As filed with the Securities and Exchange Commission on December 2, 1999
Registration No. 333-70307
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
LOG ON AMERICA, INC.
(Name of Small Business Issuer in its Charter)
Delaware 7375 05-0496586
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
--------------------
3 Regency Plaza
Providence, Rhode Island 02903
(401) 459-6298
(Address and telephone number of principal executive
offices and principal place of business)
--------------------
David R. Paolo, President
Log On America, Inc.
3 Regency Plaza
Providence, Rhode Island 02903
(401) 459-6298
(Name, address and telephone number of agent for service)
Copies to:
Gary W. Mair, Esq. Lawrence B. Fisher, Esq.
Silverman, Collura & Chernis, P.C. Orrick, Herrington & Sutcliffe LLP
381 Park Avenue South, Suite 1601 30 Rockefeller Plaza, 40th Floor
New York, New York 10016 New York, New York 10112
Telephone (212) 779-8600 Telephone (212) 506-3660
Facsimile (212) 779-8858 Facsimile (212) 506-3730
<PAGE>
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]______________________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________________________________
If this form is a post-effective registration statement filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]______________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Proposed Maximum Prosposed Minimum
Title of Each Class of Securities to be Amount to be Offering Price Per Aggregate Offering Amount of
Registered Registered Share(1) Price (1) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 2,530,000(2) $10.00 $25,300,000 $7,033.40
- ------------------------------------------------------------------------------------------------------------------------------------
Representative's Warrants to purchase shares
of Common Stock 220,000 $.0001 $22 $0(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock Issuable Upon Exercise of
Representative's Warrants 220,000(3) $12.00 $2,640,000 $733.92
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock held by Selling Stockholders
1,896,116 $10.00 $18,961,160 $5,271.20
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants held by
Selling Stockholders 1,131,921(3) $10.00 $11,319,210 $3,146.74
- ------------------------------------------------------------------------------------------------------------------------------------
Total 5,998,037 -- $58,220,392 $16,185.27(5)
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457 of the Securities Act.
(2) Includes 330,000 shares of Common Stock issuable upon exercise of an
over-allotment option granted to the Underwriter.
(3) Pursuant to Rule 416 of the Securities Act, there are also being
registered hereby such additional indeterminate number of shares of Common
Stock as may become issuable pursuant to the anti-dilution provisions of
the Representative's Warrants.
(4) No registration fee is required pursuant to Rule 457 of the Securities
Act.
(5) The registrant has previously paid $16,185.27
in registration fees.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1999
LOG ON AMERICA, INC.
2,200,000 Shares of Common Stock
This relates to an initial public offering of 2,200,000 shares of common
stock of Log On America, Inc.
Our initial public offering price is $10.00 per share. Our common stock
is listed on the Nasdaq National Market under the symbol "LOAX."
Please see the risk factors beginning on page 6 to read about certain
factors you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
- -------------------------
Per Share Total
--------- -----
Initial public offering price................... $ 10.00 $ 22,000,000
Underwriting discount........................... $ .825 $ 1,815,000
Proceeds, before expenses, to us................ $ 9.175 $ 20,185,000
This prospectus also relates to the registration for resale of 2,246,116
shares of common stock and 745,000 shares of common stock underlying warrants
for the purchase of common stock held by certain selling stockholders identified
in this prospectus. These shares may not be sold for a period of twelve months
from the effective date of this prospectus without the prior written consent of
Dirks & Company, Inc. and us. We will not receive any proceeds from the sale of
these shares.
The underwriters have purchased from us up to 330,000 additional shares at
the initial public offering price less the underwriting discount.
DIRKS & COMPANY, INC.
Prospectus dated December __, 1999
<PAGE>
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock
offered in this prospectus. These actions include purchasing common stock to
cover some or all of a short position in the common stock maintained by the
representative, and the imposition of penalty bids. For a description of these
activities, see "Underwriting."
Picture of a man holding phone on the left; the words "Bridging the Gap
Between Voice, Data and the Internet" on the right, along with our logo.
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TABLE OF CONTENTS
Prospectus Summary.............................................................4
Risk Factors...................................................................6
We have incurred net losses since our inception and anticipate
continuing losses.........................................................6
We have a short operating history upon which to judge our prospects..........6
We require substantial funds and may need to raise additional capital
in the future............................................................6
We are dependent upon continued growth in the use of the Internet...........6
We depend on the continued development and reliability of the Internet
infrastructure............................................................6
We depend on our computer infrastructure and will be adversely affected
by any failure or damage to our systems...................................7
Our services are susceptible to disruptive problems..........................7
We may be held liable for online content provided by third parties...........7
Internet security concerns could hinder e-commerce and the damand for our
products and services.....................................................7
We need to manage our growth effectively.....................................7
If we do not continually upgrade technology, we may not be able to
compete in our industry...................................................8
If we do not effectively develop our early stage products and technology,
our business may be negatively effected...................................8
If we do not develop a sufficient sales and marketing force, we may not
be able to generate significant revenues or become profitable.............8
Government regulation and legal uncertainties could add additional
costs to doing business on the Internet...................................8
Our management has broad discretion over the use of proceeds raised
in this offering..........................................................8
We face significant competition from Internet and telephone
service providers and others..............................................9
The representative and the underwriters will continue to have
influence over us following the completion of this offering...............9
Our operations depend on our ability to maintain favorable
relationships with third party suppliers..................................9
The loss of our chief executive officer, David Paolo, may hurt our
chances for success......................................................10
Our management has substantial control over us and investors in
this offering may have no effective voice in our management..............10
The price investors pay for their shares is higher than the
per share value of our net assets and is also higher than
the price paid by our founders and prior investors.......................10
Unless we maintain a public market for our securities, you may
not be able to sell your shares..........................................10
Shares eligible for public sale after this offering could
adversely affect our stock price.........................................10
Failure of computer systems and software products to be Year 2000
compliant could negatively impair our business...........................11
Use of Proceeds...............................................................12
Capitalization................................................................12
Dividend Policy...............................................................13
Dilution......................................................................14
Selected Financial Data.......................................................15
Management's Discussion and Analysis of
Financial Condition...........................................................16
LOA...........................................................................19
Available Information.........................................................26
Management....................................................................27
Principal Shareholders........................................................31
Certain Transactions..........................................................32
Description of Securities.....................................................34
Selling Stockholders..........................................................34
Shares Eligible for Future Sale...............................................37
Underwriting..................................................................38
Legal Matters.................................................................40
Experts.......................................................................40
Index to Financial Statements................................................F-1
3
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PROSPECTUS SUMMARY
You should carefully read the entire prospectus, including the "Risk
Factors" section and the financial statements and the notes to the financial
statements. When we refer to "us" or "we," we are also referring to our
predecessor entities.
