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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, 2001


         [ ] 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, 2001 there were outstanding 6,690,607 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, 2001 2000 -------------------- --------------- (Unaudited) (Audited) ASSETS Current: Cash and cash equivalents $ 1,333,310 $ 781,082 Marketable securities 1,808,210 Accounts receivable, net of allowance for doubtful accounts 509,023 576,824 Prepaid expenses and other 163,267 126,698 ------------ ------------ Total current assets 2,005,600 3,292,814 Property and equipment, net 1,800,643 2,041,010 Intangibles, net 5,067,747 5,623,154 Other 115,610 116,090 ------------ ------------ $ 8,989,600 $ 11,073,068 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accruals $ 1,956,319 $ 2,424,779 Deferred revenue 1,122,960 1,090,204 Current portion of long-term debt 319,015 363,027 ------------ ------------ Total current liabilities 3,398,294 3,878,010 Long-term Debt, less current portion 1,310,710 1,438,459 ------------ ------------ Total liabilities 4,709,004 5,316,469 ------------ ------------ Stockholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized, issued and outstanding 558,700 and 597,800 shares, respectively Liquidation preference $8,380,500 and 8,967,000, respectively 5,587 5,978 Common Stock, $.01 par value, 25,000,000 shares authorized, 7,297,733 and 7,164,793 shares issued, respectively, 6,687,887 and 6,554,947 shares outstanding , respectively 72,977 71,648 Additional paid-in capital 35,569,181 35,570,119 Accumulated deficit (30,506,610) (29,030,607) Treasury stock, at cost, 609,846 shares (860,539) (860,539) ------------ ------------ Total stockholders' equity 4,280,596 5,756,599 ------------ ------------ $ 8,989,600 $ 11,073,068 ============ ============
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, 2001 2000 ------------------- ------------------ Revenues $ 1,689,385 $ 934,654 Costs and expenses: Cost of revenues 1,047,674 592,527 Selling, general and administrative 1,255,059 1,553,918 Depreciation and amortization 730,831 661,463 ----------- ----------- 3,033,564 2,807,908 ----------- ----------- ----------- ----------- Loss from operations (1,344,179) (1,873,254) Other income (expense): Interest income 30,381 93,299 Interest expense (39,481) (38,616) Loss on disposal of property and equipment (38,919) ----------- ----------- Net loss (1,392,198) (1,818,571) ----------- ----------- Beneficial conversion feature of Series B preferred stock 5,856,497 Preferred dividends 83,805 62,747 ----------- ----------- Net loss applicable to common shares $(1,476,003) $(7,737,815) =========== =========== Loss per common share-basic and diluted $ (0.22) $ (1.73) =========== =========== Weighted average number of common shares outstanding- basic and diluted 6,629,985 4,462,909 =========== ===========
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, 2001 2000 ------------------- -------------- Cash flow from operating activities: Net loss ($ 1,392,198) ($ 1,818,571) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 730,831 661,463 Loss on disposal of property end equipment 38,919 Noncash compensation charge 21,845 Changes in assets and liabilities Marketable securities 1,808,210 Accounts receivable 67,801 15,391 Prepaid expenses and other (36,569) (12,327) Other assets 480 (4,505) Accounts payable and accrued expenses (552,263) (266,099) Deferred revenue 32,756 32,891 ------------ ------------ Net cash provided by (used in) operating activities 697,967 (1,369,912) ------------ ------------ Cash flows from investing activities: Acquisition of property and equipment (25,864) (49,891) Disposal of property and equipment 51,886 ------------ ------------ Net cash provided by (used in) investing activities 26,022 (49,891) ------------ ------------ Cash flows from financing activities: Principal payments on long-term debt (171,761) (442,085) Proceeds from sale of preferred stock 14,597,563 ------------ ------------ Net cash (used in) provided by financing activities (171,761) 14,155,478 ------------ ------------ Net increase in cash and cash equivalents 552,228 12,735,675 Cash and cash equivalents, beginning of period 781,082 615,190 ------------ ------------ Cash and cash equivalents, end of period $ 1,333,310 $ 13,350,865 ============ ============ Supplemental information: Approximate interest paid during the period $ 32,000 $ 10,000 ============ ============
See notes to condensed consolidated financial statements. -3-

