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Previous: ADVISORS SERIES TRUST, N-30D, 1999-03-23 |
Next: NORWEST INTEGRATED STRUCTURED ASSETS INC, 8-K, 1999-03-23 |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: January 8, 1999
(Date of earliest event reported)
COMPU-DAWN, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in charter)
Delaware 000-22611 11-3344575
- -------------------------------------------------------------------------------
(State or other jurisdiction (Commission File No.) (IRS Employer Identification
of incorporation) Number)
77 Spruce Street, Cedarhurst, New York 11516
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 374-6700
1
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
(i) Balance Sheet of LocalNet Communications, Inc. as of December 31,
1997.
(ii) Statements of Income of LocalNet Communications, Inc. for the
period from March 28, 1997 (inception) to December 31, 1997.
(iii)Statement of Changes in Stockholders' Equity of LocalNet
Communications, Inc. for the period from March 28, 1997
(inception) to December 31, 1997.
(iv) Statement of Cash Flows of LocalNet Communications, Inc. for the
period from March 28, 1997 (inception) to December 31, 1997.
(v) Condensed Balance Sheet of LocalNet Communications, Inc. as of
September 30, 1998.
(vi) Condensed Statements of Operations of LocalNet Communications,
Inc. for the nine months ended September 30, 1998 and 1997.
(vii)Condensed Statements of Cash Flows of LocalNet Communications,
Inc. for the nine months ended September 30, 1998 and 1997.
(b) Pro Forma Financial Information.
(i) Pro Forma Balance Sheet of the Company as of September 30, 1998.
(ii) Pro Forma Statements of Operations of the Company for the nine
months ended September 30, 1998.
(iii)Pro Forma Statements of Operations of the Company for the year
ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COMPU-DAWN, INC.
Dated: March 23, 1999 By: /s/ Mark Honigsfeld
-----------------------------------
Mark Honigsfeld,
President and Chief Executive Officer
<PAGE>
LOCALNET COMMUNICATIONS, INC.
FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28,1997
(DATE OF INCEPTION)
TO DECEMBER 31,1997
AND INDEPENDENT AUDITORS' REPORT
* * * * * * *
<PAGE>
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Balance Sheet 2
Statement of Income 4
Statement of Changes in Stockholders' Equity 5
Statement of Cash Flows 6
Notes to Financial Statements 8
<PAGE>
Ennis, Pellum & Griggs, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
<TABLE>
<CAPTION>
<S> <C> <C>
RAY 0. HILLIARD, CPA RETIRED JACKSONVILLE PONTE VEDRA
ROBERT W. ENNIS, CPA 4417 BEACH BOULEVARD. SUITE 304 2207 SAWGRASS VILLAGE DRIVE
RON R. PELLUM JACKSONVILLE, FLORIDA 32207 PONTE VEDRA BEACH, FLORIDA 32082
ERIC N. GRIGGS, CPA 904-396-5965 904-280-2053
BONNIE H. SMITH, CPA FAX: 9O4~399-4O94 FAX: 904-280-2055
www.jaxcpa.com E-Mail: [email protected]
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
LocalNet Communications, Inc.
Jacksonville, Florida
We have audited the accompanying balance sheet of LocalNet Communications, Inc.
(a Florida corporation) as of December 31, 1997, and the related statements of
income, retained earnings and cash flows for the period from March 28, 1997
(date of inception) to December 31, 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 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 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 audit provides 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 LocalNet Communications, Inc.
as of December 31, 1997, and the results of its operations and cash flows for
the period from March 28, 1997 (date of inception) to December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Ennis, Pellum & Griggs, P.A.
Jacksonville, Florida
May 13, 1998
MEMBERS AMERICAN AND FLORIDA INSTITUTES OF CERTIFIED PUBLIC ACCOUNTANTS MEMBER
OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS PRIVATE COMPANIES
PRACTICE SECTION
<PAGE>
<TABLE>
<CAPTION>
LOCALNET COMMUNICATIONS, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 278,789
Accounts receivable 25,249
Employee advances 14,023
Inventory 36,371
Prepaid expenses 3,475
Deferred income taxes - current 176,960
-------
Total Current Assets 534,867
-------
PROPERTY AND EQUIPMENT - AT COST:
Equipment and software 125,296
Furniture and fixtures 9,937
-----
135,233
Accumulated depreciation (7,870)
-------
Total Property and Equipment, Net 127,363
-------
OTHER ASSETS:
Deposits 2,000
Deferred income taxes - noncurrent 13,026
-------
Total Other Assets 15,026
------
TOTAL ASSETS $ 677,256
=========
</TABLE>
See notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
LOCALNET COMMUNICATIONS, INC.