Log On America
Log On America, Inc. is a Northeast regional Information/Internet service
provider and a competitive local exchange carrier. We have been providing
on-line services, and related products, to individual and corporate clients
since November 1992.
As an Internet service provider, we provide business and home Internet
users with access to the Internet through a personal computer and a modem or
dedicated line. This service is called dial-up access. We currently maintain a
dial-up Internet service throughout the Northeast. A large part of our current
operations is providing dedicated access lines for commercial accounts.
Dedicated access lines are telecommunication lines used solely for a specific
use, such as facsimile or Internet communications. To expand our services, we
have been approved as a competitive local exchange carrier in the State of Rhode
Island, and Massachusetts. As a competitive local exchange carrier, or a company
that provides local access lines as opposed to long-distance or other services,
we intend to provide a full range of local telecommunications services to our
customers, such as Internet, voice, data and cable programming. Our clients
include residential users, Internet services providers, wireless carriers and
business, government and institutional end users. We intend to provide all of
these services in selected cities in the Northeast with populations of 200,000
to 2,000,000.
We incorporated in Rhode Island in 1992, and following several corporate
transactions, as discussed elsewhere in this prospectus, we are now a Delaware
corporation. Our principal offices are located at 3 Regency Plaza, Providence,
Rhode Island 02903, telephone (401) 459-6298, facsimile (401) 459-6222, email:
[email protected], and we maintain a web site at "www.loa.com." Nothing contained on
our web site should be construed as a part of this prospectus.
The Offering
Shares of Common Stock
Offered by Us................... 2,200,000 shares of common stock.
Securities Outstanding Upon
Completion of this Offering .... 8,013,383 shares of common stock issued and
outstanding. This number excludes
795,667 shares of common stock reserved for
issuance upon the exercise of currently
outstanding warrants, 220,000 shares of
common stock reserved for issuance upon the
exercise of warrants granted to the
representative of the several underwriters of
this offering, and 1,234,200 options granted
pursuant to our stock option plan.
Use of Proceeds................ We intend to use the net proceeds from the
sale of the common stock to finance network
expansion and equipment upgrades, strategic
acquisitions, marketing and sales activity,
and working capital and for general corporate
purposes.
Risk Factors.................... Our shares of common stock are highly
speculative, involve a high degree of risk
and immediate and substantial dilution. Our
shares should not be purchased by an investor
who cannot afford the loss of his or her
entire investment.
Nasdaq National Market Symbol..... LOAX
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<PAGE>
Summary Financial Data
You should read the following summary financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and the financial statements and the notes to the financial
statements included elsewhere in this prospectus. We derived the statement of
operations data for the years ended December 31, 1998 and 1997, and the balance
sheet data for the year ended December 31, 1998 from our audited financial
statements included elsewhere in this prospectus. The statement of operations
data for the three and nine month period ended September 30, 1999, was derived
from our unaudited financial statements. The as adjusted balance sheet data as
of December 31, 1998 takes into account the 2,200,000 shares offered in this
prospectus at an initial offering price of $10.00 per share and the application
of the net proceeds that we received, less the expenses of the offering. It also
gives effect to our reorganization.
<TABLE>
<CAPTION>
For the nine months
ended September 30, Year Ended
1999 December 31,
---------------------- ------------
(unaudited) 1998 1997
---- ----
Statement of Operations Data:
<S> <C> <C> <C>
Revenue ........................................... $ 1,682,357 $ 759,878 $ 351,560
Operating Expenses ................................ 4,034,376 $ 1,179,897 629,584
----------- ----------- -----------
Operating Loss .................................... (2,352,019) (420,019) (278,024)
------------ ----------- -----------
Other income (expense) ............................ 366,162 (2,044) (1,977)
Net loss .......................................... $(1,985,857) $ (422,063) $ (280,001)
============ =========== ===========
Weighted average shares outstanding --
basic and
diluted ........................................... 6,222,179 3,853,265 2,434,600
============ =========== ===========
Loss per common share -- basic and
diluted ........................................... $ (0.32) $ (.11) $ (.12)
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited) Actual As Adjusted
----------- ------ -----------
Balance Sheet Data (end of period):
<S> <C> <C> <C>
Cash............................................... $ 18,890,649 $ 630,131 $19,777,729
Working Capital.................................... $ 19,699,429 $ 248,245 $19,412,384
Total Assets....................................... $ 32,699,465 $1,137,000 $20,284,598
Total Debt......................................... $ 1,775,341 $ 16,541 $ -0-
Total Liabilities.................................. $ 4,338,120 $ 480,612 $ 464,071
Stockholders' Equity............................... $ 28,361,345 $ 656,388 $19,820,527
</TABLE>
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<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to invest in shares of our common stock. This
prospectus contains forward-looking statements which can be identified by the
use of words such as "intend," "anticipate," "believe," "estimate," "project,"
or "expect" or other similar statements. These statements discuss future
expectations, contain projections of results of operations or of financial
condition, or state other "forward-looking" information. When considering these
statements, you should keep in mind the risk factors described below and other
cautionary statements in this prospectus. The risk factors described below and
other factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ from those contained in
any forward-looking statement.
We have incurred net losses since our inception and anticipate continuing
losses.
To date, we have had limited revenues and have not shown a profit in our
operations. As of September 30, 1999 our accumulated deficit was approximately
$2,407,920. Although we intend to expand our marketing of products and services,
we may not be able to achieve these objectives or, if these objectives are
achieved, we may never be profitable. If profitability is achieved, we may not
be able to sustain it. We cannot predict when, or if, profitability might be
achieved.
We have a short operating history upon which you can judge our prospects.
We commenced our business in 1992 but did not produce significant revenues
until 1996. Accordingly, we have a limited operating history upon which you can
evaluate our business and prospects. Our historical data is of limited value in
projecting future operating results. You must consider our business in light of
the risks, expenses and problems frequently encountered by companies with
limited operating histories.
We require substantial funds and may need to raise additional capital in the
future.
Based on our currently proposed plans and assumptions, we anticipate that
the net proceeds from the sale of the shares of our common stock offered hereby
will be sufficient to satisfy our contemplated cash requirements for the 12
month period following the consummation of this offering. We may then require
additional funding. We have no current arrangements with respect to sources of
additional financing. Other additional financing may not be available on
commercially reasonable terms, or at all. The inability to obtain additional
financing, when needed, would have a negative effect on us, including possibly
requiring us to curtail or cease operations. If any future financing involves
the sale of our equity securities, the shares of our common stock held by our
stockholders would be substantially diluted. If we incur indebtedness or
otherwise issue debt securities, we will be subject to risks associated with
indebtedness, including the risk that interest rates may fluctuate and the
possibility that we may not be able to pay principal and interest on the
indebtedness.