FRONTLINE COMMUNICATIONS CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 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, 2000. There has been no significant changes in accounting policies since December 31, 2000. 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 EPS since the effect would be antidilutive. NOTE C-CAPITAL STOCK During the three months ended March 31, 2001 the Company issued 132,940 shares of common upon conversion of 39,100 shares of Series B Convertible Redeemable preferred stock. During the three months ended March 31, 2000, additional dividends (noncash) related to beneficial conversion feature of the preferred stock of approximately $5,856,000 were recorded as a result of the conversion price of the preferred stock being less than the market price of the common stock at the time of the offering. -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. 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 2000 and 2001 a significant part of the Company's revenues were derived from providing Internet access services to individuals and businesses. These revenues are 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 or quarterly, 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. Acquisitions Acquisitions have historically been an important aspect of the Company's growth strategy. In 2000, the Company acquired substantially all of the assets of The PressRoom Online Services, Application Resources Information Services, Inc d/b/a Way Communications, The First Street Corporation, Wizardnet, Inc., Delanet, Inc. (internet access service providers) and PNM Group, Inc., a Web design company. The Company also acquired certain customers of Double D Network Services, Inc. pursuant to an agreement whereby the Company paid Double D a referral fee for each Double D customer who signed up for the Company's dial-up service. 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. -5-

Restructuring Program. In November 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 products 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 will enhance the Company's ability to grow its revenue base. To date the Company has realized significant cost reductions and the Company hopes to reduce additional costs in 2001. However, there can be no assurance that the restructuring program will achieve the desired results and that there will not be any disruption of any services or resulting loss of revenues. Results of Operations Comparison of the three months ended March 31, 2001 and 2000 Revenues: Revenues increased for the three months ended March 31, 2001 by $754,731 or 80.7% over the same period of the prior year. The increase was attributable mainly to an expanded customer base due to acquisitions and the Company's marketing efforts. Cost of Revenues: For the three months ended March 31, 2001, cost of revenues increased by $455,147 to $1,047,674 compared to the same period of the prior year. As a percentage of revenues, cost of revenues decreased to 62.0% from 63.4%. The absolute dollar increase in cost of revenues was due principally to increased communication and technical personnel expenses incurred to support the increased customer base. Selling, General and Administrative: For the three months ended March 31, 2001, selling general and administrative expenses decreased by $298,859 compared to the same period of the prior year. As a percentage of revenues, selling, general and administrative expenses decreased from 166.3% in 2000 to 74.3% in 2001. The decrease in selling, general and administrative expenses was due to cost reductions realized through the restructuring program. Depreciation and Amortization: For the three months ended March 31, 2001, depreciation and amortization increased by $69,368 to $730,831 compared to the same period of the prior year. The increase was due to amortization arising from acquisitions completed in 2000. The increase was partially offset by reduced amortization resulting from the intangibles written off as impaired in the fourth fiscal quarter of 2000. Interest Income: Interest expense net of interest income for the three months ended March 31, 2001 was $9,100 compared to a net interest income of $54,683 for the three months ended March 31,2000 because the proceeds of the Company's public offering of Series B Convertible Redeemable preferred stock has been used to fund operations. Net loss: For the three months ended March 31, 2001, net loss decreased by 23.4% to $1,392,198 compared to a net loss of $1,818,571 in 2000. 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. -6-

During the three months ended March 31, 2000, additional dividends (noncash) related to the beneficial conversion feature of the preferred stock of approximately $5,856,000 were recorded as a result of the conversion price of the preferred stock being less than the market price of the common stock at the time of the offering. For the three months ended March 31, 2000 the net loss after adjusting for the additional dividends and normal dividends for preferred stock resulted in a net loss of $7,737,815 applicable to common shares. Liquidity and capital resources. The Company's working capital deficiency at March 31, 2001 was $1,392,694 compared with a working capital deficiency of $585,196 at December 31, 2000. The increase in working capital deficiency was mainly due to operating losses. The Company's primary capital requirements are to 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. The company's capital expenditures for 2001 are expected to range between $110,000 to $150,000. 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 2001. However, the Company's need for additional capital may be affected by the outcome of its effort to reduce operating expenses as part of its restructuring program. If the Company is not successful in implementing certain cost cutting measures or if revenues are below expectations, the Company may need additional financing in 2001 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 1. Legal Proceedings As reported in the Company's annual report on Form 10-KSB for the fiscal year ended December 31, 2000, in February 2001, the Company was served with a complaint filed in the United States Bankruptcy Court for the Eastern District of Virginia, Alexandria Division, by Robert O. Tyler, the Trustee in Bankruptcy for Double D Network Services, Inc. entitled Robert O Tyler, Trustee of Double D Network Services, Inc. v. Frontline Communications Corporation. On May 2, 2001, the Company and the Trustee reached a settlement whereby the Company agreed to pay $20,000 to the bankruptcy estate. The settlement is subject to bankruptcy court approval. Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K During the quarter ended March 31, 2001, the Company filed: (i) an 8-K for the event dated January 10, 2001 under Item 4 to report changes in its certifying accountant. (ii) an 8-K for the event dated February 16, 2001 under Item 5 to report the sale of a majority of its equity interest in iShopNetworks, Inc. -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 7, 2001 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-