<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): October 23, 1998
----------- -----
FRONTLINE COMMUNICATIONS CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-24223 13-3950283
- ---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
One Blue Hill Plaza, Pearl River, New York 10965
- --------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914)623-8553
-------------
Not Applicable
-----------------------------------------------------------
Former name or former address, if changed since last report
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
The following financial statements and pro forma financial
information omitted from the Company's Report on Form 8-K for the event dated
October 23, 1998 filed with the Commission on November 2, 1998, in reliance upon
instructions 7(a)(4) and 7(b)(2) of Form 8-K, are filed herewith.
(a) Financial Statements of the Businesses Acquired.
------------------------------------------------
(1) Financial statements as of December 31, 1996 and as
of December 31, 1997 and for each of the two years in
the period ended December 31, 1997
(2) Financial statements for the nine months ended
September 30, 1998 and 1997 (unaudited)
(b) Pro Forma Financial Information.
--------------------------------
(1) Unaudited pro forma condensed combined financial
statements as of September 30, 1998 and for the nine
months ended September 30, 1998 and the year ended
December 31, 197
(c) Exhibits
--------
Reference is made to the Exhibits previously filed with the
Securities and Exchange Commission as Exhibits to the Company's Report on Form
8-K filed with the Commission on November 2, 1998.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this amendment to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: January 6, 1999
FRONTLINE COMMUNICATIONS CORP.
By/s/ Samuel Gilner
----------------------------
Name: Samuel Gilner
Title: Chief Accounting Officer
-3-
<PAGE>
U.S. ONLINE, INC.
FINANCIAL STATEMENTS
DECEMBER 31,1996
<PAGE>
U.S. ONLINE, INC.
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31,1996
CONTENTS Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 1
FINANCIAL STATEMENTS
BALANCE SHEET 2
STATEMENT OF OPERATIONS 3
STATEMENT OF CHANGES IN STOCKHOLDERS'EQUITY 4
STATEMENT OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-12
SUPPLEMENTARY INFORMATION
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 13
ON SUPPLEMENTAL INFORMATION
COST OF REVENUE 14
OPERATING EXPENSES 15
<PAGE>
JOSEPH J. REPKO
Certified Public Accountant
453 N. STATE ROAD
SPRINGFIELD, PENNSYLVANIA 19064
(610) 328-9551
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
U.S. Online, Inc.
Mt. Laurel. New Jersey
I have audited the accompanying balance sheet of U.S. Online, Inc. as
of December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to
express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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. I believe that my audit provides a reasonable basis
for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Online, Inc.
as of December 31, 1996, and the results of its operations, stockholders'
equity and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
JOSEPH J.REPKO, CPA
February 8, 1997
<PAGE>
U.S. ONLINE, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $459,336
Accounts receivable:
Franchise 97,500
Customers 7,640
Due from shareholders 4,800
--------
Total current assets $569,276
FIXED ASSETS - AT COST 181,568
Less accumulated depreciation and amortization 35,719
--------
145,849
OTHER ASSETS 5,188
--------
TOTAL ASSETS $720,313
LIABILITIES AND SHAREHOLDERS'EQUITY
CURRENT LIABILITIES
Advances from related parties $ 94,416
Current portion of capital lease obligations 38,993
Current portion of long term debt - related party 33,320
Accounts payable and accrued expenses 124,899
Accrued interest - related party 10,932
Franchise deposits 157,000
--------
Total current liabilities 459,560
LONG TERM DEBT, net of current portion - related party 209,625
CAPITAL LEASE OBLIGATIONS, net of current portion 53,271
--------
Total Liabilities 722,456
SHAREHOLDERS'EQUITY
Additional paid in capital 449,400
Common stock - authorized 10,000,000 shares par value
$.001, issued and outstanding 6,400,000 shares 6,400
Accumulated deficit (457,943)
--------
Total Shareholders' Equity (2,143)
--------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $720,313
</TABLE>
See accountant's audit report and notes to financial statements.
-2-
<PAGE>
U.S. ONLINE, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,1996
Operating revenue $143,890
Cost of revenue 161,823
--------
Gross profit (17,933)
Operating expenses 382,917
--------
Operating loss (loss) (400,850)
Other income (expense)
Depreciation (35,719)
Interest expense (21,881)
Interest income 507
--------
NET LOSS (457,943)
Net loss per share of common stock $(.072)
Weighted average shares outstanding 6,400,000
See accountant's audit report and notes to financial statements.
-3-
<PAGE>
U.S. ONLINE, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,1996
Common Stock Capital in Stock-
------------ Excess of Accum'd holders'
Shares Amount Par Value Deficit Equity
---------------- ---------- ------- --------
Balance, January 1, 1996 1,000 $1,000 $ 1,000
Adjustment for fifty-
eight hundred to one
stock split 5,799,000 $4,800 4,800
Issuance of common
stock to investors in
a Private Placement
in December 22,1996 600,000 $ 600 $449,400 450,000
Net loss for the year
Ended December 31,1996 ($457,943) (457,943)
--------- ------ -------- ---------- --------
Balance,December 31,1996 6,400,000 $6,400 $449,400 ($457,943) ($ 2,143)
See accountant's audit report and notes to financial statements.
-4-
<PAGE>
U.S. ONLINE, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,1996
1996
----
Cash flows from operating activities:
Net loss ($457,943)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation and amortization 35,719
Changes in assets and liabilities:
Increase in accounts receivable (105,140)
Increase in other assets (5,188)
Increase in accounts payable and accrued expenses 135,831
Increase in deposits 157,000
-------
Net cash used in operating activities (239,721)
--------
Cash flows from investing activities.
Additions to property and equipment (36,244)
Loans to stockholder (4,800)
-------
Net cash used in investing activities (41,044)
Cash flows from financing activities:
Advances from related parties 94,416
Issuance of common stock to related parties 5,800
Net related party loans 189,885
Issuance of common stock in a private placement 450,000
-------
Net cash provided by financing activities 740,101
-------
Net increase in cash 459,336
Cash and cash equivalents - beginning --
-------
Cash and cash equivalents - ending $459,336
See accountant's audit report and notes to financial statements.
-5-
<PAGE>
U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1996
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
U.S. Online,Inc. "the Company", a Pennsylvania Corporation, is engaged in
the business of providing computer internet access service and point of
sale internet franchise sales to customers primarily in the Eastern Region
of the United States.
On October 17, 1996 the Company issued an aggregate of 5,800,000 shares of
restricted common stock to its shareholders in a 5,800 to 1 stock split.
During 1996, the Company offered to private investors through a private
offering a total of 600,000 shares at an offering price of $.75 per share.
