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 (Date of Earliest Event Reported): June 20, 2000
FRONTLINE COMMUNICATIONS CORPORATION.
(Exact name of registrant as specified in its charter)
Delaware 000-24223 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 June 20,2000
filed with the Commission on July 5, 2000 in reliance upon instructions 7(a) (4)
and 7(b)(2) of Form 8-K, are filed herewith.
(a) Financial Statements of Business Acquired.
Financial Statements of DelaNET, Inc.
(i) Report of Independent Certified Public Accountants.
(ii) Financial Statements as of December 31, 1999 and for the years
ended December 31, 1999 and 1998.
(iii) Unaudited Financial Statements as of March 31, 2000 and for the
three months ended March 31, 2000 and 1999.
(b) Pro Forma Financial Information.
Unaudited Pro Forma Condensed Combined Financial Statements for
Frontline Communications Corporation.
(i) Introduction
(ii) Pro Forma Combined Statements of Operations for the year ended
December 31, 1999 and for the three months ended March 31, 2000
(iii) Notes to Pro Forma Combined Statements of Operations
(c) Exhibits
Reference is made to 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 July 5, 2000.
<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: August 29, 2000
By:
--------------------------------------
Vasan Thatham
Principal Financial Officer
and Vice President
<PAGE>
DelaNET, Inc.
Financial Statements
Years Ended December 31, 1999 and 1998
<PAGE>
DelaNET, Inc.
================================================================================
Financial Statements
Years Ended December 31, 1999 and 1998
F-1
<PAGE>
DelaNET, Inc.
Contents
================================================================================
Report of independent certified public accountants F-3
Financial statements:
Balance sheet F-4
Statements of operations F-5
Statements of stockholders' deficit F-6
Statements of cash flows F-7
Notes to financial statements F-8 - F-17
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors of
Frontline Communications Corporation
We have audited the accompanying balance sheet of DelaNET, Inc. (the "Company")
as of December 31, 1999, and the related statements of operations, stockholders'
deficit and cash flows for each of the years in the two-year period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As further described in Note 10 to the financial statements, subsequent to
December 31, 1999, substantially all of the assets of the Company were acquired
by Frontline Communications Corporation.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DelaNET, Inc. as of December
31, 1999, and the results of its operations and its cash flows for each of the
years in the two-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
The financial statements for the year ended December 31, 1998, which were
previously audited and reported on by another auditor, have been restated
herein, as described in Note 9 to the financial statements.
New York, New York
July 31, 2000
F-3
<PAGE>
DelaNET, Inc.
Balance Sheet
================================================================================
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------------------------
<S> <C>
Assets
Current:
Cash $ 55,969
Accounts receivable, less allowance for doubtful accounts of $26,000 80,925
-------------------------------------------------------------------------------------
Total current assets 136,894
Property and equipment, net (Notes 3 and 4) 327,712
Intangibles, net of accumulated amortization of $11,825 (Note 2) 57,425
Other 11,936
-------------------------------------------------------------------------------------
$ 533,967
=====================================================================================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 354,800
Accrued payroll and other current liabilities 115,003
Due to stockholders (Note 6) 232,389
RaveNet obligation (Note 2) 26,000
Current portion of capital lease obligations (Note 4) 75,275
Deferred revenue 334,534
-------------------------------------------------------------------------------------
Total current liabilities 1,138,001
Capital lease obligations, less current portion (Note 4) 88,875
-------------------------------------------------------------------------------------
Total liabilities 1,226,876
-------------------------------------------------------------------------------------
Commitments and contingencies (Notes 4, 5 and 8)
Stockholders' deficit:
Common stock, $0.10 par value, 400,000 shares authorized;
400,000 shares issued and outstanding 40,000
Additional paid-in capital 657,774
Accumulated deficit (1,390,683)
-------------------------------------------------------------------------------------
Total stockholders' deficit (692,909)
-------------------------------------------------------------------------------------
$ 533,967
=====================================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DelaNET, Inc.
