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Quarterly report filed by small businesses

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 June 30, 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 July 24, 2001 there were outstanding 7,084,462 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 of Financial Condition And
         Results Of Operations                                                6


Part II  Other information                                                    9

         Signatures                                                          10






FRONTLINE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets





                                                                                     June 30,          December 31,
                                                                                       2001                2000
                                                                                   ------------        ------------
                                                                                    (Unaudited)          (Audited)
                                                                                                           
ASSETS
Current:
   Cash and cash equivalents                                                         $1,040,279            $781,082
   Marketable securities                                                                                  1,808,210
   Accounts receivable, net of allowance for doubtful accounts                          453,197             576,824
   Prepaid expenses and other                                                            94,138             126,698
                                                                                   ------------        ------------
                                 Total current assets                                 1,587,614           3,292,814

Property and equipment, net                                                           1,680,787           2,041,010
Intangibles, net                                                                      4,496,047           5,623,154
Other                                                                                   120,859             116,090

                                                                                   ------------        ------------
                                                                                     $7,885,307         $11,073,068
                                                                                   ============        ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accruals                                                     $2,058,839          $2,424,779
   Deferred revenue                                                                     935,881           1,090,204
   Current portion of  long-term debt                                                   299,888             363,027
                                                                                   ------------        ------------
                              Total current liabilities                               3,294,608           3,878,010

Long-term Debt, less current portion                                                  1,268,834           1,438,459

                                                                                   ------------        ------------
                                  Total liabilities                                   4,563,442           5,316,469
                                                                                   ------------        ------------

Stockholders' equity:
   Preferred stock, $.01 par value, 2,000,000 shares authorized, issued and
      outstanding 540,600 and 597,800 shares, respectively
      Liquidation preference $8,109,000 and 8,967,000, respectively                       5,406               5,978
   Common Stock, $.01 par value, 25,000,000 shares authorized,  7,701,108 and
      7,164,793 shares issued, respectively, 7,084,462 and 6,554,947 shares
      outstanding , respectively                                                         77,011              71,648
   Additional paid-in capital                                                        35,728,109          35,570,119
   Accumulated deficit                                                              (31,624,009)        (29,030,607)
   Treasury stock, at cost, 616,646 and 609,846 shares, respectively                   (864,652)           (860,539)
                                                                                   ------------        ------------
                              Total stockholders' equity                              3,321,865           5,756,599

                                                                                   ------------        ------------
                                                                                     $7,885,307         $11,073,068
                                                                                   ============        ============





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,
                                                                  2001            2000            2001             2000
                                                              -----------     -----------     -----------     ------------
                                                                                                           
Revenues                                                       $1,669,865      $1,033,542      $3,359,250       $1,968,196

Costs and expenses:
      Cost of revenues                                            924,373         660,745       1,972,047        1,253,272
      Selling, general and administrative                       1,021,003       2,275,025       2,276,062        3,828,943
      Depreciation and amortization                               742,643         721,621       1,473,474        1,383,084
                                                              -----------     -----------     -----------     ------------
                                                                2,688,019       3,657,391       5,721,583        6,465,299
                                                              -----------     -----------     -----------     ------------
Loss from operations                                           (1,018,154)     (2,623,849)     (2,362,333)      (4,497,103)

Other income (expense):
   Interest income                                                 13,770         162,089          44,151          255,388
   Interest expense                                               (34,040)        (42,120)        (73,521)         (80,736)
   Loss on disposal of property and equipment                                                     (38,919)
                                                              -----------     -----------     -----------     ------------
Net loss                                                       (1,038,424)     (2,503,880)     (2,430,622)      (4,322,451)
                                                              -----------     -----------     -----------     ------------


Beneficial conversion feature of Series B  preferred stock                                                       5,856,497

Preferred dividends                                                78,975          90,893         162,780          153,640

                                                              -----------     -----------     -----------     ------------
Net loss applicable to common shares                          ($1,117,399)    ($2,594,773)    ($2,593,402)    ($10,332,588)
                                                              ===========     ===========     ===========     ============

Loss per common share-basic and diluted                            ($0.17)         ($0.46)         ($0.39)          ($2.05)
                                                              ===========     ===========     ===========     ============

Weighted average number of  common shares
   outstanding- basic and diluted                               6,720,035       5,633,698       6,675,259        5,048,303
                                                              ===========     ===========     ===========     ============





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,
                                                                             2001               2000
                                                                         ------------       ------------

                                                                                                
Cash flow from operating activities:
   Net loss                                                               ($2,430,622)       ($4,322,451)
   Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
      Depreciation and amortization                                         1,473,474          1,383,084
      Loss on disposal of property and equipment                               38,919
      Noncash compensation charge                                                                 21,845
      Changes in assets and liabilities
         Marketable securities                                              1,808,210
         Accounts receivable                                                  123,627             87,903
         Prepaid expenses and other                                            32,560           (113,975)
         Other assets                                                          (4,769)          (258,114)
         Accounts payable and accrued expenses                               (365,940)           114,542
         Deferred revenue                                                    (154,323)             4,502
                                                                         ------------       ------------
               Net cash  provided  by (used in) operating activities          521,136         (3,082,664)
                                                                         ------------       ------------