We are dependent upon the continued growth in the use of the Internet.
Our future operating results are highly dependent upon the increased use
of the Internet by consumers for information, publication, distribution and
commerce. Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of use, access, and quality of
service, remain unresolved and may impact the growth of Internet use. If
widespread commercial use of the Internet does not develop, our business,
results of operations and financial condition will be negatively affected.
We depend on the continued development and reliability of the Internet
infrastructure.
We depend on the reliability, speed, data capacity, ease of use,
accessibility and security of the Internet as well as its continued development
and acceptance for commercial use. The success of our services and products
depend, in large part, upon the further development of an infrastructure for
providing Internet access and services. The Internet has experienced, and it is
expected to continue to experience, significant growth in the number of users.
The Internet infrastructure may not be able to support the demands placed on it
by this continued growth in use. The Internet could also lose its viability due
to delays in the development or
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<PAGE>
adoption of new standards and protocols to handle increased levels of Internet
activity, or due to increased governmental regulation. The infrastructure or
complementary services necessary to make the Internet a viable commercial
marketplace may not develop, or the Internet may not become a viable commercial
marketplace for services and products such as the services that we currently
offer. If this happens, our business, results of operations and financial
condition will be negatively affected.
We depend on our computer infrastructures and will be adversely affected by any
failure or damage to our systems.
Substantially all of our communications and computer hardware is located
at our offices in Providence, Rhode Island. Our system is vulnerable to damage
from fire, flood, earthquakes, power loss, telecommunications failures,
break-ins and similar events. Moreover, we do not presently have a disaster
recovery plan, carry any business interruption insurance or have any secondary
"off-site" systems or a formal disaster recovery plan. A system failure at our
present location would have a major adverse affect on the performance of our
services.
Our services are susceptible to disruptive problems.
Despite our implementation of network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptive problems. Computer viruses, break-ins or other problems caused by
third parties could lead to interruptions, delays or cessation in service to
users of our services and products. Any of these risks could have a negative
effect on our business, results of operations and financial condition.
We may be held liable for online content provided by third parties.
Materials may be downloaded and distributed to others by the on-line or
Internet services offered by us or the Internet service providers with which we
have a relationship. If this happens, claims may be made against us for
defamation, negligence, copyright or trademark infringement, or some other
reason. These claims or the imposition of liability may have a negative effect
on our business, results of operations and financial condition.
Internet security concerns could hinder e-commerce and the demand for our
products and services.
A significant barrier to e-commerce and communications over the Internet
has been the need for the secure transmission of confidential information. We
may incur significant costs to protect against the threat of security breaches
or to alleviate problems caused by breaches. Internet usage and the demand for
our services could decline if any well-publicized compromise of security occurs.
Although we are not aware of any attempts by programmers or "hackers" to
penetrate our network security, these actions could occur in the future. A party
who is able to penetrate our network security could misuse our users' personal
information or credit card information and users might sue us or bring claims
against us. Concerns over the security of Internet transactions and the privacy
of users may also inhibit the growth of the Internet generally, particularly as
a means of conducting commercial transactions. Security breaches or the
inadvertent transmission of computer viruses could expose us to a risk of loss
or litigation and possible liability. Our business, results of operations, and
financial condition could be negatively effected if contractual provisions
attempting to limit our liability in these areas are not successful or
enforceable, or if other parties do not accept these contractual provisions as
part of our agreements with them.
We need to manage our growth effectively.
Our growth has placed and will continue to place a significant strain on
our managerial, operational and financial resources. We need to:
o improve our financial and management controls, reporting systems and
procedures;
o expand, train and manage our work force for marketing, sales and
support, product development, site design, and network and equipment
repair and maintenance; and
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o manage multiple relationships with various customers, strategic
partners and other third parties.
If we do not continually upgrade technology, we may not be able to compete in
our industry.
We will need to continually expand and upgrade our infrastructure and
systems and ensure high levels of service, speedy operation, and reliability. In
addition, we will have to improve our methods for measuring the performance and
commercial success of our different products to better respond to customers'
demands for information on product effectiveness and to better determine which
products and services can be developed most profitably. Our current and planned
personnel, financial and operating procedures and controls may not be adequate
to support our future operations. If we are unable to manage our growth
effectively, our business will be negatively affected.
If we do not effectively develop our early stage products and technology, our
business may be negatively effected.
The Internet market is characterized by rapidly changing technology,
evolving industry standards, frequently introduced new services, products and
enhancements and changing customer demands. Many of our products and service
applications are in the early stages of development and/or marketing, including
the products and services we will offer as a competitive local exchange carrier.
Many of our competitors have already introduced products that include one or
more of the features incorporated in our products. We expect that our
competitors may attempt to replicate the technology of our products or employ
competing technologies, if our products are commercially successful. Our risks
include unforeseen design or engineering problems with our products and
applications. These or other risks associated with new product and service
development or introduction may occur. If they do occur, they could have an
adverse effect on our financial condition and operating results.
If we do not develop a sufficient sales and marketing force, we may not be able
to generate significant revenues or become profitable.
Currently we have 15 sales and marketing employees and we have not
established distribution channels for our services and products. We may not be
able to develop a sufficient sales force and marketing group. Our inability to
develop a sufficient sales force and marketing group would have a negative
effect on our business, results of operations and financial condition.
Government regulation and legal uncertainties could add additional costs to
doing business on the Internet.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act sought to prohibit transmitting various types of
information and content over the Internet. Several telecommunications companies
have petitioned the Federal Communications Commission to regulate Internet
service providers and online service providers in a manner similar to long
distance telephone carriers and to impose access fees on those companies. This
could increase the cost of transmitting data over the Internet. Moreover, it may
take years to determine the extent to which existing laws relating to issues
such as property ownership, libel and personal privacy are applicable to the
Internet. Any new laws or regulations relating to the Internet could adversely
affect our business.
Our management has broad discretion over the use of proceeds raised in this
offering.
We intend to use approximately $6,000,000 or 31.3%, of the net proceeds of
the offering to expand our network capabilities and to upgrade our equipment,
and $5,750,000 or 30.0%, of the net proceeds to acquire other businesses.
Although we have estimated the amount of the net proceeds to be used for a
particular purpose under "Use of Proceeds," to the extent that our management
determines that a change is advisable, we may change the amount of the net
proceeds that will be used. Accordingly, our management will have broad
discretion as to how to spend the net proceeds of the offering.