Statements of Operations
================================================================================
Year ended December 31, 1999 1998
--------------------------------------------------------------------------------
Revenues $ 1,191,278 $ 717,732
--------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues (Note 5) 865,317 442,981
Selling, general and administrative (Note 6) 583,386 318,111
Noncash compensation (Note 6) 384,000 10,000
Depreciation and amortization 141,785 76,474
--------------------------------------------------------------------------------
Total costs and expenses 1,974,488 847,566
--------------------------------------------------------------------------------
Loss from operations (783,210) (129,834)
Interest expense (37,962) (30,070)
--------------------------------------------------------------------------------
Net loss $ (821,172) $ (159,904)
================================================================================
See accompanying notes to financial statements.
F-5
<PAGE>
DelaNET, Inc.
Statements of Stockholders' Deficit
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1999 and 1998
------------------------------------------------------------------------------------------------------------------------------------
Common stock Additional Total
---------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit deficit
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 91,280 $ 9,128 $ 62,872 $ (409,607) $ (337,607)
Issuance of common stock 11,520 1,152 (1,152) -- --
Issuance of common stock in settlement of
stockholder loans (Note 6) 92,708 9,271 222,503 -- 231,774
Issuance of common stock for
compensation (Note 6) 4,000 400 9,600 -- 10,000
Net loss -- -- -- (159,904) (159,904)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 199,508 19,951 293,823 (569,511) (255,737)
Issuance of common stock for
compensation (Note 6) 200,492 20,049 363,951 -- 384,000
Net loss -- -- -- (821,172) (821,172)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 400,000 $ 40,000 $ 657,774 $(1,390,683) $ (692,909)
===================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
DelaNET, Inc.
Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(821,171) $(159,904)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 141,785 76,474
Allowance for doubtful accounts (33,000) 49,000
Noncash compensation 384,000 10,000
Changes in assets and liabilities, net of effects of
acquisition of businesses:
Accounts receivable 132,955 (200,830)
Other assets (8,437) (3,500)
Accounts payable 262,092 69,956
Accrued payroll and other current liabilities 39,171 38,167
Deferred revenue 140,179 78,797
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 237,574 (41,840)
-------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (73,800) (72,636)
Acquisition of businesses, net of cash acquired (20,250) (20,000)
-------------------------------------------------------------------------------------------------
Net cash used in investing activities (94,050) (92,636)
-------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of notes payable (30,847) (8,255)
Payment on RaveNet obligation (3,000) --
Net proceeds from stockholder loans 17,158 168,364
Repayments of capital lease obligations (70,866) (27,311)
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (87,555) 132,798
-------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 55,969 (1,678)
Cash, beginning of year -- 1,678
-------------------------------------------------------------------------------------------------
Cash, end of year $ 55,969 $ --
=================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 37,962 $ 30,070
=================================================================================================
Supplemental disclosures of non-cash investing and financing
activities:
Capital lease obligations incurred for the purchase of equipment $ 133,495 $ 69,892
Notes payable issued for the purchase of intangible assets $ -- $ 29,000
=================================================================================================
Supplemental disclosure of non-cash financing activities:
Common stock issued in settlement of stockholder loans $ -- $ 231,774
=================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
1. Summary of Significant
Accounting Policies
Organization and Basis of Presentation
DelaNET, Inc. (the "Company") was incorporated on May 17, 1996 under the
laws of the State of Delaware. The Company is an internet service provider
serving the greater Delaware area, including parts of Pennsylvania and New
Jersey.
As further described in Note 10, subsequent to December 31, 1999,
substantially all of the assets of the Company were acquired by Frontline
Communications Corporation. No adjustments have been made in these
financial statements as a result of such acquisition.
Revenue Recognition
Revenue related to internet services is recognized over the period in which
services are provided. Deferred revenue represents prepaid subscription
fees by subscribers.
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
the 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.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
calculated using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or the estimated useful lives of
the assets. Property and equipment under capital leases is stated at the
present value of minimum lease payments and is amortized using the
straight-line method over the shorter of the lease term or the estimated
useful lives of the assets.
F-8
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
Years
------------------------------------------------------------------------
Computer equipment 3-5
Furniture and fixtures 7
Leasehold improvements 3
========================================================================
Intangibles
Intangibles consist of purchased customer bases. Amortization is calculated
using the straight-line method over five years, the expected benefit
period.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," long-lived assets, such as property and
equipment and intangibles, are evaluated for impairment when events or
changes in circumstances indicate that the carrying amount of the assets
may not be recoverable through the estimated undiscounted future cash flows
from the use of such assets. Through December 31, 1999, the Company has not
recorded any such impairment.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. As such, the Company is not subject to Federal
or state income taxes directly. Income or loss of the Company passes
through to the individual stockholders.
