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Optional form for quarterly and transition reports of small business issuers

10QSB


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 March 31, 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 April 26, 2002 there were outstanding 8,944,551 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 5 Part II Other information 8 Signatures 9

Frontline Communications Corporation Condensed Consolidated Balance Sheets

March 31, December 31, 2002 2001 ------------ ------------ (Unaudited) (Audited) ASSETS Current: Cash and cash equivalents $ 413,490 $ 602,534 Accounts receivable, net of allowance for doubtful accounts 230,523 264,257 Prepaid expenses and other 44,985 33,023 ------------ ------------ Total current assets 275,508 297,280 Property and equipment, net 1,112,193 1,267,625 Intangibles, net 100,034 140,738 Other 103,134 105,493 ------------ ------------ $ 1,590,869 $ 1,811,136 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accruals $ 1,649,692 $ 1,761,947 Deferred revenue 682,016 615,350 Current portion of long-term debt 231,541 247,840 ------------ ------------ Total current liabilities 2,563,249 2,625,137 Long-term Debt, less current portion 804,655 858,829 ------------ ------------ Total liabilities 3,367,904 3,483,966 ------------ ------------ Stockholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized, issued and outstanding 527,100 shares (liquidation preference $7,906,500) 5,271 5,271 Common Stock, $.01 par value, 25,000,000 shares authorized, 9,561,197 shares issued and 8,944,551 shares outstanding 95,612 95,612 Additional paid-in capital 36,074,277 36,074,277 Accumulated deficit (36,674,053) (36,380,804) Treasury stock, at cost, 616,646 shares (864,652) (864,652) ------------ ------------ Total stockholders' deficiency (1,363,545) (1,070,296) ------------ ------------ $ 2,004,359 $ 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 March 31, March 31, 2002 2001 ----------- ----------- Revenues $1,352,269 $ 1,689,385 Costs and expenses: Cost of revenues 681,854 1,047,674 Selling, general and administrative 667,322 1,255,059 Depreciation and amortization 194,262 730,831 ----------- ----------- 1,543,438 3,033,564 ----------- ----------- Loss from operations (191,169) (1,344,179) Other income (expense): Interest income 1,742 30,381 Interest expense (21,543) (39,481) Loss on disposal of property and equipment (3,214) (38,919) ----------- ----------- Net loss (214,184) (1,392,198) ----------- ----------- Preferred dividends 79,065 83,805 ----------- ----------- Net loss available to common shareholders (293,249) (1,476,003) =========== =========== Loss per common share-basic and diluted $(0.03) $(0.22) =========== =========== Weighted average number of common shares outstanding-basic and diluted 8,944,551 6,629,985 =========== ===========
See notes to condensed consolidated financial statements. -2-

FRONTLINE COMMUNICATIONS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Revised

For the three months ended March 31, March 31, 2002 2001 ----------- ----------- Cash flow from operating activities: Net loss $(214,184) $(1,392,198) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 194,262 730,831 Loss on disposal of property and equipment 3,214 38,919 Changes in operating assets and liabilities Marketable securities 1,808,210 Accounts receivable 33,734 67,801 Prepaid expenses and other (11,962) (36,569) Other assets 2,359 480 Accounts payable and accruals (191,317) (552,263) Deferred revenue 66,666 32,756 ----------- ----------- Net cash (used in) provided by operating activities (117,228) 697,967 ----------- ----------- Cash flows from investing activities: Acquisition of property and equipment (6,343) (25,864) Proceeds from disposal of property and equipment 5,000 51,886 ----------- ----------- Net cash (used in) provided by investing activities (1,343) 26,022 ----------- ----------- Cash flows from financing activities: Principal payments on long-term debt (70,473) (171,761) ----------- ----------- Net cash used in financing activities (70,473) (171,761) ----------- ----------- Net (decrease) increase in cash and cash equivalents (189,044) 552,228 Cash and cash equivalents, beginning of period 602,534 781,082 ----------- ----------- Cash and cash equivalents, end of period $ 413,490 $ 1,333,310 =========== =========== Supplemental information: Approximate interest paid during the period $14,000 $32,000 =========== ===========
See notes to condensed consolidated financial statements. -3-

FRONTLINE COMMUNICATIONS CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) 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. -4-

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 three months ended March 31, 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. -5-

Results of Operations Comparison of the three months ended March 31, 2002 and 2001 Revenues: Revenues decreased for the three months ended March 31, 2002 by $337,116 or 20% over the same period 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 March 31, 2002, cost of revenues decreased by $365,820 to $681,854 compared to the same period of the prior year. As a percentage of revenues, cost of revenues decreased to 50% from 62%. 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 March 31, 2002, selling general and administrative expenses decreased by $587,737 compared to the same period of the prior year. As a percentage of revenues, selling, general and administrative expenses decreased from 74.3% in 2001 to 49.3% in 2002. The decrease in selling, general and administrative expenses was due to cost reductions realized through the 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 March 31, 2002, depreciation and amortization decreased by $536,569 to $194,262 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 Income: Interest expense net of interest income for the three months ended March 31, 2002 was $19,801 compared to a net interest expense of $9,100 for the three months ended March 31,2001. As the proceeds of the Company's public offering of Series B Convertible Redeemable preferred stock has been used to fund operations, interest income decreased during the three months ended March 31, 2002 compared to the same period of the prior year. Additionally, interest expense for the three months ended March 31, 2002 decreased compared to the same period of the prior year due to decreased debt level. Net loss: For the three months ended March 31, 2002, net loss decreased by 84.6% to $214,184 compared to a net loss of $1,392,198 in the comparable period of 2001. The Company has incurred significant losses as revenues generated were not sufficient to offset the substantial up-front expenditures and operating costs associated with attracting and retaining additional customers. Liquidity and Capital Resources. The Company's working capital deficiency at March 31, 2002 was $1,874,251 compared with a working capital deficiency of $1,725,323 at December 31, 2001. The increase in working capital deficiency was mainly 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. -6-

In March and April of 2002, the Company obtained executed subscriptions from investors representing $250,000 of gross proceeds, in a private offering of 8% convertible notes and common stock purchase warrants. The Company will issue to the investors an aggregate principal amount of $250,000 of convertible notes, which will mature three years from the date of issuance, and warrants to purchase an aggregate of 1,250,000 shares of its common stock. The value of the warrants will be recorded as additional interest expense over the life of the convertible notes. The Company anticipates that the offering will be consummated in May of 2002. 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, the proceeds from the Company's private offering of convertible notes and common stock purchase warrants which are expected to be consummated in May of 2002 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. -7-

PART II OTHER INFORMATION Item 6. Exhibits and 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 8, 2002 By: /s/ Stephen J. Cole-Hatchard _____________________________ Stephen J. Cole-Hatchard Chief Executive Officer and President By: /s/ Vasan Thatham __________________ Vasan Thatham Principal Financial Officer and Vice President -9-