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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
|X| Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934.
For the fiscal year ended December 31, 1998
OR
|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the transition period from __________ to __________
Commission File Number 000-24223
FRONTLINE COMMUNICATIONS CORPORATION
(Name of Small Business Issuer in Its Charter)
Delaware 13-3950283
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
One Blue Hill Plaza, P.O. Box 1548, Pearl River, New York 10965
(Address of principal executive offices) (Zip Code)
(914) 623-8553
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 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 past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes X No |_|
The issuer's revenues for the year ended December 31, 1998 were $574,964.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 15, 1999 was $28,031,317. As of March 15, 1999, there
were 3,229,844 shares of the issuer's Common Stock outstanding.
Documents Incorporated by Reference:
None
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PART I
Item 1. Business.
General
Frontline Communications Corporation (the "Company") is an Internet service
provider that offers "Effortless E-commerce and Internet Access" to individual
and business subscribers located in the Northeast United States. The Company
provides subscribers with direct access to a wide range of Internet applications
and resources, including electronic mail, web hosting and design, dedicated
circuits, E-commerce solutions, access to World Wide Web sites and
regional/local information and data services. The Company believes that its low
subscriber to modem ratio, its technical and customer support, its broad range
of services and efficiencies gained through its Competitive Local Exchange
Carrier ("CLEC") status will enable it to capitalize on the emerging and
expanding markets for Internet services.
According to the Company's business plan, the Company plans to grow
primarily by acquisition, with a focus on acquiring companies in the following
three areas: 1) Internet Service Providers (ISPs) (to increase subscriber base
and revenues); 2) companies which provide other Internet-related services, such
as Web site design, software development and E-commerce-enabling services (to
provide a broad range of services to its customer base); and 3) E-commerce
companies (to capitalize on the various revenue-enhancing opportunities in the
E-commerce arena).
Since its initial public offering in May 1998, the Company has achieved
rapid growth in accordance with its business plan. As of March 2, 1999, the
Company serviced approximately 15,000 subscribers, compared to 1,400 at December
1997. This growth is primarily due to the fourth quarter acquisitions of the
customer bases of the following ISPs: (a) Roxy Systems, Inc., d/b/a/ Magic
Carpet, an ISP with approximately 1,000 subscribers in Orange County, New York,
(b) US Online, Inc., an ISP with approximately 3,500 subscribers in New York,
New Jersey and Pennsylvania, and (c) Webspan Communications, Inc., an ISP with
approximately 9,000 subscribers in New York and New Jersey. The Company retained
Webspan's Technical Support team, which now serves as the Company's in-house
technical support center. The Company believes that the establishment of an
in-house technical support center will allow the Company to maintain the rigid
support levels required to retain customers in a competitive market.
The Company has also acquired an E-commerce company, WOWFactor, Inc.
("WOWFactor"). WOWFactor is a web-based marketplace which provides E-commerce
information and services to women. Over 1.2 million women business owners are
currently profiled in WOWFactor's on-line directory. The Web site, which is
scheduled to launch in April 1999, will provide comprehensive E-commerce
solutions, advanced business searches, on-line requests for proposals and
personal search services for women-owned businesses.
In addition, the Company entered into a non-binding letter of intent to
acquire Public Affairs Group (PAG), the parent Company of Business Women's
Network (BWN). BWN owns a database listing over 2,300 women's professional
associations and organizations representing over nine million women. The listing
is published annually in BWN's Business Women's Directory, and is also available
on-line. If acquired, BWN's database will augment WOWFactor's already existing
database.
In order to support its rapid growth, the Company has increased its number
of employees from 8 employees at December 1997 to the 46 people that it
currently employs. Through aggressive recruiting, the Company now has several
divisions, including technical, operational, sales and marketing, legal and
financial. The Company also has its own Customer Service Center, which operates
from 8 a.m. to midnight, seven days per week.
The Company's telecommunications network is currently comprised of leased
high-speed data lines and eleven points-of-presence ("POPs") which allow
internet access throughout Rockland, Orange, Dutchess, Sullivan, Putnam, Ulster
and Westchester counties in New York, New York City (including the five
boroughs), Long Island, most counties in New Jersey and the Philadelphia
metropolitan area. These POPs permit subscribers in these areas
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to access the Internet through a local telephone call. The Company currently
supports 14.4, 28.8 and 36.6 Kbps modems at each of its POPs and has X2 56K and
ISDN technologies at most of its POPs.
In addition, in December 1998, CLEC Communications Corp., a wholly owned
subsidiary of the Company, was granted Competitive Local Exchange Carrier
("CLEC") status by the New York State Public Service Commission. As a CLEC, the
Company's subsidiary may subscribe to and resell all forms of local telephone
service in the State of New York. The provision of services is contingent upon
the filing of an interconnection agreement with the local Incumbent Local
Exchange Carriers ("ILEC") which is planned for Second Quarter 1999. The Company
intends to build its own network infrastructure, which it believes will
eliminate its current reliance upon the infrastructures of the ILECs. The
Company believes that its CLEC status, combined with the efficiencies inherent
in operating its own network, should result in lower overhead costs and a more
predictable infrastructure - both of which should inure to the benefit of the
Company's customers. CLEC filings in additional states are planned for the near
future.
The Company was incorporated under the laws of the State of Delaware in
February 1997. The Company's principal executive offices are located at One Blue
Hill Plaza, Pearl River, New York 10965, and its telephone number is (914)
623-8553. The Company's home page is located on the World Wide Web at
www.fcc.net. The WOWFactor Web site is located at www.wowfactor.com.
Market Trends
In recent years, the Internet has experienced a rapid increase in its
number of users. According to IntelliQuest Research, it is estimated that the
number of adult individuals online in the United States is approximately 79.4
million, with an additional 18.8 million people planning to go online in 1999.
Forrester Research estimated that the total goods traded over the web in the
U.S. in 1997 reached $9 billion. In the year 2000, Forrester expects the total
goods traded to increase to $160 billion, and by year 2002, $327 billion. The
Company believes that the following key trends will contribute favorably to
expected continued popularity of the Internet:
Increased E-commerce: Online Advertising and Online Shopping: Corporate spending
on on-line advertising and sponsorships continues to steadily
increase, as emerging demographics of Web users have begun to mirror
worldwide demographics. According to a report by Simba Information,
spending on on-line advertising will reach $7.1 billion by 2002, as a
significantly higher percentage of women and middle-income users visit
the Internet. Forrester Research documented that in 1997, fifteen
percent of total revenue was derived from sales made online. Forrester
expects that by year 2000, forty-two percent of total revenue will
result from sales made online.
Research from CnetNews.com documents that online buyers are spending
more over time. In 1998, thirty-five percent of online buyers spent
more than $300 online. This was an eleven percent increase from 1997.
Further, retailers such as 1-800-Flowers and First Auction report a
three hundred percent increase in online sales versus the same period
one year ago.
Increased Availability of user-friendly technology and support for E-commerce:
Internet use is promoted by the development of software tools that
simplify access to the Internet's applications and resources. As users
become more comfortable with the Internet and the Internet
increasingly becomes a medium for business transactions, personal
financial management, entertainment and personal communication, the
Company believes that demand by individuals for competitively priced,
direct, high speed access to commerce-enabled businesses, updated
information, personal home pages, interactive multimedia games and
entertainment will continue to grow.
Further, there is an increased availability of tools to facilitate
e-commerce. Digital coupon programs, incentive and bonus mile
programs, new technology such as "impulse technology" and digital
payment technologies encourage online businesses and consumers to
transact business online. Corporations and online organizations such
as TrustE have taken initiatives, such as posting privacy policies,
providing encryption technology, and firewalls to ensure consumers
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and businesses that their transactions and disclosed information
remain secure.
Continuing Penetration of Computers and Modems in the Home: An increasing
percentage of computer owners also own modems, which are now
pre-installed in a growing number of new computers. According to
FIND/SVP's 1997 survey, more than 42.7 million households in the
United States own a personal computer; approximately 40 million also
own a modem; and 36.5 million households use the Internet. The Company
believes that this growth is accompanied by increasing use of
computers for communications such as Internet access, facsimile
transmissions and electronic mail.
Growth of the Informational, Entertainment and Commercial Applications of the
Internet: Use of the Internet has grown rapidly since its
commercialization in the early 1990s. An increasing number of servers
and Web sites are connected to the Internet, making available text,
graphics, audio and video information which may be accessed by
consumers. Through an Internet connection, users can access
commercial, educational and governmental databases, entertainment
software, photographs and videos, newspapers, magazines, library card
catalogs, industry newsletters, weather updates and other information.
Traditional and emerging Internet applications, including electronic
mail, the World Wide Web and USENET news groups are also increasing in
popularity.
Management believes that all of these factors indicate that the Company's
growth potential is secure in this marketplace. The Company will develop a focus
on Internet access and e-commerce services for consumers both at home and in the
workplace, and for small businesses. The current marketplace supports the online
transactions of both consumers and small businesses.
Market indicators are speculative and depend on independent factors in the
marketplace and the economy that are beyond the Company's control. If any or all
of these indicators prove to be inaccurate or inflated, it may have a negative
affect on the growth or the revenues of the Company.
Company Strategy
The Company's strategy is to attempt to aggressively build a significant
customer base in the Northeastern United States as the ISP for small to
medium-sized businesses. The Company intends to provide its customers
"Effortless E-commerce and Internet Access". The Company's full range of
Internet access services include dial up access, web hosting, dedicated
connections and DSL service. On the E-Commerce front, the Company's goal is to
provide the small to medium-sized business owner with cost-effective
full-service E-commerce solutions which are easy to implement and maintain.
Available E-commerce solutions will include commerce-enabled Web sites, document
security services, Internet payment services, digital coupons and on-line
merchandising technologies. To properly promote the Company's services and
thereby potentially increase its subscriber base, the Company is expanding its
sales and marketing staff by seeking to recruit top-notch staff and management.
In addition, the Company is focusing its acquisition efforts on companies with
forward-looking sales and marketing, high-quality customer service and
top-quality network infrastructure.
Management recognizes that the Company must concentrate its resources on
developing key segments of its business in order to accomplish its goal. The
Company will seek to concurrently (i) develop its ISP business, (ii) initiate
and foster its E-commerce business, and (iii) expand and develop its
capabilities and the services that it makes available to its customers.
1. Development of the ISP business
The Company's core business is providing Internet service to individual and
small business subscribers. The Company offers a range of services starting at a
simple $19.95 per month basic package that includes E-mail and Internet access
to higher priced individualized service that may include Web hosting, dedicated
circuits, and Digital Subscriber Lines ("DSL") service. The Company believes
that it is one of the first ISPs to offer DSL service
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to its customers, which allows the customer high-speed access the Internet over
"Pots" lines (literally, "Plain Old Telephone" lines), as opposed to digital
lines.
Approximately 15,000 customers subscribed to the Company's ISP service as
of March 2, 1999. The Company recognizes that the market for individual Internet
access is heavily influenced by personal referrals. Thus, the Company has made
generating positive referrals and stimulating subscriber growth and retention
through high-quality customer service a focus of its marketing efforts. The
Company also offers incentives to existing subscribers and Value-Added Resellers
("VARs") who refer its service to new customers. A subscriber who refers a new
dial-up customer to the Company will receive one free month of service for each
referral, subject to the new subscriber remaining active for a minimum of sixty
days. In addition to encouraging referrals from existing subscribers, the
Company has initiated a program in which VARs receive a commission based on a
percentage of the value of any service contract that they refer to the Company.
The Company also will seek to expand this core subscriber base by acquiring ISPs
with large numbers of monthly subscribers, particularly ISPs with a large number
of small business subscribers.
The Company believes that the revenues derived from the ISP business will
allow the Company to embark on potentially profitable E-commerce endeavors
without many of the financial risks inherent to companies without a similar
revenue base.
2. E-commerce Business Launch
A study by Jupiter Communications has found that 35% of the Internet
population has made an on-line purchase in the last year. According to
eMarketer's eCommerce: Retail Shopping Report, on-line retail revenues should
increase 784% over the next four years, from $4.5 billion by year-end 1998 to
$35.3 billion by 2002. This estimate would make E-commerce one of the fastest
growing segments of the Internet industry. The Company is seeking to grow with
this segment of the industry both through its acquisition of companies that are
strong in the industry and also by building strength from within the company's
existing network structure.
On October 9, 1998, the Company acquired WOWFactor, a company engaged in
the business of promoting E-commerce through its Web site devoted to
professional women and women-owned businesses. The Company's entry into the
E-commerce arena will coincide with the launch of the WOWFactor site in April
1999. WOWFactor anticipates three primary sources of revenue. First, the site is
being designed to provide corporate sponsors the opportunity to reach
WOWFactor's site visitors via corporate sponsorship programs. Second, WOWFactor
plans to derive revenue from various forms of advertising, such as banner ads,
posting links to affiliate partners and shared revenue from ads provided by
content partners. Third, WOWFactor expects to derive fees by providing web
hosting and E-commerce enabling services to other sites.
WOWFactor will be offering free of charge to its customers, for a limited
time, a unique service that allows the user to request a personal, limited
search of the businesses profiled in the WOWFactor directory. WOWFactor will
respond with listings from its database. WOWFactor will also offer users a
unique "Business Reply Card" service that allows users to submit "Online
Requests for Proposals" by completing a template on the site. Both services
promote WOWFactor's overriding goal - bringing buyers and sellers together on
the Internet.
3. Expansion and development of capabilities and services
The Internet Access and E-commerce business is rapidly developing, and the
Company recognizes that if it does not continue to keep apace, or even ahead of,
the advances in the industry, it will fall behind the competition. The Company
is continually looking for new and inventive ways that it can offer better, more
complete, more efficient and less expensive service to its customers.
Specifically, the Company has decided to consolidate its POPs for
operational efficiency by creating one "SuperPOP" in each of New York, New
Jersey and Pennsylvania. POPs permit subscribers to access the Internet through
a local telephone call. By consolidating its POP's, the Company hopes to lower
its monthly overhead by
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taking advantage of economies of scale.
In addition, the Company, through its wholly-owned subsidiary, CLEC
Communications Corp., has been granted CLEC status in New York. As a CLEC, the
Company is authorized to subscribe and resell all forms of local telephone
service in the State of New York (the provision of services is contingent upon
filing an Interconnection Agreement with the local ILEC, which is planned for
the Second Quarter 1999). The Company also has plans to build its own network
infrastructure, which it believes will eliminate its current reliance upon the
infrastructures of the ILECs. The Company believes that its CLEC status will
enable it to directly provide certain services to its customers which it
currently provides indirectly through partnerships and contracts with third
parties. For example, the Company currently offers DSL service to its customers
through a partnership with another DSL provider. Upon a successful CLEC roll
out, the Company believes that it will have the capacity to offer DSL directly
to its customers. Rapid changes in the industry and in governmental regulations
controlling the industry make it difficult, however, to predict the advantages
of the Company's maintenance of its CLEC status.
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The Company's strategy and future marketing plans are subject to change as
a result of a number of factors, including progress or delays in the Company's
expansion efforts, changes in market conditions, the nature of possible
acquisitions which may become available to it in the future and technological
and competitive factors. There can be no assurance that the Company will be able
to successfully implement its business plan or otherwise continue to
successfully expand its operations.
Internet Services
The Company provides a variety of competitively priced Internet access
services. The Company's primary focus is on individuals who connect to the
Internet via a modem (referred to as "dial-up" accounts). Dial-up subscribers
can access the Internet by calling the Company's local POPs. The Company bills
its subscribers in advance on a monthly or quarterly basis. Subscribers
typically pay their balance through pre-authorized credit card accounts.
Dial-Up Accounts: The Company believes that dial-up accounts present an
attractive opportunity for growth. A user can quickly activate an
account with the Company, obtain two Internet E-mail addresses, Web
space and establish automatic billing to the user's credit card.
Subscriber accounts are priced from $19.95 per month for unlimited
connections, $48 per month for an unlimited ISDN use account and $6.95
per month for limited use customers. There is no connection fee.
Connections for ISDN services require the customer to obtain an ISDN
line from the local telephone company. The Company's network supports
connectivity software which utilizes standard communication protocols
such as TCP/IP, which enable a user's computer to communicate with
other computers over the Internet. As of March 2, 1999, the Company
had approximately 15,000 individual and business accounts.
Dedicated Access: The Company also offers high speed, high bandwidth
dedicated leased lines principally for business users who desire to
connect internal computer networks to the Internet, 24 hours a day,
seven days a week. The Company offers leased line accounts to provide
Internet services to businesses at various speeds, including 56K
circuits, fractional T-1 and full T-1 lines, depending on the
customer's needs. The Company provides its customers with dedicated
leased lines and bills subscribers on a monthly basis through a
consolidated bill (which includes the phone company's charges).
Web Design and Hosting Services: Without incurring the expense of setting
up and maintaining a Web server, including in-house technical support
to design and maintain a Web site, a subscriber can rent space on a
server for an Internet presence. The Company offers Web site hosting
services for a 24-hour interactive presence on the Internet. The
Company's Web servers connect directly to the Internet via high speed
T-1 lines providing maximum bandwidth. This service includes domain
name registration, 24-hour access, file upload and/or download
capability, and statistical logs. The Company also offers Web page
design and development services and will seek to expand the scope of
such services in the future.