Unaudited pro forma income tax information included in Note 6 is presented
in accordance with SFAS No. 109, "Accounting for Income Taxes," as if the
Company had been subject to Federal and state income taxes for the years
ended December 31, 1999 and 1998.
F-9
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
Advertising
All costs associated with advertising services are expensed as incurred.
Advertising expense of approximately $58,000 and $13,000 for the years
ended December 31, 1999 and 1998, respectively, is included in selling,
general and administrative expenses.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts
receivable. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers comprising the
Company's customer base and the relatively minor balances of each
individual account. At December 31, 1999, the fair value of the Company's
financial instruments approximate their carrying value based on their terms
and interest rates.
Comprehensive Income (Loss)
The Company has no components of comprehensive income or expense.
Accordingly, the Company's comprehensive loss and net loss are equal for
all periods presented.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which requires entities to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal years beginning after June 15, 2000. The Company does not presently
enter into any transactions involving derivative financial instruments and,
accordingly, does not anticipate the new standard will have any effect on
its financial statements.
F-10
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of
APB Opinion No. 25 ("FIN No. 44"). FIN No. 44 clarifies the application of
APB Opinion No. 25 for certain issues including:
(a) the definition of an employee for purposes of applying APB Opinion No.
25,
(b) the criteria for determining whether a plan qualifies as a
noncompensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a
business combination.
In general, FIN No. 44 is effective July 1, 2000. The Company does not
expect the adoption of FIN No. 44 to have a material impact on its
financial position or results of operations.
2. Acquisitions
On December 23, 1998, the Company entered into a stock purchase agreement
(the "Agreement") with RaveNet Systems, Inc. ("RaveNet") to acquire 100% of
the outstanding common stock of RaveNet in exchange for $20,000 and an
obligation to pay an additional $80,000 within six months from the date of
the Agreement. As of December 31, 1999, the Company had paid the $20,000
and an additional $3,000 and was in negotiations to reduce the overall
original purchase price. In accordance with a settlement agreement entered
into in May 2000 between the Company and the former RaveNet stockholders,
the purchase price was deemed to be $49,000, all of which was allocated to
purchased customer base, included in intangibles to be amortized over five
years, the expected benefit period. The remaining obligation to RaveNet of
$26,000 is reflected in the financial statements as of December 31, 1999
and was subsequently paid in May 2000.
F-11
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
On June 30, 1999, the Company entered into an asset purchase agreement with
New World Internet Providers, Inc. ("New World") to acquire the customer
base and assume certain liabilities of New World in exchange for $10,000.
The customer base, with a value of $20,250, is included in intangibles to
be amortized over five years, the expected benefit period.
3. Property and Equipment
Property and equipment consists of the following:
December 31, 1999
---------------------------------------------------------------------------
Computer equipment $ 547,295
Furniture and fixtures 10,076
Leasehold improvements 22,037
---------------------------------------------------------------------------
579,408
Less: Accumulated depreciation and amortization (251,696)
---------------------------------------------------------------------------
Total $ 327,712
===========================================================================
Included in computer equipment is equipment under capitalized leases with
costs of $274,680 and accumulated amortization of $115,870 at December 31,
1999.
4. Leases
The Company leases certain computer and office equipment under capitalized
leases, and office space under noncancelable operating leases, expiring at
various dates through 2002.
F-12
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
Future minimum annual lease payments under capitalized leases as of
December 31, 1999 are as follows:
---------------------------------------------------------------------------
2000 $105,485
2001 44,116
2002 58,688
---------------------------------------------------------------------------
Total minimum lease payments 208,289
Less: Amount representing interest (44,139)
---------------------------------------------------------------------------
Present value of minimum lease payments 164,150
Less: Current portion (75,275)
---------------------------------------------------------------------------
$ 88,875
===========================================================================
Future minimum lease commitments under a noncancelable operating lease as
of December 31, 1999 are approximately $15,000 and $7,000 for the years
ended December 31, 2000 and 2001, respectively.