BALANCE SHEET
DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
<S> <C>
Accounts payable $ 171,207
Commissions payable 152,590
Unearned revenue 145,756
Accrued expenses 35,477
Unearned commissions 23,087
Current maturities of long-term debt 208,962
-------
Total Current Liabilities 737,079
-------
LONG-TERM DEBT 201,733
-------
STOCKHOLDERS' DEFICIT:
Common stock - authorized 1,000,000 shares; $.01 par value;
issued and outstanding 113,465 shares 1,135
Additional paid-in capital 74,990
Stock subscriptions receivable (824)
Accumulated deficit (336,857)
-------
(261,556)
---------
Total Stockholders' Deficit
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 677,256
=========
</TABLE>
See notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
LOCALNET COMMUNICATIONS, INC.
STATEMENT OF INCOME
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
REVENUES:
<S> <C>
Marketing service $ 672,089
Communication services 58,764
---------
Total Revenues 730,853
-------
OPERATING EXPENSES:
Commissions 383,731
Materials and service fees 82,188
Payroll expenses 184,404
Sales meeting expenses 106,348
Travel and entertainment 123,370
Consulting and management fees 119,802
Advertising 43,406
Professional services 28,063
Office expense 57,294
Rent expense 39,039
Transportation and equipment 26,772
Repairs and maintenance 13,815
Telephone and communications 17,366
Depreciation 7,870
Other 13,872
------
Total Operating Expenses 1,247,340
---------
INCOME (LOSS) FROM OPERATIONS (516,487)
---------
OTHER INCOME (EXPENSE):
Interest expense (13,971)
Interest income 3,615
-------
Total Other Income (Expense) (10,356)
--------
NET LOSS BEFORE INCOME TAXES (526,843)
INCOME TAX EXPENSE (BENEFIT) (189,986)
---------
NET LOSS $(336,857)
---------
</TABLE>
See notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
LOCALNET COMMUNICATIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 28,1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
ADDITIONAL STOCK
COMMON STOCK PAID-IN SUBSCRIPTION ACCUMULATED
DATE SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
<S> <C> <C> <C> <C> <C> <C>
Issue stock for subscription
receivable 4/1/97 50,000 $ 500 $ --- $ 500 $ ---
Issue stock for cash 8/14/97 30,000 300 --- --- ---
Issue stock for subscription
receivable 8/14/97 25,000 250 --- 250 ---
Issue stock for cash 12/30/97 1,050 11 74,990 --- ---
Issue stock for subscription
receivable 12/30/97 1,628 16 --- 16 ---
Issue stock for subscription
receivable 12/31/97 5,787 58 --- 58 ---
Net loss for the period from
March 28, 1997 through
December 31, 1997 --- --- --- --- (336,857)
-------- ----- ----- ----- -------
Balance, December 31, 1997 113,465 $1,135 $74,990 $ 824 $ (336,857)
======= ====== ======= ======= ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
LOCALNET COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $ (336,857)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for deferred income taxes (189,986)
Depreciation and amortization 7,870
(Increase) Decrease in:
Receivables (39,272)
Inventories (36,371)
Prepaid expenses (3,475)
Other assets (2,000)
Increase (Decrease) in:
Accounts payable 171,207
Accrued liabilities 211,154
Unearned revenue 145,756
----------
Net Cash Used in Operating Activities (71,974)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (72,490)
----------
Net Cash Used in Investing Activities (72,490)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 75,301
Proceeds from long-term debt 387,000
Principal payments on long-term debt (39,048)
---------
Net Cash Provided by Financing Activities 423,253
-------
NET INCREASE IN CASH 278,789
CASH - BEGINNING ---
-------------
CASH - ENDING $ 278,789
===========
</TABLE>
See notes to financial statements.
