<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-24223
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Frontline Communications Corporation
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(Exact name of small business issuer as specified in its charter)
Delaware 13-3950283
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(State or other jurisdiction of (I.R.S. Employer)
Incorporation or organization) Identification number)
One Blue Hill Plaza
PO Box 1548
Pearl River, New York 10965
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(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code:
(914) 623-8553
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Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date:
Common stock $0.01 par value 3,016,480 shares
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Class Outstanding at June 25,1998
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<PAGE>
Frontline Communications Corporation
Index
Part I. Financial Information Page Number
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Item 1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . 2
Statement of Operations (Unaudited) . . . . . . . . . . . . . . 3
Statement of Cash Flows (Unaudited) . . . . . . . . . . . . . . 4
Notes to Financial Statements . . . . . . . . . . . . . . . . . 5
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 7
Part II. Other Information
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Item 1
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6
Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 9
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
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Page 1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Frontline Communications Corporation
Balance Sheet
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<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
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(Unaudited)
<S> <C> <C>
Assets
Current:
Cash and Cash Equivalents $ -- $ 39,725
Accounts receivables, less allowance for doubtful accounts of
$16,271 in 1998, $16,666 in 1997 19,288 10,404
Prepaid expenses and other 4,421 8,527
Deferred registration costs 366,071 231,071
----------- -----------
Total current assets 389,780 289,727
Equipment, net 170,704 178,506
Deposits 17,967 17,967
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578,451 486,200
=========== ===========
Liabilities and Stockholders' Deficit
Current:
Notes payable 392,238 329,537
Accounts payable and accrued expenses 480,635 359,174
Deferred revenue 34,994 24,385
----------- -----------
Total current liabilities 907,867 713,096
Notes payable-long term portion 225,494 218,052
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Total liabilities 1,133,361 931,148
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Commitment and contingencies
Stockholders' deficit:
Preferred stock, $.01 par value, 1,000,000 authorized, 0 issued and
outstanding -- --
Common stock, $0.01 par value, 10,000,000 shares authorized, 1,408,000
issued and outstanding 14,080 14,080
Additional paid-in capital 1,646,520 1,646,520
Accumulated deficit (2,210,510) (2,099,548)
Stock subscriptions receivable (5,000) (6,000)
----------- -----------
Total Stockholders' deficit (554,910) (444,948)
-----------
=========== ===========
$ 578,451 $ 486,200
=========== ===========
</TABLE>
See accompanying notes to financial statements. Page 2
<PAGE>
Frontline Communications Corporation
Statements of Operations
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<TABLE>
<CAPTION>
Three month period
ended March 31,
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(Unaudited)
1998 1997
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<S> <C> <C>
Revenues $ 122,060 $ 58,446
Cost of revenues 96,744 43,404
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Gross Profit 25,316 15,042
Operating expenses:
Selling, general and administrative 119,371 38,469
----------- -----------
Non-Cash Compensation Charge -- 1,257,000
Loss from operations (94,055) (1,281,216)
Other income (expense):
Interest expense (16,907) (1,333)
Other income -- 544
----------- -----------
Net Loss (110,962) (1,281,216)
=========== ===========
Loss per share of common stock $ (.09) $ (1.05)
=========== ===========
Weighted average number of shares outstanding: $ 1,218,000 $ 1,218,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
Page 3
<PAGE>
Frontline Communications Corporation
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
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<TABLE>
<CAPTION>
Three month period
Ended March 31,
-----------------------------------
(Unaudited)
1998 1997
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (110,962) $(1,281,216)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 22,816 5,859
Allowance for doubtful accounts (395) --
Officer salary contributed to
Capital -- 1,500
Stock options issued for services -- 8,000
Non-cash Compensation Charge -- 1,257,000
Changes in assets and liabilities:
Accounts receivable (8,489) (3,021)
Prepaid expenses and other 4,106 3,048
Other Assets -- --
Accounts payable and accrued expenses 121,461 16,898
Interest due on stockholders loans 7,446 --
Deferred revenue 10,609 --
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Net Cash provided by operating activities 46,592 8,068
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Cash flows from investing activities:
Acquisitions of equipment (12,014) (13,572)
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Net Cash used by investing activities (12,014) (13,572)
Cash flows from financing activities
Deferred registration costs (135,000) --
Proceeds from bank note payable 65,000 --
Proceeds from stockholder loans -- 7,489
Collections from subscriptions receivable 1,000 --
Repayments of stockholders loans (5,303) --
Proceeds from sale of common stock -- --
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Net Cash provided (used) by financing activities (74,303) 7,489
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Net increase (decrease) in cash and cash equivalents (39,725) 1,985
Cash, beginning of period 39,725 2,303
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Cash, end of period $ -- 4,288
=========== ===========
</TABLE>
See accompanying notes to financial statements
Page 4
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements
March 31, 1998
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments, consisting of normal recurring accruels, considered
necessary for a fair presentation of the results for interim periods. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of the results to be expected for the full year ending December 31, 1998. For
further information refer to be consolidated financial statements and footnotes
thereto contained in the Frontline Communications Corporation Registration
Statement on Form SB-2 for the year ended December 31, 1997.