Rent expense for the years ended December 31, 1999 and 1998 amounted to
approximately $19,000 and $12,000, respectively.
5. Major Vendors
During the years ended December 31, 1999 and 1998, the Company purchased a
significant portion of its cost of revenues from a few major vendors.
During the year ended December 31, 1999, purchases from three vendors
totaled 32%, 24% and 11% of the Company's total cost of revenues. During
the year ended December 31, 1998, purchases from four vendors totaled 18%,
15%, 14% and 12% of the Company's total cost of revenues.
Additionally, the Company has entered into service agreements through 2004
with certain of its vendors. Annual commitments under such agreements
aggregate approximately $150,000, $112,000, $71,000, $71,000 and $43,000
for the years ending December 31, 2000 through 2004, respectively. In
connection with the asset purchase agreement, as described in Note 10,
commitments under such service agreements have been assumed by Frontline
Communications Corporation as of June 20, 2000.
F-13
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
6. Related Party Transactions
During 1999 and 1998, certain stockholders of the Company incurred various
operating expenses on behalf of the Company. These amounts have been
recorded as expenses by the Company in the periods incurred. Amounts due to
stockholders, which are short-term and noninterest-bearing, totaled
$232,389 at December 31, 1999.
During 1999, the Company issued 200,492 shares of its common stock, with a
fair value of $384,000, to two of its officers/stockholders, which has been
charged to the Company's 1999 operations as noncash compensation.
During 1998, the Company issued 92,708 shares of its common stock, with a
fair value of $231,774, as settlement of certain amounts due to
stockholders.
During 1998, the Company issued 4,000 shares of its common stock, with a
fair value of $10,000, to two employees, which has been charged to the
Company's 1998 operations as noncash compensation.
During 1999, cash compensation to three officers/stockholders totaled
$36,000. During 1998, there was no such cash compensation to those
individuals.
F-14
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
7. Income Taxes (Unaudited)
As a Subchapter S corporation, the Company is not subject to Federal or
state income taxes directly. Unaudited pro forma income tax expense
(recovery) which would have resulted if the Company was a C corporation for
income tax reporting purposes, differs from the amounts that would result
from applying the Federal statutory rate of 34% as follows:
December 31, 1999 1998
---------------------------------------------------------------------------
Federal income taxes
(recoveries)
computed at the
statutory rate $(279,198) (34.0)% $(54,367) (34.0)%
State income taxes
(recoveries), net of
Federal benefit (45,164) (5.5) (8,795) (5.5)
Change in valuation
allowance 324,000 39.5 63,000 39.5
Other 362 -- 162 --
---------------------------------------------------------------------------
Total $ -- --% $ -- --%
===========================================================================
Temporary differences that give rise to the components of pro forma
deferred tax assets and liabilities as described above are approximately as
follows:
December 31, 1999
---------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $ 434,000
Accounts receivable 10,000
Deferred revenue 132,000
---------------------------------------------------------------------------
Gross deferred tax assets 576,000
Deferred tax liability:
Property and equipment (27,000)
---------------------------------------------------------------------------
Net deferred tax asset 549,000
Valuation allowance (549,000)
---------------------------------------------------------------------------
Net deferred tax asset $ --
===========================================================================
F-15
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
8. Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the
Company's financial position, results of operations or liquidity.
9. Restatement
During the course of the audit of the Company's financial statements for
the year ended December 31, 1999, and the re-audit of the financial
statements for the year ended December 31, 1998, the Company became aware
of certain required adjustments, primarily in the accounts payable, RaveNet
obligation and accounts receivable balances as of December 31, 1998. The
financial statements for the year ended December 31, 1998 have been
restated to reflect these adjustments, as summarized below:
---------------------------------------------------------------------------
Net loss - as previously reported $(208,000)
Adjustments - increase (decrease):
Additional cost of revenues (75,000)
Allowance for doubtful accounts 78,000
Reversal of write-off of intangible asset 50,000
Other (4,904)
---------------------------------------------------------------------------
Net loss - as adjusted $(159,904)
===========================================================================
F-16
<PAGE>
DelaNET, Inc.