6
<PAGE>
<TABLE>
LOCALNET COMMUNICATIONS. INC.
<CAPTION>
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C>
Cash paid during the period for:
Interest expense $ 877
===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Property and equipment purchased $ 135,233
Less: purchases financed (62,743)
-----------
Cash paid for property and equipment $ 72,490
===========
</TABLE>
See notes to financial statements.
7
<PAGE>
LOCALNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
LocalNet Communications, Inc. (the Company) is a Florida corporation
incorporated on March 28, 1997. The Company is a customer acquisition
company whose core business is communications and technology products
and services. The business includes switched access or local dial tone
business, wireless communications, long distance telephone service,
paging satellite systems, computer and Internet services and innovative
information superhighway products.
Unearned Revenue
The Company primarily utilizes independent representatives ("IRs") to
market its products and services. Revenues include fees from
independent representatives for the purchase of a start-up package,
training, support and sales aid supplies and commissions from service
providers for customer usage of telecommunications services.
Marketing service revenues are primarily comprised of receipts from
IRs. Receipts from IRs consist of fees to enroll as Sales
Representatives (SRs) or Area Representatives (ARs). Both positions
provide start-up packages which include different levels of specialized
materials, training, and management support services. Receipts also
include tuition fees from ARs who enroll in a trainer certification
course. The portions of the marketing service revenues that relate to
ongoing management support services are deferred in accordance with
generally accepted accounting principles and amortized over a period of
12 months in order to match those revenues with the costs of providing
the related support services. Unearned revenue includes deferred
revenue for management support services, deposits from IRS for LocalNet
Broadcast Network (LBN) Tele-TV adapters and advance draws on
commissions from service providers.
Unearned Commissions
Commissions are paid to IRs based upon the acquisition of new
subscribers and usage by subscribers. The Company also pays Commissions
for the training of IRs. Commissions are recorded as an expense in the
period the related revenue is recognized. Commissions payable includes
commissions earned by IRS as of December 31, 1997. The unearned
commissions includes commissions for subscriber acquisition expected to
be earned by IRS in 1998 and paid from IRs fees received and recognized
as revenue in 1997. Management estimates that it is probable that 75%
of the ARS and 50% of the SRs will qualify to earn the commissions.
8
<PAGE>
LOCALNET COMMUNICATIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Inventories
Inventory consists primarily of marketing materials and promotional
items, and is valued at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the following estimated useful live
of the related assets. Computer software includes external direct costs
of software developed for internal use and is depreciated using the
straight-line method over 3 years, which is the estimated useful life.
Depreciation expense for 1997 totaled $7,870. The lives used in
determining depreciation are as follows:
Equipment and software 3 to 5 years
Furniture and fixtures 5 to 7 years
The costs of additions and improvements which substantially extend the
useful life and/or value of a particular asset are capitalized. Repair
and maintenance costs which do not increase the useful lives of the
assets are charged to expense as incurred. Upon disposition, the cost
and related accumulated depreciation are remove from the accounts and
any gain or loss is included in the results of operations.
Advertising Costs
The Company expenses advertising costs as they are incurred.
Statement of Cash Flows
For purposes of cash flows, cash and cash equivalents include cash on
hand and interest bearing deposits with maturities of 90 days or less.
Allowance for Bad Debts
No allowance for uncollectible accounts has been provided since it is
believed the balances in accounts receivable are fully collectible.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No.109,
"Accounting for Income Taxes," which requires that deferred income tax
expenses be provided based
9
<PAGE>
LOCALNET COMMUNICATIONS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income Taxes (Continued)
upon estimated future tax effects of differences between the carrying
amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes calculated based upon
provisions of enacted tax laws.
Use 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.
2. LEASE COMMITMENTS:
The Company is obligated under various leases for office space,
vehicles, and equipment. Rent expense under these leases for 1997
totaled $58,997. The minimum future lease payments under these leases
are as follows:
1998 $54,810
1999 17,346
-------
Total minimum future rentals $72,156
-------
3. NOTES PAYABLE:
Notes payable consist of the following:
Note payable for $39,000 to RECOM Cellular (a related
company) dated June 30, 1997, interest payable quarterly
at 10% and full principal balance due June 30, 1998. $ 39,000
Note payable for $98,000 to Smart Phone America, Inc.