Co-Location Space: The Company provides a physical location at its facility
for a customer to install equipment and connect directly to the
Internet. This service provides customers with a low cost direct
connection to the Company's router. The Company provides this service
under maintenance agreements with pricing determined by the amount of
space occupied and bandwidth needed.
Subscriber Applications
The Company provides its subscribers with access to the full range of
available Internet applications, including:
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Electronic Mail: E-mail is an Internet application by which an Internet
user can exchange messages with any other user who has an E-mail
address. These messages may be text or other kinds of computer files,
such as images, computer programs or word processing documents.
Messages can be sent almost instantly to designated individuals or
groups on a mailing list.
World Wide Web: The World Wide Web is a browsing and searching system
comprised of thousands of computer servers, referred to as home pages,
each linked by a special communications protocol. This open protocol
allows Internet users to view and access text, graphics, digital video
and audio resident on a home page or to connect instantaneously to
related and linked information on the same server or other home pages.
Since the Internet is an open system, any company can create a home
page on the World Wide Web in order to provide users with product or
service information. Users can then solicit more information and, in
some cases, make purchases electronically. Software programs that
allow a user to explore the World Wide Web are referred to as
"browsers". Browsers such as Netscape, Mosaic and Microsoft Explorer,
which incorporates its own World Wide Web browser, have helped
contribute to the rapid growth of the World Wide Web. The Company
expects the World Wide Web to continue to grow rapidly as more
businesses and consumers become aware of the advantages of
communications on the Internet. As part of its service, the Company
provides each subscriber with one megabyte of Web space on the
Company's World Wide Web servers.
USENET News Groups: USENET is a network of thousands of computers attached
to the Internet that provide forums, or news groups, that allow users
to exchange information on a variety of topics of shared interest.
Internet users can seek or provide information on diverse topics
ranging from sports or other hobbies, to job opportunities, to
restaurant and travel suggestions.
Databases and Public Domain Software: An increasing number of host
computers are being connected to the Internet, which make available
growing amounts of text, graphics, audio and video information and
public domain software. For example, with an Internet connection, a
user can access commercial, educational and government databases,
newspapers, magazines, library card catalogs, industry newsletters,
weather updates, and other information.
File Transfer Protocol: The Internet can be easily used to move electronic
files (including data, programs or text) from one computer to another.
This can be very useful for parties in separate locations that
collaborate on data files. Data transferred over the Internet remains
in digital format and does not need to be reentered by a receiving
party; it can be manipulated and then re-transmitted to other Internet
users.
Network Infrastructure
Geographic Coverage: As of December 31, 1998, the Company offered Internet
access service through Frontline POPs located in 4 states.
The Company's Network: Users located within local dialing range of the
Company's POPs connect to the POP through telephone lines provided by the local
telephone company. Each of the Company's POPs generally connect to the Company's
NYC hub, or directly to the Internet, via a leased data communication line. The
equipment located in the remote POPs consists primarily of a router and terminal
servers.
In order to continue to build its base of individual dial-up subscribers,
the Company intends to continue to evaluate the need to expand existing POPs, to
open new POPs, and to place servers in remote locations to optimize network
traffic. The number and location of additional POPs that the Company may
actually open depend on such factors as subscriber demand, relative costs of
telecommunications facilities, competitive considerations, and other factors,
including the ability to provide service through other CLECs.
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The Company's network hub is currently connected to the Internet through
leased data communications lines from Internet backbone providers that carry
data traffic for Frontline and other subscribers and deliver it either to its
end destination (if that destination is connected directly to their networks) or
to the Internet gateway points where the traffic is routed onward to its
ultimate destination. As the Company grows, it will need to increase the
bandwidth of its connection to the rest of the Internet. This may be done
through increasing the bandwidth of the Company's connections through current
providers, by adding new connections through other providers, or by establishing
leased line connections directly to the Internet gateway points.
The Company maintains a Network Management Center at its Pearl River, NY
headquarters through which the Company's technical staff monitors network
traffic, service quality, and security, as well as equipment at individual POPs,
to ensure reliable Internet access. The Network Management Center is monitored
24 hours a day, 7 days a week. In addition, the Company is continuing to invest
in improved network monitoring software and hardware systems.
The Company is subject to risk from a natural disaster or other
unanticipated events at these sites, and any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company. The Company currently maintains $1,000,000 of general liability
insurance, which includes coverage for business interruption and property
damage.
Internet Access Providers and Suppliers
The Company currently relies on a limited number of suppliers to provide
Internet access via leased telecommunications lines on a cost-effective and
continuous basis. The Company has not entered into an interconnect agreement
with such supplier. Although the Company believes that it currently has
sufficient access to telecommunications networks on favorable terms and believes
that its relationship with such supplier is satisfactory, any increase in rates
charged by such supplier would materially adversely affect the Company's
operating margins. Failure to obtain continuing access to such networks would
also have a material adverse effect on the Company, including possibly requiring
the Company to significantly curtail or cease its operations.
The Company also is dependent on third-party manufacturers of hardware
components. Certain components used by the Company in providing its networking
services are acquired from only one source, including high performance routers
manufactured by Cisco Systems, Inc. and remote access servers manufactured by
3Com (formerly U.S. Robotics, Inc). In addition, in March 1999, the Company
issued purchase orders to purchase communications equipment from a major
telecommunications equipment manufacturer sufficient to build its own network
infrastructure. The transaction is subject to the negotiation of a definitive
agreement. Although the Company believes that network equipment is currently
available from numerous sources, failure by manufacturers to deliver quality
products on a timely basis or the inability to develop alternative sources if
and as required, could result in delays which could materially adversely affect
the Company's business and limit the Company's ability to expand its operations.
Marketing and Sales
Although the Company continues to provide Internet service to a growing
number of individual subscribers, its primary focus has shifted to providing
Internet service to small businesses in the northeastern United States. The
Company currently obtains new subscribers by (i) responding to inbound calls and
E-mails which are largely generated from referrals from existing subscribers,
and (ii) acquisitions of other ISPs. The Company is continuing its marketing
programs that target retention and referrals that are associated with its
current base of dial-up customers.
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In addition, the Company is transitioning it's marketing position to be the
ISP for small businesses. The branding of "frontline.net - Effortless E-commerce
& Internet Access" is underway. This slogan is intended to communicate the
Company's unique focus to potential small business customers.
The primary methods planned for targeting new small business customers
include direct response marketing programs such as radio, outbound
telemarketing, online marketing, and broadcast fax. Affinity marketing programs,
such as those with affiliates such as on-line book and record sellers, will also
be employed. In a highly competitive industry such as this one, the Company
believes that name recognition is essential. The Company's marketing personnel
are actively working to achieve this name recognition by "branding" through
radio, trade and local business print media advertising and local event
marketing. The Company believes that branding also aids in the development of a
quality VAR and affiliate channel.
The Company currently has in-house sales staff consisting of an Executive
Vice President of Marketing and Sales, a Director of Business Development, a
Sales Manager, and inbound sales representatives. The Company plans to outsource
outbound telemarketing in the second quarter of 1999.
The Company's investment in WOWFactor is an initial step in the Company's
efforts to reach small businesses. WOWFactor, with its focus on women business
owners nationally, is believed to be a potent distribution channel for the
Company's services. The Company believes that marketing, development, and
infrastructure are providing substantial economic leverage to both companies.
The Company further believes that the efficiencies are measurable and are
providing differentiation and cost advantages.
Customer Support
The Company believes that providing prompt and effective technical
assistance to its subscribers and customers is essential for retention of its
customers, cost containment and quality improvement efforts. The Company
provides network monitoring and emergency subscriber assistance services 24
hours a day, seven days a week. Regular support and technical assistance is
available 16 hours per day, 7 days per week. The Company plans to implement
24-hour technical support during 1999. In house technical personnel respond to
telephone and E-mail inquiries. All customer service is handled in-house in
order to maintain the support levels required to retain customers in a
competitive market. There can be no assurance, however, that the Company's
customer support resources will be sufficient to manage any expansion in the
Company's subscriber base. Any failure to adequately match customer support
resources to projected increases in subscribers could adversely affect the
Company.
Competition
The market for Internet access services is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
intensify in the future. The Company believes that its ability to compete
successfully is significantly affected by numerous factors, including price,
ease of use, reliability, customer support, geographic coverage and industry and
general economic trends (particularly unfavorable economic conditions adversely
affecting consumer discretionary spending). The Company's competitors include
many large companies that have substantially greater market presence and
financial, technical, marketing and other resources than the Company, including
(i) international, national and regional commercial Internet service providers,
such as Performance Systems International, Inc.; (ii) established on-line
services companies that currently offer Internet access, such as America Online,
Inc.; (iii) computer hardware and software and other technology companies, such
as IBM and Microsoft Corp.; (iv) national long distance carriers, such as AT&T
Corp., MCI Communications Corp. and Sprint Corp.; (v) regional telephone
companies; and (vi) cable operators, such as TeleCommunications, Inc.
The Company also competes with smaller ISPs in the northeastern regional
area that also focus on providing Internet access to individual subscribers and
smaller businesses. These smaller ISPs are competing for the same market share
as the Company. Such companies include SimLab Network, SageNetworks, RCN
Network, and Verio Network. The Company believes that it has an advantage over
these competitors in that it is aggressively
-10-
<PAGE>
working to expand by offering new and innovative programs such as the VAR
program and an E-commerce Program. The Company believes that, with the exception
of Verio Network, none of the above competitors offer both a VAR and an
E-commerce Program.
New competitors, including large computer hardware and software, media,
cable and telecommunications companies, have increased their focus on the
Internet access market, resulting in even greater competition for the Company.
Increased competition has resulted and could continue to result in significant
price competition, which in turn could result in significant reductions in the
average selling price of the Company's services. In addition, increased
competition for new subscribers could result in increased sales and marketing
expenses and related subscriber acquisition costs, which could materially
adversely affect the Company's potential profitability. There can be no
assurance that the Company will be able to offset the effects of any such
competition or resulting price reductions through an increase in the number of
its subscribers, higher revenue from enhanced services or cost reductions or
that the Company will have the financial resources, technical expertise or
marketing and support capabilities to compete successfully.
The market for Internet access is characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
software and service introductions. There can be no assurance that the Company
can successfully identify new product and service opportunities as they arise
and develop and bring new products and services to market in a timely manner or
that software, services or technologies developed by others will not render the
Company's services or technologies noncompetitive, obsolete or less marketable.
The Company currently does not have any proprietary applications software.
The Company's entree into the E-commerce market through its launch of the
WOWFactor site exposes it to a whole new array of competitive companies.
WOWFactor will be entering a market that is also targeted by iVillage, Oxygen
Media, womencentral.com, womenowned.com, women.com and herspace.com.
Employees
As of March 1, 1999, the Company had 40 employees in addition to its 6
executive officers. Of such employees, 20 are engaged in customer support, 4 are
engaged in sales and marketing, 1 in business development, 5 in accounting and
finance, 1 in legal and 9 in administration. The Company engages part-time
employees from time to time. None of the Company's employees is represented by a
union. The Company considers its employee relations to be good.
Item 2. Properties
The Company's executive offices are located in Pearl River, New York, where
the Company leases approximately 5,525 square feet under a lease that expires in
June 2002. The annual rental ranges from approximately $100,000 to $110,000
through the lease term. The Company also leases space (typically, less than 100
square feet) in various geographic locations to house the telecommunications
equipment for each of its POPs. Leased facilities for POPs have various
expiration dates through May 2002. Aggregate annual rentals for POPs are
approximately $17,000.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-11-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information. The Common Stock has traded since May 5, 1998 on the
NASDAQ SmallCap market under the symbol "FCCN." The following table sets forth,
for the periods indicated, the range of the high and low bid prices for the
Common Stock as reported by NASDAQ. Such prices reflect inter-dealer quotations,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
High Low
---- ---
Fiscal Year Ended December 31, 1998
Second Quarter
(commencing May 15, 1998)............................ 5.25 4.25
Third Quarter........................................ 8.125 2.125
Fourth Quarter....................................... 8.2188 2.375
Fiscal Year Ended December 31, 1999
First Quarter
(through March 15, 1999)............................. 13.625 5.625
On March 15, 1999, the last sale price for the Common Stock as reported by
NASDAQ was $11.75 per share. The number of record holders of the Company's
Common Stock was approximately 54 as of March 15, 1999. The Company believes
that there are in excess of 400 beneficial owners of its Common Stock.
Dividend Policy. To date, the Company has not declared or paid any cash
dividends on its Common Stock. The payment of dividends, if any, in the future
is within the discretion of the Board of Directors and will depend upon the
Company's earnings, its capital requirements and financial condition and other
relevant factors. The Company presently intends to retain all earnings to
finance the Company's continued growth and development of its business and does
not expect to declare or pay any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities. In October 1998, the Company
issued 10 shares of Series A Preferred Stock to shareholders of WOWFactor, Inc.
The Series A Preferred Stock is convertible into $1,000,000 in Common Stock of
the Company in July 1999, subject to a maximum of 250,000 shares of Common Stock
and a minimum of 20,000. In December 1998, the Company issued 113,364 shares of
its Common Stock to the stockholder of Webspan, Inc. The foregoing issuances
were made in reliance on Section 4(2) of the Securities Act of 1933. In March
1999, the Company sold 158,856 shares of its Common Stock to two institutional
investors in reliance on Regulation D of the Securities Act of 1933. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations, below.
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 approximately $5,800,000, after payment of underwriting discounts and
commissions, fees and offering expenses. Since May 19, 1998 (the date of the
closing of the initial public offering) through December 31, 1998, the Company
used approximately $1,482,000 of the net proceeds for acquisitions and related
expenses, $264,118 for a stock repurchase described below; $443,000 for the
repayment of indebtedness (including $185,848 to affiliates); $366,000 for
network and POP upgrades; and approximately $212,000 for marketing expenses.
-12-
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements contained herein which are not historical facts are
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Exchange Act. These "forward
looking statements" are subject to risks and uncertainties, including but not
limited to, risks associated with the Company's future growth and operating
results, the ability of the Company to successfully integrate newly acquired
subscribers, business entities and personnel into its operations, changes in
consumer preferences and demographics, technological change, competitive
factors, unfavorable general economic conditions, Year 2000 compliance and other
factors described herein. The Company assumes no obligation to update the
forward looking information to reflect actual results or changes in the factors
affecting such forward looking information. Actual results may vary
significantly from such forward looking statements.
Overview
The Company was organized in February 1997 as successor to the business of
Hobbes & Co., LLC, INET Communications Company, LLC and Sara Girl & Co., LLC
(collectively, the "Predecessor Companies"), limited liability companies
organized in May and August 1995 and July 1996 to own and operate POPs. In May
1997, the Company effected a reorganization (the "Reorganization") pursuant to
which the Predecessor Companies (i) transferred all of their assets, subject to
all of their liabilities, to the Company, (ii) principal stockholders of the
Company, exchanged their respective interests in the Predecessor Companies for
promissory notes in the aggregate principal amount of $372,137 and (iii) each of
the Predecessor Companies dissolved. The Company's financial statements include
the accounts of the Company and the Predecessor Companies.
The Company's revenues are derived primarily from providing Internet access
services to individual and business subscribers. Revenues are comprised
principally of recurring revenues from the Company's customer base,
non-recurring start-up fees for X2 56K and leased line connections and from
various ancillary services. The Company charges subscription fees, which are
billed monthly or quarterly, in advance, typically pursuant to pre-authorized
credit card accounts, or automatic bank transfers. The Company has not yet
generated any revenues from CLEC or E-commerce activities.
Monthly subscription service revenue is recognized over the period in which
services are provided. Service revenues derived from dedicated access services,
which require the installation and use of Company provided equipment at a
subscriber's location, are recognized when the service is commenced. Fee
revenues for ancillary services are recognized as services are performed.
The Company's operating results may be significantly affected by subscriber
attrition rates. Subscribers may discontinue service without penalty at any
time, and there can be no assurance that the Company will not be subject to
significant subscriber attrition.
Acceleration in the growth of the Company's subscriber base or changes in
usage patterns among subscribers may increase operating costs. Acceleration in
the growth of the subscriber base could require the Company to hire additional
personnel and increase the Company's expenses related to marketing, network
infrastructure and customer support sooner than anticipated. An increase in peak
time usage or an overall increase in usage by subscribers could adversely affect
the Company's ability to consistently meet the demand for its access services.
As a result, the Company may be required to hire additional personnel and
increase expenses related to network infrastructure capacity with minimal
corresponding increases in revenue on a per subscriber basis.
-13-
<PAGE>
Acquisitions
The Company has expanded its operations through internal growth and
acquisitions, which has placed and may continue to place a significant strain on
its management, personnel, administrative, operational, financial and other
resources. To successfully manage its growth, the Company will be required to
continue to implement and improve its information and operating systems, hire,
train and manage an increasing number of management and other personnel and
monitor its operations. There can be no assurance that the Company will be able
to successfully manage its expanded operations.
WOWFactor, Inc.
