-----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, OFCQdKXi+/6Cy8VNfMCypml8UMhZV9o3/Z81ZNoZqumXzmWXZGKOIEBCVzmvEq8d srPzrYXqNb0UbDwKjGntGg== 0000950117-02-001763.txt : 20020806 0000950117-02-001763.hdr.sgml : 20020806 20020806152703 ACCESSION NUMBER: 0000950117-02-001763 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020806 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: 1934 Act SEC FILE NUMBER: 001-15673 FILM NUMBER: 02720656 BUSINESS ADDRESS: STREET 1: ONE BLUE HILL PLAZA STREET 2: STE 1548 CITY: PEARL RIVER STATE: NY ZIP: 10965 BUSINESS PHONE: 9146238553 MAIL ADDRESS: STREET 1: ONE BLUE HILL PLAZA STREET 2: STE 1548 CITY: PEARL RIVER STATE: NY ZIP: 10965 FORMER COMPANY: FORMER CONFORMED NAME: EASY STREET ONLINE INC DATE OF NAME CHANGE: 19970820 10QSB 1 a33109.txt FRONTLINE COMMUNICATIONS SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2002 [ ] 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 001-15673 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) (845) 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 July 29, 2002 there were outstanding 9,206,885 shares of the issuer's Common Stock, $ .01 par value. INDEX
Page Part I Financial Information Item 1 Financial Statements (Unaudited) 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 of Financial Condition And Results Of Operations 6 Part II Other information 9 Signatures 10
Frontline Communications Corporation Condensed Consolidated Balance Sheets
June 30, December 31, 2002 2001 ------------------- --------------- (Unaudited) (Audited) ASSETS Current: Cash and cash equivalents $413,680 $602,534 Accounts receivable, net of allowance for doubtful accounts 220,024 264,257 Prepaid expenses and other 43,406 33,023 ------------------- --------------- Total current assets 677,110 899,814 Property and equipment, net 968,129 1,267,625 Intangibles, net 59,330 140,738 Other 107,260 105,493 ------------------- --------------- $1,811,829 $2,413,670 =================== =============== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable $852,146 $910,234 Accrued expenses 764,873 851,713 Deferred revenue 620,441 615,350 Current portion of long-term debt 935,991 247,840 ------------------- --------------- Total current liabilities 3,173,451 2,625,137 Capitalized lease obligation 36,655 130,229 Promissory notes payable, net of unamortized discount of $72,917 at June 30, 2002 127,083 728,600 ------------------- --------------- Long-term debt, less current portion 163,738 858,829 ------------------- --------------- ------------------- --------------- Total liabilities 3,337,189 3,483,966 ------------------- --------------- Stockholders' deficiency: Preferred stock, $.01 par value, 2,000,000 shares authorized, issued and outstanding 515,000 and 527,100 shares, respectively. 5,150 5,271 Liquidation preference $7,725,000 and $7,906,500, respectively. Common Stock, $.01 par value, 25,000,000 shares authorized, 9,852,337 and 9,561,197 shares issued respectively, 9,206,885 and 8,944,551 shares 98,523 95,612 outstanding, respectively. Additional paid-in capital 36,196,487 36,074,277 Accumulated deficit (36,954,104) (36,380,804) Treasury stock, at cost, 645,452 and 616,646 shares, respectively. (871,416) (864,652) ------------------- --------------- Total stockholders' deficiency (1,525,360) (1,070,296) ------------------- --------------- $1,811,829 $2,413,670 =================== ===============
See notes to condensed consolidated financial statements. -1- FRONTLINE COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2002 2001 2002 2001 ------------------- -------------------- ------------- ---------------- Revenues $1,286,961 $1,669,865 $2,639,230 $3,359,250 Costs and expenses: Cost of revenues 648,006 924,373 1,329,860 1,972,047 Selling, general and administrative 632,257 1,021,003 1,299,579 2,276,062 Depreciation and amortization 193,457 742,643 387,719 1,473,474 ------------------- -------------------- ------------- ---------------- 1,473,720 2,688,019 3,017,158 5,721,583 ------------------- -------------------- ------------- ---------------- Loss from operations (186,759) (1,018,154) (377,928) (2,362,333) Other income (expense): Interest income 4,320 13,770 6,062 44,151 Interest expense (22,177) (34,040) (43,720) (73,521) Loss on disposal of property and equipment (3,214) (38,919) ------------------- -------------------- ------------- ---------------- Net loss (204,616) (1,038,424) (418,800) (2,430,622) ------------------- -------------------- ------------- ---------------- Preferred dividends 75,435 78,975 154,500 162,780 ------------------- -------------------- ------------- ---------------- Net loss available to common shareholders (280,051) (1,117,399) (573,300) (2,593,402) =================== ==================== ============= ================ Loss per common share-basic and diluted ($0.03) ($0.17) ($0.06) ($0.39) =================== ==================== ============= ================ Weighted average number of common shares outstanding- basic and diluted 9,061,412 6,720,035 9,003,304 6,675,259 =================== ==================== ============= ================