The maximum offering would raise the company $450,000, the minimum would
raise $300,000. At December 31, 1996, the Company obtained its maximum
offering.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided for by the
straight-line and accelerated methods over the estimated useful lives of
the assets.
Income Taxes
The company elected to be taxed as a Subchapter "S" Corporation for both
federal and state tax purposes. Accordingly, the company's results of
operations are reflected in the shareholder's individual tax returns"
therefore, no tax provision has been reflected in the accompanying
financial statements. On December 22, 1996, the company terminated its
Subchapter "S" election due to the addition of a corporate shareholder.
The company filed a regular corporate return for the short period December
22, to December 31, 1996. No provision for taxes has been reflected on the
accompanying financial statement due to a net loss for the short period.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
-6-
<PAGE>
U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1996
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Con't)
Repairs and Maintenance
Expenditures for repairs, maintenance, and minor renewals are charged
against income as incurred and expenditures for major renewals and
betterments are capitalized and amortized over five years. The cost and
accumulated depreciation of assets sold or retired are removed from the
respective accounts with any gain or loss on disposal reflected in income.
Cash and Cash Equivalents
The Company considers cash equivalents to be those short-term investments
maturing within three months of the balance sheet date.
Loss per Share
The loss per share is based on the weighted average number of shares of
common stock outstanding during the year. The effect of the stock split of
5,800 to 1 has been considered in this calculation.
Fair Value of Financial Instruments
The note due from shareholders is based on the terms at which those same
loans would be made currently and approximate their fair value. At
December 31, 1996, the carrying value of the assets were $720,313 which
equates their fair value. The carrying value of the capital lease
obligations was $92,264, the related party long-term note was $242,945,
and the related party advances were $94,416 and are reflective of
borrowing rates currently available to the Company.
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Company has a potential concentration of credit risk consisting
primarily of temporary cash deposits and trade accounts receivable.
Concentrations of credit with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base
and their dispersion across different geographic locations. At December
31, 1996, the Company held $459,336 in one bank account which is in excess
of the federal deposit insurance company limit of $100,000 creating a
potential concentration of credit risk of $359,336.
-7-
<PAGE>
U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1996
NOTE 3- FIXED ASSETS
Major classifications of property and equipment are summarized below:
1996
----
Computer equipment and software $164,418
Furniture and Fixtures 15,715
Leasehold improvements 1,435
--------
$181,568
--------
At December 31, 1996 the Company agreed to assume title of assets under
capital leases previously leased by a related party. The equipment was
physically in operation by the Company and payments were made by the
Company directly to the third party lessors.
NOTE 4 - RELATED PARTY TRANSACTIONS
Balance Sheet Items
Notes Payable U.S. Online, Inc. has incurred a related party obligation
to two companies for expenses paid on the Company's behalf. Such
expenses included: payroll, advertising, rent and other operating
expenses advanced since inception. As of December 31, 1996, the net
advanced costs were $242,945. The note bears interest at 9% annually and
is payable in monthly installments of $5,043 beginning March 15, 1997.
Interest on the related party debt was $10,932 at December 31, 1996.
Annual maturities are as follows:
1997 $ 33,320
1998 43,413
1999 47,486
2000 51,940
2001 56,812
2002 9,974
--------
$242,945
--------
-8-
<PAGE>
U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Advances
Related parties had advanced expenses including payroll, advertising,
rent, equipment and other expenses since inception. The amounts
outstanding at December 31, 1996 was $94,416.
Operating Sub-Lease
The Company maintains a related party obligation on several
non-cancelable operating sub-leases from a Company controlled by an
executive officer of the Company and a principle shareholder. The master
leases from which the sub-leases are derived from are guaranteed by the
principles of the affiliated Company. The details of these related party
leases are as follows:
Facility rentals, monthly payments of $2,972, with certain operating
expenses and amortized costs, expiring May 1998.
Telephone system, monthly payments of $361, expiring March 1998.
Security System, monthly payments of $355, expiring May 2000.
Computer equipment, monthly payments of $979, on various leases expiring
December 1999.
NOTE 5 - CAPITAL LEASE OBLIGATIONS
The Company has purchased certain computer equipment and furniture under
capital lease obligations expiring through 2001. Accordingly, SFAS 13
requires that the asset be capitalized and depreciated and the related
lease obligations be recorded at the present value of the future minimum
lease payments and interest imputed. The lease obligations are secured by
the corresponding assets, guaranteed by a related party Company and
personal guarantees by the executive officers and a principal shareholder
of the Company. Future minimum lease obligations at December 31, 1996 for
capital lease obligations were as follows:
-9-
<PAGE>
U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1996
<TABLE>
<CAPTION>
Minimum Gross
Monthly Lease
Obligation Obligations
---------- -----------
<S> <C> <C>
Capital lease obligation for modem pools, $ 586 $ 32,831
including interest of 12 5/8%
Capital lease obligation for modem pools, 539 25,328
including interest of 18 3/8%
Capital lease obligation for computer network, 101 1,621
including interest of 20 11/16%
Capital lease obligation for computer server, 442 14,595
including interest of 15 1/16%
Capital lease obligation for computer web space, 491 13,261
including interest of 18 9/16%
Capital lease obligation for computer equipment, 414 11,187
including interest of 23 7/16%
Capital lease obligation for computer equipment, 259 6,737
including interest of 86 1/8%
Capital lease obligation for office furniture, 416 20,386
including interest of 19 15/16% ------ --------
Future minimum lease payments $3,248 $125,946
------ --------
Annual maturities are as follows:
1997 $ 38,993
1998 38,182
1999 25,709
2000 17,956
2001 5,106
-------
$125,946
Less amounts representing interest (33,682)
Present value of minimum lease payments $ 92,264
Less current portion (38,993)
Capital lease obligation, net of current portion $ 53,271
</TABLE>
NOTE 6 - LEASES
The Company maintains a related party obligation on several non-cancelable
operating sub-leases from a Company controlled by an executive officer of
the Company and a principle shareholder. The master leases from which the
sub-leases are derived from are guaranteed by the principles of the
affiliated Company. The details of these related party leases are as
follows:
-10-
<PAGE>
U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1996
Facility rentals, monthly payments of $2,972, with certain operating
expenses and amortized costs, expiring May 1998.
Telephone system, monthly payments of $361, expiring March 1998. Security
System, monthly payments of $355, expiring May 2000. Computer equipment,
monthly payments of $979, on various leases expiring December 1999.
Future minimum rentals under all non-cancelable operating leases are as
follows:
Year Ending December 31,
------------------------
1997 $ 35,085
1998 23,235
1999 15,409
2000 1,225
--------
$ 74,954
NOTE 7 - PROPOSED MERGER
On December 2, 1996 the Company signed a letter of intent to merge with
Venture Quest, Inc., a New York corporation. One share of the Company's
common stock will be exchanged for one share of Venture Quest, Inc.
common stock with Venture Quest, Inc. being the surviving corporation.
