You are using an outdated browser. Please upgrade to the latest version for the best experience. Upgrade your browser now.

Skip Navigation

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 September 30, 2000

[ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934.
                For the transition period from _______ to ______

                               Commission file number 000-24223


                             FRONTLINE COMMUNICATIONS CORPORATION
              (Exact name of Small Business issuer as specified in its Charter)


        Delaware                                                 13-3950283
(State or other jurisdiction                                  (I.R.S Employer
Of incorporation or organization)                         Identification number)

One Blue Hill Plaza, P.O. Box 1548, Pearl River, New York          10965
       (Address of principal executive offices)                  (Zip Code)

                                 (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 October 7, 2000 there were outstanding 6,149,887 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                                               9


Part II Other information                                                     12

        Signatures                                                            13




Frontline Communications Corporation
Condensed Consolidated Balance Sheets




                                                                                           September 30,      December 31,
                                                                                               2000              1999 (1)
                                                                                           ------------       ------------
                                                                                           (Unaudited)
                                                                                                        
ASSETS
Current:
   Cash and cash equivalents                                                               $  4,465,546       $    615,190
   Accounts receivable, net of allowance for doubtful accounts                                  505,830            288,337
   Prepaid expenses and other                                                                   204,251            122,308
                                                                                           ------------       ------------
                                     Total current assets                                     5,175,627          1,025,835

Property and equipment, net                                                                   2,126,194          2,944,948
Intangibles, net                                                                              9,001,636          4,146,107
Other                                                                                           366,853            297,742

                                                                                           ------------       ------------
                                                                                           $ 16,670,310       $  8,414,632
                                                                                           ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accruals                                                           $  2,509,291       $  1,548,043
   Deferred revenue                                                                           1,256,191            684,219
   Current portion of capitalized lease obligations and notes payable                           384,553            433,917
                                                                                           ------------       ------------
                                  Total current liabilities                                   4,150,035          2,666,179

Capitalized lease obligations and notes payable- net of current portion                       1,522,863          1,458,583

                                                                                           ------------       ------------
                                      Total liabilities                                       5,672,898          4,124,762
                                                                                           ------------       ------------

Stockholders' equity:
   Preferred stock, $.01 par value, 2,000,000 authorized,
     issued and outstanding 618,700 and none, respectively
      Aggregate liquidation preference $10,020,000                                                6,187
   Common Stock, $.01 par value, 25,000,000 authorized,  7,093,733 and
      4,484,060 issued, respectively, 6,532,887 and 4,252,540 outstanding,
       respectively                                                                              70,937             44,841
   Additional paid-in capital                                                                35,331,229         15,147,547
   Accumulated deficit                                                                      (23,540,687)       (10,600,905)
   Note receivable                                                                              (37,500)           (37,500)
   Treasury stock, at cost, 560,846 and 231,520 shares, respectively                           (832,754)          (264,113)
                                                                                           ------------       ------------
                                  Total stockholders' equity                                 10,997,412          4,289,870

                                                                                           ------------       ------------
                                                                                           $ 16,670,310       $  8,414,632
                                                                                           ============       ============



(1)  The balance sheet at December 31, 1999 is derived from audited financial
     statements at that date. See notes to condensed consolidated financial
     statements.

                                       -1-




FRONTLINE COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)




                                                              For the three months ended                For the nine months ended
                                                           September 30,      September 30,        September 30,       September 30,
                                                                2000               1999                2000                1999
                                                           ------------        ------------        ------------        ------------
                                                                                                           
Revenues                                                   $  1,621,319        $    744,167        $  3,589,515        $  2,159,585
                                                           ------------        ------------        ------------        ------------
Costs and expenses:
      Cost of revenues                                          954,789             548,836           2,208,061           1,426,006
      Selling, general and administrative                     2,070,354           1,741,634           5,899,297           3,770,720
      Depreciation and amortization                           1,164,268             468,725           2,547,352           1,189,080
      Non-cash compensation charge                                                                                          712,220
                                                           ------------        ------------        ------------        ------------
                                                              4,189,411           2,759,195          10,654,710           7,098,026
                                                           ------------        ------------        ------------        ------------
Loss from operations                                         (2,568,092)         (2,015,028)         (7,065,195)         (4,938,441)