See notes to condensed consolidated financial statements. -2- FRONTLINE COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six months ended June 30, June 30, 2002 2001 ------------------------------------ Cash flow from operating activities: Net loss ($418,800) ($2,430,622) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 387,719 1,473,474 Debt discount amortization 2,083 Loss on disposal of property and equipment 3,214 38,919 Noncash compensation charge 50,000 Changes in operating assets and liabilities Marketable securities 1,808,210 Accounts receivable 44,233 123,627 Prepaid expenses and other (10,383) 32,560 Other assets (1,906) (4,769) Accounts payable and accrued expenses (299,428) (365,940) Deferred revenue 5,091 (154,323) ------------------- -------------- Net cash (used in) provided by operating activities (238,177) 521,136 ------------------- -------------- Cash flows from investing activities: Acquisition of property and equipment (14,895) (44,073) Proceeds from disposal of property and equipment 5,000 51,886 ------------------- -------------- Net cash (used in) provided by investing activities (9,895) 7,813 ------------------- -------------- Cash flows from financing activities: Principal payments on long-term debt (134,018) (265,639) Payments to acquire treasury stock (6,764) (4,113) Proceeds from private sale of notes payable 200,000 ------------------- -------------- Net cash provided by (used in ) financing activities 59,218 (269,752) ------------------- -------------- Net (decrease) increase in cash and cash equivalents (188,854) 259,197 Cash and cash equivalents, beginning of period 602,534 781,082 ------------------- -------------- Cash and cash equivalents, end of period $413,680 $1,040,279 =================== ============== Supplemental information: Approximate interest paid during the period $42,000 $71,000 =================== ============== Approximate capital lease obligations incurred $33,000 ============== Approximate dividends on Series B Preferred stock paid in common stock $163,000 ============== Approximate debt issue discount arising from the value of warrants $75,000 ===================
See notes to condensed consolidated financial statements. -3- FRONTLINE COMMUNICATIONS CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2002 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 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, 2001. There have been no significant changes in accounting policies since December 31, 2001. 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 follows SFAS No. 128, "Earning per Share", which provides for the calculation of "basic" and "diluted" earning per share ("EPS"). Basic EPS includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted - average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur through the effect of common shares issuable upon exercise of stock options and warrants and convertible securities. Potential common shares have not been included in the computation of diluted loss since the effect would be antidilutive. NOTE C- ADOPTION OF NEW ACCOUNTING LITERATURE The Company adopted the provisions of Statement of Financial Accounting Standards No. 141 and No. 142 as of January 2, 2002. The adoption of these standards had no effect on the Company's financial position, results of operations or cash flows. NOTE D- CAPITAL STOCK In May 2002, the Company entered into a consulting agreement for marketing services and issued to the consultant 250,000 shares of common stock as consideration for the services rendered by the consultant. Accordingly, $50,000, representing the fair value of the shares issued, was charged to operations. During the six months ended June 30, 2002, the Company issued 41,140 shares of common stock upon conversion of 12,100 shares of Series B Convertible Redeemable preferred stock. -4- FRONTLINE COMMUNICATIONS CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2002 In June of 2002, the Company's Board of Directors elected not to declare a dividend on its Series B Convertible Redeemable preferred stock for the six months ending June 30, 2002. Accrued expenses at June 30, 2002 include $154,500 representing unpaid dividends. NOTE E- LONG-TERM DEBT In June 2002, the Company completed a private placement of 8% promissory notes and received proceeds of $200,000 (including $50,000 from Officers and Directors). The promissory notes bear interest at 8% and mature in three years from the date of issuance. The Company has the option to convert the principal amount due under the promissory notes into shares of its common stock at a conversion price of $4.80 per share, under certain circumstances, as defined in the agreement with the promissory note holders, such as the market price of the Company's common stock exceeding $6 per share. The Company also issued to the note holders warrants to purchase an aggregate of 1,000,000 shares of its common stock at an exercise price of $.08 per share. Out of the proceeds, $75,000 was allocated as the value of the warrants and is deducted from the current value of the notes payable in the accompanying balance sheet (Discount). The debt issue discount arising from the value of the warrants is being amortized as additional interest over the life of the promissory notes. NOTE F- SUBSEQUENT EVENT In July 2002, the Company entered into a letter of intent to merge with Shecom Corporation ("Shecom"), a manufacturer and distributor of computers, peripherals and memory modules. According to Shecom, it had revenues of approximately $309 million in 2001. Under the terms of the letter of intent, the Company will acquire all of the issued and outstanding shares of Shecom in an all stock exchange, and after the merger the shareholders of Shecom will own a majority of the Company's stock. The transaction is subject to, among other things, satisfactory completion of due diligence by both parties, an execution of a definitive agreement with customary closing conditions, including regulatory and shareholder approval, and is expected to close early in the fourth quarter of 2002. However, there cannot be any assurance that the closing will occur at that time or that the closing will occur at all. -5- 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 Securities Exchange Act of 1934. 