The exchange is intended to qualify as a tax-free transaction under
Section 351 of the Internal Revenue Code.
NOTE 8 - NOTES PAYABLE
Notes Payable
U.S. Online, Inc. has incurred a related party obligation to two
companies for expenses paid on the Company's behalf. Such expenses
included: payroll, advertising, rent and other operating expenses
advanced since inception. As of December 31, 1996, the net advanced
costs were $242,945. The note bears interest at 9% annually and is
payable in monthly installments of $5,043 beginning March 15, 1997.
Interest on the related party debt was $10,932 at December 31, 1996.
-11-
<PAGE>
U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1996
NOTE 8 - NOTES PAYABLE (con't)
Annual maturities are as follows-.
1997 $ 33,320
1998 43,413
1999 47,486
2000 51,940
2001 56,812
2002 9,974
------
$242,945
NOTE 9 - NONMONETARY TRANSACTION
Capital lease obligations were incurred for the purchase of equipment in
the amount of $104,512.
Related parties contributed equipment in the amount of $48,312 along
with the payment of Company expenses in the amount of $346,390. The
equipment has been recorded in the accompanying balance sheet at its
fair market value on the date of the transfer.
NOTE 10 - FRANCHISE
The Company intends to sell Point of Presence territorial rights and
equipment under franchising arrangements. These rights granted under the
franchise will allow the franchise to exclusively market services
provided by the Company throughout a particular geographic region.
-12-
<PAGE>
JOSEPH J. REPKO
Certified Public Accountant
453 N. STATE ROAD
SPRINGFIELD, PENNSYLVANIA 19064
(610) 328-9551
Report of Independent Certified Public Accountants
On Supplementary Information
Officers and Directors
U.S Online, Inc.
Mount Laurel, NJ
My audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole of U.S. Online, Inc. for the year ended
December 31, 1997, which is presented in the preceding section of this report.
The supplementary information presented hereinafter is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the audit procedures applied
in the audit of the basic financial statements and, in my opinion, is fairly
stated, in all material respects, in relation to the basic financial statements
taken as a whole.
January 6, 1999
JOSEPH J. REPKO, CPA
-13-
<PAGE>
U.S. ONLINE, INC.
SUPPLEMENTAL INFORMATION
COST OF REVENUE
YEAR ENDED DECEMBER 31,1996
Advertising $ 80,131
Agent's commissions 7,986
Credit card settlement fees 6,279
Electrical expense 4,390
Telecommunication charges 63,037
--------
$161,823
--------
See accountant's report on supplemental information.
-14-
<PAGE>
U.S. ONLINE, INC.
SUPPLEMENTAL INFORMATION
OPERATING EXPENSES
YEAR ENDED DECEMBER 31,1996
Salaries office 80,325
Payroll tax expense 7,695
Automobile expenses 1,126
Casual labor 13,380
Charity 600
Computer supplies and software 40,409
Consulting 20,000
Corporate taxes 325
Dues and subscriptions 4,485
Entertainment 1,177
Fuel and oil 1,071
Insurance 1,645
Lease - telephone system 4,334
Office expenses 30,221
Postage 32,112
Printing 12,790
Professional fees 48,640
Rent - office 35,674
Rent - computer room 785
Rental equipment 14,181
Repairs and maintenance 1,741
Security system lease 4,876
Technical manuals 865
Telephone 16,946
Utilities 7,514
--------
$382,917
--------
See accountant's report on supplemental information.
-15-
<PAGE>
U.S. ONLINE, INC.
(FORMERLY VENTURE QUEST, INC.)
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
U.S. ONLINE, INC.
COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
CONTENTS
Combined Balance Sheet 1
Combined Statement of Operations 3
Combined Statement of Changes in Shareholders' Equity 4
Combined Statement of Cash Flows 6
Combined Notes to Financial Statements 8-18
Combined Supplemental Information 19
Combined Cost of Revenue 20
Combined Operating Expenses 21
<PAGE>
JOSEPH J. REPKO
Certified Public Accountant
453 N. STATE ROAD
SPRINGFIELD, PENNSYLVANIA 19064
(610) 328-9551
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
U.S. Online, Inc.
Mount Laurel, NJ 08054
I have audited the accompanying balance sheet of U.S. Online, Inc. as of
December 31, 1997 and the related statement of operations, shareholders equity,
and cash flows for the period then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from 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.
I believe that my audits provide a reasonable basis for my opinion.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern.
As shown in the financial statements, the company incurred a substantial net
loss of $1,310,142 for 1997. At December 31, 1997, current liabilities exceeded
current assets by $1,399,853 and total liabilities exceed total assets by
$1,036,621. These factors, and others discussed in Note 18 specifically the
bankruptcy filings under Chapter 11 and then conversion to Chapter 7,
liquidation, indicates that the company will not continue to exist. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that will be necessary in the circumstances. In
addition, I was unable to obtain written representations from one of the
directors of U.S. Online, Inc.
Because of the effects of any adjustments that might have resulted had the
ultimate outcome of the uncertainty referred to in the preceding paragraph been
known, I do not express an opinion on the financial statements referred to
above.
January 6, 1999
Joseph J. Repko, C.P.A.
<PAGE>
U.S. ONLINE, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,573
Accounts receivable:
Franchise 34,000
Customers 19,783
Due from shareholders 4,800
Due from franchise owners 34,610
--------
Total current assets $ 99,766
FIXED ASSETS - AT COST 709,319
Less accumulated depreciation and amortization 187,550
--------
521,769
OTHER ASSETS
Deposits 13,647
Organization Costs - Net 12,500
--------
26,147
--------
TOTAL ASSETS $647,682
========
<PAGE>
U.S. ONLINE, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations 169,512
Accounts payable and accrued expenses 714,050
Franchise deposits 485,030
Sales tax payable 3,852
Deferred revenue 47,175
----------
Total current liabilities $1,419,619
CAPITAL LEASE OBLIGATIONS, net of current portion 264,684
----------
Total Liabilities 1,684,303
----------
SHAREHOLDERS' EQUITY
Common stock - authorized 200,000,000 shares par value
$.002, issued and outstanding 9,936,000 shares 19,871
Additional paid in capital 756,076
Accumulated deficit (1,812,568)
----------
Total Shareholders' Equity (1,036,621)
----------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 647,682
==========
<PAGE>
U.S. ONLINE, INC.
