards to the extent that realization of said benefits is more likely
than not. The only item giving rise to such a deferred tax asset or liability is
the loss carryforward as a result of the operating loss incurred for the period
from inception (February 2, 1996) to December 31, 1997. However, due to the
uncertainty of the Company's ability to generate income in the future, the
deferred tax asset has been fully reserved.
NEW ACCOUNTING PRONOUNCEMENTS
The Company follows 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 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.
F-10
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.
4. COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of 100,000,000
shares of common stock. As of December 31, 1997, there is a minimum of
97,232,798 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.
5. RELATED-PARTY TRANSACTIONS
The Company has obtained $1,000,000 "key man" term policies insuring each of the
lives of Messrs. Frost and Hanna. In connection with the purchase of such
policies, The Marshal E. Rosenberg Organization, Inc., a firm affiliated with
Dr. Rosenberg, a Vice President, Treasurer and Director of the Company received
a payment of approximately $4,464 during 1997.
F-11
During 1997, certain directors of the Company made unsecured, noninterest
bearing loans totaling $75,000 to the Company for operating expenses. These
loans were repaid from the proceeds of the Offering.
6. 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.
7. REDEMPTION OF COMMON STOCK
In June 1997, the Company redeemed, at the original purchase price, 80,000
shares of its common stock from a third party.
F-12