On October 9, 1998, the Company acquired all of the issued and outstanding
capital stock of WOWFactor, Inc. ("WOWFactor"), a company engaged in the
business of promoting e-commerce through its Web sites primarily for women's
businesses. The Company issued to the stockholders of WOWFactor ten shares of
newly created Series A Preferred Stock, which is convertible on July 15, 1999
into Common Stock with a market value of $1,000,000, subject to a maximum
issuance of 250,000 shares of Common Stock. In addition, to the extent that the
Company's Common Stock has a market value on July 15, 1999 of (i) less than
$3.00 per share or (ii) greater than $3.00 per share but less than $4.00 per
share, the Company agreed to issue to the WOWFactor stockholders options to
purchase up to an aggregate of 100,000 or 50,000 shares of Common Stock,
respectively.
Roxy Systems, Inc. d/b/a Magic Carpet
On October 9, 1998, the Company acquired substantially all of the assets
used in the business of Roxy Systems, Inc. d/b/a Magic Carpet in consideration
of $75,000 in cash and the assumption of approximately $61,000 of liabilities.
At the time of the acquisition, Magic Carpet was an Internet service provider
with approximately 1,000 subscribers in Orange County, New York.
US Online, Inc.
On October 23, 1998, the Company acquired assets used in the business of US
Online, Inc. ("US Online"), including a POP the Philadelphia area, and assumed
two of US Online's executory contracts for consideration of $570,000 in cash
paid upon closing. At the time of the acquisition, US Online was engaged in the
business of providing Internet access, Web hosting and leased communications
lines to approximately 3,500 subscribers in New York, New Jersey and
Pennsylvania.
Webspan, Inc.
On December 17, 1998, the Company acquired substantially all of the assets
used in the business of Webspan Communications, Inc. ("Webspan") in
consideration of $500,000 in cash and an aggregate of 113,364 shares of Common
Stock. At the time of the acquisition, Webspan was an Internet service provider
with approximately 9,000 subscribers in New York and New Jersey.
The acquisitions resulted in the Company recording intangible assets of
approximately $3,215,000 at December 31, 1998 which are being amortized over a
period of three years. See Note 4 to Notes to Consolidated Financial Statements.
Results of Operations
Comparison of the Years ended December 31, 1998 and 1997
Revenues: Revenues for the year ended December 31, 1998 were $574,964 compared
to $321,706 for the year ended December 31, 1997. The increase was attributable
to an expanded subscriber base. The Company had approximately 15,000 and 1,400
subscribers at December 31, 1998 and 1997, respectively. The increase in
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<PAGE>
subscriber base was principally due to acquisitions.
Cost of Revenues: Cost of revenues for 1998 were $651,378 compared to $ 251,298
for 1997. Cost of revenues as a percentage of revenues for 1998 was 113.3%
compared to 78.1 for 1997. The increase in cost of revenues was due to increased
communication, depreciation and technical personnel expenses incurred to support
the increased subscriber base and in anticipation of future subscriber growth.
The Company expects these costs to increase in absolute dollars as additional
subscribers are added.
Operating Expenses: Operating expenses were $1,744,029 compared to $2,077,883
for 1998 and 1997, respectively. Operating expenses for 1998 and 1997 included
non-cash compensation charges of $175,137 and $ 1,537,000, respectively.
Excluding the non-cash charges, operating expenses increased by $ 1,028,009 in
1998 compared to 1997. This increase in operating expenses was attributable to
higher advertising, payroll, professional fees and rent expenses incurred in
1998 to support the increased revenue base and in anticipation of future growth.
Management anticipates future increases in operating expenses related to
advertising, rent payroll, depreciation and professional fees.
Interest Income: Interest income net of interest expense for 1998 was $73,344
compared to net interest expense of $28,421for 1997. The increase in interest
income was due to investment of unutilized proceeds of the Company's initial
public offering.
Net Loss: The Company has incurred significant losses and anticipates that it
will continue to incur losses until sufficient revenues are generated to offset
the substantial up-front expenditures and operating costs associated with
attracting and retaining additional subscribers. For the years ended December
31, 1998 and 1997, the Company incurred net losses of $1,744,099 and $
2,037,417, respectively. There can be no assurance that the Company will be able
to attract and retain a sufficient number of subscribers to significantly
increase its revenues or ever achieve profitable operations.
Liquidity and Capital Resources
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.
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 were repaid in May 1998.
In May of 1998, the Company completed an initial public offering of its
securities and received net proceeds of approximately $5.8 million. Out of the
proceeds $443,000 was used for repayment of indebtedness (including $185,848 to
affiliates), and $264,113 was used to repurchase 231,520 shares of the Company's
Common Stock. The Company completed four acquisitions in 1998 and used
approximately $1,482,000 for the cash portion of the purchase price and related
expenses. The remaining proceeds, after meeting the Company's working capital
and capital expenditure requirements, are currently held in interest-bearing
bank accounts.
The Company's working capital at December 31, 1998 was $1,245,536 compared
to a working capital deficit of $423,369 at December 31, 1997. The increase in
working capital was due to receipt of the proceeds of the Company's initial
public offering.
In March 1999, the Company sold 158,856 shares of its Common Stock to two
investors for an aggregate purchase price of $2,000,000. The Company agreed to
include the shares (as well as the shares underlying the warrants described
below) in a registration statement filed with the Securities and Exchange
Commission by May
-15-
<PAGE>
26, 1999 and granted repricing rights with respect to the shares, subject to a
maximum issuance of 450,000 shares. The Company may, at any time prior to the
effectiveness of registration, redeem the Common Stock issued in its entirety
for a premium. The Company also issued warrants to purchase an aggregate of
21,662 shares of common stock at an exercise price of $13.849 per share. The
warrants are exercisable on or before March 25, 2002.
The Company's primary capital requirements are to fund acquisition of
subscriber bases and related Internet businesses, establish additional POPs,
install network equipment, lease space for consolidated POPs, and working
capital. To date, the Company has financed its capital requirements primarily
through issuance of debt and equity securities. The Company currently does not
have any lines of credit. The availability of capital sources is dependent upon
prevailing market conditions, interest rates, and financial condition of the
Company.
The Company's capital expenditures for 1999 are expected to range between
$300,000 to $400,000. In addition, the Company has issued purchase orders to
purchase communications equipment and professional services in the aggregate
amount of $2,000,000 from a major telecommunications equipment manufacturer. The
manufacturer would provide the necessary financing through a lease. The
transaction is subject to the negotiation and execution of a definitive
agreement. The Company believes that its available cash resources supplemented
by potential lease financing for the equipment will be sufficient to support the
working capital expenditure requirements through at least the end of 1999.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000"problem is
concerned with whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate wrong data or fail. The Year 2000
problem is pervasive and complex, as virtually every company's computer
operations will potentially be affected in some way.
The Company is currently engaged in a phased process to evaluate its
internal status with respect to the Year 2000 issue. In the first phase,
completed in the fourth quarter of 1998, Frontline conducted an assessment of
its systems including both IT systems and non-IT systems such as hardware
containing embedded technology, for Year 2000 compliance. The network systems of
the Company's operating regions are substantially similar in technology. If
issues are uncovered and resolved during the assessment of the east coast
operating region, such resolutions will be directly applied to other operating
regions.
The Company utilized certain employees in its evaluation of possible Year
2000 problems. The costs and expenses of such employees have not been material.
To date, the Company has not discovered Year 2000 issues in the course of its
assessment that would have a material adverse effect on its business, results of
operations or financial condition; however, the Company cannot assure that all
Year 2000 issues were discovered during the assessment or that it will not
discover additional Year 2000 issues that could have such an effect.
Phase two of the Company's phased process, which is expected to be
completed during the second quarter of 1999, will involve taking any needed
corrective action to bring systems into compliance and to develop a contingency
plan in the event any non-compliant critical systems remain by January 1, 2000.
The continued consolidation of the Company's operations, provisioning of
national operation systems, and standard maintenance updates is critical to the
successful completion of the Company's Year 2000 plan. As part of phase two, the
Company will attempt to quantify the impact, if any, of the failure to complete
any necessary corrective action. Although the Company cannot currently estimate
the magnitude of such impact, if systems material to its operations have not
been made Year 2000 compliant upon completion of this phase, the Year 2000 issue
could materially adversely affect the Company.
To date, the costs incurred with respect to phase two have not been
material. Future costs are difficult to estimate; however, the Company does not
currently anticipate that such costs will be material. Concurrently with
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<PAGE>
the analysis of the Company's internal systems, the Company has begun to survey
third-party entities with which it transacts business, including critical
vendors and financial institutions, for Year 2000 compliance. With respect to
the most critical vendors, the Company is in the process of evaluating the Year
2000 preparedness of its telecommunications providers, on which the Company is
reliant for the network services crucial to Web hosting and Internet
connectivity services. The Company is actively working to mitigate any potential
impact by maintaining diverse providers for such network services. However,
failure of any one provider may have a material adverse impact on the Company's
operations. The Company expects to complete this survey in the Third quarter of
1999. At this time the Company cannot estimate the effect, if any, that
non-compliant systems at these entities could have on the Company, and the
Company cannot assure that the impact, if any, will not be material.
Effect of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." ("SFAS No. 133"), which requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. 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.
Item 7. Financial Statements.
The financial statements appear in a separate section of this report
following Part III.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
1
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stephen J. Cole-Hatchard 41 Chairman of the Board, Chief Executive Officer and
President
Nicko Feinberg 27 Chief Information Officer, Executive Vice President of
Technology and Director
Michael Olbermann 42 Chief Operating Officer, Executive Vice President and
Director
Vasan Thatham 41 Chief Financial Officer and Vice President
Amy Wagner-Mele 30 Executive Vice President, Secretary and General Counsel
Ronald C. Signore 38 Director
Ronald Shapss 52 Director
Margaret McGillin 37 Executive Vice President of Sales and Marketing
</TABLE>
Stephen J. Cole-Hatchard has been Chairman, Chief Executive Officer and
President of the Company since August 1997. Mr. Cole-Hatchard was Vice President
of Finance of the Company from February 1997 to August 1997 and has been a
director of the Company since February 1997. Prior to joining the Company, Mr.
Cole-Hatchard was Chief Financial Officer for Hudson Technologies, Inc. from
1993 to 1997. A 1989 cum laude graduate of Pace Law School, Mr. Cole-Hatchard is
a member of the bar of the State of New York.
Nicko Feinberg has been a director and Vice President of Technology of the
Company since November 1996 and Chief Information Officer since August 1997.
From April 1994 to October 1996, Mr. Feinberg was a Sales Manager and, from
April 1991 to April 1994, a Sales Account Executive for Microage Computer
Outlet, Inc., a company engaged in computer sales and training.
Michael Olbermann has been Chief Operating Officer since September 1997 and
a director of the Company since February 1997. Mr. Olbermann was also Vice
President of Business Development from February 1997 until September 1997. Mr.
Olbermann has owned and operated Rock House Construction Co., Inc., a company
engaged in commercial and residential construction, since 1986.
Vasan Thatham has been Vice President and Chief Financial Officer of the
Company since February, 1999. Prior to joining the Company, from 1994 through
1998. Mr. Thatham was Vice President and Chief Financial Officer of Esquire
Communications Ltd., a company engaged in providing legal support services. From
1987 to 1993, Mr. Thatham was comptroller and ultimately Chief Financial Officer
of Strings Ltd., a specialty retail chain. From 1978 to 1987, Mr. Thatham held
various positions with Ernst & Young in Kuwait and KMPG Peat Marwick in India.
Mr. Thatham is a chartered accountant under the laws of India.
Amy Wagner-Mele has been Vice President, Secretary and Corporate Counsel of
the Company since
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<PAGE>
September 1998, and was recently promoted to Executive Vice President, General
Counsel. Prior to joining the Company, Ms. Wagner-Mele was an associate with the
New York office of Winston & Strawn, an international Corporate/litigation firm,
where she litigated securities actions, contract disputes and appellate matters.
From 1993 to 1997, Ms. Wagner-Mele was an associate with Podvey, Sachs, Meanor,
Catenacci, Hildner & Cocoziello, P.C. in Newark, New Jersey, where she handled a
variety of corporate litigation matters, from filing through appeal. Ms.
Wagner-Mele received her juris doctor from the New York University School of Law
in 1993. She received her bachelor's degree, magna cum laude, from the
University of Delaware in 1990. She is admitted to the New York and New Jersey
bars.
Ronald C. Signore has been a director of the Company since December 1997.
Mr. Signore, a Certified Public Accountant licensed in New York and New Jersey,
has been a partner in the accounting firm of Robert Gray & Co., LLP, for more
than the past five years.
Ronald Shapss has been a director of the Company since December 1997. Mr.
Shapss is the founder of Ronald Shapss Corporate Services, Inc., ("RSCS") a
company engaged in consolidating fragmented industries since 1992. RSCS was
instrumental in facilitating the roll-up of several companies into such entities
as U.S. Delivery, Inc., Consolidated Delivery & Logistics, Inc. and Corestaff,
Inc. Mr. Shapss was also the founder of Coach USA, Inc. and is presently on the
advisory boards of Consolidated Partners Founding Fund, L.L.C., and 1+ USA,
Inc., which founded Advanced Communications Group, Inc. (ADG), a CLEC which
trades on the New York Stock Exchange. A 1970 graduate of Brooklyn Law School,
Mr. Shapss is a member of the New York bar.
Margaret McGillin has been Vice President of Marketing and Sales of the
Company since October 1998 and was recently promoted to Executive Vice President
of Marketing and Sales. She is also President of WOWFactor. Ms. McGillin earned
her MBA from The Leonard N. Stern School of Business at New York University and
a bachelor's degree from Northeastern University with degrees in marketing,
finance and international business. During her 15 year career, Ms. McGillin has
served as Account Director for Modem Media, and as District Product Manager for
AT &T, before founding WOWFactor, Inc. in 1995. Ms. McGillin is an active
lecturer and panelist on issues concerning women in marketing and technology.
Her memberships include: Women in New Media, Women, Inc., The National
Association of Female Executives, The National Association of Women Business
Owners, George Dean's 50/50 by 2000, and the New York New Media Association.
All directors hold office until the next annual meeting of stockholders for
the ensuing year or until their successors have been duly elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. The Company has established an Audit Committee of the
Board of Directors consisting of Messrs. Signore and Shapss.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers, directors and
persons who own more than 10% of a registered class of our equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% shareholders are
required by Securities and Exchange Commission regulations to furnish us with
copies of all forms that they files pursuant to Section 16(a).
Based solely upon our review of the copies of such forms that we received,
we believe that, during the year ended December 31, 1998, all filing
requirements applicable to our officers, directors, and greater than 10%
shareholders were complied with.
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<PAGE>
Item 10. Executive Compensation.
Executive Compensation
The following table sets forth the compensation paid to the Company's Chief
Executive Officer (the "Named Executive") for the fiscal year ended December 31,
1998. No other executive officer of the Company received aggregate compensation
which exceeded $100,000 during such year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards($)
----------------------------------- -----------------------
Name and Principal Position Year Salary($) Bonus($) Other Annual Restricted Securities
Compensation Stock Award Underlying
Options/
SARs(#)
<S> <C> <C> <C>
Stephen J. Cole-Hatchard, 1998 $34,846 79,000
Chief Executive Officer ======= =====
</TABLE>
The following table discloses options granted during the fiscal year ended
December 31, 1998 to the Named Executive:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN FISCAL YEAR ENDING DECEMBER 31, 1998
Number of
Shares Underlying % of Total Options Granted to Exercise Price
Name Options Granted Employees in Fiscal Year ($/share) Expiration Date
- ----------------- ----------------- ----------------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Stephen J. Cole 79,000 18.54% 2.50 10/08/03
Hatchard ======
</TABLE>
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<PAGE>
The following table sets forth information concerning the number of options
owned by the Named Executive and the value of any in-the-money unexercised
options as of December 31, 1998. No options were exercised by the Named
Executive during fiscal 1998:
<TABLE>
<CAPTION>
Aggregated Option Exercises
And Fiscal Year-End Option Values
---------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Options at December 31,
December 31, 1998 1998(1)
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Stephen J. Cole- 79,000 -0- $333,301 -0-
- -Hatchard
</TABLE>
- ----------
(1) Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year end
market value of our common stock. An option is "in-the-money" if the fiscal
year end fair market value of our common stock exceeds the option exercise
price. The closing sale price of our common stock on December 31, 1998 was
$6.719.
Employment Agreements
The Company has entered into three-year employment agreements with each of
Messrs. Feinberg, Cole-Hatchard and Olbermann which provide for an annual base
compensation of not less than $88,000, $45,000, and $88,000, respectively, and
such bonuses as the Board of Directors may, in its sole discretion, from time to
time determine. The Company also entered into a three-year employment agreement
with Margaret M. McGillin pursuant to which Ms. McGillin agreed to serve as
Executive Vice President of Sales of the Company at a salary of $82,000 per
annum, for year one, and not less than $98,000 per annum for year two and
thereafter. The Company also entered into a three-year employment agreement with
Amy Wagner-Mele pursuant to which Ms. Wagner-Mele agreed to serve as Corporate
Counsel at a salary of not less than $98,000 per annum. The employment
agreements provide for employment on a full-time basis and contain a provision
that the employee will not compete or engage in a business competitive with the
current or anticipated business of the Company during the term of the employment
agreement and for a period of two years thereafter.
