UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005 -------------- [ ] Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from to --------------- ---------------- Commission File Number 000-50781 --------- Arpeggio Acquisition Corporation -------------------------------- (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 20-0953973 -------- ---------- (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10 East 53rd Street, 36th Floor, New York, New York 10022 --------------------------------------------------------- (Address of Principal Executive Office) (212) 319-7676 -------------- (Issuer's Telephone Number, Including Area Code) 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 [ ] As of May 13, 2005, 8,300,000 shares of common stock, par value $.0001 per share, were issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] Page ---- Part I: Financial Information: Item 1 -Financial Statements (Unaudited): Balance Sheets 3 Statements of Operations 4 Statement of Stockholders' Equity 5 Statements of Cash Flows 6 Summary of Significant Accounting Policies 7 Notes to Financial Statements 8 Item 2 - Management's Discussion and Analysis or Plan of Operation 12 Item 3 - Controls and Procedures 13 Part II. Other Information Item 2 - Changes in Securities and Small Business Issuer Purchases of Equity Securities 14 Item 6 - Exhibits and Reports on Form 8-K 14 Signatures 15 2 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) BALANCE SHEETS -------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, 2005 2004 (UNAUDITED) -------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,135,425 $ 1,219,597 U.S. Government Securities held in Trust Fund (Note 2) 35,830,291 35,634,814 Accrued interest receivable, Trust Fund (Note 2) 5,154 6,294 Prepaid expenses 21,250 42,500 ------------- ------------- Total current assets 36,992,120 36,903,205 ------------- ------------- Total assets $ 36,992,120 $ 36,803,205 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Income tax payable $ 15,643 $ 26,922 Accrued expenses 12,797 8,757 ------------- ------------- Total current liabilities 28,440 35,679 ------------- ------------- Common stock, subject to possible conversion, 1,359,320 shares at conversion value (Note 2) 6,932,532 6,932,532 ------------- ------------- Commitment (Note 5) Stockholders' equity (Notes 2, 3, 6 and 7) Preferred stock, $.0001 par value, Authorized 1,000,000 shares; none issued Common stock, $.0001 par value Authorized 30,000,000 shares; Issued and outstanding 8,300,000 shares (which includes 1,359,320 subject to possible conversion) 830 830 Additional paid-in capital 29,863,738 29,863,738 Retained earnings accumulated during development stage 166,580 70,426 ------------- ------------- Total stockholders' equity 30,031,148 29,934,994 ------------- ------------- Total liabilities and stockholders' equity $ 36,992,120 $ 36,903,205 ============= ============= See accompanying summary of significant accounting policies and notes to unaudited financial statements. 3 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) STATEMENTS OF OPERATIONS (UNAUDITED) -------------------------------------------------------------------------------- THREE MONTHS PERIOD FROM ENDED APRIL 2, 2004 MARCH 31, 2005 (INCEPTION) TO MARCH 31, 2005 -------------------------------------------------------------------------------------------------------------- Expenses: General and administrative expenses (Note 5) $ (55,182) $ (213,821) ----------- ------------- Operating loss (55,182) (213,821) ----------- ------------- Interest income 198,695 495,477 ----------- ------------- Net income before provision for income taxes 143,513 281,656 ----------- ------------- Provision for income taxes (Note 8) (47,359) (115,076) ----------- ------------- Net income 96,154 166,580 ----------- ------------- Basic and fully diluted net income per share 0.01 ----------- Weighted average common shares outstanding 8,300,000 ----------- See accompanying summary of significant accounting policies and notes to unaudited financial statements. 4 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) -------------------------------------------------------------------------------- Retained earnings Additional accumulated Preferred Stock Common Stock Paid-In during the Shares Amount Shares Amount Capital development stage Total ------------------------------------------------------------------------------------------------------------------------------------ Balance, April 2, 2004 (inception) ---- $ ---- --- $ --- $ --- $ --- $ --- Issuance of common stock to initial stockholders ---- ---- 1,500,000 150 24,850 --- 25,000 Sale of 6,800,000 units and underwriter's options, net of underwriters' discount and offering expenses (includes 1,359,320 shares subject to possible ---- ---- 6,800,000 680 29,838,888 --- 29,839,568 conversion) Net income for the period ---- ---- ---- --- ---- 70,426 70,426 ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2004 ---- ---- 8,300,000 $ 830 $29,863,738 $70,426 $ 29,934,994 ------------------------------------------------------------------------------------------------------------------------------------ Net income for the period (unaudited) ---- ---- ---- --- ---- 96,154 96,154 ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 2005 (unaudited) ---- $ ---- 8,300,000 $ 830 $29,863,738 $166,580 $30,031,148 ========== ===== =========== ======== =========== ------------------------------------------------------------------------------------------------------------------------------------ See accompanying summary of significant accounting policies and notes to unaudited financial statements. 