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Operating revenue $ 610,564
Cost of revenue 1,119,580
----------
Gross profit (509,016)
Operating expenses 692,789
----------
Operating loss (1,201,805)
Other income (expense)
Depreciation (148,494)
Interest expense (70,347)
Interest income 13,143
Debt forgiveness income 97,361
----------
NET LOSS (1,310,142)
==========
Net loss per share of common stock $ (.21)
==========
Weighted average shares outstanding 6,260,319
==========
<PAGE>
U.S. ONLINE, INC
COMBINED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Total
Common Stock Capital In Share-
----------------------------- Excess of Accumulated Holders'
Shares Amount Par Value Deficit Equity
--------------- ---------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 875,000 $1,750 $27,858 ($44,483) ($14,875)
Issuance of common stock in
January 1997 to Venture Quest
Shareholders for cancellation of
Debt 55,000 110 12,190 12,300
Issuance of common stock in
January 1997 to Venture Quest
Shareholders for investment return
Under the Rule 419 offering 362,500 725 725
Issuance of common stock in
January 1997 to Venture Quest
Shareholders for service to be
Rendered 7,500 15 15
U.S. Online, Inc. prior to merger 6,400,000 6,400 449,400 (457,943) (2,143)
Issuance of common stock to
Investors in private placement
Prior to merger in June 1997
U.S. Online 17,333 17 12,982 12,999
</TABLE>
<PAGE>
U.S. ONLINE, INC.
COMBINED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (cont)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Total
Common Stock Capital In Share-
----------------------------- Excess of Accumulated Holders'
Shares Amount Par Value Deficit Equity
--------------- ---------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Exchange of U.S. Online Stock (6,417,333) ($6,417) 6,417
Issuance of common stock to
U.S. Online, Inc. shareholders
In a 1:1 exchange 6,417,333 12,834 (12,834)
Issuance of common stock to
Investors in a private placement
On July 19, 1997 at $.75 per share 19,667 39 14,711 14,750
Issuance of common stock to
Investors in a private placement
On October 29,1997 at $.25 per share
199,000 398 49,352 49,750
Issuance of common stock to
Investors in a private placement
On October 29,1997 at $.10 per
Share
2,000,000 4,000 196,000 200,000
Net loss for the year
ended December 31, 1997 ($1,310,142) (1,310,142)
---------- ------- -------- ----------- -----------
Balance 9,936,000 $19,871 $756,076 ($1,812,568) ($1,036,621)
========= ======= ======== =========== ===========
</TABLE>
<PAGE>
U.S. ONLINE, INC
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
1997
-----------
Cash flows from operating activities:
Net loss ($1,310,142)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation and amortization 154,081
Changes in assets and liabilities:
Increase in accounts receivable (12,143)
Decrease in due from Franchise Pop's 63,500
Increase in due from franchise owners (34,610)
Increase in accounts payable and accrued expenses 589,151
Increase in franchise deposits 88,030
Increase in deferred revenue 47,175
Increase in sales tax payable 3,852
-----------
Increase in security deposits (8,459)
-----------
Net cash used in operating activities (419,565)
-----------
Cash flows from investing activities:
Additions to property and equipment 99,111
Payment for organizational costs (14,750)
-----------
Net cash used in investing activities (113,861)
-----------
<PAGE>
U.S. ONLINE, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Cash flows from financing activities:
Repayment of principle under capital lease obligations (189,550)
Issuance of common stock in a private placement 264,500
-----------
Net cash provided by financing activities 74,950
-----------
Net decrease in cash (458,476)
Cash and cash equivalents - beginning of year 465,049
-----------
Cash and cash equivalents - ending of year $6,573
===========
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Summary of Significant Accounting Policies
This summary of significant accounting policies of U.S. Online, Inc.
(formerly Venture Quest, Inc.) "the Company" is presented to assist in
understanding the Company's financial statements. The financial statements
and notes are representations of the Company's management who is
responsible for their integrity and objectivity.
Nature of Operations
U.S. Online, Inc. (formerly Venture Quest, Inc.) "the Company", was
organized under the laws of New York on July 18, 1989, and is engaged in
the business of providing computer internet access service and point of
sale internet franchise sales to customers primarily in the Eastern Region
of the United States.
Basis of Combination
The combined financial statements include the accounts of U.S. Online,
Inc., a Pennsylvania Corporation and Venture Quest, Inc., a New York
Corporation. All significant intercompany accounts and transactions have
been eliminated in the combination.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided for by the
straight-line and accelerated methods over the estimated useful lives of
the assets. Organization costs are amortized on a straight-line basis over
a period of five years.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due. The Company
had a net loss of $1,310,410 at December 31, 1997 and accordingly no
provision for income taxes is necessary. The Company has loss carry forward
that may be offset against future federal income taxes expiring 2112.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (con't)
Repairs and Maintenance
Expenditures for repairs, maintenance, and minor renewals are charged
against income as incurred and expenditures for major renewals and
betterments are capitalized and amortized over five years. The cost and
accumulated depreciation of assets sold or retired are removed from the
respective accounts with any gain or loss on disposal reflected in income.
Cash and Cash Equivalents
The Company considers cash equivalents to be those short-term investments
maturing within three months of the balance sheet date.
Loss per Share
The loss per share is based on the weighted average number of shares of
common stock outstanding during the year.
Fair Value of Financial Instruments
The note due from shareholders is based on the terms at which those same
loans would be made currently and approximate their fair value. At December
31, 1997, the carrying value of the assets were $647,682 which equates
their fair value. The carrying value of the capital lease obligations was
$434,196 and are reflective of borrowing rates currently available to the
Company.
Deferred Revenue
Deferred revenue represents prepayment of customer accounts for services to
be rendered. These revenues are amortized over the number of months in the
period.
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Company has a potential concentration of credit risk consisting
primarily of temporary cash deposits and trade accounts receivable.
Concentrations of credit with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across different geographic locations.
NOTE 3- FIXED ASSETS
Major classifications of property and equipment are summarized below:
Dec. 31,1997
---------------
Computer equipment and software $666,784
Furniture and Fixtures 41,100
Leasehold improvements 1,435
--------
$709,319
========
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - RELATED PARTY TRANSACTIONS
Balance Sheet Items
Long Term Debt
U.S. Online, Inc. had incurred a related party obligation to a company for
expenses paid on the Company's behalf. Such expenses included: payroll,
advertising, rent and other operating expenses advanced since inception. At
December 31, 1996, the net advanced costs were $242,945 and were included
on the balance sheet financial statement as long-term debt related party.
Retirement of Long Term Debt
On April 7, 1997, the Board of Directors voted to exchange $200,000 of long
term debt to a related party for POP (Point of Presence) deposits. The
value of the deposits are estimated at a fair market value established by
the Board of Directors. The deposits are to be converted later to
franchises. Under such agreement, the franchises will be located in the
following territories: Manhattan, NY, Edison, NJ, Eatontown, NJ and
Morristown, NJ.