Director Compensation
The Company does not currently pay its employee directors any fees for
attending Board meetings. The Company pays non-employee directors $3,000 per
annum for attending Board Meetings.
In December 1997, the Company entered into a consulting agreement with Mr.
Shapss which provides for Mr. Shapss to assist the Company with mergers and
acquisitions. In consideration of such services, the Company issued to Mr.
Shapss 100,000 shares of Common Stock and non-plan options to purchase 80,000
shares of Common
-21-
<PAGE>
Stock at an exercise price of $2.00 per share. The Company also agreed to pay to
Mr. Shapss $2,000 per month through May 1999.
1997 Stock Option Plan
In February 1997, the Board of Directors and stockholders of the Company
adopted the 1997 Stock Option Plan (the "Plan"), pursuant to which 500,000
shares of Common Stock are reserved for issuance upon exercise of options. The
Plan is designed to serve as an incentive for retaining qualified and competent
employees, directors and consultants.
The Company's Board of Directors, or a committee thereof, administers the
Plan and is authorized, in its discretion, to grant options thereunder to all
eligible employees of the Company, including officers and directors (whether or
not employees) of, and consultants to, the Company. The Plan provides for the
granting of both "incentive stock options" (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended) and non-qualified stock options.
Options can be granted under the Plan on such terms and at such prices as
determined by the Board of Directors, or a committee thereof, except that the
per share exercise price of options will not be less than the fair market value
of the Common Stock on the date of grant. In the case of an incentive stock
option granted to a stockholder who owns stock of the Company possessing more
than 10% of the total combined voting power of all classes of stock ("10%
stockholder"), the per share exercise price will not be less than 110% of such
fair market value. The aggregate fair market value (determined on the date of
grant) of the shares covered by incentive stock options granted under the Plan
that become exercisable by a grantee for the first time in any calendar year is
subject to a $100,000 limit.
Options granted under the Plan will be exercisable during the period or
periods specified in each option agreement. Options granted under the Plan are
not exercisable after the expiration of ten years from the date of grant (five
years in the case of incentive stock options granted to a 10% stockholder) and
are not transferable other than by will or by the laws of descent and
distribution.
As of December 31, 1998, the Company has granted options to purchase an
aggregate of 583,000 shares of Common Stock (net of forfeitures) under the Plan
at an exercise price ranging from $2.00 to $5.18 per share; 83,000 of the
options are subject to shareholder approval prior to issuance.
-22-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of March 15, 1999
relating to the beneficial ownership of shares of Common Stock by: (i) each
person or entity who is known by the Company to own beneficially five percent or
more of the outstanding Common Stock; (ii) each of the Company's directors; and
(iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name of Number of Shares Percentage of Shares
Beneficial Owner Beneficially Owned (1) Beneficially Owned
- ----------------------------------------- ---------------------- --------------------
<S> <C> <C>
Nicko Feinberg 296,000(2) 9.1%
Stephen J. Cole-Hatchard 296,000(3) 8.9%
Michael Olbermann 228,000(2) 7.0%
Ronald Shapss 200,000 6.2%
Ronald Signore 67,400(4) 2.0%
All directors and executive officers as a 1,122,400(5) 32.0%
group (eight persons)
</TABLE>
(1) The Company believes that all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock
beneficially owned by them.
(2) Includes options to purchase 40,000 shares of Common Stock.
(3) Includes 144,000 shares held by the Cole-Hatchard Family Limited
Partnership, of which Mr. Cole-Hatchard is the general partner, and optins
to purchase 99,000 shares of Common Stock. Does not include 20,000 shares
held by Mr. Cole-Hatchard's mother and brother and warrants to purchase
64,000 shares held by Mr. Cole-Hatchard's mother.
(4) Includes (i) warrants to purchase 39,200 shares of Common Stock held by The
Rough Group, of which Mr. Signore is a general partner, (ii) 3,200 shares
of Common Stock held by The Rough Group and (iii) options to purchase
25,000 shares of Common Stock held by Mr. Signore. Mr. Signore disclaims
beneficial ownership of other securities held by The Rough Group.
(5) Includes options and warrants to purchase 278,200 shares of Common Stock.
-23-
<PAGE>
Item 12. Certain Relationships and Related Transactions.
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. Nicko Feinberg and Stephen J. Cole-Hatchard, officers
and directors of the Company, and Mr. Michael Char, a former officer and
director of the Company. Included in such indebtedness was $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 efforts 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 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 (a) satisfy
$240,000 of existing obligations due to Mr. Char (including $15,000 of legal
fees) and (b) repurchase 231,520 shares from Mr. Char.
In May 1998, the Company repaid $20,000 of indebtedness to each of Messrs.
Cole-Hatchard and Feinberg. The balance of the indebtedness owed to Messrs.
Cole-Hatchard and Feinberg of $46,800 and $121,800, respectively (aggregating
$168,600) bears interest at the rate of 8% per annum.
Mr. Cole-Hatchard's mother and brother purchased 12,000 shares and 8,000
shares, respectively, at $2.00 per share, pursuant to the Company's private
placement in May 1997. The Rough Group, a general partnership of which Mr.
Signore, a director of the Company, is a general partner, purchased 16,000
shares pursuant to the Company's private placement in May 1997. In addition, Mr.
Cole-Hatchard's mother and The Rough Group purchased $40,000 and $85,000,
respectively, principal amount of promissory notes pursuant to the Company's
December 1997 private placement, and received warrants to purchase 64,000 and
196,000 shares, respectively, at an exercise price of $5.00 per share. The notes
were repaid in May 1998.
In August 1998, Mr. Cole-Hatchard borrowed $46,800 from the Company
evidenced by a demand promissory note bearing interest at the rate of 8% per
annum.
In September 1998, Mr. Feinberg borrowed $55,000 from the Company evidenced
by a demand promissory note bearing interest at the rate of 8% per annum. In
October 1998, Mr. Feinberg borrowed an additional $42,000 on the same terms.
The Company believes that the foregoing transactions were on terms no less
favorable than those that could have been obtained from unaffiliated third
parties. All future transactions between the Company and its affiliates will be
on terms no less favorable than would be obtained from unaffiliated third
parties.
-24-
<PAGE>
Item 13. Exhibits, Lists and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of the Company.+
3.2 By-Laws of the Company.+
4.1 Certificate of Designation of Series A Preferred Stock.++
10.1 Employment Agreements with Messrs. Cole-Hatchard, Feinberg and
Olbermann.+
10.2 Employment Agreement with Ms. Margaret McGillin.++
10.3 Stock Purchase Agreement dated as of October 1, 1998 by and among the
Company, WOWFactor, Inc. and the WOWFactor stockholders.++
10.4 Form of Registration Rights Agreement among the Company and the
WOWFactor stockholders.++
10.5 Asset Purchase Agreement dated as of October 9, 1998 by and between
the Company and Roxy Systems, Inc. d/b/a Magic Carpet.++
10.6 Letter Offer to Purchase Substantially all of the Assets of US
Online, Inc.+++
10.7 Asset Purchase Agreement dated as of November 24, 1998 by and among
the Company, Webspan, and the sole stockholder of Webspan.++++
10.8 Amendment to Asset Purchase Agreement dated December 17, 1998 by and
among the Company, Webspan, and the sole stockholder of
Webspan.++++
10.9 Form of Registration Rights Agreement among the Company and the sole
stockholder of Webspan.++++
10.10 1997 Stock Option Plan of the Company.+
10.11 Stock Purchase Agreement dated March 25, 1999, with Exhibit A
10.12 Registration Rights Agreement dated March 25, 1999, with Exhibit A
23.1 Subsidiaries
27.1 Financial Data Schedule (SEC use only).
- ----------
+ Incorporated by reference to the applicable exhibit contained in the
Company's Registration Statement on Form SB-2 (file no. 333-34115).
++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated October 9, 1998.
+++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated October 23, 1998.
-25-
<PAGE>
++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated December 17, 1998.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1998:
Form 8-K dated October 9, 1998 (as amended on Form 8-K/A dated December 23,
1998) relating to the acquisition of WowFactor and Magic Carpet.
Form 8-K dated October 23, 1998 (as amended on Form 8-K/A dated January 6,
1999) relating to acquisition of US Online, Inc.
Form 8-K dated December 17, 1998 (as amended on Form 8-K/A dated March 2,
1999) relating to acquisition of Webspan Communications, Inc.
-26-
<PAGE>
Frontline Communications Corporation
Contents
================================================================================
Report of independent certified public accountants F-2
Consolidated financial statements:
Balance sheet F-3
Statements of operations F-4
Statements of stockholders' equity (deficit) F-5
Statements of cash flows F-6
Notes to consolidated financial statements F-7 - F-21
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors of
Frontline Communications Corporation
We have audited the accompanying consolidated balance sheet of Frontline
Communications Corporation (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended December 31, 1997 and 1998. 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 audits 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1998, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
New York, New York
March 12, 1999, except for Note 13 which is as of March 26, 1999.
F-2
<PAGE>
Frontline Communications Corporation
Consolidated Balance Sheet
================================================================================
<TABLE>
<CAPTION>
December 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Current:
Cash and cash equivalents $ 1,994,711
Accounts receivable, less allowances for doubtful accounts of $5,526 3,327
Notes receivable from stockholders (Note 3) 143,800
Prepaid expenses and other 58,281
- ------------------------------------------------------------------------------------------------------------
Total current assets 2,200,119
Property and equipment, net (Note 5) 981,785
Intangibles, net (Note 4) 3,081,326
Other 23,173
- ------------------------------------------------------------------------------------------------------------
$ 6,286,403
============================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 163,805
Accrued expenses 137,357
Deferred revenue 614,852
Current portion of capitalized lease obligations (Note 7) 38,569
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 954,583
Notes payable to stockholders (Note 6) 168,600
Capitalized lease obligations - net of current portion (Note 7) 115,833
- ------------------------------------------------------------------------------------------------------------
Total liabilities 1,239,016
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 8, 9 and 12)
Stockholders' equity (Notes 1, 2, 9, 10 and 12):
Preferred stock, $.01 par value, 1,000,000 shares authorized,
10 issued and outstanding --
Common stock, $.01 par value, 10,000,000 shares authorized,
3,361,364 issued 33,614
Additional paid-in capital 9,121,533
Accumulated deficit (3,843,647)
- ------------------------------------------------------------------------------------------------------------
5,311,500
Treasury stock, at cost, 231,520 shares (264,113)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,047,387
- ------------------------------------------------------------------------------------------------------------
$ 6,286,403
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Frontline Communications Corporation
Consolidated Statements of Operations
================================================================================
Year ended December 31, 1997 1998
- --------------------------------------------------------------------------------
Revenues $ 321,706 $ 574,964
Cost of revenues 251,928 651,378
- --------------------------------------------------------------------------------
Gross profit (loss) 69,778 (76,414)
Operating expenses:
Selling, general and administrative 540,883 1,744,029
Non-cash special compensation charge (Note 1) 1,537,000 --
- --------------------------------------------------------------------------------
Loss from operations (2,008,105) (1,820,443)
Other income (expense):
Interest income -- 108,194
Interest expense (28,421) (31,850)
Other (891) --
- --------------------------------------------------------------------------------
Net loss $(2,037,417) $(1,744,099)
================================================================================
Loss per share - basic and diluted $ (1.67) $ (.72)
================================================================================
Weighted average number of shares outstanding -
basic and diluted 1,218,000 2,435,035
================================================================================
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Frontline Communications Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
====================================================================================================================================
Years ended December 31, 1997 and 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Additional Stock
-------------------------- -------------------------- paid-in Accumulated subscriptions
Shares Amount Shares Amount capital deficit receivable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 -- $-- -- $ -- $ 6,000 $ (62,131) $ --
Frontline reorganization
(Note 2) -- -- 640,000 6,400 (325,000) -- --
Shares issued as compensation
(Note 9) -- -- 100,000 1,000 199,000 -- --
Shares issued as compensation
(Note 1) -- -- 820,000 8,200 1,230,000 -- (6,000)
Officer salary contributed to
capital -- -- -- -- 3,000 -- --
Private placement sale of
shares at $2 per share -- -- 200,000 2,000 398,000 -- --
Common stock options issued for
services (Note 9) -- -- -- -- 108,000 -- --
Warrants issue to debtholders
(Note 6) -- -- -- -- 24,000 -- --
Recapitalization (4-for-5
reverse split)(Note 10) -- -- (352,000) (3,520) 3,520 -- --
Net loss -- -- -- -- -- (2,037,417) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,408,000 14,080 1,646,520 (2,099,548) (6,000)
Payment of stock subscription -- -- -- -- -- -- 6,000
Initial public offering of
common stock, net (Note 1) -- -- 1,840,000 18,400 5,792,005 -- --
Purchase of treasury stock, at
cost (231,520 shares)
(Note 12) -- -- -- -- -- -- --
Common stock options issued for
services (Note 9) -- -- -- -- 175,137 -- --
Preferred shares issued for
acquisition of subsidiary
(Note 4) 10 -- -- -- 1,000,000 -- --
Shares issued to acquire
business (Note 4) -- -- 113,364 1,134 507,871 -- --
Net loss -- -- -- -- -- (1,744,099) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 10 $-- 3,361,364 $33,614 $9,121,533 $(3,843,647) $ --
====================================================================================================================================
<CAPTION>
- --------------------------------------------------------------
Total
Treasury stockholders'
stock, at equity
cost (deficit)
- --------------------------------------------------------------
Balance, December 31, 1996 $ -- $ (56,131)
Frontline reorganization
(Note 2) -- (318,600)
Shares issued as compensation
(Note 9) -- 200,000
Shares issued as compensation
(Note 1) -- 1,232,200
Officer salary contributed to
capital -- 3,000
Private placement sale of
shares at $2 per share -- 400,000
Common stock options issued for
services (Note 9) -- 108,000
Warrants issue to debtholders
(Note 6) -- 24,000
Recapitalization (4-for-5
reverse split) (Note 10) -- --
Net loss -- (2,037,417)
- --------------------------------------------------------------
Balance, December 31, 1997 -- (444,948)
Payment of stock subscription -- 6,000
Initial public offering of
common stock, net (Note 1) -- 5,810,405
Purchase of treasury stock, at
cost (231,520 shares)
(Note 12) (264,113) (264,113)
Common stock options issued for
services (Note 9) -- 175,137
Preferred shares issued for
acquisition of subsidiary
(Note 4) -- 1,000,000
Shares issued to acquire
business (Note 4) -- 509,005
Net loss -- (1,744,099)
- --------------------------------------------------------------
Balance, December 31, 1998 $(264,113) $ 5,047,387
==============================================================
</TABLE>
F-5
See accompanying notes to consolidated financial statements.
<PAGE>
Frontline Communications Corporation
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1997 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,037,417) $(1,744,099)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 44,558 220,575
Officer salary contributed to capital 3,000 --
Noncash compensation charge 1,537,000 175,137
Allowance for doubtful accounts 16,666 (11,140)
Accounts receivable write-off 8,605 --
Changes in assets and liabilities, net of effects from
acquisitions in 1998:
Accounts receivable (35,169) 25,561
Notes receivable from stockholders -- (143,800)
Prepaid expenses and other (5,479) (49,754)
Other assets (16,354) (5,206)
Accounts payable and accrued expenses 300,816 (58,012)
Interest due on stockholders loans 19,452 --
Deferred revenue 24,385 46,467
- ----------------------------------------------------------------------------------------------------
Net cash used in operating activities (139,937) (1,544,271)
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (176,304) (423,297)
Acquisition of businesses -- (1,481,820)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (176,304) (1,905,117)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of stockholder loans (45,266) (378,989)
Proceeds from stockholder loans, net 230,000 --
Proceeds from sale of common stock 400,000 6,000
Proceeds from initial public offering of common stock -- 6,041,476
Registration costs (231,071) --
Payments to acquire treasury stock -- (264,113)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 353,663 5,404,374
- ----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 37,422 1,954,986
Cash and cash equivalents, beginning of year 2,303 39,725
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 39,725 $ 1,994,711
====================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,451 $ 31,000
Noncash investing and financing activities:
Common stock issued for reduction of stockholder loans 9,600 --
Notes payable to stockholders issued as distributions 325,000 --
Capital lease obligations incurred -- 207,725
Preferred shares issued to acquire subsidiaries -- 1,000,000
Common stock issued to acquire business -- 509,005
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
1. Summary of Business
Significant
Accounting Frontline Communications Corporation ("Frontline" or the
Policies "Company") is an internet service provider and
Competitive Local Exchange Carrier ("CLEC") that offers
E-commerce and internet access to individual and business
subscribers located in the Northeast United States.
Frontline consummated an initial public offering ("IPO")
during May 1998 and raised net proceeds of $5,810,405
(see Note 10).