8
<PAGE>
We face significant competition from Internet and telephone service providers
and others.
The Internet connectivity business is highly competitive, and there are no
substantial barriers to entry. We believe that competition will intensify.
Currently, our primary competitors include such companies as:
o national Internet service providers: Earthlink, PSINet, Inc., UUNET
Technologies, Inc. and GTE
o regional telecommunications providers: Bell Atlantic, The Internet
Access Company or TIAC, and Winstar Communications, Inc.;
o on-line service providers: America Online, Inc. and Microsoft Corp.;
and
o regional telephone companies and long distance companies: MCI
Worldcom, Inc. and AT&T Corp.
Many of our current and potential competitors have substantially greater
human and financial resources, experience, and brand name recognition than we
do, and may have significant competitive advantages through other lines of
business and existing business relationships. Furthermore, additional major
media and other companies with financial and other resources substantially
greater than ours may introduce new Internet products and services that compete
with the services and products we offer. Our future growth and profitability
will depend, in part, upon consumer and commercial acceptance of our voice, data
and Internet technology, and significant penetration of our related products and
services. Our competitors may develop products or services that are superior to
ours or achieve greater market acceptance than our products and services.
The representative and the underwriters will continue to have influence over us
following the completion of this offering.
Dirks & Company has been given the right, for a period of five years from
the completion of this offering, to designate a person to our board of
directors. Upon completion of this offering, the representative will also
receive, for nominal consideration, warrants to purchase 220,000 shares of our
common stock. Accordingly, the representative will continue to have influence
over our operations following the completion of this offering.
Our operations depend on our ability to maintain favorable relationships with
third party suppliers.
We depend in large part on third-party suppliers for our access to the
Internet through leased telecommunications lines, such as Bell Atlantic Corp.
and MCI Worldcom, Inc./UUNET. Although we believe this access is available from
several alternative suppliers, we may not be able to obtain substitute services
from other providers at reasonable or comparable prices or in a timely manner.
We are also dependent upon the regional telephone operating company, Bell
Atlantic, to provide installations of circuits and to maintain those circuits.
Substantial failure by any of these third parties to perform could negatively
affect our business, operations, and financial condition.
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<PAGE>
The loss of the services of our chief executive officer, David Paolo, could hurt
our chances for success.
We are dependent on the continued employment and performance of our
executive officers and key employees, particularly of our CEO, David Paolo. The
loss of Mr. Paolo, or his incapacity to perform his duties, would have a
materially negative effect upon our activities and prospects. We do not have key
man life insurance coverage on the life of Mr. Paolo. The loss of the services
of any of our key employees or officers could adversely affect on our business.
Our management has substantial control over us and investors in this offering
may have no effective voice in our management.
Our directors and executive officers will own approximately 37.21% of the
then outstanding shares of our common stock as of November 29, 1999.
Accordingly, these shareholders will possess substantial control over our
operations. This control may allow them to amend corporate filings, elect all of
our board of directors, other than the director to be designated by the
representative, and substantially control all matters requiring approval by our
shareholders, including approval of significant corporate transactions.
Management will also have the ability to delay or prevent a change in our
control and to discourage a potential acquirer for us or our securities. If you
purchase our common stock, you may have no effective voice in our management.
The price investors pay for their shares is higher than the per share value of
our net assets and is also higher than the price paid by our founders and prior
investors.
The initial public offering price per share of our common stock is
substantially higher than the net tangible book value per share of our
outstanding common stock. Purchasers of our common stock will suffer immediate
and substantial dilution of $7.09 per share, or approximately 71% of the initial
public offering price of $10.00 per share. Further, existing shareholders,
including founders, purchased or were issued their shares at an average price of
$.23 per share as compared to the initial public offering price of 10.00 per
share. See "Dilution."
Unless we maintain a public market for our securities, you may not be able to
sell your shares.
Failure to maintain an active trading market could negatively effect the
price of our securities, as well as effect your ability to sell your shares.
Shares eligible for public sale after this offering could adversely affect our
stock price.
Sales of substantial amounts of our common stock in the public market
after this offering, or the perception that these sales may occur, could
materially and adversely affect the market price of the common stock or our
ability to raise capital through an offering of equity securities. Assuming no
exercise of outstanding warrants, of the 8,013,383 shares of common
stock to be outstanding upon completion of this offering, 4,776,116, will be
immediately tradeable without restriction under the Securities Act.
"Affiliates," as defined in the Securities Act, must always sell their shares in
accordance with the terms, including volume limitations, of Rule 144 under the
Securities Act.
In addition, an aggregate of 745,000 shares, issuable upon the exercise of
outstanding warrants, will be immediately tradeable without restriction upon the
completion of this offering, subject to the lock-up agreements described below.
2,714,600 of the 8,013,383 shares to be outstanding upon the completion of
the offering, will be "restricted securities" as defined in Rule 144. All of
these restricted securities have been held for more than one year as of the date
of this prospectus. Therefore, all of these shares will be eligible for public
sale beginning 90 days after the date of
10
<PAGE>
this prospectus in accordance with the requirements of Rule 144, subject to the
lock-up agreements described below
Our stockholders and our warrant holders have agreed to not directly or
indirectly, offer, sell, pledge, grant any option to purchase, or otherwise sell
or dispose of any of our shares for a period of twelve months after the offering
without the prior written consent of Dirks & Company and us. Dirks & Company
agreed with the Nasdaq Stock Market not to release any of our securityholders
who purchased our securities during 1998 from the lock-up during the six(6)
month period from April 22, 1999, without the consent of the Nasdaq Stock
Market.
On November 28, 1999, our representitive and us agreed to release shares
of our common stock previously subject to the lock-up to one affiliated security
holder in the amount of 25,000 shares and non-affiliated selling securityholders
in the amount of 470,000 shares. As a result of the foregoing, we filed a
post-effective amendment to our registration statement of which this prospectus
forms a part.
Failure of computer systems and software products to be Year 2000 compliant
could negatively impact our business.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results. We believe that our products and
internal systems are year 2000 compliant. We have confirmed our year 2000
compliance by obtaining representations by third party vendors of their
products' year 2000 compliance, as well as specific testing of our products. The
failure of products or systems maintained by third parties or our products and
systems to be year 2000 compliant could cause us to incur significant expenses
to remedy any problems, or seriously damage our business. We have not incurred
significant costs for these purposes and we do not believe that we will incur
significant costs for these purposes in the foreseeable future. In June 1998, we
began converting our computer system to be Year 2000 compliant. As of December
15, 1998, all of our non-IT systems were compliant. As of September 30, 1999, we
spent approximately $12,000 on our Year 2000 compliance efforts. This figure
includes all labor and expenses.
