<PAGE>
________________________________________________________________________________
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 June 30, 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
--------------------------------
Frontline Communications Corporation
------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3950283
(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
(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code:
(914) 623-8553
-----------------------------
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
---------------------------- ----------------
Class Outstanding at August 10,1998
________________________________________________________________________________
<PAGE>
Frontline Communications Corporation
Index
Part I. Financial Information Page Number
- ------- --------------------- -----------
Item 1
Balance Sheets.................................... 2
Statements of Operations (Unaudited).............. 3
Statements 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
- -------- -----------------
Item 1
Legal Proceedings................................. 9
Item 2
Use of Proceeds .................................. 9
Item 6
Exhibits and Reports on Form 8-K ................. 9
Signatures ....................................................... 10
- ----------
Page 1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
Frontline Communications Corporation
Balance Sheets
________________________________________________________________________________
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 4,793,944 $ 39,725
Accounts receivables, less allowance for doubtful accounts of
$20,199 and, $16,666 in respectively 17,590 10,404
Prepaid expenses and other current assets 26,615 8,527
Deferred registration costs --- 231,071
----------- ----------
Total current assets 4,838,149 289,727
Equipment, net 235,608 178,506
17,967
Deposits 17,967
----------- ----------
Total assets $ 5,091,724 $ 486,200
=========== ==========
Liabilities and Stockholders' Equity
Current:
Notes payable $ -- $ 329,537
Accounts payable and accrued expenses 124,334 359,174
Deferred revenue 34,495 24,385
----------- ----------
Total current liabilities 158,829 713,096
Notes payable-long term portion 168,600 218,052
----------- ----------
Total liabilities 327,429 931,148
----------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 authorized, 0 issued and
outstanding --- ---
Common stock, $0.01 par value, 10,000,000 shares authorized, 3,016,480
issued and outstanding 32,480 14,080
Common stock purchase warrants, 2,320,000 issued and outstanding 184,420
Treasury Stock, 231,520 shares, at cost
(260,000)
Additional paid-in capital 7,514,546 1,646,520
Accumulated deficit (2,702,651) (2,099,548)
Stock subscriptions receivable (4,500) (6,000)
----------- ----------
Total Stockholders' equity (deficit) 4,764,295 (444,948)
----------- ----------
$ 5,091,724 $ 486,200
=========== ==========
</TABLE>
See accompanying notes to financial statements. Page 2
<PAGE>
Frontline Communications Corporation
Statement of Operations
________________________________________________________________________________
<TABLE>
<CAPTION>
Three month period
ended June 30,
------------------
(Unaudited)
----------- ---------
1998 1997
<S> <C> <C>
Revenues $ 124,113 $ 72,708
Cost of revenues 126,620 49,924
----------- ----------
Gross Profit (2,507) 22,784
Operating expenses:
Selling, general and administrative 237,305 284,971
----------- ----------
Loss from operations (239,812) (262,187)
Other income (expense):
Interest expense (7,113) (2,454)
Other income (18,897) (1,041)
----------- ----------
Net Loss (265,822) (265,682)
----------- ----------
Loss per share of common stock $ (.12) $ (0.15)
----------- ----------
Weighted average number of shares outstanding: 2,212,240 1,816,000
=========== ==========
</TABLE>
Page 3 See accompanying notes to financial statements.
<PAGE>
Frontline Communications Corporation
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
________________________________________________________________________________
<TABLE>
<CAPTION>
Six month period
Ended June 30,
-----------------
(Unaudited)
1998 1997
---------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (372,032) $(289,898)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 35,737 14,446
Allowance for doubtful accounts 3,533 ---
Officer salary contributed to capital --- 3,000
Stock options issued for services --- 8,000
Non-cash Compensation Charge --- 205,000
Changes in assets and liabilities:
Accounts receivable (10,719) (10,261)
Prepaid expenses and other (18,088) (7,636)
Other Assets --- (16,354)
Accounts payable and accrued expenses (234,840) 82,078
Deferred revenue 10,110 ---
---------- ---------
Net Cash provided by operating activities (586,299) (11,625)
Cash flows from investing activities:
Acquisitions of equipment (92,839) (114,922)
---------- ---------
Net Cash used by investing activities (92,839) (114,922)
Cash flows from financing activities
Deferred registration costs --- (63,000)
Proceeds from bank note payable --- ---
Proceeds from stockholder loans --- 20,000
Collections from subscriptions receivable 1,500 ---
Repayments of stockholder and bank loans (402,989) (15,266)
Purchase of Treasury Stock (260,000) ---
Proceeds from sale of common stock and warrants 6,094,846 400,000
---------- ---------
Net Cash provided (used) by financing activities 5,433,357 341,734
---------- ---------
Net increase (decrease) in cash and cash equivalents 4,754,219 215,187
Cash, beginning of period 39,725 2,303
---------- ---------
Cash, end of period $4,793,944 217,490
========== =========
</TABLE>
See accompanying notes to financial statements. Page 4
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements
June 30, 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.