Other income (expense):
   Interest income                                               93,823              17,522             349,211              73,117
   Interest expense                                             (40,120)            (11,735)           (120,856)            (27,800)

                                                           ------------        ------------        ------------        ------------
Net loss                                                     (2,514,389)         (2,009,241)         (6,836,840)         (4,893,124)
                                                           ------------        ------------        ------------        ------------

Dividends related to beneficial conversion
  feature of preferred stock                                                                          5,856,497

Preferred dividends                                              92,805                                 246,445

                                                           ------------        ------------        ------------        ------------
Net loss applicable to common shares                       ($ 2,607,194)       ($ 2,009,241)       ($12,939,782)       ($ 4,893,124)
                                                           ============        ============        ============        ============

Loss per common share-basic and diluted                    ($      0.43)       ($      0.55)       ($      2.40)       ($      1.43)
                                                           ============        ============        ============        ============

Weighted average number of  common shares
   outstanding- basic and diluted                             6,040,254           3,647,499           5,381,400           3,421,359
                                                           ============        ============        ============        ============



See notes to condensed consolidated financial statements.

                                       -2-


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



                                                                                       For the nine months ended
                                                                                   September 30,       September 30,
                                                                                       2000                1999
                                                                                 ------------------  -----------------
                                                                                                    
Cash flow from operating activities:
   Net loss                                                                            ($6,836,840)       ($4,893,123)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization                                                      2,547,352          1,189,080
      Noncash compensation charge                                                           29,345            712,220
      Changes in assets and liabilities net of effect of acquisition
        of businesses
         Accounts receivable                                                               (12,546)          (190,843)
         Prepaid expenses and other                                                        (81,943)            (7,977)
         Other assets                                                                     (258,114)          (156,576)
         Accounts payable and accruals                                                    (845,404)           860,423
         Deferred revenue                                                                  (79,626)            (7,426)
                                                                                 ------------------  -----------------
                      Net cash used in operating activities                             (5,537,776)        (2,494,222)
                                                                                 ------------------  -----------------

Cash flows from investing activities:
   (Acquisition) disposal  of property and equipment, net                                  148,193           (821,538)
   Acquisition of businesses- net of cash acquired                                      (3,846,290)          (681,661)
                                                                                 ------------------  -----------------
                      Net cash used in investing activities                             (3,698,097)        (1,503,199)
                                                                                 ------------------  -----------------

Cash flows from financing activities:
   Proceeds from sale of common stock, net                                                                  2,769,420
   Proceeds from exercise of stock options                                                                    215,000
   Principal payments on capitalized lease obligations and debt                           (623,718)           (67,928)
   Proceeds from sale of preferred stock, net                                           14,597,587
   Payments to acquire treasury stock                                                     (568,641)
   Payments for repricing rights                                                          (165,359)
   Dividends paid                                                                         (153,640)
                                                                                 ------------------  -----------------
                      Net cash provided by financing activities                         13,086,229          2,916,492
                                                                                 ------------------  -----------------

Net increase (decrease)  in cash and cash equivalents                                    3,850,356         (1,080,929)

Cash and cash equivalents, beginning of period                                             615,190          1,994,711
                                                                                 ------------------  -----------------

Cash and cash equivalents, end of period                                                $4,465,546           $913,782
                                                                                 ==================  =================

Supplemental information:
Approximate interest paid during the period                                                $60,000            $28,000
                                                                                 ==================  =================

The Company entered into capital lease obligations in the
the aggregate amount of approximately                                                     $128,000         $1,337,000
                                                                                 ==================  =================



The Company  issued  368,878  shares  of common  stock  valued at  $631,000  and
  promissory notes in the aggregate amount of $1,094,000 for acquisitions during
  nine months ended September 30, 2000.

In September 2000, the Company cancelled a capital lease obligation,  along with
 its' related equipment and accruals, in the aggregate amount of $1,376,000.

