-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DV+rVQfMGgFz3lryEzA5qO8Flew2v73tLhGMIR6j/zyb+OOtZlCf+XSfTl/QpT11 Kz5qrt3WH1gO27OxQdwDXA== 0000891554-99-000940.txt : 19990514 0000891554-99-000940.hdr.sgml : 19990514 ACCESSION NUMBER: 0000891554-99-000940 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTLINE COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001040850 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 133950283 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24223 FILM NUMBER: 99619513 BUSINESS ADDRESS: STREET 1: ONE BLUE HILL PLAZA 6C FLOOR STREET 2: P O BOX 1548 CITY: PEARL RIVER STATE: NY ZIP: 10965 BUSINESS PHONE: 9146238553 MAIL ADDRESS: STREET 1: ONE BLUE HILL PLAZA 6C FLOOR STREET 2: P O BOX 1548 CITY: PEARL RIVER STATE: NY ZIP: 10965 FORMER COMPANY: FORMER CONFORMED NAME: EASY STREET ONLINE INC DATE OF NAME CHANGE: 19970820 10QSB 1 QUARTERLY REPORT 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. 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 Frontline Communications Corporation Condensed Consolidated Balance Sheets
March 31, December 31, 1999 1998 (1) ------------ ------------ (Unaudited) 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 ============ ============
(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- 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. -2- FRONTLINE COMMUNICATIONS CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited)
For the three months ended March 31, March 31, 1999 1998 ----------- ----------- 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 ===========
The Company entered into capital lease obligations in the aggregate amount of approximately $180,000 during the three months ended March 31, 1999. -3- 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- 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- 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- 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- 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- 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 -9- EX-27 2 FDS --
5 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 3-MOS DEC-31-1999 MAR-31-1999 3,059,935 0 7,336 15,526 0 3,254,697 1,433,874 201,555 7,649,630 1,237,004 0 0 0 36,202 5,979,290 7,649,630 0 656,857 434,208 1,244,318 0 0 0 (1,011,895) 0 (1,011,895) 0 0 0 (1,011,895) (0.31) (0.31)
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