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, and other factors described herein and in the Company's other Securities and Exchange Commission filings. The words "believe", "expect", "anticipate", "intend" and "plan" and similar expressions identify forward-looking statements, which speak only as of the date the statements were made. The Company assumes no obligation to update the forward-looking information. Actual results may vary significantly from the results expressed or implied by such forward looking statements. Overview During the six months ended June 30, 2002 and 2001 a significant part of the Company's revenues were derived from providing Internet access services to individuals and businesses. These revenues were comprised principally of recurring revenues from the Company's customer base, leased line connections and from various ancillary services. The Company charges subscription fees, which are billed monthly, quarterly or annually, in advance, typically pursuant to pre-authorized credit card accounts. The balance of the Company's revenues were derived from website development and hosting services. Monthly subscription service revenue for Internet access is recognized over the period in which services are provided. Fee revenue for website development and Internet website presence services are recognized as services are performed. Deferred revenue represents prepaid access fees by customers. Restructuring Program. In October 2000, the Company initiated a restructuring program designed to, among other things, reduce its operating losses. The program consists of reductions of personnel, reduction in marketing and promotional expenses, consolidation of certain operations, exit from certain marginal product lines not related to the Company's core business, and closure of regional offices. The Company believes that the restructuring program and related cost reductions, will permit the Company to maintain service quality to its customers, while a more focused product offering portfolio should enhance the Company's ability to grow its revenue base. The Company has realized significant cost reductions from its restructuring program and the Company hopes to reduce additional costs during the remainder of 2002. However, there can be no assurance that the restructuring program will achieve the desired results and that there will not be any disruption or curtailment of any services or resulting loss of revenues. -6- Results of Operations Comparison of the three and six months ended June 30, 2002 and 2001 Revenues: Revenues decreased for the three and six months ended June 30, 2002 by $382,904 or 22.9%, and by $720,020 or 21.4%, respectively, over the same periods of the prior year. The decrease in revenues were in part due to the Company's closure of unprofitable satellite offices and due to a lesser amount of website development work performed in 2002. Cost of Revenues: For the three months ended June 30, 2002, cost of revenues decreased by $276,367 to $648,006 compared to the same period of the prior year. For the six months ended June 30, 2002, cost of revenues decreased by $642,187 to $1,329,860 compared to the same period of the prior year. Cost of revenues as a percentage of revenues for the three and six months ended June 30, 2002 were 50.4% and 50.4%, respectively, compared to 55.4% and 58.7%, respectively, in 2001. The decrease in cost of revenues as a percentage of revenues was due to cost reductions realized through the Company's restructuring program. Selling, General and Administrative: For the three months ended June 30, 2002, selling general and administrative expenses decreased by $388,746 compared to the same period of the prior year. As a percentage of revenues, selling, general and administrative expenses decreased from 61.1% in 2001 to 49.1% in 2002. For the six months ended June 30, 2002, selling general and administrative expenses decreased by $976,483 compared to the same period of the prior year. As a percentage of revenues, selling, general and administrative expenses decreased from 67.8% in 2001 to 49.2% in 2002.The decrease in selling, general and administrative expenses was due to cost reductions realized through the Company's restructuring program. The principal component of the decrease was in payroll and related costs due to workforce reduction. Depreciation and Amortization: For the three months ended June 30, 2002, depreciation and amortization decreased by $549,186 to $193,457 compared to the same period of the prior year. For the six months ended June 30, 2002, depreciation and amortization decreased by $1,085,755 to $387,719 compared to the same period of the prior year. The decrease was due to reduced amortization resulting from the Company's intangible assets written off as impaired in the fourth fiscal quarter of 2001. Interest Expense: Interest expense for the three months ended June 30, 2002 was $22,177 compared to an interest expense of $34,040 for the three months ended June 30,2001. Interest expense for the six months ended June 30, 2002 was $43,720 compared to an interest expense of $73,521 for the six months ended June 30, 2001. Interest expense for the three and six months ended June 30, 2002 decreased compared to the same periods of the prior year due to decreased debt level. Net loss: For the three months ended June 30, 2002, net loss decreased by 80.3% to $204,616 compared to a net loss of $1,038,424 in the comparable period of 2001. For the six months ended June 30, 2002, net loss decreased by 82.8% to $418,800 compared to a net loss of $2,430,622 in the comparable period of 2001. The Company incurred significant losses during the three and six months ended June 30, 2002 as