Reorganization and Principles of Combination
The consolidated financial statements include the
accounts of Hobbes & Co., LLC ("Hobbes"), INET
Communications Company, LLC ("INET") and Sarah Girl &
Co., LLC ("Sarah 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
consolidation has been accounted for as if the acquirer
was Hobbes. With respect to the acquisition of INET, the
acquisition has been accounted for as a consolidation of
entities under common control in a manner similar to a
pooling of interests and reflects the consolidated
financial position, operating results and cash flows of
Hobbes and INET as if they had been consolidated for all
periods presented. With respect to Sarah Girl and
Frontline, the business consolidation has been accounted
for using purchase accounting, which resulted in the
recording of a special non-cash charge of $1,230,000. The
non-cash 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. An additional non-cash
charge was taken for the value of services on stock
issued to a director. The Predecessor Companies were
dissolved and Frontline is the continuing legal entity.
All intercompany accounts and transactions have been
eliminated.
F-7
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly-owned
subsidiaries. Intercompany balances and transactions have
been eliminated.
Property, Equipment and Depreciation
Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation
and amortization is computed over the estimated useful
lives of the assets using the straight-line method.
The following estimated useful lives are applied in the
computation of depreciation and amortization:
Years
---------------------------------------------------------
Computer and office equipment 3-5
Furniture and fixtures 5
Leasehold improvements Lease term
=========================================================
Intangible Assets
Intangible assets include goodwill, the excess of the
cost of purchased businesses over the fair value of the
net acquired, and purchased customer bases. Amortization
is computed using the straight-line basis over three
years, the expected benefit period.
Revenue Recognition
Monthly subscription service revenue is recognized over
the period in which services are provided. Service
revenues derived from dedicated access services, which
require the installation and use of Company provided
equipment at subscriber's location, are recognized when
the service is commenced. Fee revenues for ancillary
services are recognized as services are performed.
Deferred revenue, represents pre-paid access fees by
subscriber.
Long-Lived Assets
Long-Lived assets, such as property and equipment,
intangibles and customer bases, 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 these assets. When any such
impairment exists, the related assets will be written
down to fair value. No write downs were necessary for the
years ended December 31, 1997 and 1998.
F-8
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Income Taxes
Deferred income taxes are provided on differences between
the financial reporting and income tax bases of assets
and liabilities based upon statutory tax rates enacted
for future periods. Valuation allowances are established
when necessary to reduce deferred tax assets to the
amount expected to be realized.
Use of Estimates
In preparing the consolidated financial statements in
conformity with generally accepted accounting principles,
management is required 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 consolidated financial
statements, and the reported amount of revenues and
expenses during the reporting period. Actual results
could differ from those estimates. Many of the Company's
estimates and assumptions used in the financial
statements relate to the Company's industry which are
subject to rapid technological change. It is reasonably
possible that changes may occur in the near term that
would affect Managements' estimates with respect to the
carrying values of plant and equipment, intangibles and
customer bases.
Credit Risk
Financial instruments which potentially subject the
Company to concentrations of credit risk consist
principally of temporary cash investments and trade
accounts receivable. The Company's cash investments are
placed with high credit quality financial institutions
and may exceed the amount of federal deposit insurance.
Concentrations of credit risk with respect to trade
receivables are limited due to the large number of
customers comprising the Company's customer base.
Cash and Cash Equivalents
The Company considers all highly liquid money market
instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalent
instruments were $-0- and $1,766,267 at December 31, 1997
and 1998, respectively.
F-9
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Financial Instruments
The carrying amounts of financial instruments including
cash, accounts receivable, notes receivable from (payable
to) stockholders and accounts payable approximated fair
value as of December 31, 1998, because of the relatively
short maturity of these instruments.
Stock-Based Compensation
The Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation"
establishes a fair value method for accounting for
stock-based compensation plans either through recognition
or disclosure. The Company adopted the employee
stock-based compensation provisions of SFAS No. 123 by
disclosing the pro forma net income and pro forma net
income per share amounts assuming the fair value method.
Stock arrangements with non-employees, if applicable, are
recorded at fair value.
Advertising
All costs associated with advertising services are
expensed in the period incurred. Advertising expense was
approximately $28,000 and $ 136,000 for the years ended
December 31, 1997 and 1998, respectively.
Loss Per Share
The Company has adopted SFAS No. 128, "Earnings per
Share," which provides for the calculation of "basic" and
"diluted" earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income
available to common shareholders by the weighted average
number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which
they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants.
Diluted earnings per share amounts have not been reported
becuase the Company has a net loss and the impact of the
assumed conversion of preferred stock and exercise of
stock options and warrants would be anti-dilutive.
F-10
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Effect of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging
Activities." ("SFAS No. 133"), which requires companies
to recognize all derivatives as either assets or
liabilities in the statement of financial position and
measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999.
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.
2. Reorganization On May 30, 1997, the Predecessor Companies were acquired
by the Company by issuing three notes aggregating
$325,000 (see Note 5) for all the membership interest in
the Predecessor Companies. For accounting purposes Hobbes
has been considered to be the acquirer. As a result, the
business consolidation of Hobbes and INET has been
accounted for as a consolidation of entities under common
control in a manner similar to a pooling of interests.
The business consolidation with Sarah Girl and Frontline
have been accounted for as purchases. The net assets and
operations of Sarah Girl and Frontline are not material
to the Company's consolidation financial statements.
Notes payable to the members of the Predecessor Companies
are accounted for as distributions in the accompanying
consolidated statements of stockholders' equity.
3. Notes Receivable During August and October 1998, the Company made advances
from aggregating $143,800 to two of its stockholders. The
Stockholders notes are due on demand and bear interest at 8% which is
offset against the interest payable owing to the
stockholders (see Note 6).
F-11
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
4. Acquisition of During 1998, the Company made the following acquisitions
Businesses all of which were accounted for using the purchase method
of accounting with the results of each acquisition
included in the consolidated financial statements from
the respective acquisition date. The acquisition resulted
in intangibles of $3,215,226, which are being amortized
over their expected benefit period of 3 years.
At December 31, 1998, intangibles were as follows:
<TABLE>
<CAPTION>
Customer
Goodwill bases Total
-------------------------------------------------------------------
<S> <C> <C> <C>
Intangibles $1,143,998 $2,071,228 $3,215,226
Less: Accumulated
amortization 88,979 44,921 133,900
-------------------------------------------------------------------
$1,055,019 $2,026,307 $3,081,326
===================================================================
</TABLE>
WOWFactor
On October 9, 1998, the Company acquired all of the
issued and outstanding capital stock of WOWFactor, Inc.
("WOWFactor"), a New Jersey corporation engaged in the
business of promoting e-commerce through its web sites
primarily for women's businesses. The Company issued to
the stockholders of WOWFactor ten shares of newly created
Series A preferred stock, which is convertible on July
15, 1999 into common stock with a market value of
$1,000,000, subject to a maximum issuance of 250,000
shares. In addition, to the extent that the Company's
common stock has a market value on July 15, 1999 of (i)
less than $3.00 per share or (ii) greater than $3.00 per
share but less than $4.00 per share, the Company agreed
to issue to the WOWFactor stockholders options to
purchase up to an aggregate of 100,000 or 50,000 shares,
respectively.
F-12
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Roxy Systems d/b/a Magic Carpet
On October 9, 1998, the Company acquired substantially
all of the assets used in the business of Roxy Systems,
Inc. d/b/a Magic Carpet ("Roxy") in consideration of
$75,000 in cash and the assumption of approximately
$60,000 of liabilities. Roxy is an internet service
provider which, at the date of acquisition, had
approximately 1,000 individual and business subscribers
in Orange County, New York.
US Online
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 US Online, Inc. ("US Online"), including
a point of presence in the Philadelphia area, and assumed
two of US Online's executory contracts for consideration
of $570,000 in cash paid upon closing. At the time of the
acquisition, US Online was engaged in the business of
providing internet access, web hosting and leased
communications lines to approximately 3,500 subscribers
in New York, New Jersey and Pennsylvania.
Webspan
On December 17, 1998, the Company acquired substantially
all of the assets used in the business of Webspan
Communications, Inc. ("Webspan") in consideration of
$500,000 in cash, assumption of approximately $544,000 of
liabilities and an aggregate of 113,364 shares of the
Company's common stock (approximately $509,000). At the
time of the acquisition, Webspan was an internet service
provider with approximately 9,000 individual and business
subscribers in New York and New Jersey.
F-13
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
The following pro forma consolidated financial
information has been prepared to reflect the 1998
acquisitions. The pro forma financial information is
based on the historical financial statements of the
Company and those of the acquired businesses. The
accompanying pro forma operating statements are presented
as if the acquisitions occurred on January 1, 1997. The
pro forma financial information is unaudited and is not
necessarily indicative of what the actual results of
operations of the Company would have been assuming the
acquisitions had been completed as of January 1, 1997,
and neither is it necessarily indicative of the results
of operations for future periods.
<TABLE>
<CAPTION>
Year ended December 31, 1997 1998
-----------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Revenues $ 2,383,063 $ 2,635,923
Net loss (5,320,805) (4,307,399)
=======================================================================
Net loss per share - basic and diluted $ (3.85) $ (1.69)
=======================================================================
</TABLE>
The above unaudited pro forma consolidated financial
information has been adjusted to reflect amortization of
intangibles as generated by the acquisitions over a
three-year period, WOWFactor officer's employment
agreement entered into at the date of acquisition, the
conversion of the preferred shares issued in the
WOWFactor acquisition and the issuance of 113,364 common
shares in the Webspan acquisition.
F-14
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
5. Property and Property and equipment consisted of the following:
Equipment
December 31, 1998
---------------------------------------------------------
Computer and office equipment $1,070,492
Furniture and fixtures 38,705
Leasehold improvements 13,783
---------------------------------------------------------
1,122,980
Less: Accumulated depreciation and
amortization 141,195
---------------------------------------------------------
$ 981,785
=========================================================
6. Notes Payable On May 30, 1997, the Company issued notes aggregating
Stockholders $372,137 to three of its stockholders related to the
reorganization discussed in Note 2, and certain advances
made to the Company since inception. The notes bear
interest at 8%. To date $203,537 has been repaid and
$168,600 will be deferred until such time as the Company
achieves $1.9 million in pre-tax earnings, but in no
event sooner than May 2000.
7. Capital Lease The Company leases computer equipment under capital
Obligations leases. The assets acquired under capital leases have a
cost of $207,725 and accumulated depreciation of $-0- as
of December 31, 1998.
F-15
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
The following is a schedule of future minimum lease
payments under capitalized leases, together with the
present value of the net minimum lease payments at
December 31, 1998.
---------------------------------------------------------
Payments for the year ending:
1999 $ 75,745
2000 75,745
2001 75,745
---------------------------------------------------------
Total minimum lease payments 227,235
Less: Amount representing interest 72,833
---------------------------------------------------------
Present value of net minimum lease payments 154,402
Less: Current portion 38,569
---------------------------------------------------------
Long-term lease obligations $115,833
=========================================================
8. Commitments and Leases
Contingencies
The Company rents office space and equipment under
operating lease agreements expiring at various dates
through 2002.
Future minimum rental payments required under operating
leases as of December 31, 1998 are approximately as
follows:
---------------------------------------------------------
1999 $121,000
2000 119,000
2001 118,000
2002 57,000
---------------------------------------------------------
Total $415,000
=========================================================
Rental expense was $69,981 and $134,249 for the years
ended December 31, 1997 and 1998, respectively.
F-16
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
The Company has entered into three-year employment
agreements with certain officers and employees which
provide for aggregate annual base compensation of
approximately $401,000, and such bonuses as the Board of
Directors may, in its sole discretion, from time to time
determine. These employment agreements, which expire in
August 2000 and September 2001, provide for employment on
a full-time basis (except for the Company's agreement
with its Chief Executive Officer) and contain a provision
that the employee will not compete or engage in a
business competitive with the current or anticipated
business of the Company during the term of the employment
agreement and for a period of two years thereafter.
9. Stock Options The Company has a stock option plan (the "Plan"), which
authorized the issuance of incentive options and
non-qualified options to purchase up to 500,000 shares of
common stock. The plan has a ten year term. The Board
retained the authority to determine the individuals to
whom, and the times at which, stock options would be
made, along with the number of shares, vesting schedule
and other provisions related to the stock options.
The Company applies Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" and
related interpretations by recording compensation expense
for the excess of fair market value and the exercisable
price per share as of the date of the grant in accounting
for its stock options. Accordingly, no compensation costs
have been recognized for its issuance of options to
employees since the exercise price exceeded the then fair
market value on the date of the grant. In accordance with
SFAS No. 123, the Company has recognized $108,000 and
$175,137 as the fair value of services received for the
136,000 and 103,000 options granted to non-employees
during 1997 and 1998, respectively.
F-17
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
SFAS No. 123 requires the Company to provide pro forma
information regarding net loss and net loss per share as
if compensation cost for the Company's stock options had
been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimates
fair value of each stock based option at the date of the
grant using the Black Scholes option-pricing model with
the following weighted average assumptions used for
options in 1997 and 1998:
1997 1998
---------------------------------------------------------
Risk-free interest rate 6.51% 4.29% - 5.48%
Expected life 5 years 5 years
Expected volatility 15.00% 46.10%
Dividend yield None None
=========================================================
Under the accounting provisions of SFAS No. 123, the
Company's net loss and loss 1 per share would have been
reduced to the pro forma amounts indicated below:
1997 1998
---------------------------------------------------------
Net loss:
As reported $(2,037,417) $(1,744,099)
Pro forma (2,037,417) (2,060,753)
=========================================================
Net loss per share (basic and diluted):
As reported $ (1.67) $ (.72)
Pro forma (1.67) (.85)
=========================================================
Stock options granted prior to 1998 were considered to
have minimal value based on the fair value method of SFAS
No. 123.
F-18
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
A summary of the status of the Company's stock option
plan as of December 31, 1997 and 1998, and changes during
the years ending on those dates, is presented below:
<TABLE>
<CAPTION>
December 31, 1997 1998
- ---------------------------------------------------------------------------------------------------------
Weighted average Weighted averag
Shares exercise price Shares exercise price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year -- $ -- 165,600 $ 2.00
Granted 280,000 2.00 426,200 3.00
Exercised -- -- -- --
Forfeited (114,400) (2.00) (8,800) (2.00)
- ---------------------------------------------------------------------------------------------------------
Outstanding at end of year 165,600 $ 2.00 583,000 $ 2.73
=========================================================================================================
Options exercisable at year-end -- $ -- 457,000 $ 2.66
=========================================================================================================
Weighted average fair value of options
granted during the year $ -- $ 1.62
=========================================================================================================
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------- ---------------------------------
Weighted
average Weighted Number
Number remaining average exercisable at Weighted
outstanding at contractual exercise December 31, average
Range of exercise prices December 31, 1998 life price 1998 exercise price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 to $3.00 418,600 9.4 $2.31 358,600 $2.27
$3.00 to $5.18 164,400 9.4 $3.81 98,400 $4.09
============================================================================================================================
</TABLE>
F-19
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
10. Capital Stock At December 31, 1998, there was an aggregate of 2,460,000
and Warrants warrants outstanding at exercise prices between $4.80 and
$7.92 per share, expiring at various times through 2003,
as follows:
In December 1997, as partial consideration for a loan,
the Company granted warrants to purchase 300,000 shares,
at an exercise price of $5.00 per share, expiring in
December 2003. These warrants were valued at $24,000 and
recorded as a debt discount.
As part of its IPO in May, the Company offered and sold
warrants (the "Public Warrants") to purchase 1,840,000
shares, at an exercise price of $4.80 per share, expiring
in February 2003.
In March 1998, the Company effected a 4 for 5 reverse
stock split. All shares and per share data in the
consolidated financial statements have been adjusted to
give retroactive effect to the reverse stock split.
Additionally, during May 1998, the Company sold to the
underwriter of the IPO, warrants to purchase 160,000
shares, at an exercise price of $6.60 per share, and
160,000 shares, at an exercise price of $7.92 per share.
These warrants expire in May 2003.
The Board of Directors is authorized to fix the rights,
preferences, privileges and restrictions of any series of
preferred stock, including the dividend rights, original
issue price, conversion rights, voting rights, terms of
redemption, liquidation preferences and sinking fund
terms thereof, and the number of shares constituting any
such series and the designation thereof and to increase
or decrease the number of shares subsequent to the
issuance of shares of such series (but not below the
number of shares of such series then outstanding).
F-20
<PAGE>
Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
11. Income Taxes The Company had net operating loss carryforwards of
approximately $1,500,000 at December 31, 1998, which
expire beginning in 2111. The tax benefit of these losses
has been completely offset by a valuation allowance due
to the uncertainty of its realization.
12. Litigation In connection with a settlement of all disputes with a
Settlement former officer, the Company purchased 231,520 shares of
common stock owned by that officer for $264,113. These
amounts were accounted for as treasury stock in the
accompanying balance sheet.