On August 3, 1997, the Board of Directors voted to exchange the remaining
$40,000 demand note to a related party for POP (Point of Presence)
deposits. The value of the deposits were issued at an estimated discount of
between 28% and 38% established by the Board of Directors. The deposits are
to be converted later to franchises. Under such agreement, the franchises
will be located in the following territories: Nassau County, Long Island
New York, Southern West Chester County, New York and Vineland, New Jersey.
Advances
Related parties had advanced expenses including payroll, advertising, rent,
equipment and other expenses since inception. The amounts outstanding at
December 31, 1996 was $94,416 and were included in the financial statement
as advances from related parties.
Forgiveness of Debt (Advances)
On April 7, 1997, management reached an agreement with the related
companies concerning the advances. The related companies agreed to forgive
the advances in the amount of $97,661 of which $94,416 was listed as
related party advances on the balance sheet at December 31, 1996.
Operating Sub-Lease
The Company maintains a related party obligation on several non cancelable
operating sub-leases from a Company controlled by an executive officer of
the Company and a principle shareholder. The master leases from which the
sub-leases are derived from are guaranteed by the principles of the
affiliated Company. The details of these related party leases are as
follows:
Facility rentals, monthly payments of $2,972, with certain operating
expenses and amortized costs, expiring May 1998.
Telephone system, monthly payments of $361, expiring March 1998.
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - RELATED PARTY TRANSACTIONS (cont)
Security system, monthly payments of $355, expiring May 2000.
Computer equipment, monthly payments of $979, on various leases expiring
December 1999.
NOTE 5 - CAPITAL LEASE OBLIGATIONS
The Company has purchased certain computer equipment and furniture under
capital lease obligations expiring through 2001. Accordingly, SFAS 13
requires that the asset be capitalized and depreciated and the related
lease obligations be recorded at the present value of the future minimum
lease payments and interest imputed. Some of the lease obligations are
secured by the corresponding assets, guaranteed by a related party Company
and personal guarantees by the executive officers and a principal
shareholder of the Company. Future minimum lease obligations at December
31, 1997 for capital lease obligations were as follows:
<TABLE>
<CAPTION>
Minimum Gross
Monthly Lease
Obligation Obligations
---------------- ------------------
<S> <C> <C>
Capital lease obligation for modem pools, including interest
of 12 5/8%, expires August 2001 $ 621 $ 27,324
Capital lease obligation for modem pools, including interest
of 18 3/8%, expires December 2000 539 19,404
Capital lease obligation for computer network, including
interest of 20 11/16%, expires April 1998 101 404
Capital lease obligation for computer server, including
interest of 19.2%, expires September 1999 468 9,828
Capital lease obligation for computer web space, including
interest of 22.8%, expires March 1999 520 7,800
Capital lease obligation for computer equipment, including
interest of 23 7/16%, expires March 1999 414 6,210
Capital lease obligation for computer equipment, including
interest of 86 1/8%, expires February 1999 259 3,626
Capital lease obligation for office furniture, including
interest of 19 15/16%, expires January 2001 416 15,392
Capital lease obligation for computer equipment
including interest of 13.41%, expires June 2001 5,189 217,938
Capital lease obligation for furniture, including
interest of 29.47%, expires April 1999 1,199 19,184
Capital lease obligation for computer network bundle,
Including interest of 5.93%, expires May 2000 141 4,089
Capital lease obligation for furniture, including
Interest of 29.9%, expires April 2000 163 4,564
Capital lease obligation for copier machine,
including interest of 21.05%, expires May 2002 175 9,275
</TABLE>
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Capital lease obligation for modem pool equipment,
including interest of 25.3%, expires April 2000 196 5,488
Capital lease obligation for computer equipment
including interest of 11.91%, expires May 2001 640 26,240
Capital lease obligation for modem bundles
including interest of 9.47%, expires August 1999 6,052 121,040
Capital lease obligation for monitors, keyboards & routers
including interest of 11.91%, expires September 2000 235 7,755
Capital lease obligation for scanners and printers
including interest of 18.05%, expires September 2000 186 6,138
Capital lease obligation for racks and cards
including interest of 14.0%, expires September 2000 134 4,422
Capital lease obligation for net frames and processors
including interest of 15.49%, expires December 2000 184 6,624
Capital lease obligation for tiget switch and ports
including interest of 12.8%, expires August 2000 163 5,216
Capital lease obligation for master switch and conv. rack
including interest of 12.81%, expires December 2000 335 12,060
------- --------
Future minimum lease payments $18,330 $540,021
======= ========
Annual maturities are as follows:
1998 $219,152
1999 172,548
2000 105,628
2001 41,818
Thereafter 875
--------
$540,021
Less amounts representing interest (108,554)
--------
Present value of minimum lease payments $431,467
Less current portion 169,512
--------
Capital lease obligation, net of current portion $261,955
========
</TABLE>
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 - LEASES
The Company maintains a related party obligation on several non cancelable
operating sub-leases from a Company controlled by an executive officer of
the Company and a principle shareholder. The master leases from which the
sub-leases are derived from are guaranteed by the principles of the
affiliated Company. The details of these related party leases are as
follows:
Facility rentals, monthly payments of $2,972, with certain operating
expenses and ,amortized costs, expiring May 1998.
Telephone system, monthly payments of $361, expiring March 1998.
Security System, monthly payments of $355, expiring May 2000.
Computer equipment, monthly payments of $979, on various leases expiring
December 1999.
Future minimum rentals under all non cancelable operating leases are as
follows:
Year Ending December 31,
------------------------
1998 $23,235
1999 15,409
2000 1,225
-------
$39,869
=======
On August 3, 1997, the Board of Directors voted to exchange $60,000 of
related party rents, or five months of payments where the equivalent is
$60,000, for POP (Point of Presence) deposits. The value of the deposits
were issued at an estimated discount of between 28% and 38% as established
by the Board of Directors. The deposits are to be converted later to
franchises. Under such agreement, the franchises will be located in the
following territories: Nassua County, Long Island New York, Southern West
Chester County, New York and Vineland, New Jersey. (See Retirement of Long
Term Debt footnote above)
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 7 - AGREEMENT, MERGER AND CORPORATE NAME CHANGE
On May 7, 1997, U.S. Online, Inc., a Pennsylvania Corporation, signed a
merger agreement with Venture Quest, Inc., a New York corporation. One
share of the Company's common stock was exchanged for one share of Venture
Quest, Inc. common stock with Venture Quest, Inc. being the surviving
corporation. The exchange is intended to qualify as a tax-free transaction
under Section 351 of the Internal Revenue Code. Venture Quest, Inc. has
elected to adopt the U.S. Online, Inc. name effective the date of the
merger which was June 26, 1997.