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 three months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the full year ending December 31,
1998. For further information refer to the financial statements and footnotes
thereto contained in the Frontline Communications Corporation Registration
Statement on Form SB-2.
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.
Page 5
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Frontline Communications Corporation
Notes to Financial Statements
June 30, 1998
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, and notes payable to the members of the
Predecessor Companies were accounted for as distributions.
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. The balance of $260,000 was charged against equity
for the repurchase of 231,520 shares owned by Mr. Char. Mr. Char will retain
24,480 shares, subject to a lock-up agreement with the underwriter.
5. Public Offering
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.
6. Subsequent Events
In July, 1998, the Company executed non-binding letters of intent to
acquire Lanline Communications, Inc., an Internet Service Provider located in
White Plains, New York; WOWFactor, Inc., an Electronic Internet Commerce Company
and Internet Service Provider located in Montclair, New Jersey; and Animal Town,
Inc., a children's game and toy distributor located in Santa Rosa, California.
The proposed acquisitions are subject to certain conditions, including
satisfactory completion of due diligence. The Company is currently engaged in
due diligence investigations and negotiations of binding agreements for these
proposed transactions. There can be no assurance that these transactions can be
consumated.
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 June 30, 1998 were $124,113, compared to
$72,708 for the prior comparable period. At June 30, 1998 and June 30, 1997, the
Company had ten and four POPs, respectively. The Company had approximately 1,800
and 750 subscribers, respectively, at June 30, 1998 and 1997.
Cost of revenues for the three months ended June 30, 1998 was $126,620,
or approximately 102% of revenues. Cost of revenues for the three months ended
June 30, 1997 was $49,924, or approximately 69% of revenues.
Operating expenses for the three months ended June 30, 1998 were
$237,305, including $167,773 in payroll expenses. Operating expenses for the
three months ended June 30, 1997 were $284,971, including a non-cash,
non-recurring charge of $205,000, and payroll expenses of $31,378. The increase
in operating expenses was attributable to payroll, rent and professional fees.
Payroll increases were 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 June 30, 1998 was $7,113 or
6% of revenues, as compared to $2,454, or 3% of revenues for the prior period.
Interest expense relates primarily to financing the purchase of computer
hardware and related equipment.
For the three months ended June 30, 1998 and 1997, the Company incurred
net losses of $228,028 and $265,682, 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, to
lease space for consolidated POPs, to engage in strategic acquisitions, and 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 June 30, 1998, the Company had working capital of
$4,679,320.
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 the public offering.
Page 7
<PAGE>
In May 1997, the Company effected the reorganization, pursuant to which
it issued promissory notes in the amounts of $141,800, $66,800, and $163,537
respectively, to Messrs. Feinberg and Cole-Hatchard, officers and Directors of
the Company, and Mr. Char, a former officer and Director. 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 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 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 has been expensed in the quarter ending June 30, 1998, and
(iii) the repurchase of 231,520 shares from Mr. Char for $260,000, which has
been 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,
1998. 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 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.
In May, 1998, the Company received net proceeds of $6,414,200 pursuant
to a public offering of its securities.
The capital requirements relating to implementation of the Company's
business plan will be significant. 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.
Page 8
<PAGE>
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 9
<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, 1998, (the date of the closing of
the initial public offering) through July 13, 1998, the company used $62,869 of
the net proceeds for marketing and advertising; $407,813 for working capital;
$260,000 for the stock re-purchase; 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 10
<PAGE>
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: /S/ Stephen J. Cole-Hatchard August 14, 1998
-----------------------------------------------------
Stephen J. Cole-Hatchard, Date
Chairman, President and CEO
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
AT JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 17,590
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,838,149
<PP&E> 235,608
<DEPRECIATION> 40,431
<TOTAL-ASSETS> 5,091,724
<CURRENT-LIABILITIES> 158,829
<BONDS> 0
0
0
<COMMON> 32,480
<OTHER-SE> 4,731,815
<TOTAL-LIABILITY-AND-EQUITY> 5,091,724
<SALES> 0
<TOTAL-REVENUES> 124,113
<CGS> 126,744
<TOTAL-COSTS> 126,620
<OTHER-EXPENSES> 237,305
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,113
<INCOME-PRETAX> (228,028)
<INCOME-TAX> 0
<INCOME-CONTINUING> (228,028)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (228,028)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