(a related company) dated August 31, 1997, interest
payable quarterly at 10% and full principal balance
due August 31, 1998. 70,178
10
<PAGE>
LOCALNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
3. NOTES PAYABLE (CONTINUED):
<S> <C>
Note payable for $250,000 to a shareholder dated August 14, 1997,
interest accrued at 8.5%, with principal and accrued interest due
August 14, 2000. The note provides for additional payments of: $15 of
the fee paid by each independent area representative and 1/4% of gross
revenues, until the note is paid in full; $10 of the fee in perpetuity
after the note is paid in full, and 1/4% of gross revenues from long
distance usage for 2 years. Personally guaranteed by member of the
Board of Directors. 239,440
Note payable for $35,152 to First Union National Bank dated September
29, 1997, payable $771 per month including interest at 11%,
collateralized by computer and office equipment and furniture.
Personally guaranteed by a shareholder. 34,486
Note payable for $27,591 to First Union National Bank dated November
12, 1997, payable $591 per month including interest at the Wall Street
Journal prime rate plus 1%, collateralized by 1995 Chevrolet Suburban.
Personally guaranteed by a shareholder. 27,591
--------
Total long-term debt 410,695
Less: current portion (208,962)
---------
Long-term debt, net $20l,733
---------
---------
</TABLE>
Following are maturities of long-term debt for each of the next five
years:
1998 $ 208,962
1999 101,147
2000 72,487
2001 14,039
2002 14,060
------
Total $410,695
--------
11
<PAGE>
LOCALNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
4. PROVISION FOR INCOME TAXES:
Deferred tax assets and liabilities are determined based on the
difference between financial statements and tax basis of assets and
liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. Current income taxes are based
on the year's income taxable for federal and state income tax reporting
purposes.
The components of the provision (benefit) for income taxes are as
follows for the period ended December 31, 1997:
Current:
Federal $ ---
State ---
----------
Deferred:
Federal (162,218)
State (27,768)
Valuation allowance ----------
$(189,986)
----------
Temporary differences which give rise to the net deferred income tax
liability at December 31, l997 are as follows:
<TABLE>
<CAPTION>
Deferred Deferred
Tax Asset Tax Liability
<S> <C> <C>
Depreciation and amortization $ --- $ 4,284
Unearned commissions 8,688 ---
Net operating loss carryforward 162,502 ---
Start-up cost (net of amortization) 23,080 ---
------ --------
194,270 4,284
Valuation Allowance --- ---
-------- --------
$194,270 $ 4,284
======== =======
</TABLE>
These amounts have been presented in the financial statements as net
deferred tax assets as follows:
Deferred tax asset - current $ 176,960
Deferred tax asset - noncurrent 13,026
---------
Net deferred tax asset $ 189,986
=========
The Company expects to have sufficient future income to realize its
recorded deferred tax assets, and therefore has not recorded a
valuation allowance.
12
<PAGE>
LOCALNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
4. PROVISION FOR INCOME TAXES (CONTINUED):
The income tax expense (benefit) may differ from the expense (benefit)
that would result from applying statutory rates to income before income
taxes primarily because of non-deductible expenses for entertainment,
food and life insurance
As of December 31, 1997, the Company has an unused net Operating loss
carryforward of $431,842 which expires, if not used, in 2012.
5. RELATED PARTY TRANSACTIONS:
During 1997, the Company purchased consulting and management services,
from related parties, including National Wireworks, Inc. d/b/a Recom
Cellular, SmartPhone America, Inc., Anglo- American Fulfillment
Company, Osprey Capital Management, LLC and certain individual
stockholders.
Expenses included payments to related parties in the amounts of
$109,374 for consulting and management fees, $61,721 to reimburse
payroll expenses and $25,000 for rent expense. Additionally, $12,611
was accrued for interest expense on notes payable to related companies
and shareholders.
