REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Unity First Acquisition Corp.:
We have audited the accompanying balance sheet of Unity First Acquisition
Corp. (a Delaware corporation in the development stage) as of November 18,
1996. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. 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 audit provides a reasonable
basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Unity First Acquisition Corp. as
of November 18, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLC
New York, New York
November 18, 1996
Page 6 of 13 Pages
UNITY FIRST ACQUISITION CORP.
(a development stage entity)
BALANCE SHEET
NOVEMBER 18, 1996
ASSETS
CASH $ 693,063
RESTRICTED CASH 6,007,500
---------
Total assets $ 6,700,563
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accrued registration costs $ 192,083
Due to affiliate 103,417
-------
Total liabilities 295,500
COMMON STOCK, SUBJECT TO POSSIBLE CONVERSION,
249,875 shares at conversion value 1,201,899
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000 shares
authorized, no shares issued -
Common stock, $.0001 par value, 20,000,000 shares
authorized, 1,625,125 shares issued and
outstanding (excluding 249,875 shares subject
to possible conversion) 163
Additional paid in capital 5,248,001
Deficit accumulated during the development stage (45,000)
---------
Total stockholders' equity 5,203,164
---------
Total liabilities and stockholders' equity $ 6,700,563
The accompanying notes are an integral part of this balance sheet.
Page 7 of 13 Pages
UNITY FIRST ACQUISITION CORP.
(a development stage entity)
NOTES TO BALANCE SHEET
NOVEMBER 18, 1996
1. ORGANIZATION AND OPERATIONS
Unity First Acquisition Corp. (the "Company") was incorporated in the State
of Delaware on May 30, 1996, for the purpose of raising capital which is to
be used to effect a business combination (the "Business Combination"). The
Company is currently in the development stage. All activity of the Company
to date has related to its formation and fund raising.
As further discussed in Note 2, on November 12, 1996, the Company effected
an initial public offering of its securities (the "Offering").
The Offering is considered a "blind pool." Blind pool offerings are
inherently characterized by an absence of substantive disclosures relating to
the use of the net proceeds of the offering. Consequently, although
substantially all of the proceeds of the Offering are intended to be utilized
to effect a Business Combination, the proceeds are not specifically designated
for this purpose. After payment of underwriting discounts and commissions
and the underwriters' non-accountable expense allowance, 90% of the net
proceeds will be held in an interest-bearing trust account ("Trust Account")
until the earlier of (1) written notification by the Company of its need for
all or substantially all of such net proceeds for the purpose of implementing
a Business Combination, or (2) the liquidation of the Company in the event
that the Company does not effect a Business Combination within 18 months from
the consummation of the Offering. Notwithstanding the foregoing, if the
Company enters into a letter of intent, an agreement in principle or a
definitive agreement to effectuate a Business Combination prior to the
expiration of such 18-month period, the Company's Certificate of Incorporation
provides that the Company will be afforded up to an additional 6 months
following the expiration of the initial 18-month period to consummate such
Business Combination. Moreover, since the Company has not yet identified an
acquisition target (the "Target") investors in the Offering will have
virtually no substantive information available for advance consideration of
any specified Business Combination.
The accompanying balance sheet 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
Page 8 of 13 Pages
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 assurances that the
United States Congress will not enact legislation which will prohibit or
restrict the sale of securities of "blank check" companies.
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.
The Company will not effect a Business Combination unless the fair market
value of the Target, as determined by the Board of Directors of the Company
in its sole discretion, based upon valuation standards generally accepted by
the financial community including, among others, book value, cash flow, and
both actual and potential earnings, is at least equal to 80% of the net
assets (assets less liabilities) of the Company at the time of such
acquisition.
In management's opinion, the Company has not satisfied the criteria for
qualifying its securities in the Nasdaq System and as a result, the Company's
securities will be traded in the over-the-counter market. It is anticipated
that they will be quoted on the OTC Bulletin Board, an NASD sponsored and
operated interdealer automated quotation system for equity securities not
included in The Nasdaq Stock Market, as well as in the NQB Pink Sheets
published by National Quotation Bureau Incorporated. The OTC Bulletin Board
was introduced as an alternative to "pink sheet" trading of over-the-counter
securities. Although the Company believes that the OTC Bulletin Board has
been recognized by the brokerage community as an acceptable alternative to
the NQB Pink Sheets, there can be no assurance that the liquidity and prices
of the Units in the secondary market will not be adversely affected.