2. Summary of Significant Accounting Policies
Business
Frontline Communications Corporation ("Frontline" or the "Company") is an
internet service provider that provides subscribers with direct access to a wide
range of internet applications and resources including electronic mail, World
Wide Web sites and regional and local information and data services.
Reorganization
The financial statements include the accounts of Hobbes & Co., LLC
("Hobbes"), INET Communications Company, LLC ("INET") and Sara Girl & Co., LLC
("Sara Girl"), (collectively the "Predecessor Companies") and Frontline
Communications Corporation. As described more fully in Note 2, on May 30, 1997,
Frontline acquired the net assets of the Predecessor Companies. For accounting
purposes, the business combination has been accounted for as if the acquirer is
Hobbes. With respect to the acquisition of INET, the acquisition has been
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests and reflects the combined financial position,
operating results and cash flows of Hobbes and INET as if they had been combined
for all periods presented. With respect to Sara Girl and Frontline, the business
combination has been accounted for using purchase accounting, which resulted in
the recording of a special non-cash charge of $1,230,000. This charge represents
the estimated fair market value of the Company's 820,000 shares of common stock
issued to certain founding shareholders in February 1997 for current and future
services. The Predecessor Companies were dissolved and Frontline is the
continuing legal entity. Intercompany accounts and transactions have been
eliminated.
3. Reorganization
On May 30, 1997, the Predecessor Companies were acquired by the Company by
issuing three notes aggregating $325,000 (excluding $47,137 of certain advances)
(See Note 5) for all the membership interest in the Predecessor Companies (the
"Reorganization"). For accounting purposes Hobbes has been considered to be the
acquirer. As a result, the business combination of Hobbes and INET has been
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests. The business combination with Sara Girl and
Frontline have been accounted for as purchases. The net assets and operations of
Sara Girl and Frontline are not material to the Company's financial statements.
Notes payable to the members of the Predecessor Companies are accounted for as
distributions in the accompanying statement of stockholders' equity.
Page 5
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Frontline Communications Corporation
Notes to Financial Statements
March 31, 1998
4. Litigation
In June 1997, Michael Char, a former officer and director of the
Company, had disagreements with other members of management with respect to
various business matters.
In March 1998, the Company settled all disputes with Mr. Char (the
"Char Settlement"). In addition to payment of $65,000 in March,1998, the Company
made a payment to Mr. Char in the amount of $435,000 from the proceeds of the
initial public offering in exchange for all debts, notes and claims of Mr. Char,
which aggregated $240,000, and the balance of which was charged against equity
for the 231,520 shares owned by Mr. Char. Mr. Char will retain 24,480 shares,
subject to a lock-up agreement with the underwriter.
5. Subsequent Events
In May 1998, the Company consummated a public offering of 1,840,000
shares of common stock at $4.00 per share, and 1,840,000 common stock purchase
warrants for $.10 per warrant, each excercisable at $4.80 per underlying common
share. Net proceeds to the Company after underwriter discounts and expenses were
$6,414,200.
Page 6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The statements contained herein which are not historical facts are
forward looking statements that involve risks and uncertainties, including but
not limited to, changes in market conditions, regulatory and economic factors,
increased competition, the nature of supplier and customer arrangements which
become available to the company in the future, technological obsolescence, and
unexpected technological advances. The company's actual results may differ
materially from the results discussed in any forward looking statements.