11
<PAGE>
USE OF PROCEEDS
We received net proceeds from the sale of the 2,200,000 shares of common
stock offered hereby, and the exercise of the underwriter's over-allotment, in
the approximate amount of $22,100,000, at an initial offering price of $10.00
per share. These numbers take into account underwriting discounts and
commissions, and other estimated expenses of approximately $360,000 that we will
pay.
We anticipate using the net proceeds from the offering to first expand our
network infrastructure and upgrade our current equipment to allow us to provide
bundled services of voice, Internet and cable programming. Second, we intend to
use a combination of capital stock and cash to acquire certain companies with
similar product offerings to accelerate revenue growth. Third, we intend to
employ several means of direct marketing, print advertising, broadcast media,
and web advertising, along with additional marketing and sales personnel to grow
revenues. Finally, we intend to utilize the remainder of these proceeds for
working capital and general corporate purposes. These uses of the net proceeds
are summarized as follows:
Amount($): Percent(%)(1)
---------- -------------
Network expansion and equipment upgrades(2) $6,000,000 31.3%
Strategic acquisitions(3) $5,750,000 30.0%
Marketing and sales(4) $2,250,000 11.7%
Working capital and general corporate purposes(5) $8,100,000 27.0%
- ----------
(2) We intend to purchase routing and switching equipment to continue our
network buildup of specific products and services which we currently
offer.
(3) We do not currently have any plans or agreements regarding acquisitions.
(4) We intend to hire additional sales and marketing personnel and advertise
in various media sources.
(5) Working capital and general corporate purposes consist primarily of
selling general and administrative expenses. We intend to use a portion of
working capital to hire additional operational, technical, and
administrative personnel, utilize additional consulting services, and
increase office space from 3,000 to 5,000 square feet. We also intend to
repay indebtedness of approximately $16,000 from our working capital. We
may allocate certain of these funds to the other uses described above as
our management deems necessary. Net proceeds from the sale of the
over-allotment option will be used for working capital and
general corporate purposes.
This represents our best estimate of the allocation of the net proceeds
from the sale of shares of common stock based upon the current state of our
business operations, current plans and current economic and industry conditions.
Our management has the right to reallocate the net proceeds among the categories
listed above or for additional purposes. Accordingly, we will have broad
discretion as to the application of the net proceeds.
Pending these uses, we intend to invest the net proceeds from this
offering in interest bearing accounts, certificates of deposit, money market
funds or other short term investments.
CAPITALIZATION
The following table sets forth our capitalization as of December 3, 1998,
and the three and nine month period, ended September 30, 1999, and as adjusted
to give effect to the following:
o sale of the 2,200,000 shares of our common stock offered by this
prospectus at an initial public offering price of $10.00 per
share; and
o the application of the estimated net proceeds from the sale of the
2,200,000 shares of common stock offered by this prospectus which includes
the repayment of all outstanding debt.
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<PAGE>
The as adjusted table does not give effect to the following:
o 650,000 shares of our common stock reserved for issuance upon the exercise
of outstanding warrants exercisable during the five year period commencing
January 15, 1999 at an exercise price of $1.00 per share;
o 50,000 shares of our common stock reserved for issuance upon the exercise
of outstanding warrants exercisable during the five year period commencing
December 31, 1998 at an exercise price of $3.50 per share;
o 45,000 shares of our common stock reserved for issuance upon the exercise
of outstanding warrants exercisable during the four year period commencing
December 31, 1998 at an exercise price of $3.25 per share;
o 220,000 shares of our common stock reserved for issuance upon the exercise
of the warrants granted to the representative of the underwriters of this
offering exercisable during the four year period commencing one year from
the date of this prospectus at an exercise price of 165% of the public
offering price.
o 1,234,200 shares of our common stock reserved for issuance upon the
exercise of outstanding options granted pursuant to our stock option plan.
The table should be read in conjunction with our financial statements,
including the notes to our financial statements, which appear elsewhere in this
prospectus.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
Actual As Adjusted
------ -----------
<S> <C> <C> <C>
Total Long Term Liabilities: ................. $ 662,145 $ 16,541 --
Stockholders Equity (deficit):
common stock, $.01 par value; authorized
20,000,000 shares 7,647,383 issued
and outstanding as of September 30, 1999 .... $ 52,288 $ 21,763 $ 47,063
Additional paid-in capital(1) ................ $ 30,716,977 $ 1,056,688 $ 23,498,827
------------ ------------ ------------
Accumulated deficit .......................... (2,407,920) $ (422,063) $ (422,063)
------------ ------------ ------------
Total stockholders' equity .............. 28,361,345 $ 656,388 $ 23,123,827
------------ ------------ ------------
Total capitalization .................... $ 29,023,490 $ 656,388 $ 23,123,827
============ ============ ============
</TABLE>
(1) In January, 1998 our board of directors approved a change in our authorized
common stock from 1,000 shares at no par value to 5,000,000 shares at $.01 par
value. Simultaneously, David R. Paolo, our president and then sole shareholder,
exchanged his 1,000 shares for 1,958,620 shares of the newly authorized $.01 par
value stock. In addition, Mr. Paolo received 475,980 shares of stock issued as a
result of the settlement with the Tekcom holders. In November, 1999, a majority
of our shareholders approved a change in our authorized common stock from
20,000,000, .01 par value to 125,000,000, .01 par value per share, and
authorized shares of 15,000,000 preferred at .01 par value per share effective
21 days from December 2, 1999.
DIVIDEND POLICY
We have never paid any dividends on our common stock. We do not intend to
declare or pay dividends on our common stock, but to retain our earnings, if
any, for the operation and expansion of our business. Dividends will be subject
to the discretion of our board of directors and will be contingent on future
earnings, if any, our financial condition, capital requirements, general
business conditions and other factors as our board of directors deems relevant.