13. Subsequent Event In March 1999, the Company entered into an agreement with
two institutional investors pursuant to which the Company
sold 158,856 shares of common stock, at prevailing market
price, for an aggregate purchase price of $2,000,000. The
agreement with the investors provides for certain
registration and repricing rights. The Company may, at
any time prior to the effectiveness of registration,
redeem the common stock issued in its entirety for a
premium. The Company also issued 21,662 warrants to
purchase common stock for 13.849 per share. The warrants
are exercisable on or before March 25, 2002.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly signed this report on its behalf
by the undersigned, thereunto duly authorized on the 26th day of March 1999.
FRONTLINE COMMUNICATIONSCORPORATION
By: /s/ Stephen J. Cole-Hatchard
-------------------------------------------------
Stephen J. Cole-Hatchard, Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of 1934, this
report was signed by the following persons in the capacities and on the dates
stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Stephen J. Cole-Hatchard Chief Executive Officer, March 26, 1999
- ---------------------------- President, and Director (Principal
Stephen J. Cole-Hatchard Executive Officer)
/s/ Nicko Feinberg Chief Information Officer, March 26, 1999
- ---------------------------- Executive Vice President of
Nicko Feinberg Technology and Director
/s/ Michael Olbermann Chief Operating Officer, Executive March 26, 1999
- ---------------------------- Vice President and Director
Michael Olbermann
/s/ Vasan Thatham Chief Financial Officer and March 26, 1999
- ---------------------------- Executive Vice President
Vasan Thatham
/s/ Amy Wagner-Mele Executive Vice President, March 26, 1999
- ---------------------------- Secretary and General Counsel
Amy Wagner-Mele
/s/ Margaret McGillin Executive Vice President of Sales, March 26, 1999
- ---------------------------- Marketing and Business Development
Margaret McGillin
/s/ Ronald C. Signore Director March 26, 1999
- ----------------------------
Ronald C. Signore
/s/ Ronald Shapss Director March 26, 1999
- ----------------------------
Ronald Shapss
</TABLE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of March 25, 1999, is
entered into by and between FRONTLINE COMMUNICATIONS CORP., a Delaware
corporation, with headquarters located at One Blue Hill Plaza, 6th Floor, P. O.
Box 1548, Pearl River, NY 10965 (the "Company"), and the undersigned (the
"Buyer").
Buyer hereby represents and warrants to, and agrees with the Company as follows:
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, (THE "1933 ACT"), ARE RESTRICTED SECURITIES (AS DEFINED
IN RULE 144 UNDER THE 1933 ACT) AND MAY NOT BE OFFERED FOR SALE, SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO REGISTRATION UNDER THE 1933 ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT. THE SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO REGISTRATION OR AN
EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BE APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY AUTHORITY ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
WITNESSETH:
WHEREAS, the Company and the Buyer are executing and delivering this Agreement
in reliance upon exemptions from securities registration afforded under
Regulation D ("Regulation D") as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act") and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Company will issue to Buyer and the Finder (as hereinafter
defined), upon the terms and conditions of this Agreement (i) shares of Common
Stock, $.01 par value per share (the "Common Stock"), (ii) Repricing Rights (as
hereinafter defined) to acquire shares of Common Stock (the "Additional
Shares"), and (iii) Warrants to purchase shares of Common Stock (the "Warrant
Shares"). The Common Stock, Repricing Rights, Additional Shares, Warrants and
Warrant Shares are hereinafter referred to collectively, as the "Securities";
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
1
<PAGE>
a. Purchase. The undersigned hereby agrees to purchase from the Company
U.S.D.$2,000,000 of Common Stock of the Company at a price per share equal
to the average closing bid price of the Common Stock as reported by Nasdaq
for the five (5) trading days immediately preceding March 19,1999 (the
"Purchase Price Per Share"), together with certain Repricing Rights (as
defined in Section 5(a) hereof) for an aggregate purchase price of
$2,000,000 (the "Purchase Price"). In no event shall the Company issue in
the aggregate more than 450,000 shares of Common Stock, Additional Shares
and Warrant Shares under the terms of this Agreement.
b. Option to fund subsequent tranche. During the 60 day period following the
date the registration statement covering this offering is declared
effective, the Company may request one additional funding tranche of up to
$1,000,000, as long as such amount does not cause the Buyer's holdings to
equal or exceed 5% of the then current market capitalization of the
Company. The funding of a subsequent tranche is also subject to no material
adverse changes in the Company since the prior Closing Date and the trading
volume equaling or exceeding the average trading volume in the calendar
month prior to the Closing Date, sustained for a period of at least one
month prior to the subsequent tranche. In the event that the parties agree
to a subsequent tranche, the parties will enter into a stock purchase
agreement in substantially the same form. The 450,000 share cap referred to
in 1(a) above shall not apply to shares issued in any subsequent tranche.
c. Warrant Coverage. The Buyer shall receive warrants to purchase 17,330
shares of Common Stock on the Closing Date. The Warrants shall have a three
year term and an exercise price of 110% of the Purchase Price Per Share.
d. Form of Payment. The Buyer shall pay the purchase price for the Common
Stock by delivering immediately available good funds in United States
Dollars to Joseph B. LaRocco as the escrow agent (the "Escrow Agent"). Upon
confirmation that the funds are received , within two business days
following payment by the Buyer to the Escrow Agent of the purchase price of
the Common Stock, the Company shall deliver a Certificate for the Common
Stock duly executed on behalf of the Company, to the Escrow Agent.
e. Method of Payment. Payment into escrow of the purchase price for the Common
Stock shall be made in accordance with instructions provided by the
Company.
Not later than 4:00 p.m., Eastern Standard Time, on or before March 26, 1999,
the Buyer shall wire the Purchase Price to the Escrow Agent. On March 26, 1999
the Company shall deliver the Common Stock being purchased to the Escrow Agent.
Once the Escrow Agent is in possession of the Common Stock being purchased and
has received the Purchase Price into his escrow account he shall notify the
Company and wire the Purchase Price in accordance with instructions received
from the Company, less a 8%
2
<PAGE>
placement fee and $15,000 document preparation and escrow fee (the $15,000 fee
shall also cover document preparation and escrow services for the second
tranche), to the Company and overnight the Common Stock to the Buyer. Time is of
the essence with respect to such payment, and failure by the Buyer to make such
payment, shall allow the Company to cancel this Agreement.
The Escrow Agent shall not be liable for any action taken or omitted by him in
good faith and in no event shall the Escrow Agent be liable or responsible
except for the Escrow Agent's own gross negligence or willful misconduct. The
Escrow Agent has made no representations or warranties in connection with this
transaction and has not been involved in the negotiation of the terms of this
Agreement or any matters relative thereto. The Buyer and the Company each agree
to indemnify and hold harmless the Escrow Agent from and with respect to any
suits, claims, actions or liabilities arising in any way out of this transaction
including the obligation to defend any legal action brought which in any way
arises out of or is related to this Agreement. The Escrow Agent is not rendering
securities advice to anyone with respect to this proposed transaction; nor is
the Escrow Agent opining on the compliance of the proposed transaction under
applicable securities law.
2. BUYER REPRESENTATIONS, WARRANTIES; ACCESS TO INFORMATION; INDEPENDENT
INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with, the Company
as follows:
a. The Buyer is purchasing the Common Stock for its own account for investment
only and not with a view towards the resale, public sale or distribution thereof
and not with a view to or for sale in connection with any distribution thereof;
b. The Buyer is (i) an "accredited investor" as that term is defined in Rule 501
of the General Rules and Regulations under the 1933 Act by reason of Rule
50f(a)(3), and (ii) experienced in making investments of the kind described in
this Agreement and the related documents, (iii) able, by reason of the business
and financial experience of its officers (if an entity) and professional
advisors (who are not affiliated with or compensated in any way by the Company
or any of its affiliates or selling agents), to protect its own interests in
connection with the transactions described in this Agreement, and the related
documents, and (iv) able to afford the entire loss of its investment in the
Common Stock;
c. All subsequent offers and sales of the shares of Common Stock by the Buyer
shall be made pursuant to registration under the 1933 Act or pursuant to an
exemption from registration;
d. The Buyer understands that the Common Stock is being offered and sold, and
the Securities are being offered, to it in reliance on specific exemptions from
the registration requirements of federal and state securities laws and that the
Company is relying upon the truth and accuracy of, and the Buyer's compliance
with, the representations, warranties,
3
<PAGE>
agreements, acknowledgements and understandings of the Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
the Buyer to acquire the Common Stock and receive an offer of the Securities ;
e. The Buyer and its advisors, if any, have either been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Common Stock which have been
requested by the Buyer or have had access thereto. The Buyer and its advisors,
if any, have been afforded the opportunity to ask questions of the Company and
have received complete and satisfactory answers to any such inquiries. Without
limiting the generality of the foregoing, the Buyer has also had the opportunity
to obtain and to review the Company's (1) Quarterly Reports on Form 10-QSB for
the fiscal quarters ended March 31, 1998, June 30, 1998 and September 30, 1998
and Form 10-QSB/A for the fiscal quarter ended June 30, 1998 and (2) Forms 8-K,
if any, filed since October 16, 1998, as well as copies of the Company's press
releases since June 30, 1998 (the "Company's SEC Documents").
f. The Buyer understands that its investment in the Securities involves a high
degree of risk;
g. The Buyer understands that no federal or state agency or any other government
or governmental agency has passed on or made any recommendation or endorsement
of the Securities;
h. This Agreement has been duly and validly authorized, executed and delivered
on behalf of the Buyer and is a valid and binding agreement of the Buyer
enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
i. No Short Sales. Buyer expressly agrees that until such time it has sold all
of the securities and/or all of the Shares and Warrants that it shall not,
directly or indirectly, through an affiliate (as that term is defined under Rule
405 promulgated under the Act) or by, with or through an unrelated third party
or entity, whether or not pursuant to a written or oral understanding,
agreement, arrangement, scheme, or artifice of any nature whatsoever, engage in
the short selling of the Company's Common Stock or any other equity securities
of the Company whether now existing or hereafter issued, or engage in any other
activity of any nature whatsoever that has the same affect as a short sale, or
is a de facto or de jure short sale, of the Company's Common Stock or any other
equity security of the Company whether now existing or hereafter issued,
including but not limited to the sale of any rights pursuant to any
understanding, agreement, arrangement, scheme or artifice of any nature
whatsoever, whether oral or in writing, relative to the Company's Common Stock
or any other equity securities of the Company whether now existing or hereafter
created.
j. The Buyer is not purchasing the Common Stock and Warrants as a result of, or
pursuant to, any advertisement, article, notice or other communication published
in any newspaper, magazine or similar media or broadcast over television or
radio or presented
4
<PAGE>
at any seminar or meeting whose attendees, including the Buyer, had been invited
by any general advertising or general solicitation.
3. COMPANY REPRESENTATIONS
The Company represents and warrants to the Buyer that:
a. Concerning the Shares. The Common Stock has been duly authorized and, when
paid for as provided herein, will be duly and validly issued, fully paid and
non-assessable and will not subject the holder thereof to personal liability by
reason of being such holder. There are no preemptive rights of any stockholder
of the Company, as such, to acquire the Common Stock.
b. Reporting Company Status. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly qualified as a foreign corporation in all jurisdictions in which the
failure to so qualify would have a material adverse effect on the Company and
its subsidiaries taken as a whole. The Company has registered its Common Stock
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the Common Stock is listed and traded on The Nasdaq Small
Cap Market . The Company has filed all material required to be filed pursuant to
all reporting obligations under either Section 13(a) or l5(d) of the Exchange
Act, and has received no notice, either oral or written, with respect to the
continued eligibility of the Common Stock for such listing.
c. Stock Purchase Agreement; Registration Rights Agreement and Stock. This
Agreement and the Registration Rights Agreement, the form of which is attached
hereto (the "Registration Rights Agreement"), have been duly and validly
authorized by the Company, this Agreement has been duly executed and delivered
by the Company and this Agreement is, and the Registration Rights Agreement,
when executed and delivered by the Company, will be, valid and binding
agreements of the Company enforceable in accordance with their respective terms,
subject as to enforceability to general principles of equity, the
indemnification provisions of the Registration Rights Agreement, and to
bankruptcy, insolvency, moratorium, and other similar laws affecting the
enforcement of creditors' rights generally; and the Securities will be duly and
validly issued, fully paid and non-assessable when delivered on behalf of the
Company upon payment therefor in accordance with this Agreement, subject to
general principles of equity and to bankruptcy, insolvency, moratorium, or other
similar laws affecting the enforcement of creditors' rights generally.
d. Non-contravention. The execution and delivery of this Agreement and the
Registration Rights Agreement by the Company, the issuance of the Securities,
and the consummation by the Company of the other transactions contemplated by
this Agreement, the Registration Rights Agreement, and the Common Stock do not
and will not conflict with or result in a breach by the Company of any of the
terms or provisions of or constitute a default under, the articles of
incorporation or by-laws of the Company, or any material indenture, mortgage,
deed of trusts or other material agreement or
5
<PAGE>
instrument to which the Company is a party or by which it or any of its
properties or assets are bound, or any material existing applicable law, rule,
or regulation or any applicable decree, judgment, or order of any court, United
States federal or state regulatory body, administrative agency, or other
governmental body having jurisdiction over the Company or any of its properties
or assets, except such conflict, breach or default which would not have a
material adverse effect on the transactions contemplated herein.
e. Approvals. No authorization, approval or consent of any court, governmental
body, regulatory agency, self-regulatory organization, or stock exchange or
market is required to be obtained by the Company for the issuance and sale of
the Securities to the Buyer as contemplated by this Agreement.
f. SEC Filings. None of the Company's filings with the Securities and Exchange
Commission since June 1, 1998 contained, at the time they were filed, any untrue
statement of a material fact or omit to state any material fact or necessary to
make the statements made therein in light of the circumstances under which they
were made, not misleading. The Company has since June 1, 1998 filed all
requisite forms, reports and exhibits thereto with the Securities and Exchange
Commission.
g. Absence of Certain Changes. Since June 1, 1998 , there has been no material
adverse change and no material adverse development in the business, properties,
operations, financial condition, outstanding securities, or results of
operations of the Company, except as disclosed in the documents referred to in
Section 2(e) hereof.
h. Full Disclosure. There is no fact known to the Company (other than general
economic conditions known to the public generally) that has not been disclosed
in writing to the Buyer (including through the publicly filed documents of the
Company) that (i) could reasonably be expected to have a material adverse effect
on the condition (financial or otherwise) or in the earnings, business affairs,
properties or assets of the Company or (ii) could reasonably be expected to
materially and adversely affect the ability of the Company to perform its
obligations pursuant to this Agreement.
i. Absence of Litigation. Except as disclosed in the documents referred to in
Section 2(e) hereof, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or, to the
knowledge of the Company or any of its subsidiaries, threatened against or
affecting the Company or any of its subsidiaries, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business, condition (financial or other), or results of operations
of the Company and its subsidiaries taken as a whole or the transactions
contemplated by this Agreement or any of the documents contemplated hereby or
which would materially adversely affect the validity or enforceability of, or
the authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents.
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j. Absence of Events of Default. Except as disclosed in writing to the Buyer
(including through the publicly filed documents of the Company) no Event of
Default, as defined in any agreement to which the Company is a party, and no
event which, with the giving of notice or the passage of time or both, would
become an Event of Default (as so defined), has occurred and is continuing,
which would have a material adverse effect on the Company's financial condition
or results of operations.
k. No Default. Except as disclosed in writing to the Buyer (including through
the publicly filed documents of the Company) the Company is not in default in
the performance or observance of any material obligation, agreement, covenant or
condition contained in any material indenture, mortgage, deed of trust or other
material instrument or agreement to which it is a party or by which it or its
property may be bound, and neither the execution, nor the delivery by the
Company, nor the performance by the Company of its obligations under this
Agreement or the Common Stock, other than the conversion provision thereof, will
conflict with or result in the breach or violation of any of the terms or
provisions of, or constitute a default or result in the creation or imposition
of any lien or charge on any assets or properties of the Company under, any
material indenture, mortgage, deed of trust or other material agreement or
instrument to which the Company is a party or by which it is bound or any
statute or the Certificate of Incorporation or By-laws of the Company, or any
decree, judgment, order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or its properties, or its listing
agreement with respect to any securities exchange or trading market on which the
Common Stock is listed.
l. Prior Issues. During the twelve (12) months preceding the date hereof, the
Company has not issued any debt, securities or convertible securities in capital
transactions which have not been fully disclosed in the Company's SEC Documents.
Except for employee restricted stock and employee stock options, all such
issuances have been fully converted into shares of common stock and there are no
outstanding unconverted debt or convertible securities from those transactions,
except as disclosed in the SEC Documents.
m. Finder. Merchant Bancorp of America, Reg'd (the "Finder") shall receive a
placement fee of 8% of all funds raised, payable in cash from escrow at closing.