Notes to Financial Statements
================================================================================
10. Subsequent Event
On June 20, 2000 (the "Closing Date"), pursuant to an Asset Purchase
Agreement, substantially all of the assets of the Company were acquired by
Frontline Communications Corporation ("Frontline") for consideration of
approximately $3,697,000, subject to certain adjustments, as follows: (1)
$1,750,000 cash paid to the Company on the Closing Date; (2) $250,000
placed in escrow on the Closing Date, to be distributed in accordance with
an escrow agreement; (3) 200,000 shares of unregistered common stock of
Frontline, valued at $321,400; (4) a convertible promissory note in the
principal amount of $728,600 (the "Convertible Promissory Note"); and (5)
the assumption of approximately $647,000 of liabilities. The principal
amount of the Convertible Promissory Note is payable in full on June 20,
2003, with the right of early repayment, and bears interest at a rate of 4%
per annum, payable semi-annually commencing on December 20, 2000. Pursuant
to the Convertible Promissory Note, Frontline will have the option to
convert the principal amount and any unpaid accrued interest into
unregistered shares of common stock of Frontline, at a conversion rate of
$8 per share, if, at any time during the term of the Convertible Promissory
Note, the closing price of the common stock of Frontline equals or exceeds
$10 per share.
F-17
<PAGE>
DelaNET, Inc.
Financial Statements
For the period ended March 31, 2000
<PAGE>
DelaNET, Inc.
Table of contents
Financial Statements (unaudited):
Condensed Balance Sheets 1
Condensed Statements of Operations 2
Condensed Statements of Cash flows 3
Notes to Condensed Financial Statements 4
<PAGE>
DelaNET, Inc.
Condensed Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999 (1)
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current:
Cash $ 79,012 $ 55,969
Accounts receivable, net of allowance for doubtful accounts 110,035 80,925
Prepaid expenses and other 1,530 --
----------- -----------
Total current assets 190,577 136,894
Property and equipment, net 407,160 327,712
Intangibles, net 52,969 57,425
Other 11,936 11,936
----------- -----------
$ 662,642 $ 533,967
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 515,393 $ 469,803
Due to stockholders 232,389 232,389
RaveNet obligation 26,000 26,000
Deferred revenue 339,886 334,534
Current portion of capitalized lease obligations 70,000 75,275
----------- -----------
Total current liabilities 1,183,668 1,138,001
Capitalized lease obligations, net of current portion 153,873 88,875
----------- -----------
Total liabilities 1,337,541 1,226,876
----------- -----------
Stockholders' deficit:
Common Stock, $.01 par value, 400,000 authorized, 400,000 issued
and outstanding 40,000 40,000
Additional paid-in capital 657,774 657,774
Accumulated deficit (1,372,673) (1,390,683)
----------- -----------
Total stockholders' deficit (674,899) (692,909)
----------- -----------
$ 662,642 $ 533,967
=========== ===========
</TABLE>
(1) The condensed balance sheet at December 31, 1999 is derived from audited
financial statements at that date.
See notes to condensed financial statements.
-1-
<PAGE>
DelaNET, Inc.
Condensed Statements of Operations
(Unaudited)
Three months ended
March 31, March 31,
2000 1999
--------- ---------
Revenues $ 531,106 $ 250,263
Costs and expenses:
Cost of revenues 356,372 194,262
Selling, general and administrative 149,626 126,159
Depreciation and amortization 28,256 23,455
--------- ---------
Total costs end expenses 534,254 343,876
--------- ---------
Loss from operations (3,148) (93,613)
Other income (expense):
Interest expense (11,118) (9,538)
Other income 32,276 --
--------- ---------
Net income (loss) $ 18,010 ($103,151)
========= =========
See notes to condensed financial statements.
-2-
<PAGE>
DelaNET, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 18,010 ($103,151)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 28,256 23,455
Changes in assets and liabilities net of effect of acquisition
of businesses
Accounts receivable (29,110) (11,744)
Prepaid expenses and other assets (1,530) (100)
Accounts payable and accrued expenses 45,580 161,084
Deferred revenue 5,352 70,944
--------- ---------
Net cash provided by operating activities 66,558 140,488
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (18,135) (12,682)
--------- ---------
Net cash used in investing activities (18,135) (12,682)
--------- ---------
Cash flows from financing activities:
Repayments of capital lease obligations (25,380) (16,607)
--------- ---------
Net cash used in financing activities (25,380) (16,607)
--------- ---------
Net increase in cash 23,043 111,199
Cash, beginning of period 55,969 --
--------- ---------
Cash, end of period $ 79,012 $ 111,199
========= =========
Supplemental information:
Approximate interest paid during the period $ 11,000 $ 9,500
Capital lease obligations incurred for the purchase of equipment $ 86,000 $ 11,000
</TABLE>
See notes to condensed financial statements.