Furthermore, there is no assurance that the Company will be able to
successfully effect a Business Combination. As discussed previously, if the
Company is unable to effect a Business Combination within 24 months of the
consummation of the Offering, the Company's Certificate of Incorporation
provides for the Company's automatic liquidation. If the Company were to
expend all of the net proceeds of the Offering not held in the Trust Account
prior to liquidation, but recognizing that such net proceeds could become
subject to the claims of creditors of the Company which could be prior to the
claims of stockholders of the Company, it is possible that the Company's
liquidation value may be less than the amount in the Trust Account, inclusive
of any net interest income thereon. Moreover, all of the Company's initial
stockholders have agreed to waive their respective rights to participate in
any such liquidation distribution on shares owned prior to the Offering.
If the Company is unable to acquire control of an operating business or
businesses, it may be required to register as an investment company under the
Investment Act of
Page 9 of 13 Pages
1940, as amended (the "Act"). The Company is unable to predict what effect
registration under such Act would have, but it believes that its ability to
pursue its current business plan could be adversely affected as a result.
The most significant difference with respect to financial statement
presentation and disclosure requirements for companies registered under the
Act would require the investments held by the Company to be adjusted to
market value at the balance sheet date. The Company believes that its
anticipated principal activities, which will involve acquiring control of
an operating company, will not subject the Company to regulation under the
Act.
At the time the Company seeks stockholder approval of any Business
Combination, the Company will offer each stockholder who acquired shares
through the Offering ("Public Stockholder") the right to have his shares of
Common Stock converted to cash if such stockholder votes against the Business
Combination and the Business Combination is approved and consummated. The
per-share conversion price will be equal to the amount in the Trust Fund
(inclusive of any interest thereon) as of the record date for determination
of stockholders entitled to vote on such Business Combination, divided by the
number of Public Shares. Without taking into account interest, if any,
earned on the Trust Fund, the per-share conversion price would be $4.81.
There will be no distribution from the Trust Fund with respect to the
Warrants included in the Units. A Public Stockholder may request conversion
of his shares at any time prior to the vote taken with respect to a proposed
Business Combination at a meeting held for that purpose, but such request
will not be granted unless such stockholder votes against the Business
Combination and the Business Combination is approved and consummated. It is
anticipated that the funds to be distributed to the Public Stockholders who
have their shares converted will be distributed promptly after consummation
of a Business Combination. The Initial Stockholders will not have any
conversion rights with respect to the shares of Common Stock owned by them
immediately prior to this offering. The Company will not consummate any
Business Combination if 20% or more in interest of the Public Stockholders
exercise their conversion rights. Accordingly, the conversion value of
249,875 shares (or 19.99% of the shares sold in the public offering) have
been included in the accompanying balance sheet as temporary capital.
2. PUBLIC OFFERING OF SECURITIES
In its initial public offering, effective November 12, 1996 (closed on
November 18, 1996), the Company sold to the public 1,250,000 units (the
"Units") at a price of $6.00 per Unit. The Company has granted the
Underwriters a 45 day option to purchase up to 187,500 additional Units
solely to cover over-allotments. To date, the Underwriters have not
exercised this option. Proceeds totaled $6,675,000, which was net of $825,000
in underwriting and other expenses. Each Unit consists of one share of the
Company's Common Stock, $.0001 par value, one Class A Redeemable Warrant and
one Class B Redeemable Warrant. Each Class A Redeemable Warrant and Class B
Redeemable Warrant entitles the holder to purchase from the Company one share
of Common Stock at an exercise price of $5.50 and $7.50, respectively,
commencing on the later of (i) the consummation of a Business Combination, or
(ii) one year from the effective date of the Prospectus and ending six years
after the effective date of the Offering (the "Effective Date"). The Class A
Redeemable Warrants and Class B Redeemable Warrants may be redeemable at the
option of the Company and with the consent of GKN Securities Corp. ("GKN"),
one of the Underwriters of the Offering, each as a class, in whole and not in
part, upon 30 days' notice at any time after the Redeemable Warrants become
exercisable, only in the event that the closing
Page 10 of 13 Pages
bid price of the Common Stock is at least $8.50 per share with respect to the
Class A Redeemable Warrants and $10.50 with respect to the Class B Redeemable
Warrants for 20 consecutive trading days immediately prior to notice of
redemption, at a price of $.05 per Class A Redeemable Warrant or Class B
Redeemable Warrant. The securities comprising the Units will not be
separately transferable until 90 days after the date of the Prospectus unless
GKN informs the Company of its decision to allow separate trading, but in no
event will GKN allow separate trading of the securities comprising the Units
until the preparation of an audited balance sheet of the Company reflecting
the receipt of the proceeds of the Offering.
In connection with the Offering, the Company will sell to the Underwriters
and their designees, for nominal consideration, Unit Purchase Option(s)
(the "Underwriters' UPO") to purchase up to 125,000 Units at an exercise
price of $6.60 per Unit. The Underwriters' UPOs will be exercisable for a
period of four years commencing one year from the Effective Date.