The Finder shall also receive Warrants to purchase 4,332 shares of Common Stock
on the Closing Date.) The Warrants shall have a three year term and an exercise
price per share of 110% of the Purchase Price Per Share.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the Securities have
not been and are not being registered under the provisions of the 1933 Act and,
except as provided in the Registration Rights Agreement, the Securities have not
been and are not being registered under the 1933 Act, and may not be transferred
unless (A) subsequently registered thereunder, or (B) the Buyer shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company and its counsel, to the effect that the
Securities to be sold or
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<PAGE>
transferred may be sold or transferred pursuant to an exemption from such
registration; (2) any sale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any resale of such
Securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Securities
(other than pursuant to the Registration Rights Agreement) under the 1933 Act or
to comply with the terms and conditions of any exemption thereunder.
b. Restrictive Legend. The Buyer acknowledges and agrees that until such time as
the Common Stock have been registered under the 1933 Act as contemplated by the
Registration Rights Agreement and sold in accordance with such Registration
Statement, the shares of Common Stock, shall bear a restrictive legend in
substantially the following form (and a stop transfer order may be placed
against transfer of the shares of Common Stock):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED OR SOLD EXCEPT IN
RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND SUCH LAWS OR PURSUANT TO A REGISTRATION STATEMENT.
c. Registration Rights Agreement. The parties hereto agree to enter into the
Registration Rights Agreement on or before the Closing Date.
d. Filings. The Company undertakes and agrees to make all necessary filings in
connection with the sale of the Common Stock to the Buyer as required by United
States securities laws and regulations, or by Nasdaq. Buyer agrees to make all
necessary filings with the SEC, including Schedule 13D, if applicable.
e. Reporting Status. So long as the Buyer beneficially owns any of the Common
Stock, the Company shall file all reports required to be filed with the SEC
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.
f. Use of Proceeds. The Company will use the proceeds from the sale of the
Common Stock (excluding amounts paid by the Company for legal fees and finder's
fees in connection with the sale of the Common Stock) for working capital and
shall not, directly or indirectly (except in any situation where the Company is
acquired by merger or
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otherwise by a third party) use such proceeds for any loan to or investment in
any other corporation, partnership enterprise or other person.
g. Certain Agreements. The Company will not raise any Regulation D financing
and/or private placement with common stock registration/public resale rights
into equity markets solely for the purpose of raising working capital, unless
the common shares are restricted from re-sale for at least eight months after
the Closing Date. In the event the Company breaches the terms of this
subsection, the Buyer shall have the option of either (i) exercising its Demand
Redemption as set forth in Section 5(i) hereof or (ii) completely replacing the
terms of this Stock Purchase Agreement with the terms of the other agreement,
which terms shall be applied to the balance of the Purchase Price in Common
Stock still held by the Buyer together with any accrued interest and any
accumulated liquidated damages.
5. ISSUANCE OF ADDITIONAL SHARES BASED UPON REPRICING RIGHTS; REDEMPTION TERMS.
a. Repricing Rights. Subject to Section 1(a), the Buyer is entitled to one
Repricing Right for each share of common stock purchased under the terms of this
Agreement. The Repricing Rights entitle the Buyer to acquire additional shares
of Common Stock (or its cash equivalent) for each share sold on the date of the
Exercise Notice (in the form annexed hereto as Exhibit A), equal to the number
of Repricing Rights exercised multiplied by a fraction, the numerator of which
is the difference between the Repricing Price and the Market Price (as defined
herein) and the denominator of which is the Market Price. The Repricing Price,
will be initially set at 120% of the Purchase Price Per Share (as defined in
Section 1(a) above) and increase by 2.5% per six month period thereafter. The
Market Price shall be calculated at the average closing bid price of the Common
Stock for the five trading days preceeding the date an Exercise Notice is
tendered to the Company via facsimile transmission. The Exercise Notice shall
state the number of shares of Common Stock sold by the Buyer on the date of the
Exercise Notice. A Repricing Right may only be exercised on the date of, and in
connection with, a sale of the underlying Common Stock.
At any time after the earlier of the effectiveness of the Registration
Statement or 120 days following the Closing Date, the Buyer will be permitted to
exercise up to 25% per calendar month cumulatively, of their Repricing Rights.
The Company may, at its sole option, pay the Buyer the cash value of the
Repricing Right in lieu of additional shares upon receiving a Exercise Notice by
confirming the same within two business days and wiring the cash value of the
Repricing Right to the Buyer within 5 business days of receipt of the Exercise
Notice (except if the cash value of the Repricing Right exceeds $50,000, the
Company shall have fourteen (14) calendar days to make said payment).
After effectiveness of the registration statement covering the Common Stock
being purchased, if (i) the Company's Common Stock price appreciates to more
than 127.5% of the closing price as of the Closing Date, (ii) the average
trading volume equals or exceeds a total value of $1,000,000 per day and (iii)
both (i) and (ii) are sustained for a period of at least thirty (30) consecutive
calendar days, then 25% of the total number of Repricing Rights will expire per
each thirty (30) consecutive calendar day period in
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which the requirements of (i), (ii) and (iii) have been met, so long as the
Company is in compliance in all material respects with its obligations to the
Buyer under this Agreement and the other agreements, instruments and documents
contemplated thereby. The Repricing Rights will expire in their entirety 14
months after the effectiveness of the Registration Statement.
b. Additional Shares. The Additional Shares shall be fully paid, non-assessable
Common Stock of the Company, bearing no restrictive legends, not subject to any
stop transfer instructions and registered pursuant to the terms of the
Registration Rights Agreement, a copy of which is attached hereto. In the event
the Company is required to issue Additional Shares, and does not have a
sufficient number of shares of Common Stock available to be issued, the Company
shall pay the Buyer the cash value of the Repricing Right as set forth in
Section 5(c) below.
c. Redemption Terms and Floor Price. (i) The Company may opt to pay the Buyer
the cash value of the Repricing Right in lieu of additional shares upon
receiving a Exercise Notice by confirming the same within two business days. In
the event that the Company elects to pay the cash value of the Repricing Rights
in excess of $50,000, the Company shall have 14 calendar days to make such
payment. The Company may also elect to notify the Buyer within 7 business days
advance notice that any future exercise of Repricing Rights shall be redeemed
for cash in lieu of issuing additional shares. If the Company defaults in timely
payment, then all future redemptions must be paid within 7 calendar days.
(ii) During the six month period following the Closing Date, an initial
Floor Price below which the Buyer shall not be entitled to exercise its
Repricing Rights will be set at $6.00. After the expiration of the sixth month
period following the Closing Date the floor price will be reduced to $4.00. If
the closing bid price of the Company's Common Stock falls below $4.00, the Buyer
may demand redemption at market value for the outstanding balance of the
Repricing Rights and Common Stock. The Company shall have 60 calendar days from
the date that such notice is given to make the redemption payment. If the
Company defaults, the Buyer will be permitted to continue exercising its
Repricing Rights subject to the limit set forth in Section 1(a).
(iii) In addition, at any time prior to the effectiveness of the
Registration Statement, the Company may elect to redeem the total number of
shares of Common Stock issued to the Buyer for $2,400,000, or a portion of said
shares at a pro rata price equal to 120% of the Purchase Price Per Share as set
forth in section 1(a).
d. The Company shall not issue any fractional shares of Common Stock as a result
of this Section 5. In the event additional shares are required to issued
hereunder, and the numbers of shares to be issued is not a whole number, then
the number of shares to be issued will be rounded down to the nearest whole
number.
e. The Company shall pay any documentary, stamp or similar issue or transfer tax
due on the issue of additional shares. However, the Holder shall pay any such
taxes which are due because such shares are issued in name other than its name.
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f. Subject to the limitation set forth in section 1(a) , the Company shall use
reasonable efforts to reserve out of its authorized but unissued Common Stock
enough shares of Common Stock to permit the issuance of all of the additional
shares required to be issued hereunder. All additional shares shall be, when
issued in accordance herewith, duly authorized, validly issued, fully-paid and
nonassessable.
g. At no time shall the Buyer be required to fund a subsequent tranche if in the
opinion of the Company's counsel shareholder approval would be required and such
approval has not yet been obtained.
h. The Company shall pay Buyer a cash fee of 2% of the Purchase Price per thirty
calendar day period pro rata, for the period that the following obligations
remain unsatisfied: (i) if the Repricing Rights of the Buyer are suspended for
any reason; or (ii) if the Company fails to deliver shares pursuant to the
exercise of Repricing Rights or a sale within 7 business days of company's
receipt of a facsimile Exercise Notice in the form annexed hereto as Exhibit A,
and/or fails to make a cash payment within the time periods set forth in this
Agreement or the Registration Rights Agreement, as the case may be. The Company
acknowledges that its suspension of the Repricing Rights, failure to deliver
shares pursuant to the exercise of the Repricing Rights and/or failure to make a
cash payment in a timely manner will cause the Buyer to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this section represents the parties' good faith effort to quantify
such damages and, as such, agree that: 1) the form and amount of such liquidated
damages are reasonable and will not constitute a penalty; and 2) said liquidated
damages constitute the Buyer's only remedy. The payment of liquidated damages
shall not relieve the Company from its obligations to deliver Common Stock or
honor Repricing Rights pursuant to the terms of this Agreement.
i. Demand Redemption. In the event any default by the Company under the terms of
this Agreement is continuing for more than 180 calendar days, Buyer may at its
sole option send written notice of a demand redemption to the Company. Upon
receipt of the written notice from the Buyer, the Company shall within 10
business days make a cash payment to Buyer equal to the cash value of Buyer's
then outstanding Repricing Rights and Common Stock as of the date that written
notice is received by the Company. The cash payment to be made by the Company
upon receipt of written notice of the demand redemption, shall be in addition to
any remedies or liquidated damages to which the Investor is entitled up to the
date written notice of the demand redemption is received by the Company.
j. Limits on Amount of Ownership. In no event shall the Buyer be entitled to
exercise that number of Repricing Rights in excess of the amount upon exercise
of which the sum of (1) the number of shares of Common Stock beneficially owned
by the Buyer and its affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unexercised portion of
the Repricing Rights), and (2) the number of shares
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<PAGE>
of Common Stock issuable upon exercise of the Repricing Rights with respect to
which the determination of this proviso is being made, would result in
beneficial ownership by the Buyer and its affiliates of more than 4.9% of the
outstanding shares of Common Stock of the Company. For purposes of this
provision to the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13 (d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided
in clause (1) of such provision.
6. Adjustments
a. Stock dividends; splits. If after the date on which the Common Stock is first
issued to Buyer and while Buyer still owns said Common Stock, the number of
outstanding shares of Common Stock is increased by a stock dividend payable in
shares of Common Stock or by a split of shares of Common Stock or other similar
event, then, on the date following the date fixed for the determination of
holders of Common Stock entitled to receive such stock dividend or split, the
number of shares of Common Stock purchased by the Buyer and the number of
Repricing Rights shall be increased in proportion to such increase in
outstanding shares (ignoring for this purpose any provision for the repurchase
or cash payment of fractional shares).
b. Aggregation of shares. If after the date on which the Common Stock is first
issued to Buyer and while Buyer still owns said Common Stock, the number of
outstanding shares of Common Stock is decreased by a consolidation, combination
or reclassification of shares of Common Stock or other similar event, then,
after the effective date of such consolidation, combination or reclassification,
the number of shares of Common Stock purchased by the Buyer and the number of
Repricing Rights shall be decreased in proportion to such decrease in
outstanding shares (ignoring for this purpose any provision for the repurchase
or cash payment of fractional shares).
c. Reorganization, etc. If after the date on which the Common Stock is first
issued, any capital reorganization or reclassification of the Common Stock, or
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation or other similar
event shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger, or sale, lawful and fair provision
shall be made whereby the Buyer shall thereafter have the right to purchase and
receive upon the basis and upon the terms and conditions specified in this
Agreement such shares of stock, securities, or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented by this Agreement had such reorganization, reclassification,
consolidation, merger, or sale not taken place, and in such event appropriate
provision shall be made with respect to the rights and interests of the Buyer to
the end that the provisions hereof shall thereafter be applicable, as nearly as
may be in relation to any share of stock, securities, or assets thereafter
deliverable upon the exercise hereof. The Company shall not effect any such
consolidation, merger, or sale unless prior to the consummation thereof the
successor corporation (if other than the
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Company) resulting from such consolidation or merger, or the corporation
purchasing such assets, shall assume by written instrument executed and
delivered to the Agent the obligation to deliver to the Buyer such shares of
stock, securities, or assets as, in accordance with the foregoing provisions,
the Buyer may be entitled to purchase. Upon the occurrence of any event
specified in this section, the Company shall give written notice of the record
date for such dividend, distribution, or subscription rights, or the effective
date of such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, winding up or issuance. Such notice shall also specify
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution, or subscription rights, or shall be entitled to
exchange their Common Stock for stock, securities, or other assets deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, winding up or issuance. Failure to give such notice,
or any defect therein shall not affect the legality or validity of such event.
d. Notices of Changes. Upon every adjustment of the number of shares of Common
Stock purchased by the Buyer and the number of Repricing Rights, the Company
shall give written notice thereof to the Buyer, which notice shall state the
increase or decrease, if any, in the number of shares of Common Stock purchased
by the Buyer and the number of Repricing Rights, setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based.
7. TRANSFER AGENT INSTRUCTIONS.
(i) Promptly following the delivery by the Buyer of the aggregate purchase price
for the Common Stock in accordance with Section l(c) hereof the Company will
instruct its transfer agent to issue certificates for the Common Stock
purchased, bearing the restrictive legend specified in Section 4(b) of this
Agreement. The Common Stock shall be registered in the name of the Buyer or its
nominee (duly assigned to), and in such denominations to be specified by the
Buyer. If the Buyer provides the Company with an opinion of counsel reasonably
satisfactory to the Company and its counsel that registration of a resale by the
Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a)
of this Agreement is not required under the 1933 Act, the Company shall (except
as provided in clause (2) of Section 4(a) of this Agreement) permit the transfer
of the Securities. (ii) After effectiveness of a Registration Statement, and
upon receipt of an Exercise Notice in the form annexed hereto as Exhibit A, the
Company shall deliver the number of shares specified in the Notice to the Buyer,
free of any restrictive legend or stop transfer instructions, to the address
specified in the notice within seven (7) business days of the Company's receipt
of the notice.
8. DELIVERY INSTRUCTIONS.
The Common Stock shall be delivered by the Company to the Escrow Agent pursuant
to Section l(b) hereof on a delivery against payment basis at the closing.
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9. CLOSING DATE.
The date and time of the issuance and sale of the Common Stock (the "Closing
Date") shall be March 26, 1999. The closing shall occur on the Closing Date at
the offices of the Escrow Agent. Notwithstanding anything to the contrary
contained herein, the Escrow Agent will be authorized to release the funds
representing the Purchase Price for the Common Stock, and the certificates
representing the shares of the Common Stock only upon satisfaction of the
conditions set forth in Sections 10 and 11 hereof.
10. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Common Stock to
the Buyer pursuant to this Agreement is conditioned upon:
a. The receipt and acceptance by the Company of such Agreement as evidenced by
execution of such Agreement;
b. The accuracy on the Closing Date of the representations and warranties of the
Buyer contained in this Agreement as if made on the Closing Date and the
performance by the Buyer on or before the Closing Date of all covenants and
agreements of the Buyer required to be performed on or before the Closing Date;
c. There shall not be in effect any law, rule or regulation prohibiting or
restricting the transactions contemplated hereby, or requiring any consent or
approval which shall not have been obtained.
11. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the Common Stock
is conditioned upon:
a. Acceptance by Buyer of an Agreement for the sale of Common Stock, as
indicated by execution of this Agreement;
b. Delivery by the Company to the Escrow Agent of the Common Stock in accordance
with this Agreement;
c. The accuracy on the Closing Date of the representations and warranties of the
Company contained in this Agreement as if made on the Closing Date and the
performance by the Company on or before the Closing Date of all covenants and
agreements of the Company required to be performed on or before the Closing
Date; and
d. The Company shall have its counsel prepare an opinion letter concerning the
authority of the Company to make this offering. The Company shall also prepare a
Board
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Resolution authorizing this offering. The opinion letter and Board Resolution
shall be delivered to the escrow agent who shall deliver a copy to the Buyer.
12. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in accordance with the laws
of the State of Delaware. Each of the parties consents to the jurisdiction of
the federal courts whose districts encompass any part of the City of New York in
connection with any dispute arising under this Agreement and hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum non coveniens, to the bringing of any such proceeding in such
jurisdictions. A facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original. The headings of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. This Agreement may be amended only by an instrument
in writing signed by the party to be charged with enforcement. This Agreement
supersedes all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof.
13. NOTICES. Any notice required or permitted hereunder shall be given in
writing (unless otherwise specified herein) and shall be deemed effectively
given upon personal delivery or seven business days after deposit in the United
States Postal Service, by (a) advance copy by fax, and (b) mailing by express
courier or registered or certified mail with postage and fees prepaid, addressed
to each of the other parties thereunto entitled at the following addresses, or
at such other addresses as a party may designate by ten days advance written
notice to each of the other parties hereto.
COMPANY: Stephen Cole-Hatchard, President
Frontline Communications Corp.
One Blue Hill Plaza, 6C Floor
P. O. Box 1548
Pearl River, NY 10965
Telecopier No.: 1-914-623-8669
with a copy to: Kenneth Selterman, Esq.
Tenzer, Greenblatt
The Chrysler Building
405 Lexington Avenue
New York, NY 10174-0208
Telecopier No.: 1-212-885-5001
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BUYER: At the address set forth on the signature page of this
Agreement.