5 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) STATEMENT OF CASH FLOWS (UNAUDITED) -------------------------------------------------------------------------------- Three months April 2, 2004 ended (inception) to March 31, 2005 March 31, 2005 ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 96,154 $ 166,580 Adjustments to reconcile net income to net cash used in operating activities: Gain on maturity of U.S. Government Securities held in Trust Fund (192,186) (475,000) (Decrease) increase in prepaid expenses 21,250 (21,250) (Decrease) increase in accrued interest receivable 1,140 (5,154) (Decrease) increase in income tax payable (11,279) 15,643 Increase in accrued expenses 4,040 12,797 ------------- ------------- Net cash used in operating activities (80,881) (306,384) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of U.S. Government Securities held in Trust Fund (35,830,291) (106,815,291) Maturity of U.S. Government Securities held in Trust Fund 35,827,000 71,460,000 ------------- ------------- Net cash used in investing activities (3,291) 35,355,291 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from public offering of 6,800,000 units net -- 36,772,000 Proceeds from issuance of common stock to initial stockholders -- 25,000 Proceeds from option -- 100 Proceeds from note payable, stockholder -- 77,500 Repayment of note payable, stockholder -- (77,500) ------------- ------------- Net cash provided by financing activities 0 36,797,100 Net increase in cash and cash equivalents (84,172) 1,135,425 ------------- ------------- Cash and cash equivalents at beginning of the period 1,219,597 ---- ------------- Cash and cash equivalents at end of the period $ 1,135,425 $ 1,135,425 ------------- ------------- Supplemental disclosure from cash flow information: Cash paid during the period for income taxes $ 40,473 $ 58,960 ------------- ------------- See accompanying summary of significant accounting policies and notes to unaudited financial statements 6 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. INCOME TAXES The Company follows Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes" which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. NET INCOME PER SHARE Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. No effect has been given to potential issuances of common stock from warrants or the underwriter option in the diluted computation, as their effect would be antidilutive. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. 7 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the Company's audited financial and related disclosures for the period ended December 31, 2004 included in the Company's Form 10-KSB. In the opinion of management, all adjustments (consisting primarily of normal accruals) have been made that are necessary to present fairly the financial position of the Company as of March 31, 2005 and the results of its operations and its cash flows for the three month period ended March 31, 2005 and from April 2, 2004 (inception) to March 31, 2005. Operating results for the interim period presented are not necessarily indicative of the results to be expected for a full year. 2. ORGANIZATION AND BUSINESS OPERATIONS The Company was incorporated in Delaware on April 2, 2004 as a blank check company, the objective of which is to acquire an operating business in the United States or Canada. The Company's initial stockholders purchased 1,500,000 common shares, $.0001 par value, for $25,000 on April 2, 2004. On June 30, 2004, the Company consummated an Initial Public Offering ("Offering") and raised net proceeds of $36,772,000 which is discussed in Note 3. The Company's management has broad discretion with respect to the specific application of the net proceeds of this Offering, although substantially all of the net proceeds of this Offering are intended to be generally applied toward consummating a business combination with a operating business in the United States or Canada ("Business Combination"). Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. As of March 31, 2005, an amount of $35,835,445 (which includes accrued interest of $5,154) is being held in an interest bearing trust account ("Trust Fund") until the earlier of (i) the consummation of its first Business Combination or (ii) liquidation of the Company. Under the agreement governing the Trust Fund, funds will only be invested in United Stated government securities (treasury bills) with a maturity of 180 days or less. The remaining net proceeds (not held in trust) may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. The Company, after signing a definitive agreement for the acquisition of a target business, will submit such transaction for stockholder approval. In the event that 8 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- public stockholders owning 20% or more of the shares sold in the Offering vote against the Business Combination and exercise their redemption rights described below, the Business Combination will not be consummated. All of the Company's stockholders prior to the Offering, including all of the officers and directors of the Company ("Initial Stockholders"), have agreed to vote their 1,500,000 founding shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company ("Public Stockholders") with respect to any Business Combination. After consummation of the Company's Business Combination, these voting safeguards will no longer be applicable. With respect to a Business Combination, which is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company convert his shares. The per share conversion