The Company has granted its officers and directors 200,000 warrants (50%
Class A Warrants and 50% Class B Warrants , collectively the "Directors'
Warrants") to purchase Common Stock at $5.50 and $7.50, per share,
respectively, in consideration of future services to be rendered on behalf of
the Company. The Directors' Warrants are not exercisable until the
consummation by the Company of a Business Combination and are not redeemable
by the Company.
All of the Company's present stockholders have agreed to vote their
respective shares of Common Stock in accordance with the vote of the majority
of all nonaffiliated future stockholders of the Company with respect to a
Business Combination.
In addition, the Common Stock owned by all the executive officers and
directors of the Company, their affiliates (excluding, however, their
respective spouses and adult children) and by all persons owning 5% or more
of the outstanding shares of Common Stock prior to the Offering has been
placed in escrow until the earlier of (i) the occurrence of a Business
Combination, or (ii) the liquidation date. During the escrow period, such
stockholders will not be able to sell or otherwise transfer their respective
shares of Common Stock, but retain all other rights as stockholders of the
Company, including, without limitation, the right to vote such shares of
Common Stock.
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Utilization of 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.
Page 11 of 13 Pages
4. CAPITAL STOCK
The Company's Certificate of Incorporation authorizes the issuance of
20,000,000 shares of Common Stock. Upon completion of the Offering,
14,862,500 authorized but unissued shares of Common Stock are available for
issuance (after appropriate reserves for the issuance of Common Stock in
connection with the Class A Redeemable Warrants and Class B Redeemable
Warrants, the Underwriters' UPOs, the officers' and directors' Class A Warrants
and Class B Warrants and the future grants under the Company's 1996 Stock
Option Plan). The Company's Board of Directors has the power to issue any or
all of the future grants under the Company's 1996 Stock Option Plan. The
Company's Board of Directors has the power to issue any or all of the
authorized but unissued Common Stock without stockholder 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 to the interests of the Company's stockholders who
participated in the Offering will occur.
The Board of Directors of the Company is empowered, without stockholder
approval, to issue up to 5,000 shares of "blank check" preferred stock (the
"Preferred Stock") with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Company's Common Stock.
5. RELATED PARTY TRANSACTIONS
The Chairman of the Board of Directors and the President of the Company are
principal shareholders, officers and directors of Unity Venture Capital
Associates, Ltd. ("Unity") which owns shares in the Company. Beginning June
1, 1996, commensurate with the increase in activities primarily related to
the Offering, the Company is obligated to pay Unity a monthly fee of $7,500
for general and administrative services, including the use of office space in
premises occupied by Unity.
Prior to the effective date of the Offering, the Company obtained advances
totaling approximately $58,417 to cover expenses related to the Offering.
These advances and the monthly fee noted above will be repaid out of the
proceeds of the Offering.
At November 18, 1996, a member of the Company's legal counsel owned 6,000
shares of the Company's Common Stock.
6. STOCK OPTION PLAN
On May 30, 1996, the Company's Board of Directors approved a stock option
plan (the "Plan"). The Plan, which is subject to shareholder approval,
provides for the issuance of up to 187,500 options (the "Options") to acquire
shares of the Company's Common Stock.
The Options are intended to qualify either as incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986 or as
Page 12 of 13 Pages
options which are not intended to meet the requirements of such section
("Nonstatutory Stock Options"). The Options may be granted under the Plan to
persons who, in the case of Incentive Stock Options, are key employees
(including officers) of the Company, or, in the case of Nonstatutory Stock
Options, are key employees (including officers) and nonemployee directors of
the Company, except that Nonstatutory Stock Options may not be granted to a
holder of more than 10% of the total voting power of the Company.
The exercise price of all Incentive Stock Options granted under the Plan must
be at least equal to the fair market value of such shares on the date of
grant or, in the case of Incentive Stock Options granted to the holder of 10%
or more of the Company's Common Stock, at least 110% of the fair market value
of such shares on the date of grant. The exercise price of all Nonstatutory
Stock Options granted under the Plan shall be determined by the Board of
Directors of the Company at the time of grant. The maximum exercise period
for which the Options may be granted is ten years from the date of grant
(five years in the case of Incentive Stock Options granted to an individual
owning more than 10% of the Company's Common Stock). The aggregate fair
market value (determined at the date of the option grant) of such shares with
respect to which Incentive Stock Options are exercisable for the first time
by the holder of the option during any calendar year shall not exceed
$100,000.
The FASB issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"), which will require
companies either to reflect in their financial statements or reflect as
supplemental disclosure the impact on earnings and earnings per share of the
fair value of stock based compensation using certain pricing models for the
option component of stock option plans. To date, no options have been
granted under the Plan. Disclosure, as required by SFAS 123, will be made
upon the issuance of options.
7. INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are determined based on differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each year end, and are measured based on enacted tax rates and laws that will
be in effect when the differences are expected to reverse. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
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