SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 of 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO 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
(Exact name of Small Business issuer as specified in its Charter)
Delaware 13-3950283
(State or other jurisdiction (I.R.S Employer
Of incorporation or organization) Identification number)
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)
Indicate by a check mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes _X_ No___
As of May 10, 1999, there were outstanding 3,390,700 shares of the issuer's
Common Stock, $ .01 par value.
<PAGE>
INDEX
Page
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis or Plan
Of Operations 5
Part II Other information 8
Signatures 9
<PAGE>
Frontline Communications Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 (1)
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents $ 3,059,935 $ 1,994,711
Accounts receivable, net of allowance for doubtful accounts 7,336 3,327
Prepaid expenses and other 187,426 202,081
------------ ------------
Total current assets 3,254,697 2,200,119
Property and equipment, net 1,232,319 981,785
Intangibles, net 3,113,743 3,081,326
Other 48,871 23,173
------------ ------------
$ 7,649,630 $ 6,286,403
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 508,662 $ 301,162
Deferred revenue 645,575 614,852
Current portion of capitalized lease obligation 82,767 38,569
------------ ------------
Total current liabilities 1,237,004 954,583
Capitalized lease obligations and notes payable- net of current portion 397,134 284,433
------------ ------------
Total liabilities 1,634,138 1,239,016
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 authorized, 10 issued and
outstanding
Common Stock, $.01 par value, 10,000,000 authorized, 3,620,220 and 3,361,364
issued, respectively, 3,388,700 and 3,129,844 outstanding,
respectively 36,202 33,614
Additional paid-in capital 11,098,945 9,121,533
Accumulated deficit (4,855,542) (3,843,647)
Treasury stock, at cost, 231,520 shares (264,113) (264,113)
------------ ------------
Total stockholders' equity 6,015,492 5,047,387
------------ ------------
$ 7,649,630 $ 6,286,403
============ ============
</TABLE>
(1) The balance sheet at December 31, 1998 is derived from audited financial
statements at that date.
See notes to condensed consolidated financial statements.
-1-
<PAGE>
FRONTLINE COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months ended
March 31, March 31,
1999 1998
----------- -----------
Revenues $ 656,857 $ 122,060
Cost of revenues 434,208 96,744
----------- -----------
Gross profit 222,649 25,316
Operating expenses:
Selling, general and administrative 1,244,318 119,371
----------- -----------
Loss from operations (1,021,669) (94,055)
Other income (expense):
Interest income 19,778
Interest expense (10,004) (16,907)
----------- -----------
Net loss ($1,011,895) ($ 110,962)
=========== ===========
Loss per share-basic and diluted ($ 0.31) ($ 0.09)
=========== ===========
Weighted average number of shares
outstanding- basic and diluted 3,220,990 1,218,000
=========== ===========
See notes to condensed consolidated financial statements.
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<PAGE>
FRONTLINE COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net loss ($1,011,895) ($ 110,962)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 339,436 22,816
Changes in assets and liabilities
Accounts receivable (4,010) (8,884)
Prepaid expenses and other 14,656 4,106
Other assets (25,698)
Accounts payable and accrued expenses 207,500 128,907
Deferred revenue 30,724 10,609
----------- -----------
Net cash (used) provided by operating activities (449,287) 46,592
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (129,684) (12,014)
Acquisition of businesses (311,495)
----------- -----------
Net cash used in investing activities (441,179) (12,014)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock, net 1,770,000 1,000
Proceeds from exercise of stock options 210,000
Principal payments on capitalized lease obligations (24,310)
Deferred registration costs (135,000)
Proceeds from bank note payable 65,000
Repayments of stockholder loans (5,303)
----------- -----------
Net cash provided (used) by financing activities 1,955,690 (74,303)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,065,224 (39,725)
Cash and cash equivalents, beginning of period 1,994,711 39,725
Cash and cash equivalents, end of period $ 3,059,935 $ --
=========== ===========
Supplemental information:
Approximate interest paid during the period $ 14,000
===========
</TABLE>
The Company entered into capital lease obligations in the aggregate amount of
approximately $180,000 during the three months ended March 31, 1999.
-3-
<PAGE>
FRONTLINE COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1999
NOTE A- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 (b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. The results for the interim periods are not
necessarily indicative of the results that may be attained for an entire year or
any future periods. For further information, refer to the Financial Statements
and footnotes thereto in the Company's annual report on Form 10-KSB for the
fiscal year ended December 31, 1998.
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
NOTE B- LOSS PER SHARE
The Company has adopted SFAS No. 128, "Earning per Share", which provides
for calculation of "basic" and "diluted" earning per share. Basic earnings per
share includes no dilution and is computed by weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect, in
periods in which they have dilutive effect, the effect of common shares issuable
upon exercise of stock options and warrants. Diluted earnings per share amounts
have not been reported because 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.
NOTE C-CAPITAL STOCK
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, with net proceeds to
the Company of $1,770,000. The Company also issued warrants to purchase an
aggregate of 21,662 shares of Common Stock at an exercise price of $13.85 per
share. The Company granted repricing rights with respect to the shares, and
anti-dilution rights with respect to the warrants, subject to an aggregate
maximum issuance of 450,000 shares.