ESCROW AGENT: Joseph B. LaRocco, Esq.
49 Locust Avenue, Suite 107
New Canaan, CT 06840
Telecopier No.: 1-203-966-0363
13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each party's representations and
warranties shall survive the execution and delivery hereof of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer or one of
its officers thereunto duly authorized as of the date set forth below.
NUMBER OF SHARES OF COMMON STOCK TO BE PURCHASED: 158,856
AGGREGATE PURCHASE PRICE OF SUCH COMMON STOCK: $12.59
SIGNATURES FOR ENTITIES
INVESTOR #1:
IN WITNESS WHEREOF, the undersigned represents that the foregoing statements are
true and correct and that it has caused this Stock Purchase Agreement to be duly
executed on its behalf this ____ day of March, 1999.
______________________________________ ______________________________________
Address Canadian Advantage Limited Partnership
Printed Name of Subscriber
Telecopier No. _______________________ By:____________________________________
(Signature of Authorized Person)
______________________________________ ______________________________________
Jurisdiction of Incorporation or Printed Name and Title
Organization
Federal Identification No.: _________________________
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INVESTOR #2:
IN WITNESS WHEREOF, the undersigned represents that the foregoing statements are
true and correct and that it has caused this Stock Purchase Agreement to be duly
executed on its behalf this _____ day of March, 1999.
______________________________________ ______________________________________
Address Aberdeen Avenue LLC
Printed Name of Subscriber
Telecopier No. _______________________ By:____________________________________
(Signature of Authorized Person)
______________________________________ ______________________________________
Jurisdiction of Incorporation or Printed Name and Title
Organization
Federal Identification No.: _________________________
This Agreement has been accepted as of the date set forth below.
FRONTLINE COMMUNICATIONS CORP
By: _________________________________ Date:_______________________
Printed Name and Title: ___________________________________
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EXHIBIT A
NOTICE OF EXERCISE OF REPRICING
RIGHTS AND/OR SALE OF COMMON STOCK
TO: Frontline Communications Corporation CC:
One Blue Hill Plaza
P.O. Box 1548
Pearl River, New York 10965
Attention: Stephen J. Cole-Hatchard, President/CEO
Facsimile No.: (914) 623-8669
This Exercise Notice is given pursuant to the terms of the Stock Purchase
Agreement dated as of March 25, 1999 (the "Agreement"), by and between Frontline
Communications Corporation, a Delaware corporation (the "Company") and the
undersigned (the "Buyer"). Capitalized terms used herein and not otherwise
defined herein have the respective meanings provided in the Agreement. The Buyer
hereby notifies you as follows:
Check below if applicable:
|_| Exercise of Repricing Right and Sale of Shares
(1) Exercise Date: ___________________________
(2) No. of Repricing Rights outstanding: _______________
(3) No. of Repricing Rights exercised hereby: _______________
(4) Repricing Price: __________________
(5) Average Market Price: _________________
(6) Repricing Rate: __________________
(7) Number of Repricing Shares due to Buyer: ___________. Please
issue such number of Repricing Shares in the name(s) and to the
address or the account specified immediately below or, if
additional space is necessary, on an attachment hereto:
Delivery Instructions
for Common Stock: ____________________
<PAGE>
Address: ____________________________________________
The exercise of these Repricing Rights is being made for an
immediate sale of Common Stock being issued.
(8) This is to advise you that we have sold common stock through
______________________. The sale of these shares was in
compliance with the "plan of distribution" section of the
prospectus, dated ________________, 1999, which listed
____________________ as a selling shareholder. A copy of said
prospectus was properly delivered with respect to the prospectus
delivery requirements of Section 5(b)(2) of the Securities Act of
1933, as amended. Please authorize the transfer of sale shares
into the name of __________________________ without further
restriction.
|_| Sale of Shares
This is to advise you that we have sold common stock through
______________________. The sale of these shares was in compliance
with the "plan of distribution" section of the prospectus, dated
________________, 1999, which listed ____________________ as a selling
shareholder. A copy of said prospectus was properly delivered with
respect to the prospectus delivery requirements of Section 5(b)(2) of
the Securities Act of 1933, as amended. Please authorize the transfer
of sale shares into the name of __________________________ without
further restriction.
SS or Tax ID Number: ________________________________
NAME OF BUYER:
Date: ____________________ __________________________________
By:_______________________________
Name:
Title
-2-
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 25, 1999, (this
"Agreement"), is made by and between FRONTLINE COMMUNICATIONS CORPORATION, a
Delaware corporation (the "Company"), and the person named on the signature page
hereto (the "Buyer").
WITNESETH:
WHEREAS, upon the terms and subject to the conditions of the Stock Purchase
Agreement of even date herewith, between the Buyer and the Company (the "Stock
Purchase Agreement"), the Company has agreed to issue and sell to the Buyer
shares of Common Stock, $.01 par value (the "Common Stock"), of the Company; and
WHEREAS, to induce the Buyer to execute and deliver the Stock Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "Securities
Act"), and applicable state securities laws with respect to the shares, the
shares underlying the Repricing Rights and the Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyer hereby
agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the following
meanings:
(i) "Investor" means the Buyer.
(ii) "Register," "Registered," and "Registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the Securities Act and pursuant to Rule 415 under the Securities
Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
(iii) "Registrable Securities" means the Common Stock purchased by the Buyer,
the Common Stock to be issued upon exercising the Repricing Rights and the
Warrants to be issued to the Buyer and finder by the Company, not to exceed
450,000.
(iv) "Registration Statement" means a registration statement of the Company
under the Securities Act.
1
<PAGE>
(b) Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set forth in the Stock Purchase Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare, and within sixty (60)
days after the Closing Date (as that term is defined in Section 8 of the Stock
Purchase Agreement) file a Registration Statement covering the Registrable
Securities. Such Registration Statement shall state that, in accordance with
Rule 416 and Rule 457 under the Securities Act it also covers such indeterminate
number of additional shares of Common Stock as may become issuable to prevent
dilution resulting from stock splits, stock dividends or similar event.
(b) Payments by the Company. The Company shall pay, within ten (10) business
days of receipt of written notice from the Buyer, a fee of 2% of the gross
purchase price of the Common Stock purchased by the Buyer, per each thirty day
period, on a pro rata basis, as long as the following obligations remain
unsatisfied:
(i) If the Registration Statement is not filed within sixty (60) calendar days
following the Closing Date, as that term is defined in the Stock Purchase
Agreement.
(ii) If the Registration Statement does not cover 450,000 shares of Common
Stock.
(iii) If the Registration Statement is not declared effective on or before the
one hundred twentieth (120th) calendar day after the Closing Date;
(iv) If the Company does not file any acceleration request within 5 business
days of receiving a "no review" from the SEC with regard to the
Registration Statement;
(v) If trading is suspended for more than 5 trading days due to the fault of
the Company.
(vi) If the Registration Statement cease to remain effective for more than 10
business days;
(vii) If the Company fails to deliver shares pursuant to the exercise of
Repricing Rights or a sale within seven (7) business days of the Company's
receipt of a facsimile notice in the form annexed hereto as Exhibit A (the
"Exercise Notice") and/or fails to make a cash payment within the time
periods set forth in the Stock Purchase Agreement or this Agreement, as
the case may be.
(c) Demand Redemption. In the event any default by the Company under the terms
of this Agreement is continuing for more than 180 calendar days, Investor may at
its sole option send written notice of a demand redemption to the Company. Upon
receipt of the written notice from the Investor, the Company shall within 10
business days make a cash payment to Investor equal to the intrinsic market
value of Investor's then outstanding Repricing Rights and Common Stock as of the
date that written notice is received by the Company. The cash payment to be made
by the Company upon receipt of written notice of the demand redemption, shall be
in addition to any remedies or liquidated damages to which the Investor is
entitled up to the date written notice of the demand redemption is received by
the Company.
2
<PAGE>
3. Obligations of the Company. In connection with the registration of the
Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly, and file with the SEC as soon as possible after the
Closing Date, a Registration Statement with respect to not less than the number
of Registrable Securities and thereafter use its best efforts to cause the
Registration Statement relating to Registrable Securities to become effective
not later than five (5) days after the Company is notified by the SEC that the
Registration Statement may be declared effective and keep the Registration
Statement effective pursuant to Rule 415 at all times until the earliest of (i)
the date that is one (1) year after the Closing Date (ii) the date when the
Investors may sell all Registrable Securities under Rule 144 or (iii) the date
the Investors no longer own any of the Registrable Securities (the "Registration
Period"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(b) Prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to keep
the Registration effective at all times during the Registration Period, and,
during the Registration Period, comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Securities of the Company
covered by the Registration Statement.
(c) Furnish to each Investor whose Registrable Securities are included in the
Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other documents,
as such Investor may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such Investor;
(d) Use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such other securities or
blue sky laws of such jurisdictions as the Investors who hold a majority in
interest of the Registrable Securities being offered reasonably request and in
which significant volumes of shares of Common Stock are traded, (ii) prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times during the
Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (A) qualify to do business in any
3
<PAGE>
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (B) subject itself to general taxation in any such jurisdiction,
(C) file a general consent to service of process in any such jurisdiction, (D)
provide any undertakings that cause more than nominal expense or burden to the
Company or (E) make any change in its certificate of incorporation or by-laws,
which in each case the Board of Directors of the Company determines to be
contrary to the best interests of the Company and its stockholders;
(e) As promptly as practicable after becoming aware of such event, notify each
Investor of the happening of any event of which the Company has knowledge, as a
result of which the prospectus included in the Registration Statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and use its best efforts promptly to prepare a supplement or
amendment to the Registration Statement or other appropriate filing with the SEC
to correct such untrue statement or omission, and deliver a number of copies of
such supplement or amendment to each Investor as such Investor may reasonably
request;
(f) As promptly as practicable after becoming aware of such event, notify each
Investor who holds Registrable Securities being sold of the issuance by the SEC
of any stop order or other suspension of the effectiveness of the Registration
Statement at the earliest possible time;
(g) Upon effectiveness of registration, and upon receipt of an Exercise Notice
in the form annexed hereto as Exhibit A, the Company shall (i) instruct the
transfer agent to remove all restrictive legends from the Regristrable
Securities; (ii) instruct the transfer agent to issue certificates in such
denominations or amounts as the case may be, as the Buyer may reasonably request
and registered in such names as the Buyer may request; and (iii) remove any stop
transfer order instructions.
(h) Take all other reasonable actions necessary to expedite and facilitate
disposition by the Investor of the Registrable Securities pursuant to the
Registration Statement.
4. Obligations of the Investors. In connection with the registration of the
Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it, and the intended method of disposition of the Registrable Securities
held by it, as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least five (5) days prior
to the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
4
<PAGE>
such Investor (the "Requested Information") if such Investor elects to have any
of such Investor's Registrable Securities included in the Registration
Statement. If at least two (2) business days prior to the filing date the
Company has not received the Requested Information from an Investor (a
"Non-Responsive Investor"), then the Company may file the Registration Statement
without including Registrable Securities of such Non-Responsive Investor.
Notwithstanding the foregoing, each Investor elects to have its securities
included in the Registration Statement to be filed by the Company within five
(5) days of the date hereof.
(b) Each Investor by such Investor's acceptance of the Registrable Securities
agrees to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of the Registration Statement
hereunder, unless such Investor has notified the Company in writing of such
Investor's election to exclude all of such Investor's Registrable Securities
from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 3(e) or 3(f), above,
such Investor will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(e) or 3(f) and, if so directed by the
Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
5. Expenses of Registration. All reasonable expenses, other than underwriting
discounts and commissions and other fees and expenses of investment bankers and
other than brokerage commissions, incurred in connection with registrations,
filings or qualifications pursuant to Section 3 shall be borne by the Company,
however; if Investor decides to retain Counsel, it shall do so at its own
expense.
6. Indemnification. In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold harmless
each Investor who holds such Registrable Securities, the directors, if any, of
such Investor, the officers, if any, of such Investor, each person, if any, who
controls any Investor within the meaning of the Securities Act or the Exchange
Act (each, an "Indemnified Person"), against any losses, claims, damages,
liabilities or expenses (joint or several) incurred (collectively, "Claims") to
which any of them may become subject under the Securities Act, the Exchange Act
or otherwise, insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement of a material fact contained in the Registration Statement,
prospectus, or any post-effective amendment thereof or the omission to state
therein a material fact required to be stated therein necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading Notwithstanding anything to the
5
<PAGE>
contrary contained herein, the indemnification agreement contained in this
Section 6(a) shall not be available to the extent such Claim is based on a
failure of the Investor to deliver or cause to be delivered the prospectus made
available by the Company; or apply to amounts paid in settlement of any Claim if
such settlement is effected without the the Company being a party thereto. Each
Investor will indemnify the Company and its officers, directors and agents
against any claims arising out of or based upon a claim which occurs in reliance
upon and in conformity with information furnished in writing to the Company, by
or on behalf of such Investor, expressly for use in connection with the
preparation of the Registration Statement, subject to such limitations and
conditions as are applicable to the Indemnification provided by the Company to
this Section 6. Such indemnity shall remain in full force and effect regardless
of any investigation made by or on behalf of the Indemnified Person.
(b) Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be provided,
however, that an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. In such event, the Company shall pay for only one separate legal
counsel for the Investors; such legal counsel shall be selected by the Investors
holding a majority in interest of the Registrable Securities included in the
Registration Statement to which the Claim relates. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
8. Reports under Exchange Act. With a view to making available to the Investors
the benefits of Rule 144 promulgated under the Securities Act or any other
similar rule or regulation of the SEC that may at any time permit the Investors
to sell securities of the Company to the public without registration ("Rule
144"), the Company agrees to:
6
<PAGE>
(a) make and keep public information available, as those terms are understood
and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
10. Amendment of Registration Rights. Any provision of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold an 80% in interest of the
Registrable Securities not resold to the public. Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon each Investor
and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more persons or entities with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
(b) Notices required or permitted to be given hereunder shall be in writing and
shall be deemed to be sufficiently given when personally delivered (by hand, by
courier, by telephone line facsimile transmission, receipt confirmed, or other
means) or sent by certified mail, return receipt requested, properly addressed
and with proper postage pre-paid (i) if to the Company, at One Blue Hill Plaza,
6C Floor, P. O. Box 1548, Pearl River, NY 10965with a copy to Kenneth Selterman,
Esq., Tenzer Greenblatt, The Chrysler Building, 405 Lexington Avenue, New York,
NY 10174-0208; (ii) if to the Buyer, at the address set forth under its name in
the Stock Purchase Agreement, and (iii) if to any other Investor, at such
address as such Investor shall have provided in writing to the Company, or at
such other address as each such party furnishes by notice given in accordance
with this Section 11(b), and shall be effective, when personally delivered, upon
receipt and, when so sent by certified mail, four (4) calendar days after
deposit with the United states Postal Service.
7
<PAGE>
(c) Failure of any party to exercise any right or remedy under this Agreement or
otherwise, or delay by a party in exercising such right or remedy, shall not
operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in accordance
with the laws of the State of Delaware applicable to agreements made and to be
performed entirely within such State. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based upon forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. In the event that any provision of this
Agreement is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any provision hereof which may prove invalid or unenforceable under
any law shall not effect the validity or enforceability of any other provision
hereof.
(e) This Agreement constitutes the entire agreement among the parties hereto
with respect to the subject matter hereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein.
This Agreement supersedes all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement shall inure
to the benefit of and be binding upon the successors and assigns of each of the
parties hereto.
(g) All pronouns and any variations thereof refer to the masculine, feminine or
neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference only and
shall not Emit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered to the
other party hereto by telephone line facsimile transmission of a copy of this
Agreement bearing the signature of the party so delivering this Agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
by their respective officers thereunto duly authorized as of the day and year
first above written.
FRONTLINE COMMUNICATIONS CORPORATION
By: ________________________________
Name: ________________________________
Title: ________________________________
CANADIAN ADVANTAGE LIMITED PARTNERSHIP
By: ________________________________
Name: ________________________________
Title: ________________________________
ABERDEEN AVENUE LLC
By: ________________________________
Name: ________________________________
Title: ________________________________
9
Exhibit 21
Subsidiaries of Frontline Communications Corporation
Name Ownership Jurisdiction
- ---- --------- ------------
Frontline Commerce Corporation wholly-owned Delaware
WOW Factor, Inc wholly-owned New Jersey
CLEC Communications Corporation wholly-owned Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-KSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,994,711
<SECURITIES> 0
<RECEIVABLES> 8,853
<ALLOWANCES> 5,526
<INVENTORY> 0
<CURRENT-ASSETS> 2,200,119
<PP&E> 1,122,998
<DEPRECIATION> 141,213
<TOTAL-ASSETS> 6,286,403
<CURRENT-LIABILITIES> 954,583
<BONDS> 0
0
0
<COMMON> 33,614
<OTHER-SE> 5,013,773
<TOTAL-LIABILITY-AND-EQUITY> 6,286,403
<SALES> 0
<TOTAL-REVENUES> 574,964
<CGS> 651,378
<TOTAL-COSTS> 1,744,029
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,744,099)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,744,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,744,099)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