In September  2000,  the  Company agreed to pay for certain repricing and
  redemption rights in the amount of $539,000 and the issuance of 400,000 shares
  of common stock.

See notes to condensed consolidated financial statements.

                                       -3-



FRONTLINE COMMUNICATIONS CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2000

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, 1999.

     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
calculation of "basic" and "diluted" earning per share. Basic earnings per share
includes no dilution and is computed by weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect, in periods in
which they have dilutive effect, the effect of common shares issuable upon
exercise of stock options and warrants. Diluted earnings per share amounts have
not been reported because the Company has a net loss and the impact of the
assumed conversion of preferred stock and exercise of stock options and warrants
would be anti-dilutive.


NOTE C- NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS

     In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No.44, "Accounting for Certain Transactions Involving Stock
Compensation- an Interpretation of APB No. 25 (" FIN No.44"). FIN No.44
clarifies the application of Opinion No.25 for certain issues including: (a) the
definition of employee for purposes of applying Opinion No.25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. In general, FIN No.44 is
effective July 1, 2000. The Company does not expect the adoption of FIN No.44 to
have a material impact on its financial position or results of operations.

                                       -4-



FRONTLINE COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2000

     In June 1998, the FASB issued SFAS No. 133" Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires companies to
recognize all derivative contracts at their fair values, as either assets or
liabilities on the balance sheet. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, or (2) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years after
June 15,2000.

     Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect its financial statements.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." SAB 101 provides guidance related to revenue recognition in
financial statements. In March 2000, the SEC issued SAB No. 101A, which delayed
the implementation of SAB No. 101. In June 2000, the SEC issued SAB 101B that
further delayed the implementation of SAB No. 101 to the fourth quarter of
fiscal 2000. The Company will adopt SAB No. 101, and is currently evaluating the
impact, if any, SAB No. 101 will have on its financial position or results of
operations. The Company does not expect the adoption of SAB No. 101 to have a
material impact on its financial position or results of operations.

NOTE D-CAPITAL STOCK

     In January 2000, the Company's shareholders approved an amendment to the
Certificate of Incorporation of the Company increasing the number of authorized
shares of preferred stock to 2,000,000.

     In February and March 2000, the Company sold in a public offering 1,137,300
shares of Series B Convertible Redeemable preferred stock at $15 per share and
realized net proceeds of approximately $14,404,000. Approximately $194,000 of
the offering costs were incurred in 1999. The preferred stock can be converted
into common stock at the rate of 3.4 shares of common stock for each share of
preferred stock. Preferred stockholders are entitled to receive cumulative
annual dividends of $.60 per share payable semi-annually either in cash or
shares of the Company's common stock at the sole discretion of the Company.
Further, preferred stockholders are entitled to receive a liquidation preference
of $15 per share, plus accrued dividends. The Company has the option to redeem
the preferred stock under certain circumstances.

     In connection with the offering, the Company sold to the underwriter, for
nominal consideration, warrants to purchase an aggregate of 100,000 shares of
Series B Convertible Redeemable preferred stock. The warrants will be
exercisable for a four-year period commencing one year after the date of the
consummation of the offering at an exercise price of $24.75 per share.

                                      -5-



FRONTLINE COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2000

     During the nine months ended September 30, 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.

     During the nine months ended September 30, 2000 the Company issued: (i)
1,763,240 shares of common upon conversion of 518,600 shares of Series B
Convertible Redeemable preferred stock, (ii) 11,594 shares of common stock for
services rendered and upon exercise of stock options (iii) 65,961 shares of
common stock pursuant to repricing rights and (v) 368,878 shares of common stock
for acquisition of businesses. See Note F.

     In 1999, the Company sold through private placements 499,889 shares of its
common to two investors for an aggregate price of $4,250,000. The Company had
granted the investors repricing and redemption rights based on the future market
price of its common shares. In May 2000, the Company acquired 16,312 shares of
common stock for $34,663 from the private investors. In addition, the Company
paid $165,359 for repricing rights, which has been charged to additional paid in
capital. In September 2000, the Company entered into an agreement with the two
private investors whereby the Company agreed to pay $539,392 in cash and issue
400,000 shares of common stock to resolve certain issues of interpretation that
arose out of redemption and repricing rights. . In the financial statements as
of September 30, 2000, the 400,000 shares issuable pursuant to the agreement
have been included in the issued and outstanding number of shares. The amount
payable pursuant to the agreement has been charged to additional paid in capital
and included in the accruals.