NOTE 8 - OMNIBUS AND SENIOR EMPLOYEE STOCK OPTION PLAN
On December 11, 1997, the Company voted to authorize 10,000,000 shares of
common stock for an employee stock option plan. The term of the plan will
be 10 years. The Company issued 864,000 shares to certain executives of the
Company with various employment restrictions and an exercise price of $.25.
NOTE 9 - EQUITY FINANCING, CAPITAL STOCK AND WARRANT PURCHASE SHARES
On June 19, 1997 the Board of Directors voted for the Company to offer on a
"best efforts basis", under Regulation A, 133,334 shares of common stock
at a price of $.75 per share. The offering closed with 19,667 shares being
issued and raised $14,750.
On October 29, 1997 the Board of Directors voted for the Company to offer
on a "best efforts basis ", under Regulation A, 400,000 shares of common
stock at a price of $.25 per share. The offering closed with 199,000 shares
being issued and raised $49,750.
On October 29, 1997 the Board of Directors voted for the Company to offer
on a "best efforts basis ", under Regulation A, 2,000,000 shares of common
stock at a price of $.10 per share with a minimum purchase of five thousand
dollars ($5,000) during the third and fourth quarters of 1997. The offering
closed on October 29, 1997 with the maximum shares being issued and raised
$200,000.
On July 18, 1997, the Board of Directors voted to issue to all shareholders
of record as of July 18, 1997 a Class A Common Stock Purchase Warrant with
an exercise price of $2.00 per share and a maturity of two years from
issuance.
On October 31, 1997, the Board of Directors voted to issue to all
shareholders of record a Class B Common Stock Purchase Warrant, whereby the
shareholder of record could exercise the warrant shares at an exercise
price of four dollars ($4.00) per share on a one for one basis and a
maturity of one year from date of issuance.
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - NONMONETARY TRANSACTION
Capital lease obligations were incurred for the purchase of equipment in
the amount of $428,640.
NOTE 11 - FRANCHISE
The Company intends to sell Point of Presence territorial rights and
equipment under franchising arrangements. These rights granted under the
franchise will allow the franchise to exclusively market services provided
by the Company throughout a particular geographic region.
NOTE 12 - RETIREMENT OF LONG-TERM DEBT AND NONMONETARY TRANSACTIONS
On April 7, 1997 and August 3, 1997 respectively, the Board of Directors
voted to exchange $242,000 of long term debt to a related party for POP
(Point of Presence) deposits. The value of the April 7, 1997 deposits are
at a fair market value and the August 3, 1997 deposits were issued at a
discount as established by the Board of Directors.
NOTE 13 - FOREGIVENESS OF DEBT AND NONMONETARY TRANSACTIONS
On April 7, 1997 and August 3, 1997 respectively, the Company reached an
agreement with the related companies concerning outstanding debt. The
related companies agreed to forgive debt in the following amounts which are
listed as related party advances on the balance sheet at December 31, 1996.
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 14 - COMBINED FINANCIAL STATEMENTS
Included in the financial statements at December 31, 1997 is the following
proforma balance sheet and income statement activity of Venture Quest, Inc,
the former development stage company.
<TABLE>
<CAPTION>
Venture Quest, Inc.
Venture Quest, Inc. Statement of Operations
Balance Sheet Year Ended
December 31, 1997 December 31, 1997
------------------- ------------------------
<S> <C> <C> <C>
Assets Sales $ --
Cash $ 222
Loan Receivable Officers 1,170 Bank Fees 57
------ Professional Fees (3,000)
$1,392 Taxes 976
====== -----
Liabilities and Shareholder's Equity
Loan Payable Officer $12,300 Net Income $1,967
Loan Payable Affiliate 2,000 ======
-------
14,300 Retained Earnings
- Beginning (44,483)
------
Common Stock 1,750
Additional Paid In Capital 27,858 Retained Earnings
Retained Earnings (42,516) - Ending ($42,516)
------- =======
($12,908)
$ 1,392
=======
</TABLE>
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 15 - FRANCHISE DEPOSITS
The Company has received certain deposits in the amount of $344,500 which
is reflected as franchise deposit liabilities at December 31, 1997. Upon
completion of the Uniform Franchise Offering Circular and the specific
performance and obligations of the Company to install these franchise
points-of-presence (POP) the Company will recognize such amounts as
revenue.
NOTE 16 - REALIZATION OF ASSETS AND GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a
net loss of $1,310,142 during the year ended December 31, 1997, and as of
that date, the Company's current liabilities exceeded its current assets by
$1,319,853 and its total liabilities exceeded its total assets by
$1,036,621. These factors create an uncertainty as to the Company's ability
to continue as a going concern. The Company has developed a plan to reduce
its liabilities through the sale of assets (POP franchises) and/or a
possible third party financing. The ability of the Company to continue as a
going concern is dependent upon the success of the plan. The financial
statements do not include any adjustments that might be necessary should
the Company be unable to continue as a going concern.
NOTE 17 - COMMITMENTS
On June 5, 1997 the Board of Directors agreed to issue 50,000 shares of
common stock to the Company's internal legal council in exchange for
services.
On February 4, 1997 the Board of Directors agreed to issue 3,333 shares of
common stock to the Company's franchise legal council in exchange for
services.
On December 11, 1997, the Company voted to issue the Company's Principal
Executive Officer 500,000 shares under the Senior Stock Option Plan and a
maximum compensation package of $125,000 annually inclusive of the stock
options. In addition, this employment contract would require certain
performance results.
NOTE 18 - SUBSEQUENT EVENTS
Issuance of Convertible Subordinated Debentures.
The Board of Directors voted on September 16, 1997 to issue and register
with the securities and exchange commission under Regulation A, 300,000
shares of 9% subordinated convertible debentures with a floating exercise
price at a 20% discount to the average closing bid price 15 days prior to
conversion and a five year maturity. Under the Securities Purchase
Agreement dated May 6, 1998, the Company raised $300,000 by issuing these
subordinated debentures and entered into an Intercreditor Agreement with
the Note Holders.
<PAGE>
U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Bankruptcy Filings (Chapter 11)
On August 25, 1998 the Company filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United states Bankruptcy
Court for the District of New Jersey. At the time of the filing, the
Company represented that the going concern of the business exceeded its
liquidation value.
Sale of Assets under Chapter 11
On or about October 23, 1998, the Company and the United States Bankruptcy
Court entered into an agreement with a competitor to sell substantially all
of its corporate assets for $566,000, including $161,000 paid to satisfy
certain executory contracts, eleven point of presence locations and all
equipment located at the Mount Laurel headquarters of the Company.