Cash flows from investing activities:
   Acquisition of property and equipment                                      (44,073)          (167,070)
   Disposal of property and equipment                                          51,886
   Acquisition of businesses-net of cash acquired                                             (3,244,740)
                                                                         ------------       ------------
               Net cash provided by (used in) investing activities              7,813         (3,411,810)
                                                                         ------------       ------------


Cash flows from financing activities:
   Principal payments on long-term debt                                      (265,639)          (529,067)
   Proceeds from sale of preferred stock                                                      14,597,587
   Payments to acquire treasury stock                                          (4,113)          (381,885)
   Payments for repricing rights                                                                (165,359)
   Dividends paid                                                                               (153,640)
                                                                         ------------       ------------
               Net cash (used in) provided by financing activities           (269,752)        13,367,636
                                                                         ------------       ------------

Net increase in cash and cash equivalents                                     259,197          6,873,162

Cash and cash equivalents, beginning of period                                781,082            615,190
                                                                         ------------       ------------

Cash and cash equivalents, end of period                                   $1,040,279         $7,488,352
                                                                         ============       ============

Supplemental information:
Approximate interest paid during the period                                   $71,000            $28,000
                                                                         ============       ============



The Company entered into capital lease obligations in the aggregate amount of
$33,000 during the six months ended June 30, 2001.


See notes to condensed consolidated financial statements.


                                      -3-




FRONTLINE COMMUNICATIONS CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 have 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 six months ended June 30, 2001 the Company issued 194,480 shares
of common upon conversion of 57,200 shares of Series B Convertible Redeemable
preferred stock. During the three months ended June 30, 2001, the Company
granted to certain employees options under its stock option plan to purchase an
aggregate of 445,000 shares of its common stock. In June 2001, the Company
issued 341,835 shares of common stock as semi-annual dividends to the holders 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 Series B Convertible Redeemable preferred stock being less than the market
price of the common stock at the time of the offering of the Series B
Convertible Redeemable preferred stock.



                                      -4-




NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles".
FASB 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FASB 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment applying a fair-value
based test. Additionally, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intent
to do so. The Company is in the process of determining the impact of these
pronouncements on its financial position and results of operations.



                                      -5-




I
tem 2.


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 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 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.

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.



                                      -6-




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 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 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 and six months ended June 30, 2001 and 2000

Revenues: Revenues increased for the three and six months ended June 30, 2001 by
$636,323 or 61.6% and $1,391,054 or 70.7%, respectively, over the same periods
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 June 30, 2001, cost of revenues
increased by $263,628 to $924,373 compared to the same period of the prior year.
For the six months ended June 30, 2001, cost of revenues increased by $718,775
to $1,972,047. Cost of revenues as a percentage of revenues for the three and
six months ended June 30, 2001 were 55.4% and 58.7%, respectively compared to
63.9% and 63.7%, respectively, in 2000. 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 June 30, 2001,
selling, general and administrative expenses decreased by $1,254,022 compared to
the same period of the prior year. As a percentage of revenues, selling, general
and administrative expenses decreased from 220.1% in 2000 to 61.1% in 2001. For
the six months ended June 30, 2001, selling, general and administrative expenses
decreased by $1,552,881 compared to the same period of the prior year. For the
six-month period, the selling, general and administrative expenses as a
percentage of revenues decreased from 194.5% in 2000 to 67.8% 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 June 30, 2001,
depreciation and amortization increased by $21,022 to $742,643 compared to the
same period of the prior year. For the six months ended June 30, 2001,
depreciation and amortization increased by $90,390 to $1,473,474 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.



                                      -7-




Interest Expense: Interest expense net of interest income for the three months
ended June 30, 2001 was $20,270 compared to a net interest income of $119,969
for the three months ended June 30,2000. Interest expense net of interest income
for the six months ended June 30, 2001 was $29,370 compared to a net interest
income of $174,652 for the six months ended June 30,2000. 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 in the three and six
months ended June 30, 2001 compared to the same periods of the prior year.

Net loss: For the three months ended June 30, 2001, net loss decreased by 58.5%
to $1,038,424 compared to a net loss of $2,503,880 in 2000. For the six months
ended June 30, 2001, net loss decreased by 43.8% to $2,430,622 compared to a net
loss of $4,322,451 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.

     During the six months ended June 30, 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 six months ended June 30, 2000 the net loss after
adjusting for the additional dividends and normal dividends for preferred stock
resulted in a net loss of $10,332,588 applicable to common shares.

Liquidity and capital resources.

     The Company's working capital deficiency at June 30, 2001 was $1,706,996
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 for the installation of
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.



                                      -8-




 
                                    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 2. Changes in Securities and Use of Proceeds

          During the three months ended June 30, 2001, the Company issued 61,540
     shares of common stock upon conversion of 18,100 shares of Series B
     Convertible Redeemable preferred stock and granted to certain employees
     options under its stock option plan to purchase an aggregate of 445,000
     shares of its common stock. During the three months ended June 30, 2001,
     the Company also issued 341,835 shares of common stock as semi-annual
     dividends to the holders of Series B Convertible Redeemable preferred
     stock. 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 6. Exhibits and Reports on Form 8-K


     (b)  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.


July 30, 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



                                      -10-