13
<PAGE>
DILUTION
Purchasers of our shares of common stock will experience immediate and
substantial dilution in the net tangible book value of their investment. The
difference between the initial public offering price per share of common stock
and the net tangible book value per share of common stock after this offering
constitutes the dilution per share of common stock to investors in this
offering. Net tangible book value per share is determined by dividing the net
tangible book value or total tangible assets less total liabilities by the
number of outstanding shares of common stock. As of December 31, 1998, we had a
net tangible book value of $656,388, approximately $.14 per share of common
stock. If we give effect to the sale of 2,200,000 shares of common stock at the
initial public offering price of $10.00 per share, the net tangible book
value on December 31, 1998 would have been $19,820,527 or $2.91 per share. This
represents an immediate increase in the net tangible book value of approximately
$2.77 or an increase of 1,979% per share to existing stockholders and an
immediate dilution of $7.09 per share or 71% to new investors. If we give effect
to the sale of 2,530,000 shares of our common stock, which assumes the
underwriter exercises its over-allotment option in full, at the initial
public offering price of $10.00 per share, the net tangible book value on
December 31, 1998 would have been $22,691,527 or $3.19 per share. This
represents an immediate increase in the net tangible book value of approximately
$3.05, or an increase of 2,179% per share to existing stockholders and an
immediate dilution of $6.81 per share, or 68% to new investors. The following
table illustrates the per share dilution assuming the sale of 2,200,000 shares
of our common stock:
Initial public offering
price per share ..............................$10.00
Net tangible book value
per share as of December 31, 1998.............$ .14
Increase per share attributable
to this offering..............................$ 2.77
Net tangible book value per share
after this offering...........................$ 2.91
Dilution per share to new investors............$ 7.09
The following table summarizes, as of December 31, 1998, the number of
shares of common stock purchased from us, the total consideration paid to us and
the average price per share paid by existing stockholders and by new investors.
Shares Purchased(1) Total Consideration
------------------- -------------------
Average
Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing
Stockholders............. 4,610,716 68% $ 1,078,451 5% $ .23
New Investors........... 2,200,000 32% $22,000,000 95% $10.00
--------- --- ----------- --- ------
Total............. 6,810,716 100% $23,078,451 100%
--------- --- ----------- ----
(1) Does not include (a) 650,000 shares of our common stock reserved for
issuance upon the exercise of outstanding warrants exercisable
during the five year period commencing January 15, 1999 at an
exercise price of $1.00 per share; (b) 50,000 shares of our common
stock reserved for issuance upon the exercise of outstanding
warrants exercisable during the four year period commencing December
31, 1998 at an exercise price of $3.50 per share; (c) 45,000 shares
of our common stock reserved for issuance upon the exercise of
outstanding warrants exercisable during the four year period
commencing December 31, 1998 at an exercise price of $3.25 per
share; (d) 330,000 shares of our common stock issuable upon the
exercise of the underwriter's over-allotment option; (e) 220,000
shares of common stock reserved for issuance upon the exercise of
the representative's warrants exercisable during a four year period
commencing one year from the date of this prospectus at an exercise
price of $16.50 per share; and (f) 1,234,200 shares of our common
stock reserved for issuance upon the exercise of 1,234,200
outstanding stock options granted pursuant to our stock option plan.
Should the underwriter's over-allotment option be exercised in full, new
investors will hold 2,530,000 shares of our common stock representing 35.6% of
the outstanding shares of our common stock after the offering. The proceeds of
$3,300,000 would represent approximately 13% of the total consideration paid by
investors.
14
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth our selected financial information as of
and for the periods indicated. We derived the statement of operations data for
the years ended December 31, 1998 and 1997, and the balance sheet data for the
year ended December 31, 1998 from our audited financial statements included
elsewhere in this prospectus. The statement of operations data for the three and
nine month period ended, September 30, 1999, was derived from our unaudited
financial statements. The selected financial information should be read in
conjunction with our financial statements, the notes to our financial
statements, and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The as adjusted balance sheet data as of December 31, 1998 gives
effect to the 2,200,000 shares offered in this prospectus at an initial offering
price of $10.00 per share, the application of the net proceeds that we will
receive, and the effect of our reorganization.
<TABLE>
<CAPTION>
For the nine months Year Ended
ended September 30, December 31,
1999 ------------
------------------- 1998 1997
(unaudited) ---- ----
Statement of Operations Data:
<S> <C> <C> <C>
Revenues ................................... 1,682,357 $ 759,878 $ 351,560
Operating Expenses ......................... 4,034,376 $ 1,179,897 629,584
------------- ----------- -----------
Operating Loss ............................. (2,352,019) (420,019) (278,024)
Other income (expense) .................... 366,162 (2,044) (1,977)
Net loss ................................... $ (1,985,857) $ (422,063) $ (280,001)
============= =========== ===========
Weighted average shares outstanding --
basic and diluted .......................... 6,222,179 3,853,265 2,434,600
============= =========== ===========
Loss per common share -- basic and diluted . $ (0.32) $ (.11) $ (.12)
</TABLE>
<TABLE>
<CAPTION>
September, 30, 1999 December 31, 1998
------------------- -----------------
(unaudited) Actual As Adjusted(1)
------ --------------
Balance Sheet Data (end of period):
<S> <C> <C> <C>
Cash ....................................... $ 18,890,649 $ 630,131 $23,077,729
Working Capital ............................ $ 19,699,429 $ 248,245 $22,999,429
Total Assets ............................... $ 32,699,465 $ 1,137,000 $23,584,598
Total Debt ................................. $ 1,775,341 $ 16,541 $ -0-
Total Liabilities .......................... $ 4,338,120 $ 480,612 $ 464,071
Stockholders' Equity ....................... $ 28,361,345 $ 656,388 $23,123,827
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements, the notes to our financial statements and the other financial
information contained elsewhere in this prospectus. In addition to the
historical information, this Management Discussion and Analysis of Financial
Condition and Results of Operations and other parts of this prospectus contain
forward-looking information that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by the forward-looking
information as a result of certain factors, including, but not limited to, those
set forth under "Risk Factors" and elsewhere in this prospectus.
Overview
We are a Northeast regional Information/Internet service provider and
competitive local exchange carrier. We have been providing on-line services, and
related products, to individual and corporate clients since November 1992.
As an Internet service provider, we provide business and home Internet
users with access to the Internet via a personal computer and modem or dedicated
access line. This service is called dial-up access. We currently maintain a
national dial-up Internet service throughout the Northeast. We have developed a
base of corporate and institutional customers for our Internet services and have
built the necessary network infrastructure for an Internet service network. A
large part of our current operations is providing dedicated access lines for
commercial accounts. Dedicated access lines are telecommunication lines which
are used solely for a specific use, such as facsimile or Internet communication.
In October 1998, we were approved as a competitive local exchange company in the
State of Rhode Island and in June 3, 1999, we were approved to operate as a
competitive exchange carrier in the State of Massachusetts. A competitive local
exchange carrier is a company that provides local access lines as opposed to
long-distance or other services. This allows us to send a telephone line into a
home or business and enables us to provide a full range of local
telecommunications services to our customers, such as Internet, voice, data and
cable programming. Our clients include residential users, Internet services
providers, wireless carriers and business, government and institutional end
users. We intend to provide all of these services in selected cities with
populations of 200,000 to 2,000,000.