As part of the management services to effect the Company's creation,
lease agreements and contracts for office space, equipment, and
vehicles were entered into by related parties on behalf of and for the
benefit of the Company and were subsequently adopted and ratified by
the Company's Board of Directors.
In 1997, the Company issued 82,415 shares of common stock at par to
individuals affiliated with the Company as compensation for the
organization of the Company and for rights to certain technological and
intellectual property utilized by the Company. These include 2,161
shares issued as a result of an oral agreement with a related party
which grants the right to purchase common stock at par up to 2% of the
outstanding shares in exchange for consulting services rendered to the
Company. The fair market value of the transactions was not determinable
at the time of issue. Accordingly, the transactions were valued at $824
which equals the par value of $.01.
6. CONCENTRATION OF CREDIT RISK:
The Company maintains cash balances in accounts at one bank. The
Company's accounts are insured by the Federal Deposit Insurance
Corporation up to $100,000. As of December 31, 1997, the Company had
uninsured cash balances totaling $178,789.
13
<PAGE>
LOCALNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
7. MAJOR SUPPLIERS:
Revenues from service providers in 1997 were primarily derived from
commissions on local switched services and long distance telephone
services. The Company has entered into agency agreements with American
Communications Services, Inc. (ACSI) to market local switched services
and with UniDial Incorporated UniDial) to market long distance
telephone services.
The Agreement with ACSI is for an initial term of two years. The
Agreement provides for a one year automatic renewal unless either party
advises to the contrary not less than 60 days prior to the renewal
anniversary. Additionally the Agreement shall remain in force after the
initial three year period as long as the Company maintains a 15%
incremental growth quarter over quarter beginning in each calendar
year.
The Agreement with UniDial sets forth terms for payment of commissions
to the Company. The initial term of the Agreement is five years. The
Agreement may be renewed for successive terms of two years. The
Agreement also provides terms for termination by the Company or
UniDial.
Accounts receivable at December 31, 1997 totaling $25,249 consisted of
commissions receivable from these two service providers.
8. SUBSEQUENT EVENTS:
Employment Agreements
Effective January 1, 1998, the Company executed employment agreements
with the Chief Executive Officer (CEO) and Chief Operating Officer
(COO). The employment agreements include in part provisions for the
issuance of common stock and additional compensation as a percentage of
gross revenues. The Company also entered into an oral employment
agreement with the Chief Financial Officer (CFO) which includes in part
provisions for the issuance of common stock. The agreements with the
COO and CFO pertaining to the issue of common stock contain
non-dilutive provisions totaling 2 1/2%.
Consulting and License Agreement
Effective January 1, 1998, the Company executed a consulting and
license agreement with a related party which grants an exclusive
license to certain intellectual property. The agreement includes a
provision for royalty payments based on a percentage of gross revenues
in addition to an annual stipulated consulting fee so long as the
company remains profitable. The consulting fee may be adjusted at the
discretion of the company's President and CFO.
14
<PAGE>
LOCALNET COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 28, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997
8. SUBSEQUENT EVENTS (CONTINUED)
International Operations
In 1998, the Company expanded operations into Canada, Europe and Puerto
Rice. Negotiations were being conducted to expand into other
international markets.
_______________________________
<PAGE>
LOCALNET COMMUNICATIONS, INC.
UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
<PAGE>
<TABLE>
<CAPTION>
LOCALNET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(unaudited)
- ASSETS -
CURRENT ASSETS:
<S> <C> <C>
Cash $ 64,624
Accounts receivable - net 78,879
Prepaid expenses and other current assets 14,937
Inventory 537,667
------------
TOTAL CURRENT ASSETS 696,107
PROPERTY AND EQUIPMENT:
Fixed assets $ 282,641
Less: accumulated depreciation (46,932) 235,709
--------------
OTHER ASSETS 12,454
$ 944,270
- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $1,940,350
Deferred revenues 40,090
Current portion - long-term debt 493,209
------------
TOTAL CURRENT LIABILITIES 2,473,649
STOCKHOLDERS' DEFICIT:
Common stock $ 1,135
Additional paid-in capital 439,990
Accumulated deficit (1,970,504) (1,529,379)
------------ -----------
$ 944,270
</TABLE>
Page 2.