Results of Operations
The Company commenced operations in late 1995 and established four
points of presence ("POPs") during 1996 and an additional six POPs in 1997.
Revenues for the three months ended March 31, 1998 were $122,060, compared to
$58,446 for the prior comparable period. At March 31, 1998 and March 31, 1997,
the Company had ten and four POPs, respectively. The Company had approximately
1,650 and 700 subscribers, respectively, at March 31, 1998 and 1997.
Cost of revenues for the three months ended March 1997 was $43,404, or
approximately 74.3% of revenues. Cost of revenues for the three months ended
March 1998 was $96,744, or approximately 79.3% of revenues.
Operating expenses for the three months ended March 1997 were
$1,295,469, including a non-cash charge of $1,257,000, and advertising and
payroll of approximately $16,400. The non-cash charge consisted of (i)
$1,230,000 incurred in connection with the issuance of 820,000 shares of common
stock (valued at $1.50 per share) to employees of the Company in February, 1997;
and (ii) $27,000 incurred in connection with the issuance of options to purchase
56,000 shares (valued at $.48 per share) to consultants. Operating expenses for
the three months ended March 1998 were $119,371, including advertising and
payroll expenses of $62,205. The increase in operating expenses were (without
giving effect to the non-cash charge) was attributable to payroll, rent and
professional fees. Payroll increases directly related to volume increases in
revenues. Rent increases were attributable to the addition of new POPs and the
establishment of larger administrative space. Management anticipates future
increases in operating expenses for advertising, rent, payroll, depreciation and
professional fees.
Interest expense for the three months ended March 31, 1998 was $16,907
or 13.9% of revenues, as compared to $1,333, or 2.3% of revenues for the prior
period. Interest expense relates primarily to financing the purchase of computer
hardware for the year.
For the three months ended March 31, 1997 and 1998, the Company
incurred net losses of $1,281,216 and $110,962, respectively.
Liquidity and Capital Resources
The Company's primary capital requirements have been and will continue
to be to fund the purchase and installation of network equipment at its POPs, as
well as for working capital, including the salaries of executive and other
personnel. To date, the Company has financed its capital requirements through
the issuance of debt and equity securities. At March 31, 1998, the Company had a
working capital deficit of $518,087. In May 1998, the Company received net
proceeds of $6,414,200 pursuant to a public offering of its securities.
In May 1997, the Company consummated a private placement pursuant to
which it issued 200,000 shares of Common Stock and received proceeds of
$400,000. The proceeds were used primarily for the purchase of network
equipment, salaries and expenses in connection with this offering.
Page 7
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In May 1997, the Company effected the Reorganization, pursuant to which
it issued promissory notes in the amounts of $141,800, $163,537 and $66,800,
respectively, to Messrs. Feinberg, Char and Cole-Hatchard. Included in such
indebtedness is $21,737 and $35,000, respectively, of advances made to the
Company by Messrs. Char and Cole-Hatchard to establish additional POPs. The
promissory notes were issued to Messrs. Feinberg, Char and Cole-Hatchard in
partial consideration of their effort in founding the Predecessor Companies.
In March 1998, the Company entered into a settlement agreement with Mr.
Char pursuant to which Mr. Char discontinued a lawsuit and released the Company
from all claims (including for monies owed) in consideration of (i) an up-front
payment of $65,000 and (ii) a payment of $435,000 in May, 1998, to satisfy an
aggregate of $240,000 of existing obligations due to Mr. Char (including $15,000
of legal fees), which will be expensed in the quarter ending June 30, 1998, and
(iii) the repurchase of 231,520 shares from Mr. Char for $260,000, which will be
recorded as a charge to stockholders' equity. The Company also repaid $20,000 of
indebtedness to each of Messrs. Cole-Hatchard and Feinberg in May, 1997. The
balance of the indebtedness owed to Messrs. Cole-Hatchard and Feinberg bears
interest at the rate of 8% per annum and is repayable at such time as the
Company achieves $1.9 million in pre-tax earnings, but in no event sooner than
May, 2000.