Results of Operations
Three Months Ended September 30, 1999
versus Three Months Ended September 30, 1998
Revenues
Our revenues are currently primarily comprised of dial-up, dedicated access
service and web services. Revenues grew 486% from $204,457 to $1,198,446 for the
three months ended September 30, 1999 as compared to the comparable period in
1998. Revenue growth performance is attributable to an increase in sales
efforts, services offered, the cyberTours acquisition, and an aggressive
marketing campaign in Rhode Island and Maine.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services and
equipment. Gross profit increased from $128,654 to $720,692 for an increase of
460% as compared to the comparable period in 1998. Gross profit growth
performance is attributable to an increase in sales efforts, services offered,
the cyberTours acquisition, and an aggressive marketing campaign in Rhode Island
and Maine.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased from $242,551 to
$2,280,020 for the three months ended September 30, 1999 for an increase of
840%. These increases were primarily attributed to increases in personnel cost
related to an increase in the staff headcount, an increase in marketing and
sales costs, an increase in office expense, and additional equipment costs
associated with the build out of our network backbone to accommodate increased
usage of our network.
Other Income (Expense)
Other income and expense improved from ($2,223) to $220,434 for the three months
ended September 30, 1999. This increase is primarily due to the investment
income earned on the proceeds from the initial public offering on April 22,
1999.
Net Loss
As a result of the previously mentioned factors, net loss grew from $116,120 to
$1,338,894 for the three months ended September 30, 1998 and 1999, respectively.
Nine Months Ended September 30, 1999
versus Nine Months Ended September 30, 1998
Revenues
Our revenues are currently primarily comprised of dial-up, dedicated access
service and web services. Revenues grew 205% from $551,304 to $1,682,357 for the
nine months ended September 30, 1999 as compared to the comparable period in
1998. Revenue growth performance is attributable to an increase in sales
efforts, services offered, the cyberTours acquisition, and an aggressive
marketing campaign in Rhode Island and Maine.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services and
equipment. Gross profit increased from $322,354 to $961,378 for an increase of
198% as compared to the comparable period in 1998.
Selling, General, and Administrative Expenses
General and administrative expenses increased from $498,299 to $3,313,397 for
the nine months ended September 30, 1999 for an increase of 565%. These
increases were primarily attributed to increases in personnel cost related to an
increase in the staff headcount, an increase in marketing and sales costs, an
increase in office expense, and
16
<PAGE>
additional equipment costs associated with the build out of our network backbone
to accommodate increased usage of our network.
Other Income (Expense)
Other income and expense increased from $(2,283) to $366,162 for the nine months
ended September 30, 1999. This increase is primarily due to the investment
income earned on proceeds from the initial public offering on April 22, 1999.
Net Loss
As a result of the previously mentioned factors, net loss grew from $178,228 to
$1,985,857 for the nine months ended September 30, 1998 and 1999, respectively.
Liquidity and Capital Resources
The development and expansion of our business requires significant capital
expenditures. These capital expenditures primarily include build-out costs such
as the procurement, design, and construction of our connection points and metro
service center locations in each market, as well as other costs that support our
network design.
The number of targeted central offices in each market varies, as does the
average capital cost to build our connection points in the given market. Capital
expenditures were nominal during the third quarter of 1999. We expect our
capital expenditures to be substantially higher in future periods, arising
primarily from payments of collocation fees and the purchase of infrastructure
equipment necessary for the development and expansion of our network.
Our capital requirements may vary based upon the timing and success of our
rollout and as a result of regulatory, technological, and competitive
developments, or if
- demand for our services or our anticipated cash flow from operations is
less or more than expected;
- our development plans or projections change or prove to be inaccurate;
- we engage in any acquisitions; or
- we accelerate deployment of our network services or otherwise alter the
schedule or targets of our rollout plan.
We intend to continue to expand our operations at a rapid pace and expect to
continue to operate at a loss for the foreseeable future. The nature of expenses
contributing to our future losses will include network and service costs in
existing and new markets; legal, marketing, and selling expenses as we enter
each new market; payroll-related expenses as we continue to add employees;
general overhead to support the operational increases; and interest expense
arising from financing our expenditures.
We have not paid any dividends to our shareholders and will not pay dividends
for the foreseeable future.
Through September 30, 1999, we have financed our operations and market
build-outs primarily from the sale of our common stock in 1998, for which we
received approximately $1,250,000 in net proceeds, and through our April 22,
1999 initial public offering, for which we received $21,800,000 in net proceeds.
As of September 30, 1999, we had $18,890,649 in cash equivalents and we had an
accumulated deficit of $2,407,920.
Comparison of Fiscal Year Ended December 31, 1998
to Fiscal Year Ended December 31, 1997
Revenues
Our revenues are primarily comprised of dial-up, dedicated access service
and web services. Revenues grew 116% from $351,560 to $759,878 for the year
ended December 31, 1998 as compared to the comparable period in 1997. Revenue
growth performance is attributable to an increase in sales efforts, services
offered and an aggressive marketing campaign in our local market, Rhode Island.
Dial-up
During 1998, we focused our efforts to expand our dial-up base in Rhode
Island. This was accomplished through cost-effective billboard advertising,
radio media, and target marketing campaigns. As a result, dial-up revenue grew
from $123,680 to $238,154 for the year ended December 31, 1998 as compared to
the comparable period in 1997 for an increase of 93%.
Dedicated Access Service
During the fourth quarter of 1997, we increased our sales efforts for
dedicated Internet access service resulting in higher revenue growth during
1998. Dedicated access is when a phone line is used solely for a specific
purpose, such as the Internet or a facsimile. As a result, dedicated Internet
access service business grew, based principally on high speed Internet access
lines such as ISDN and T-1, and other high speed circuit growth. These access
lines have varying degrees of transmission speeds. Revenues grew from $172,734
to $437,083 for the year ended December 31, 1998 as compared to the comparable
period in 1997 for an increase of 153%.
Web Services
During 1998, web site hosting and consulting became more important to our
new and existing customers as the popularity of the web increased as a business
tool. Web site hosting and consulting involves the development, storage and
access of web sites on our web server. Web services revenue grew from $41,895 to
$67,601 for the year ended December 31, 1998 as compared to the comparable
period in 1997 for an increase of 29%.
17
<PAGE>
Gross Profit
Gross profit consists of total revenue less the cost of delivering
services and equipment. Gross profit increased from $213,036 to $356,370 for an
increase of 67% for the years ended December 31, 1997 and 1998, respectively.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased from $491,060 in
the year ended December 31, 1997 to $776,389 in the year ended December 31, 1998
for an increase of 51%. These increases were primarily attributed to increases
in personal cost of approximately $182,000 related to the addition of six
additional personnel, increases in amortization expense of approximately $18,000
related to additional goodwill established during the year related to Wan
Secure's purchase of our predecessor company, and increases of approximately
$34,000 related to additional telecommunication costs from building out our
network backbone to accommodate increased usage of our network.