price will equal the amount in the Trust Fund as of the record date for determination of stockholders entitled to vote on the Business Combination divided by the number of shares of common stock held by Public Stockholders at the consummation of the Offering. Accordingly, Public Stockholders holding 19.99% of the aggregate number of shares owned by all Public Stockholders may seek conversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust Fund computed without regard to the shares held by Initial Stockholders. In this respect, $6,932,532 has been classified as common stock subject to possible conversion. The Company's Certificate of Incorporation provides for mandatory liquidation of the Company, without stockholder approval, in the event that the Company does not consummate a Business Combination within 18 months from the date of the consummation of the Offering (such date would be December 31, 2005), or 24 months from the consummation of the Offering if certain extension criteria have been satisfied. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Fund assets) will be less than the initial public Offering price per share in the Offering due to costs related to the Offering (assuming no value is attributed to the warrants contained in the Units in the Offering discussed in Note 3). 3. OFFERING The Company sold 6,800,000 units ("Units") in the Offering, which includes the 800,000 Units subject to the underwriters' over allotment option. Each Unit consists of one share of the Company's common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant will entitle the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing the later of the completion of a Business Combination with a target business or one year from the effective date of the Offering and expiring four years from the effective date of the Offering. The Warrants will be redeemable at a price of $.01 per Warrant upon 30 days 9 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to date on which notice of redemption is given. In connection with this Offering, the Company issued an option for $100 to the representative of the underwriters to purchase 300,000 units at an exercise price of $9.90 per Unit. In addition, the warrants underlying such Units are exercisable at $6.25 per share. 4. NOTES PAYABLE, STOCKHOLDER The Company issued a $70,000 unsecured non-interest bearing promissory note to a stockholder on April 14, 2004. The stockholder advanced additional amounts aggregating $7,500 through June 30, 2004. The note and advance were paid in full on July 1, 2004 from the net proceeds of the Offering. 5. COMMITMENT The Company presently occupies office space provided by an affiliate of an Initial Stockholder. Such affiliate has agreed that, until the acquisition of a target business by the Company, it will make such office space, as well as certain office and secretarial services, available to the Company, as may be required by the Company from time to time. The Company pays such affiliate $7,500 per month for such services commencing on June 24, 2004, the effective date of the Offering. Approximately, $22,500 for the three-month period ended March 31, 2005 and $69,250 for the period from April 2, 2004 (inception) to March 31, 2005 is included in general and administrative for such services. 6. PREFERRED STOCK The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. 7. COMMON STOCK The Company's Board of Directors authorized a 1.2 to one forward stock split of its common stock on May 25, 2004. All references in the accompanying financial statements to the numbers of shares have been retroactively restated to reflect the transaction. At March 31, 2005, there were 14,500,000 shares of common stock reserved for issuance upon exercise of redeemable warrants and underwriters' unit purchase option. 10 ARPEGGIO ACQUISITION CORPORATION (A CORPORATION IN THE DEVELOPMENT STAGE) NOTES TO UNAUDITED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 8. INCOME TAXES Provision for income taxes consist of: For the three months For the Period from ended March 31, 2005 April 2, 2004 (inception) to March 31, 2005 Current: Federal $ 13,015 $ 31,624 State and local 34,344 83,452 ------------ ------------- $ 47,359 $ 115,076 =========== ============ 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with the Company's Financial Statements and footnotes thereto contained in this report. FORWARD LOOKING STATEMENTS The statements discussed in this Report include forward looking statements that involve risks and uncertainties, including other risks detailed from time to time in the Company's reports filed with the Securities and Exchange Commission. PLAN OF OPERATIONS We were formed on April 2, 2004 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. We intend to utilize cash derived from the proceeds of our recently completed public offering, our capital stock, debt or a combination of cash, capital stock and debt, in effecting a business combination. Net Income for the three months ended March 31, 2005 of $96,154 consisted of interest income on the Trust Fund investment of $194,337, interest on cash and cash equivalents of $4,358 offset by general and administrative expenses of $22,500 for a monthly administrative services agreement, $2,081 for professional fees, $21,250 for officer liability insurance, $3,179 for travel, $47,359 for income taxes and $6,171 for other expenses. Net Income for the period from April 2, 2004 (inception) to March 31, 2005 of $166,580 consisted of interest income on the Trust Fund investment was $483,445, interest on cash and cash equivalents of $12,032 offset by general and