     In April 2000, the Company's board of directors authorized the Company to
purchase up to $1,000,000 worth of its common stock from time to time, as the
Company deems appropriate, through open market purchases or in privately
negotiated transactions. As of September 30, 2000 the Company had acquired
329,326 shares of common stock including 16,312 shares from the private
placement investors for an aggregate consideration of $569,000.

NOTE E- NON-CASH COMPENSATION CHARGE

     In 1998 and 1999, the Company granted to certain employees options to
purchase an aggregate amount of 245,768 shares of its common stock which
required shareholder approval prior to its issuance. The shareholders approved
the issuance in June 1999, and accordingly the approval date is deemed to be the
grant date. Since the fair market value of the shares at the grant date exceeded
the exercise price, compensation costs have been recognized during the nine
months ended September 30, 1999.

NOTE F- ACQUISITIONS OF BUSINESSES

     During the three months ended June 30, 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 and Wizardnet,Inc. The aggregate consideration for these
acquisitions consisted of $1,171,000 cash (including transaction-related costs)
86,277 shares of common stock (approximately $210,000) and $65,000 in non
interest-bearing promissory notes.


                                       -6-


FRONTLINE COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2000

     On June 20, 2000, the Company acquired substantially all of the assets of
Delanet, Inc. ("Delanet") in consideration of $2,100,000 cash (including
transaction-related costs) assumption of $1,354,000 of liabilities, 200,000
shares of the Company's common stock (approximately $321,000) and a promissory
note in the principal amount of $729,000. The promissory note bears interest at
4% and is payable in June of 2003. The Company has the option to convert the
principal amount due under the promissory note to shares of its common stock at
a conversion price of $8 per share under certain circumstances as defined in the
acquisition agreement.

     On September 28, 2000 the Company acquired substantially all of the assets
of PNM Group, Inc., a Web design company. The aggregate consideration consisted
of $600,000 cash (including transaction-related costs), 82,601 shares of the
Company's common stock ( approximately $100,000) and a promissory note in the
principal amount of $300,000. The promissory note bears interest at 3% and is
payable in September of 2003. The Company has the option to convert the
principal amount due under the promissory note to shares of its common stock at
a conversion price of $6 per share under certain circumstances as defined in the
acquisition agreement. If certain performance criteria are met during the twenty
four-month period ending October 31,2002, the former stockholders are entitled
to a contingent payment of up to $800,000 in cash and promissory notes.


     All of the acquisitions were accounted for using the purchase method of
accounting with the results of operations of each acquisition included in the
consolidated financial statements from the respective acquisition date. The
acquisitions resulted in the recording of intangible assets of approximately
$6,881,000, which are being amortized over their expected benefit period of 3
years.

     The accompanying pro forma operating statements are presented as if the
Delanet acquisition occurred on January 1, 1999. The pro forma information is
unaudited and is not necessarily indicative of what the actual results of
operations of the Company would have been assuming the acquisition and public
offering had been completed as of January 1, 1999 and neither is it necessarily
indicative of the results of operations for future periods.

        Nine months ended September 30              2000              1999
        ------------------------------              ----              ----

        Revenues                                $ 4,591,412        $ 3,089,858
        Net loss                                (13,720,850)        (5,421,688)
        Net loss per share- basic and diluted.       ($2.44)            ($1.50)

        The above pro forma  financial  information has been adjusted to reflect
amortization  of  intangibles  generated  by the  acquisition  over a three-year
period.