<PAGE>
<TABLE>
<CAPTION>
LOCALNET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(unaudited)
1998 1997
------------- -----------
<S> <C> <C>
REVENUES - NET $ 7,539,416 $ 475,054
------------ ---------
COSTS AND EXPENSES:
Costs of revenues 5,326,984 349,430
General and administrative 3,710,977 586,066
------------ ----------
9,037,961 935,496
------------ ----------
LOSS FROM OPERATIONS (1,498,545) (460,442)
------------ ----------
OTHER INCOME (EXPENSE):
Interest and other income 11,610 1,627
Interest expense (16,496) (9,780)
-------------- ------------
(4,886) (8,153)
--------------- ------------
LOSS BEFORE PROVISION (CREDIT) FOR INCOME TAXES (1,503,431) (468,595)
Provision (credit) for income taxes - -
------------------- ----------------
NET LOSS $(1,503,431) $(468,595)
=========== =========
</TABLE>
Page 3.
<PAGE>
<TABLE>
<CAPTION>
LOCALNET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(unaudited)
<S> <C> <C>
1998 1997
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash utilized by operating activities $(514,271) $(355,008)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (147,408) (30,553)
---------- -----------
Net cash utilized by investing activities (147,408) (30,553)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 365,000 300
Proceeds from long-term debt 290,000 422,152
Principal payments of long-term debt (207,486) (7,810)
---------- ------------
Net cash provided by financing activities 447,514 414,642
---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (214,165) 29,081
Cash and cash equivalents, beginning of period 278,789 -
---------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 64,624 $ 29,081
========== ===========
</TABLE>
Page 4.
<PAGE>
Compu-DAWN, Inc.
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma financial statements have been prepared based
upon certain pro forma adjustments to the historical financial statements of
Compu-DAWN, Inc., (the Company). The pro forma financial statements should be
read in conjunction with the notes thereto and the historical financial
statements of the Company.
The accompanying pro forma balance sheet has been presented as if the
transactions described below occurred at the Company's balance sheet date,
September 30, 1998. The accompanying pro forma statements of operations have
been prepared as if the transactions occurred at the beginning of the year ended
December 31, 1997 and the nine months ended September 30, 1998.
These pro forma financial statements do not purport to be indicative of the
results which would actually have been obtained had the pro forma transactions
been completed as of the beginning of the year ended December 31, 1997 and the
nine months ended September 30, 1998.
The pro forma transactions (see notes to pro forma financial statements) are as
follows:
- the issuance of loans by the Company and interest accrued thereon
- the peaceful surrender of assets to satisfy a portion of the loans
- recognition of an impaired loan resulting in a charge to operations
Page 1
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)
- ASSETS -
Historical
Compu-DAWN, Localnet Transactions and
Inc. Communications Adjustments Consolidated
CURRENT ASSETS:
<S> <C> <C> <C> <C>
Cash $6,407,365 $ 64,624 $1,900,000(1) $ 4,571,989
Accounts receivable 117,725 78,879 196,604
Prepaid expenses and other current assets 104,268 14,937 119,205
Loans receivable - - $1,900,000(1) 750,000(2) -
1,150,000(3)
Inventory - 537,667 194,270(2) 343,397
------------------ ----------- -------------
TOTAL CURRENT ASSETS 6,629,358 696,107 5,231,195
FIXED ASSETS 237,424 235,709 473,133
OTHER ASSETS 21,525 12,454 33,979
------------- ------------- --------------
TOTAL ASSETS $6,888,307 $ 944,270 $ 5,738,307
========== =========== ===========
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 31,936 $ 1,940,350 1,940,350(2) $ 31,936
Deferred revenue 27,898 40,090 40,090(2) 27,898
Notes payable - officer 75,000 - 75,000
Current portion - long-term debt 6,427 493,209 493,209(2) 6,427
-------------- ------------- ---------------
TOTAL CURRENT LIABILITIES 141,261 2,473,649 141,261
------------ ------------ -------------
NON-CURRENT LIABILITIES:
Long-term debt 17,565 - 17,565