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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
preference 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. Actual results may vary significantly from such
forward-looking statements.
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 modem 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.
The Company acquired all of the issued and outstanding capital stock of
WOWFactor, Inc. in October 1998. In addition, the Company acquired substantially
all of the assets of Roxy Systems, Inc. d/b/a Magic Carpet, US Online, Inc. and
Webspan Communications, Inc. in the fourth quarter of 1998. All of the
acquisitions 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.
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 1999 and 1998
Revenues: Revenues for the three months ended March 31, 1999 were $656,857
compared to $122,060 for the three months ended March 31, 1999. The increase was
attributable to an expanded subscriber base. The Company had approximately
15,000 and 1,650 subscribers at March 31, 1999 and 1998, respectively. The
increase in subscriber base was principally due to acquisitions.
Cost of Revenues: Cost of revenues for 1999 were $434,208 compared to $96,744
for 1998. Cost of revenues as a percentage of revenues for 1999 was 66.1%
compared to 79.3% for 1998. 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 $1,244,318 compared to $119,371 for
1999 and 1998, respectively. The increase in operating expenses was attributable
to higher payroll, amortization, depreciation, advertising, promotion, and
professional fees incurred in 1999 to support the increased revenue base and in
anticipation of future growth. In March 1999, the Company had 46 employees
compared to 8 in March 1998. Management anticipates future increases in
operating expenses related to advertising, promotion, payroll, depreciation and
professional fees.
-5-
<PAGE>
Interest Income: Interest income net of interest expense for 1999 was $9,774
compared to net interest expense of $16,907 for 1998. 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 three months ended
March 31, 1999 and 1998, the Company incurred net losses of $1,011,895 and
$110,962, 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
The Company's working capital at March 31, 1999 was $2,017,693 compared to
$1,245,536 at December 31, 1998. The increase in working capital was due to
receipt of the proceeds from the private sale of the Company's Common Stock in
March 1999.
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, with net proceeds to
the Company of $1,770,000. The Company also issued warrants to purchase an
aggregate of 21,662 shares of Common Stock at an exercise price of $13.85 per
share. The Company granted repricing rights with respect to the shares, and
anti-dilution rights with respect to the warrants, subject to an aggregate
maximum issuance of 450,000 shares.
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 resources is dependent
upon prevailing market conditions, interest rates, and financial condition of
the Company. The Company will require additional cash resources in connection
with its continued expansion.
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.
Year 2000
The "Year 2000" problem involves the ability of computer hardware and
software systems to accurately recognize and process date sensitive information
when the year changes to 2000.. Systems that do not properly recognize such
information could generate wrong data or fail.
-6-
<PAGE>
Year 2000 (continued)
The Company has undertaken a two-phase process to evaluate its internal
status with respect to the Year 2000 problem. In the first phase, the Company
conducted an assessment of its systems including both IT systems and non-IT
systems such as hardware embedded technology, for Year 2000 compliance. 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 process will involve taking any needed
corrective action to bring systems into compliance and develop a contingency
plan in the event any non-compliant critical systems remain by January 1,2000.
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 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 material adverse
impact on the Company's operations.
-7-
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
In January 1999, the Company issued 100,000 shares of its Common Stock
to Mr. Ronald Shapss, a director, upon exercise of options granted to
him under the Company's 1997 Stock Option Plan. In March 1999, the
Company sold 158,856 shares of its Common stock and issued warrants to
purchase aggregate 21,662 shares of Common Stock to two institutional
investors. All of the foregoing securities were issued in private
offerings pursuant to an exemption from registration offered by
section 4(2) of the Securities Act of 1933.
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 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 closing of
the initial public offering) through March 31, 1999, the Company used
approximately $1,793,000 of the net proceeds for acquisitions and
related expenses, $264,118 for a stock repurchase; $443,000 for the
repayment of indebtedness (including $185,848 to affiliates); $496,000
for network and POP upgrade; and approximately $435,000 for marketing
expenses. The balance after funding the operating losses are currently
held in interest-bearing bank accounts.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits--Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K--None
-8-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 12, 1999
By:
-------------------------------------
Stephen J. Cole-Hatchard
Chief Executive Officer and President
By:
-------------------------------------
Vasan Thatham
Principal Financial Officer and Vice President
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S FINANCIAL STATEMENTS INCLUDED IN FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,059,935
<SECURITIES> 0
<RECEIVABLES> 7,336
<ALLOWANCES> 15,526
<INVENTORY> 0
<CURRENT-ASSETS> 3,254,697
<PP&E> 1,433,874
<DEPRECIATION> 201,555
<TOTAL-ASSETS> 7,649,630
<CURRENT-LIABILITIES> 1,237,004
<BONDS> 0
0
0
<COMMON> 36,202
<OTHER-SE> 5,979,290
<TOTAL-LIABILITY-AND-EQUITY> 7,649,630
<SALES> 0
<TOTAL-REVENUES> 656,857
<CGS> 434,208
<TOTAL-COSTS> 1,244,318
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,011,895)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,011,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,011,895)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