                                       -7-



FRONTLINE COMMUNICATIONS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2000

NOTE G- CAPITAL LEASE OBLIGATION

In 1999, the Company purchased equipment in the aggregate amount of $1,376,000
from a major telecommunications manufacturer. The manufacturer had agreed to
install, test and provide support to make the equipment functional. The
manufacturer had agreed to provide financing through a lease for $957,000 which
would have required the Company to pay $36,000 per month for 30 months
commencing with the installation of the equipment. The balance of $419,000 was
payable over a period of twelve months from installation of the equipment. The
manufacturer failed to install the equipment and make it functional. In
September 2000, the Company terminated the agreement and the manufacturer has
accepted the equipment returned by the Company. Accordingly, equipment, capital
lease obligation and accrued costs balances have been adjusted by $1,376,000,
$957,000 and $419,000, respectively. The management believes that based on the
Company's current strategy, return of the equipment will not impact its current
or future operations.


                                       -8-



M
ANAGEMENT'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 1999 and 2000 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 Web
development and hosting services. The Company's business strategy is to increase
the percentage of revenues it derives from Web 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 and will continue to be an important
aspect of the Company's growth strategy. In 1999, the Company completed the
following acquisitions; Webprime, Inc., a website design, web development and
software development firm; Channel iShop.com (now iShopNetworks.com) a company
with a marketing concept targeting retail businesses; assets relating to the
dial-up internet access customer base and web design and hosting capabilities of
United Computer Specialist, Inc; a customer base of DSL customers of Lingua
Systems, Inc. d/b/a Fullwave Networks; a customer base of additional dial-up
customers of Skyhigh Information Technologies and Fronthost LLC, a company in
the business of providing web hosting and design services.

     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.
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.

                                       -9-



RESULTS OF OPERATIONS
Comparison of the three and nine months ended September 30, 2000 and 1999

Revenues: Revenues increased for the three months and nine months ended
September 30, 2000 by $877,152 or 117.9% and by $1,429,930 or 66.2%,
respectively, over the same periods of the prior year. The increase was
attributable to an expanded customer base and increased activities in Web
development and hosting services. The increase in customer base was in part due
to acquisitions, and, in part due to the Company's marketing and sales efforts.

Cost of Revenues: For the three months ended September 30, 2000 cost of revenues
increased by $405,953 to $954,789. For the nine months ended September 30, 2000
cost of revenues increased by $782,055 to $2,208,061. Cost of revenues as a
percentage of revenues for the three months and nine months ended September 30,
2000 were 58.9% and 61.5%, respectively, compared to 73.8% and 66.0%,
respectively, in 1999. The increase in cost of revenues was primarily due to
increased communication and technical personnel expenses incurred to support the
increased customer base and in anticipation of future growth. The Company
expects these costs to increase in absolute dollars as additional customers and
services are added.

Selling, General and Administrative: For the three months ended September 30,
2000, selling, general and administrative expenses increased by $328,720. As a
percentage of revenues, selling, general and administrative expenses decreased
from 234.0% in 1999 to 127.7% in 2000. For the nine months ended September 30,
2000, selling, general and administrative expenses increased by $2,128,577. For
the nine-month period, selling, general and administrative expenses as a
percentage of revenues, decreased from 174.6% in 1999 to 164.3% in 2000. The
increase in selling, general and administrative expenses was primarily
attributable to higher costs incurred for advertising, promotion and sales
personnel. The Company incurred approximately $250,000 and $750,000 more for
marketing activities during the three and nine months ended September 30, 2000,
respectively, compared to the prior year.

Depreciation and Amortization: For the three months ended September 30, 2000,
depreciation and amortization increased by $695,543 to $1,164,268. For the nine
months ended September 30, 2000, depreciation and amortization increased by
$1,358,272 to $2,547,352. The increase was due to amortization arising from 1999
and 2000 acquisitions and depreciation arising from additional equipment
acquired in the later part of 1999 and 2000.

Interest Income: Interest income net of interest expense increased by $47,916
and $183,038 for the three and nine month periods, respectively. The increase in
interest income was due to investment of unutilized proceeds of the Company's
public offering of Series B Convertible Redeemable preferred stock.