administrative expenses of $69,250 for a monthly administrative services agreement, $12,095 for professional fees, $63,750 for officer liability insurance, $16,929 for travel, $115,076 for income taxes and $51,796 for other expenses (including $25,853 in franchise tax). We consummated our initial public offering on June 30, 2004. Gross proceeds from our initial public offering, including the full exercise of the underwriters' over-allotment option, were $40,800,000. After deducting offering expenses of $1,580,000 including $1,080,000 evidencing the underwriters' non-accountable expense allowance of 3% of the gross proceeds, and underwriting discounts of $2,448,000, net proceeds were $36,772,000. Of this amount, $35,352,000 was placed in trust and the remaining proceeds are available to be used to provide for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses. We will use substantially all of the net proceeds of this offering to acquire a target business, including identifying and evaluating prospective acquisition candidates, selecting the target business, and structuring, negotiating and consummating the business combination. To the extent that our capital stock is used in whole or in part as consideration to effect a business combination, the proceeds held in the trust fund as well as any other net proceeds not expended will be used to finance the operations of the target business. We believe that we have sufficient available funds outside of the trust fund to operate through June 30, 2006, assuming that a business combination is not consummated during that time. Over this time period, we anticipate approximately $180,000 of expenses for legal, accounting and other expenses related to the due diligence investigations, structuring and negotiating of a business combination, $180,000 for the administrative fee payable to Crescendo Advisors II LLC ($7,500 per month for two years), $150,000 of expenses for the due diligence and investigation of a target business, $40,000 of expenses in legal and accounting fees relating to our SEC reporting obligations and $870,000 for general working capital that will be used for miscellaneous expenses and reserves, including approximately $115,000 for director and officer liability insurance premiums. We do 12 not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business. However, we may need to raise additional funds through a private offering of debt or equity securities if such funds are required to consummate a business combination that is presented to us. We would only consummate such a fund raising simultaneously with the consummation of a business combination. Commencing June 24, 2004, we pay Crescendo Advisors II LLC, an affiliate of Eric S. Rosenfeld, our chairman of the board, chief executive officer and president, a monthly fee of $7,500 for general and administrative services. In April and May 2004, Mr. Rosenfeld advanced an aggregate of $77,500 to us, on a non-interest bearing basis, for payment of offering expenses on our behalf. This amount was repaid in July 2004 out of the proceeds of our initial public offering. ITEM 3. CONTROLS AND PROCEDURES. An evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2005 was made under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based on that evaluation, they concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the most recently completed fiscal quarter, there has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 13 PART II. OTHER INFORMATION ITEM 2: CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES On June 30, 2004, we closed our initial public offering of 6,800,000 Units, including 800,000 Units issued upon exercise of the underwriters' over-allotment option, with each Unit consisting of one share of our common stock and two warrants, each to purchase one share of our common stock at an exercise price of $5.00 per share. The Units were sold at an offering price of $6.00 per Unit, generating gross proceeds of $40,800,000. The representative of the underwriters in the offering was EarlyBirdCapital, Inc. The securities sold in the offering were registered under the Securities Act of 1933 on a registration statement on Form S-1 (No. 333-114816). The Securities and Exchange Commission declared the registration statement effective on June 24, 2004. We paid a total of $2,448,000 in underwriting discounts and commissions, and approximately $1,580,000 has been paid for costs and expenses related to the offering, including $1,080,000 for the underwriters' non-accountable expense allowance of 3% of the gross proceeds. After deducting the underwriting discounts and commissions and the offering expenses, the total net proceeds to us from the offering were $36,772,000, of which $35,352,000 was deposited into a trust fund and the remaining proceeds are available to be used to provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. Through March 31, 2005, we have used approximately $306,384 of cash for operating expenses and $77,500 to repay advances made to us by one of our initial stockholders. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 31.1 - Section 302 Certification by CEO 31.2 - Section 302 Certification by CFO 32.1 - Section 906 Certification by CEO 32.2 - Section 906 Certification by CFO (b) Reports on Form 8-K: None 14 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARPEGGIO ACQUISITION CORPORATION Dated: May 13, 2005 /s/ Eric S. Rosenfeld --------------------- Eric S. Rosenfeld Chairman of the Board, Chief Executive Officer and President /s/ Arnaud Ajdler ----------------- Arnaud Ajdler Chief Financial Office and Secretary 15