revenues generated were not sufficient to offset the substantial up-front expenditures and operating costs associated with attracting and retaining additional customers. -7- Liquidity and Capital Resources. The Company's working capital deficiency at June 30, 2002 was $2,496,341 compared with a working capital deficiency of $1,725,323 at December 31, 2001. The increase in working capital deficiency was due to reclassification of a promissory note that is payable June 2003 in the principal amount of $728,600 from long-term debt to current liabilities and due to operating losses. The Company's primary capital requirements are to fund acquisitions of customer bases and related Internet businesses, install network equipment 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 bank lines of credit. The availability of capital resources is dependent upon prevailing market conditions, interest rates, and the financial condition of the Company. In June 2002, the Company completed a private placement of 8% promissory notes and received proceeds of $200,000 (including $50,000 from Officers and Directors). The promissory notes bear interest at 8% and mature in three years from the date of issuance. The Company has the option to convert the principal amount due under the promissory notes into shares of its common stock at a conversion price of $4.80 per share, under certain circumstances, as defined in the agreement with the promissory note holders, such as the market price of the Company's common stock exceeding $6 per share. The Company also issued to the note holders warrants to purchase an aggregate of 1,000,000 shares of its common stock at an exercise price of $.08 per share. Out of the proceeds, $75,000 was allocated as the value of the warrants and is deducted from the current value of the notes payable in the accompanying balance sheet (Discount). The debt issue discount arising from the value of the warrants is being amortized as additional interest over the life of the promissory notes. The Company's capital expenditures for 2002 are expected to range between $36, 000 and $50,000. Based on the current plans, management anticipates that cash on hand and expected recurring revenues will satisfy the Company's capital requirements through at least the end of 2002. However, the Company's need for additional capital may be affected by the outcome of its ongoing efforts to reduce operating expenses and its ability to maintain its existing revenue base. The Company's ability to maintain its existing revenue base is dependent upon many factors such as the continued viability of the Digital Subscriber Line ("DSL") providers through whom the Company offers DSL services and increased competition in the markets the Company serves for our Internet access products from cable and other Internet service providers. If the Company is not successful in maintaining its existing revenue base and implementing certain cost cutting measures, the Company may need additional financing in 2002 to continue operations as currently conducted. The Company has no available standby sources of financing and there can be no assurance that any additional financing, if required, will be available to the Company on acceptable terms, or at all. -8- PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds During the three months ended June 30, 2002, the Company issued 41,140 shares of common stock upon conversion of 12,100 shares of Series B Convertible Redeemable preferred stock and granted 250,000 shares of its common stock to a consultant. The foregoing shares were issued pursuant to exemptions from registration under Sections 3(a)(9) and 4(2) of the Securities Act of 1933. Item 4. Submission of Matters to Vote of Security Holders. The Company held an annual meeting of stockholders on June 26, 2002 at which the following matters were voted upon: 1. Election of five directors. The results of the meeting were as follows:
Broker DIRECTORS FOR WITHHELD NON-VOTES Stephen J. Cole-Hatchard 7,517,092 61,657 0 Nicko Feinberg 7,517,092 61,657 0 William A. Barron 7,517,092 61,657 0 Joseph Donahue 7,517,092 61,657 0 Ronald C. Signore 7,517,092 61,657 0
Item 5. Other Information In June of 2002, the Company's Board of Directors elected not to declare a dividend on its Series B Convertible Redeemable preferred stock for the six months ending June 30, 2002. Accrued expenses at June 30, 2002 include $154,500 representing unpaid dividends. In July 2002, the Company entered into a letter of intent to merge with Shecom Corporation, a manufacturer and distributor of computers, peripherals and memory modules. According to Shecom, it had revenues of approximately $309 million in 2001. Under the terms of the letter of intent, the Company will acquire all of the issued and outstanding shares of Shecom in an all stock exchange, and after the merger the shareholders of Shecom will own a majority of the Company's stock. The transaction is subject to, among other things, satisfactory completion of due diligence by both parties, an execution of a definitive agreement with customary closing conditions, including regulatory and shareholder approval, and is expected to close early in the fourth quarter of 2002. However, there cannot be any assurance that the closing will occur at that time or that the closing will occur at all. Item 6. Exhibits and Reports on Form 8-K None -9- 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. August 6, 2002 /s/Stephen J. Cole-Hatchard --------------------------- By: Stephen J. Cole-Hatchard Chief Executive Officer and President By: /s/Vasan Thatham ---------------- Vasan Thatham Principal Financial Officer and Vice President -10- -----END PRIVACY-ENHANCED MESSAGE-----