-3-
<PAGE>
DelaNET, Inc.
Notes to Condensed Financial Statements (Unaudited)
March 31, 2000
NOTE A-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 the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the management, the accompanying financial
statements include all normal recurring adjustments considered necessary for the
fair presentation of the results for interim periods. These unaudited interim
financial statements should be read in conjunction with the audited financial
statements included elsewhere in this Form 8-K/A. The results for the interim
periods are not necessarily indicative of the results to be expected for an
entire year or any future periods.
NOTE B- SUBSEQUENT EVENT
On June 20, 2000 (the' Closing Date"), pursuant to an Asset Purchase
Agreement, substantially all of the assets of the Company were acquired by
Frontline Communications Corporation ("Frontline") for consideration of
approximately $3,697,000, subject to certain adjustments, payable as follows:
(1) $1,750,000 cash was paid to the Company on the Closing Date; (2) $250,000
was placed in escrow on the Closing Date to be distributed in accordance with an
escrow agreement; (3) 200,000 shares of unregistered common stock of Frontline,
valued at $321,400; (4) a convertible promissory note in the principal amount of
$728,600 (the" Convertible Promissory Note") ; and (5) the assumption of
approximately $647,000 of liabilities. The principal amount of the Convertible
Promissory Note is payable in full on June 20, 2003, with the right of early
payment, and bears interest at a rate of 4% per annum, payable semi-annually
commencing on December 20,2000. Pursuant to the Convertible Promissory Note,
Frontline will have the option to convert the principal amount and any unpaid
accrued interest into unregistered shares of common stock of Frontline, at a
conversion price of $8 per share, if, at any time during the term of the
Convertible Promissory Note, the closing price of the common stock of Frontline
equals or exceeds $10 per share. No adjustments have been made in these
financial statements as a result of such acquisition by Frontline.
-4-
<PAGE>
Frontline Communications Corporation
and DelaNET, Inc.
Unaudited Pro Forma Combined Financial Information
On June 20, 2000 (the "Closing date"), pursuant to an Asset Purchase
Agreement, Frontline Communications Corporation ("Frontline") acquired
substantially all of the assets of DelaNET, Inc. ("Delanet") for consideration
of approximately $3,697,000, subject to certain adjustments, payable as follows:
(1) $1,750,000 cash was paid to Delanet on the Closing Date; (2) $250,000 was
placed in escrow on the Closing Date, to be distributed in accordance with an
escrow agreement; (3) 200,000 shares of unregistered common stock of Frontline,
valued at $321,400 (4) a convertible promissory note in the principal amount of
$728,600 (the "Convertible Promissory Note"); and (5) the assumption of
approximately $647,000 of liabilities. The principal amount of the Convertible
Promissory Note is payable in full on June 20, 2003, with the right of early
payment, and bears interest at a rate of 4% per annum, payable semi annually
commencing on December 20, 2000. Pursuant to the Convertible Promissory Note,
Frontline will have the option to convert the principal amount and any unpaid
accrued interest into unregistered shares of common stock of Frontline, at a
conversion price of $8 per share, if, at any time during the term of the
Convertible Promissory Note, the closing price of the common stock of Frontline
equals or exceeds $10 per share.
The accompanying unaudited Pro Forma Combined Statements of Operations have
been derived from Frontline's and Delanet's statements of operations for the
year ended December 31, 1999 and for the three months ended March 31, 2000.
Adjustments have been made to such information to give effect to the Delanet
acquisition and assumed public sale of Series B Convertible Redeemable preferred
stock by Frontline for $2 million issued in February 2000 to fund the cash
portion of the acquisition as if each of the transactions had occurred as of the
beginning of the earliest period covered by these Pro Forma Combined Statements
of Operations.