Deferred rent liability 29,644 - 29,644
------------- ------------------- --------------
47,209 - 47,209
------------- ------------------- --------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock 50 - 50
Common stock 31,795 1,135 1,135(2) 31,795
Additional paid-in capital 13,397,783 439,990 439,990(2) 13,397,783
Accumulated deficit (6,104,079) (1,970,504) 1,150,000(3) 1,970,504(2) (7,254,079)
Treasury stock (625,712) - (625,712)
------------- ------------------- -------------
Total stockholders' equity (deficit) 6,699,837 (1,529,379) 5,549,837
------------- ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,888,307 $ 944,270 $ 5,738,307
=========== ============ ===========
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Historical
Compu-DAWN, Localnet Transactions and
Inc. Communications Adjustments Consolidated
<S> <C> <C> <C> <C> <C>
REVENUES - NET $ 916,129 $ 7,539,416 $ 8,455,545
------------ ----------- ------------
COSTS AND EXPENSES:
Cost of revenues 395,523 5,326,984 5,722,507
General and administrative 1,212,144 3,710,977 4,923,121
Research and development 381,726 - 381,726
------------- -------------- -------------
TOTAL OPERATING EXPENSES 1,989,393 9,037,961 11,027,354
------------- ------------- ------------
LOSS FROM OPERATIONS (1,073,264) (1,498,545) (2,571,809)
------------- ------------- -------------
OTHER INCOME (EXPENSES):
Interest and other income 121,246 11,610 $171,000(1) 303,856
Interest expense (17,940) (16,496) (34,436)
Loan impairment - - 1,150,000(3) (1,150,000)
Loss due to terminated investment
transaction (296,952) - (296,952)
-------------- -------------- -------------
(193,646) (4,886) (1,177,532)
-------------- -------------- -------------
NET LOSS $(1,266,910) $(1,503,431) $(3,749,341)
=========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,988,978 2,988,978
========= =========
BASIC LOSS PER SHARE $(0.42) $(1.25)
====== ======
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(Unaudited)
Historical
Compu-DAWN, Localnet Transactions and
Inc. Communications Adjustments Consolidated
<S> <C> <C> <C> <C> <C>
REVENUES - NET $ 591,375 $ 730,853 $ 1,322,228
------------- ------------ -----------
COSTS AND EXPENSES:
Cost of revenues 406,563 465,919 872,482
General and administrative 2,195,406 781,421 2,976,827
Research and development 935,804 - 935,804
-------------- -------------- ------------
TOTAL OPERATING EXPENSES 3,537,773 1,247,340 4,785,113
------------- -------------- ------------
LOSS FROM OPERATIONS (2,946,398) (516,487) (3,462,885)
------------ ------------- ------------
OTHER INCOME (EXPENSES):
Interest and other income 120,158 3,615 $228,000(1) 351,773
Interest expense (1,610,505) (13,971) (1,624,476)
Loan impairment - - 1,150,000(3) (1,150,000)
------------- --------------- ------------
(1,490,347) (10,356) (2,422,703)
------------ -------------- ------------
NET LOSS $(4,436,745) $ (526,843) $(5,885,588)
=========== ============ ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,270,047 2,270,047
========= =========
BASIC LOSS PER SHARE $(1.95) $(2.59)
====== ======
</TABLE>
Page 4
<PAGE>
Compu-DAWN, Inc.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
NOTE - 1 During the period from October 31, 1998 to January 4, 1999, the
Company advanced a total of $1,900,000 in loans to Localnet
Communications, Inc., (Localnet) with interest at an annual rate
of 12%. The collateral for these loans were certain operating
assets of Localnet. In January 1999, the Company assigned the
loans receivable to e.TV Commerce, Inc., a newly formed wholly
owned subsidiary.
NOTE - 2 This adjustment reflects the surrender of the collateral (certain
operating assets) to the Company in settlement of $750,000 of the
aforementioned loan and the elimination of other assets and
liabilities of Localnet, not being transferred to the Company in
this transaction. The Company, through e.TV Commerce, Inc., will
utilize these operating assets to conduct the same type of
operation previously conducted by Localnet.
NOTE - 3 Since it is probable that the remaining balance will not be
collected, the loan is deemed to be impaired and the Company has
recognized a bad debt expense for $1,150,000.
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