In August 1997, the Company borrowed $60,000 from Mr. Cole-Hatchard
bearing interest at the rate of 9.25% per annum. The Company repaid $30,000 of
such indebtedness in December 1997. The balance was repaid in May, 1998,
directly to Mr. Cole-Hatchard's lender, Provident Savings Bank.
In December 1997, the Company consummated a private placement pursuant
to which it issued (i) $150,000 principal amount of promissory notes and (ii)
warrants to purchase 300,000 shares of Common Stock at an exercise price of
$5.00 per share. The notes bear interest at the rate of 9% per annum and were
repaid in May, 1998.
In March 1998, the Company borrowed a total of $65,000 from Provident
Savings Bank. The loan bears interest at the rate of 9% per annum and was repaid
in May 1998.
The capital requirements relating to implementation of the Company's
business plan will be significant. During the next twelve months, the Company
intends to purchase computer equipment to establish additional POPs and upgrade
its existing POPs, and hire additional technical and support personnel. Other
than as described above, the Company has no material commitments for capital
expenditures.
Based on currently proposed plans and assumptions relating to the
implementation of its business plans (including the timetable of, and costs
associated with, establishing additional POPs), the Company believes that its
cash resources will be sufficient to satisfy its contemplated requirements for
the reasonably foreseeable future. There can be no assurance that the Company's
cash resources will be sufficient to permit the Company to implement its
proposed business plan or that any assumptions relating to the implementation of
such plan will prove to be accurate. To the extent that the proceeds of the
offering are not sufficient to enable the Company to generate meaningful
revenues or achieve profitable operations, the inability to obtain additional
financing will have a material adverse effect on the Company. There can be no
assurance that any such financing will be available to the Company on
commercially reasonable terms, or at all.
Year 2000
The Company utilizes software and related technologies throughout its
business that will be affected by the date change in year 2000. System
modifications or replacements are underway or planned which should make all
significant computer systems at the Company compliant with the year 2000
requirement. Anticipated spending for these modifications will be expensed as
incurred and are not expected to have a material impact on the Company's ongoing
results of operations.
Page 8
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In March 1998, the Company entered into the Char Settlement. In May
1998, the Company paid $435,000 to Mr. Char to retire indebtedness and
repurchase 231,520 shares of common stock (the "Stock Repurchase").
Item 2. Use of Proceeds
In May, 1998, the Company consummated an initial public offering of
1,840,000 shares of common stock and warrants to purchase 1,840,000 shares of
common stock (including 240,000 shares and 240,000 warrants issued pursuant to
the exercise of an over-allotment option) and received net proceeds of
$6,414,200, after payment of underwriting discounts and commissions, fees, and
offering expenses of $1,129,800. Since May 19, 1988, (the date of the closing of
the initial public offering) through June 5, 1998, the Company used $11,325 of
the net proceeds for marketing and advertising; $273,663 for working capital;
$260,000 for the Stock Repurchase; and $482,444 for the repayment of
indebtedness (including $185,848 to affiliates).
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 27
b. No reports on form 8-K were filed
Page 9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed in its behalf by the
undersigned, thereunto duly authorized.
FRONTLINE COMMUNICATIONS CORPORATION
By: June 26, 1998
------------------------------------------------
Stephen J. Cole-Hatchard, Date
Chairman, President and CEO
By: June 26, 1998
------------------------------------------------
Nicko Feinberg Date
Director, Vice President and
CIO
By: June 26, 1998
------------------------------------------------
Michael Olbermann Date
Director, Vice President and COO
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AT MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 19,288
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 389,780
<PP&E> 170,704
<DEPRECIATION> 22,816
<TOTAL-ASSETS> 578,451
<CURRENT-LIABILITIES> 907,867
<BONDS> 0
0
0
<COMMON> 14,080
<OTHER-SE> 1,646,520
<TOTAL-LIABILITY-AND-EQUITY> 578,451
<SALES> 0
<TOTAL-REVENUES> 122,060
<CGS> 96,744
<TOTAL-COSTS> 96,744
<OTHER-EXPENSES> 119,371
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,907
<INCOME-PRETAX> (110,962)
<INCOME-TAX> 0
<INCOME-CONTINUING> (110,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (110,962)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