Litigation and Objections to Motions under Chapter 11 protection
Certain motions of protest were filed against the Company and its
principles for the sale of the Company's assets. In addition, an injunctive
relief and compensatory and punitive damages attributable to breach of
common law fiduciary duties as shareholders and other improper actions are
being sought by certain Point of Presence owners.
Bankruptcy Motion of Conversion from Chapter 11 to Chapter 7.
On December 21, 1998, the United States Trustee motioned to convert the
Chapter 11 petition to Chapter 7 liquidation proceedings. A United States
Trustee was appointed to liquidate the affairs of the Company based on the
debtors inability to: provide certain required documentation and schedules,
to effectuate a plan of reorganization, to pay quarterly fees due to the
United States Trustee and other supporting facts as stated in the December
21, 1998 Motion.
<PAGE>
COMBINED SUPPLEMENTAL INFORMATION
<PAGE>
U.S. ONLINE, INC.
SUPPLEMENTAL INFORMATION
COMBINED COST OF REVENUE
YEAR ENDED DECEMBER 31, 1997
Advertising $ 539,164
Agent's commissions 33,691
Credit card settlement fees 18,154
Electrical expense 15,184
Telecommunication charges 513,387
----------
$1,119,580
==========
<PAGE>
U.S. ONLINE, INC
SUPPLEMENTAL INFORMATION
COMBINED OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1997
Salaries office $269,083
Payroll tax expense 31,918
Bank charges 15,734
Casual labor 17,358
Charity 1,800
Computer supplies and software 13,837
Dues and subscriptions 1,468
Entertainment 5,818
Fuel and oil 5,895
Insurance 4,855
Lease - telephone system 3,972
Office expenses and printing 25,101
Postage 47,292
Professional fees 41,444
Rent - office 43,931
Rent - computer room 589
Rental equipment 7,344
Repairs and maintenance 7,408
Security system lease 4,258
Taxes Other 2,193
Technical manuals 2,421
Telephone 126,423
Utilities 12,647
--------
$692,789
========
<PAGE>
U. S. Online, Inc.
Financial Statements
Nine months ended September 30, 1998 and 1997
<PAGE>
U. S. Online, Inc.
Table of Contents
Financial Information Page Number
--------------------- -----------
Balance sheet . . . . . . . . . . . . . . . . . . 1
Statements of operations (unaudited). . . . . . . 2
Statement of stockholders' deficit (unaudited). . 3
Statements of cash flows (unaudited). . . . . . . 4
Notes to financial statements . . . . . . . . . . 5
<PAGE>
U. S. Online, Inc.
Balance Sheet
- --------------------------------------------------------------------------------
September 30,
1998
-------------
(Unaudited)
ASSETS
Current:
Cash and cash equivalents $ 1,046
Accounts receivable
Franchise -
Customers 18,351
Due from shareholders 4,800
----------
Total current assets 24,197
Equipment, net of depreciation 455,400
Other assets
Deposits 16,615
Organizational costs, net of amortization 11,750
----------
TOTAL ASSETS $ 507,962
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current:
Advances from related party $ -
Current portion of capital lease obligations 157,426
Current portion of long term debt-related party -
Accounts payable and accrued expenses 1,362,528
Notes payable, private placement offering 166,250
Franchise deposits 414,169
Deferred revenue 90,750
----------
Total current liabilities 2,191,123
Long term debt, net of current portion-related party -
Capitalized lease obligations, net of current portion 301,900
----------
Total liabilities 2,493,023
----------
Stockholders' Deficit:
Common stock, $.002 par value, 200,000,000 shares
authorized, 9,237,000 issued and outstanding 19,066
Additional paid-in capital 781,132
Accumulated deficit (2,785,259)
----------
Total stockholders' deficit (1,985,061)
----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 507,962
==========
See accompanying notes to financial statements. Page 1
<PAGE>
U. S. Online, Inc.
Statements of Operations
- --------------------------------------------------------------------------------
Nine months
ended September 30,
(Unaudited)
- --------------------------------------------------------------------------------
1998 1997
--------- -----------
Revenues $ 768,142 $ 408,553
Cost of Revenues 915,454 596,710
--------- ---------
Gross profit (147,312) (188,157)
Operating expenses:
Selling, general and administrative 825,379 530,256
--------- ---------
Loss from operations (972,691) (718,413)
Other income (expense):
Interest expense - -
Interest income - -
Other - -
--------- ---------
Net loss $(972,691) $(718,413)
========= =========
See accompanying notes to financial statements. Page 2
<PAGE>
U. S. Online, Inc.
Statement of stockholders' deficit
- --------------------------------------------------------------------------------
Nine months ended September 30, 1998
- --------------------------------------------------------------------------------
Capital Accumulated
Stock Deficit Total
- --------------------------------------------------------------------------------
Balance, December 31, 1997 $ 775,948 $ (1,812,568) $(1,036,620)
Net loss 0 (972,691) (972,691)
Capital contributions 24,250 0 24,250
- --------------------------------------------------------------------------------
Balance, September 30, 1998 $ 800,198 $ (2,785,259) $(1,985,061)
================================================================================
See accompanying notes to financial statements. Page 3
<PAGE>
U. S. Online, Inc.
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Nine months
ended September 30,
----------------------------------------
(Unaudited)
1998 1997
---------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net Loss $(972,691) $(718,413)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 139,083 109,135
Allowance for doubtful accounts - -
Officer salary contributed to capital - -
Stock options issued for services - -
Non-cash compensation charge - -
Changes in assets and liabilities:
Accounts receivable 70,042 49,542
Notes receivable - -
Prepaid expenses and other - -
Other assets (2,218) (20,098)
Accounts payable and accrued expenses 644,626 362,149
Notes payable 166,250 -
Franchise deposits (70,861) 187,500
Deferred revenue 43,575 10,000
--------- ---------
Net cash used by operating activities 17,806 (20,185)
Cash flows from investing activities:
Acquisition of equipment (72,714) (494,916)
--------- ---------
Net cash used by operating activities (72,714) (494,916)
Cash flows from financing activities:
Due to related parties - (297,361)
Proceeds from stockholder loans & capitalized leases 25,130 354,004
Repayments of stockholder loans & capitalized leases - -
Purchase of treasury stock - -
Proceeds from sale of common stock and warrants 24,250 11,164
--------- ---------
Net cash used by financing activities 49,380 67,807
--------- ---------
Net increase (decrease) in cash and cash equivalents: (5,527) (447,294)
Cash, beginning of period 6,573 459,336
--------- ---------
Cash, end of period $ 1,046 $ 12,042
========= =========
</TABLE>
See accompanying notes to financial statements Page 4
<PAGE>
U. S. Online, Inc.
Notes to Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation of the results for interim periods. Operating
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year ending December 31,
1998.