The unaudited Pro Forma Combined Statements of Operations 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 of the operations 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 Combined
Statements of operations should be read in conjunction with the respective
historical financial statements of Frontline and that of Delanet which are
contained elsewhere herein.
A consolidated balance sheet subsequent to the Closing Date was included in
Frontline's unaudited interim financial statements as of June 30, 2000, as filed
on Form 10-QSB on August 14,2000. As such no pro forma balance sheet is provided
herein.
Page 1
<PAGE>
FRONTLINE COMMUNICATIONS CORPORATION and DELANET, Inc.
Pro Forma Combined Statement of Operations
For the year ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
Frontline DelaNet Adjustments Note Combined
------------ ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 2,975,213 $ 1,191,278 $ 4,166,491
------------ ------------ ------------
Costs and expenses:
Cost of revenues 2,015,824 865,317 2,881,141
Selling, general and administrative 5,235,711 583,386 56,000 1 5,875,097
Depreciation and amortization 1,764,373 141,785 1,311,321 2 3,217,479
Non-cash compensation charge 754,220 384,000 (384,000) 1 754,220
------------ ------------ ------------ ------------
9,770,128 1,974,488 983,321 12,727,937
------------ ------------ ------------ ------------
Loss from operations (6,794,915) (783,210) (983,321) (8,561,446)
Other income (expense):
Interest and other income 82,411 82,411
Interest expense (44,754) (37,962) (82,716)
------------ ------------ ------------ ------------
Net loss (6,757,258) (821,172) (983,321) (8,561,751)
------------ ------------ ------------ ------------
Preferred dividends 80,000 3 80,000
------------ ------------ ------------ ------------
Net loss applicable to common shares ($ 6,757,258) ($ 821,172) ($ 1,063,321) ($ 8,641,751)
============ ============ ============ ============
Loss per common share-basic and diluted ($ 1.90) ($ 2.30)
============ ============
Weighted average number of common shares
outstanding- basic and diluted 3,550,231 4 3,750,231
============ ============
</TABLE>
Page 2
<PAGE>
FRONTLINE COMMUNICATIONS CORPORATION and DELANET, Inc.
Pro Forma Combined Statement of Operations
For the three months ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
Frontline DelaNet Adjustments Note Combined
------------ ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 934,654 $ 531,106 $ 1,465,760
------------- ------------- -------------
Costs and expenses:
Cost of revenues 592,527 356,372 948,899
Selling, general and administrative 1,553,918 149,626 14,000 1 1,717,544
Depreciation and amortization 661,463 28,256 327,830 2 1,017,549
------------- ------------- ------------- -------------
2,807,908 534,254 341,830 3,683,992
------------- ------------- ------------- -------------
Loss from operations (1,873,254) (3,148) (341,830) (2,218,232)
Other income (expense):
Interest and other income 93,299 32,276 125,575
Interest expense (38,616) (11,118) (49,734)
------------- ------------- ------------- -------------
Net loss (1,818,571) 18,010 (341,830) (2,142,391)
------------- ------------- ------------- -------------
Dividends related to beneficial conversion
feature of preferred stock 5,856,497 5,856,497
Preferred dividends 62,747 9,556 3 72,303
------------- ------------- ------------- -------------
Net loss applicable to common shares ($ 7,737,815) $ 18,010 ($ 351,386) ($ 8,071,191)
============= ============= ============= =============
Loss per common share-basic and diluted ($ 1.73) ($ 1.73)
============= =============
Weighted average number of common shares
outstanding- basic and diluted 4,462,909 4 4,662,909
============= =============
</TABLE>
Page 3
<PAGE>
Frontline Communications Corporation
and DelaNET, Inc.
Unaudited Pro Forma Combined Financial Information
Pro Forma adjustments
The Pro Forma Adjustments to the Unaudited Pro Forma Statements of Operations
are as follows:
1. To adjust historical compensation of officers to compensation per
consulting agreements entered into at date of acquisition.
2. To reflect amortization of acquired intangibles, using estimated useful
life of 3 years.
3. To record the dividend payable on Series B Convertible Redeemable preferred
stock.
4. The weighted average number of shares have been adjusted for issuance of
200,000 shares of Frontline's common stock for Delanet acquisition.
Page 4