                                      -10-



     Net Loss and net loss applicable to common shares: The Company has incurred
significant losses and anticipates that it will continue to incur losses until
sufficient revenues are generated to offset the substantial up-front
expenditures and operating costs associated with attracting and retaining
additional customers. For the three months ended September 30, 2000 and 1999,
the Company incurred net losses of $2,514,389 and $2,009,241, respectively. For
the nine months ended September 30, 2000 and 1999, the Company incurred net
losses of $6,836,840 and $4,893,124, respectively. There can be no assurance
that the Company will be able to attract and retain a sufficient number of
customers to significantly increase its revenues or ever achieve profitable
operations.

     During the nine months ended September 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 nine months ended September 30, 2000 net loss
after adjusting the additional dividends and normal dividends for preferred
stock resulted in a loss of $12,939,782 applicable to common shares.

Liquidity and Capital Resources

     The Company's working capital at September 30, 2000 was $1,025,592 compared
to a deficiency of $1,640,344 at December 31, 1999. The increase in working
capital was due to receipt of the proceeds from the public sale of the Company's
Series B Convertible Redeemable preferred stock in February and March 2000.

     In February and March 2000, the Company sold in a public offering 1,137,300
shares of Series B Convertible Redeemable preferred stock at $15 per share and
realized net proceeds of approximately $14,404,000. The preferred stock can be
converted into common stock at the rate of 3.4 shares of common stock for each
share of preferred stock. Preferred stockholders are entitled to receive
cumulative annual dividends of $.60 per share payable semi-annually either in
cash or shares of the Company's common stock at the sole discretion of the
Company. Further, preferred stockholders are entitled to receive a liquidation
preference of $15 per share, plus accrued dividends. The Company has the option
to redeem the preferred stock under certain circumstances.

     Out of the proceeds of the public offering of Series B Convertible
Redeemable preferred stock, $569,000 was used to repurchase 329,326 shares of
the Company's common stock, $3,846,000 was used for acquisitions of businesses
and $425,000 was used to repay debt. The remaining proceeds, after meeting the
Company's working capital and capital expenditure requirements, are currently
held in interest-bearing bank accounts.

     The Company's primary capital requirements are to fund acquisition 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 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 2000 are expected to range between
$340, 000 to $500,000. Based on the Company's current plans and assumptions
relating to its strategy, the management anticipates that the cash on hand, and
expected revenues will satisfy the company's capital requirements through at
least the end of 2000.

     The Company is currently in the process of reducing operating expenses. If
the Company is not successful in implementing certain cost cutting measures, it
may need additional financing in 2001 to continue its operations as currently
conducted. The Company has no available additional 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.

                                      -11-



 
                                    PART II
                                OTHER INFORMATION


Item 2. Changes in Securities and Use of Proceeds

        Recent Sales of Unregistered Securities

        During the three months ended September 30, 2000, the Company issued
        5,764 shares of its common stock to a consultant and issued 82,601
        shares of its common stock for acquisition. In addition, the Company
        agreed to issue 400,000 shares of its common stock to two institutional
        investors for repricing and redemption rights. The foregoing securities
        were issued in private offerings pursuant to an exemption from
        registration offered by Section 4(2) of the Securities Act of 1933.






Item    6. Exhibits and Reports on Form 8-K

        (a) Exhibits - Exhibit 27 Financial Data Schedule

        (b) Reports on Form 8-K 

        During the quarter ended September 30, 2000, the Company filed an 8-k
        for the event dated June 20, 2000 under Items 2 and 7 to report its'
        acquisition of substantially all of the assets of Delanet, Inc. The
        Company filed an amendment to the foregoing 8-k under Item 7 to file
        certain financial statements and pro forma financial information
        concerning the acquired business.

                                      -13-




                                   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.


November 14, 2000


                         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

                                      -14-






  


5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENT INCLUDED IN FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-2000 SEP-30-2000 4,465,546 0 605,830 100,000 0 5,175,627 2,991,041 864,847 16,670,310 4,150,035 1,522,863 0 6,187 70,937 10,920,288 16,670,310 0 3,589,515 2,208,061 8,446,649 0 0 (120,856) (6,836,840) 0 (6,836,840) 0 0 0 (12,939,782) (2.40) (2.40)