Page 5
<PAGE>
Frontline Communications Corp.
and U. S. Online, Inc.
Unaudited Pro Forma Combined Financial Information
On October 23, 1998, Frontline Communications Corp. (the Company) acquired the
business and substantially all of the assets of U. S. Online, Inc. ("USOL")
Pursuant to an order of the United States Bankruptcy Court, District of New
Jersey, on October 23, 1998, the Company acquired substantially all of the
assets used in the business of U. S. Online, Inc. ("USOL"), including a point of
presence in the Philadelphia area, and assumed two of USOL's executory contracts
for consideration of $566,000 in cash paid upon closing.
The unaudited pro forma combined balance sheet as of September 30, 1998 assumes
that the acquisition occurred on September 30, 1998 and includes the September
30, 1998 historical balance sheet of the Company, and the acquired assets of
USOL adjusted for the pro forma effects of this acquisition. The unaudited pro
forma combined statements of operations for the nine months ended September 30,
1998 and the year ended December 31, 1997 assumes that the acquisition had
occurred on January 1, 1997. It includes the historical statements of operations
of the Company and USOL for the periods presented adjusted for the pro forma
effects of the acquisition.
The unaudited pro forma condensed combined financial statements have been
included as required and allowed by the rules of the Commission and are provided
for informational purposes only. The pro forma statements of operations do not
purport to be indicative of the results which would have been obtained if the
acquisition had been effected on the date indicated or which may be obtained in
the future.
The accompanying unaudited pro forma condensed combined financial statements
should be read in conjunction with the respective historical financial
statements of the Company and USOL which are contained elsewhere herein.
<PAGE>
Frontline Communications Corp. and U. S. Online, Inc.
Pro Forma Combined Balance Sheet
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Frontline U. S. Pro Forma Note Pro Forma
Comm. Online, Inc Adjustments A Combined
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<S> <C> <C> <C> <C> <C>
Assets
Current:
Cash and cash equivalents $ 4,108,925 $ (570,375) 1 $ 3,538,550
Accounts receivable, net 42,144 42,144
Notes receivable 103,895 103,895
Prepaid expenses and other current assets 41,569 41,569
Deferred registration costs
------------------------------------------------ ------------
Total current assets 4,296,533 - (570,375) 3,726,158
Equipment, net 305,321 44,610 349,931
Other assets:
Intangibles, net 1,294,974 575,765 1 1,870,739
Other 49,062 49,062
================================================ ============
Total Assets $ 5,945,890 $ 44,610 $ 5,390 $ 5,995,890
================================================ ============
Liabilities and Stockholders' Equity
Current:
Notes payable $ 60,000 $ 60,000
Accounts payable and accrued expenses 188,838 50,000 1 238,838
Deferred revenue 35,692 35,692
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Total current liabilities 284,530 50,000 334,530
Notes payable-long-term portion 168,600 168,600
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Total liabilities 453,130 50,000 503,130
Net assets acquired - 44,610 (44,610) -
Stockholders' Equity
Preferred stock 1,000,000 1,000,000
Common stock 32,480 32,480
Additional paid-in-capital 7,438,525 7,438,525
Accumulated deficit (2,709,632) (2,709,632)
Treasury stock (264,113) (264,113)
Stock subscriptions receivable (4,500) (4,500)
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Total Stockholders' Equity 5,492,760 - - 5,492,760
================================================ ============
Total Liabilities and Stockholders' Equity $ 5,945,890 $ 44,610 $ 5,390 $ 5,995,890
================================================ ============
</TABLE>
<PAGE>
Frontline Communications Corp. and U. S. Online, Inc.
Pro Forma Combined Statement of Operations
Nine Months Ended Sept. 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Frontline U. S. Pro Forma Note Pro Forma
Comm. Online, Inc Adjustments A Combined
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<S> <C> <C> <C> <C> <C>
Revenues $ 591,038 $ 768,142 $ 1,359,180
Cost of revenues 471,951 915,454 1,387,405
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Gross profit 119,087 (147,312) (28,225)
Operating expenses:
Selling, general & administrative 1,084,301 825,379 143,941 2 2,053,621
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Total operating expenses 1,084,301 825,379 143,941 2,053,621
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Loss from operations (965,214) (972,691) (143,941) (2,081,846)
Other income (expense)
Interest expense (27,912) (27,912)
Interest income 64,949 64,949
Other
=============================================== ============
Net loss $(928,177) $(972,691) $ (143,941) $ (2,044,809)
=============================================== ============
Loss per share of common stock $ (0.34) $ (0.75)
Weighted average number of shares 2,721,077 2,721,077
</TABLE>
<PAGE>
Frontline Communications Corp. and U. S. Online, Inc.
Pro Forma Combined Statement of Operations
The Year Ended December 31, 1997
(Audited)
<TABLE>
<CAPTION>
Frontline U. S. Pro Forma Note Pro Forma
Comm. Online, Inc Adjustments A Combined
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<S> <C> <C> <C> <C> <C>
Revenues $ 507,029 $ 610,564 $ 1,117,593
Cost of revenues 457,146 1,119,580 1,576,726
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Gross profit 49,883 (509,016) - (459,133)
Operating expenses:
Selling, general & admin. 1,104,124 743,922 191,902 2 2,039,948
Non-cash compensation charge 1,771,000 1,771,000
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Total operating expenses 2,875,124 743,922 191,902 3,810,948
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Loss from operations (2,825,241) (1,252,938) (191,902) (4,270,081)
Other income (expense)
Interest expense (28,421) (70,347) (98,768)
Interest income 13,143 13,143
Other (891) (891)
================================================ ============
Net Loss $(2,854,553) $(1,310,142) $ (191,902) $(4,356,597)
================================================ ============
Loss per share of common stock $ (1.94) $ (2.97)
Weighted average number of shares 1,468,000 1,468,000
</TABLE>
<PAGE>
Frontline Communications Corp.
and U. S. Online, Inc.
Unaudited Pro Forma Combined Financial Information
Note A
The pro forma adjustments to the unaudited pro forma condensed combined
financial statements are as follows:
1. To reflect a $570,375 payment for the assets of U. S. Online, Inc. and
accrued acquisition costs of approximately $50,000
2. To reflect amortization of acquired intangibles using estimated useful
lives of 3 to 5 years
3. The weighted average number of shares have been adjusted by 250,000 shares
to reflect the conversion of the preferred shares into common stock as if
the conversion had occurred on January 1, 1997.