Advertising
Advertising expenses were $64,820 for the year ended December 31, 1997,
and $36,515 for the year ended December 31, 1998, for a decrease of $28,305, or
44%.
Other Expenses
Other expenses represent interest on our small business loans. Other
expenses were $1,977 and $2,044 for the years ended December 31, 1997 and 1998,
respectively, for an increase of 3%.
Payroll Tax
We had penalties in connection with a payroll tax delinquency. We settled
with the IRS in the amount of $41,559 and received a final release to that
effect, dated December 28, 1998.
Net Loss
As a result of the previously mentioned factors, net loss grew from
$280,001 to $422,063 for the years ended December 31, 1997 and 1998,
respectively, for an increase of 51%.
Employees
As of December 31, 1998, we had 13 employees as compared to 10 employees
as of December 31, 1997.
Liquidity and Capital Resources
We have historically financed our operations primarily through the sale of
equity and debt securities and through funds provided by Global Telemedia, our
predecessor's parent company.
During 1997, we received $179,260 from our parent company, Global
Telemedia. We utilized these funds for operations, to expand marketing efforts
and to expand our customer base. During the third quarter of 1998, we sold
275,000 shares of our common stock in a private placement, dated August 18,
1998, resulting in gross proceeds of $275,000 for use in operational activities.
During December 1998, we privately sold an additional 369,216 shares of our
common stock resulting in gross proceeds of approximately $1,200,000, and
received approximately $1,000,000 in net proceeds.
As of December 31, 1998, we had notes payable totaling $16,541, and
accrued but unpaid expenses totaling $18,307, current accounts payable totaling
$428,575, and current working capital of $248,245.
In August 1998, we issued 1,000,000 warrants to several consultants in
consideration of business promotion and marketing. The warrants are exercisable
during the five-year period commencing January 15, 1999, at the exercise price
of $1.00. The shares of common stock underlying the warrants contain piggyback
registration rights.
In December 1998, we issued an aggregate of 131,921 warrants to our chief
financial officer and our legal counsel for services rendered, and to a
placement agent in connection with the December private placement. Of the
warrants, 50,000 and 45,000 are exercisable at $3.50 and $3.25 per share,
respectively. These warrants are exercisable during the five and four-year
period, respectively, commencing December 31, 1998. The remaining 36,921
warrants were issued to our placement agent in December 1998 and are exercisable
at $3.90 during the four-year period commencing December 15, 1999. The warrants
issued to the placement agent will be cancelled prior to the completion of this
offering.
For the period ended December 31, 1998, our negative cash flow from
operations was ($422,063), up from ($280,001) for the same period in the prior
year due to an increase in selling, general and administrative costs and a
repayment of certain current obligations.
We anticipate, based upon our current plans and assumptions relating to
operations, that the cash available following completion of this offering will
be sufficient to satisfy our contemplated cash requirements for 12 months
following completion of this offering.
18
<PAGE>
Year 2000 Compliance.
The inability of computers, software and other equipment utilizing
microprocessing to organize and properly address certain fields containing a
two-digit year is commonly referred to as the Year 2000 problem. As the year
2000 approaches, computer systems may be unable to accurately process certain
date-based information.
We have implemented a Year 2000 program to ensure that our computer
systems and applications will function properly beyond 1999. We have identified
vendor and business partner software with which we electronically interact, or
from which we purchase supplies, and have requested Year 2000 compliance
certifications. We have received verbal assurances from those vendors and
business partners that they and their respective suppliers are Year 2000
compliant. Although we believe all of our systems are and will be Year 2000
compliant, there can be no assurances that all of our vendors' and business
partners' systems will be Year 2000 compliant. Our cost to comply with the Year
2000 initiative is not expected to be material.
In June 1998, we began converting our computer system to be Year 2000
compliant. As of December 15, 1998, all of our non-IT systems were compliant. As
of September 30, 1999, we spent approximately $12,000 on our Year 2000
compliance efforts. This figure includes all labor and expenses.
Recent Accounting Pronouncements.
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This statement provides guidance on
accounting for the costs of computer software developed or obtained for internal
use and identifies characteristics of internal use software as well as assists
in determining when computer software is for internal use. This statement is
effective for fiscal years beginning after December 15, 1998, with earlier
application permitted. We have not determined the impact of the adoption of this
statement as this is highly dependent upon the nature, timing and extent of
future internal use software development.
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities."
This statement provides guidance on the financial reporting of start-up costs
and organization costs. It requires that the cost of start-up activities and
organization costs be expensed as incurred. This statement of position is
effective for financial statements for fiscal years beginning after December 15,
1998. We do not expect adoption of this statement to have a material impact on
our financial statements.
We will be required to adopt Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Statement No. 131 superseded statement No. 14, "Financial Reporting for Segments
of a Business Enterprise" and is effective for years beginning after December
31, 1997. Statement 131 establishes standards for the way that public business
enterprises report selected information about operating segments in financial
reports. Statement 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The addition of
statement 131 will not effect our results of operations or financial position,
but may effect the disclosure of the segment information in the future.
In June 1998, the Financial Accounting Standards Board or "FASB," issued
statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement changes the previous accounting definition of
derivative, which focused on freestanding contracts such as options and
forwards, including futures and swaps, expanding it to include embedded
derivatives and many commodity contracts. Under the statement, every derivative
is recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Statement No. 133 is effective for fiscal years beginning after June
15, 1999. Earlier application is allowed as of the beginning of any quarter
beginning after issuance. We do not anticipate that the adoption of statement
No. 133 will have a material impact on our financial position or results of
operations.
Changes in our certifying accountant
On June 14, 1999, we dismissed our former independent accountants, Tauber
& Balser, P.C. and engaged Ernst & Young to audit our consolidated financial
statements. The decision to change independent accountants was recommended and
approved by our board of directors. Tauber & Balser served as independent
accountants of our financial statements for the years ended December 31, 1998
and 1997. The report on our consolidated financial statements for the years
ended December 31, 1998 and 1997 contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle. In connection with its audits for the years ended December
31, 1998 and 1997, and during the fiscal year 1999 prior to Tauber and Balser's
dismissal, we had no disagreements with Tauber & Balser on matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Tauber &
Balser would have caused them to make reference thereto in their report on the
consolidated financial statements for such years.
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LOA
Overview
We were incorporated in Rhode Island in 1992 for the purpose of providing
online and Internet related services. We are a Rhode Island and Massachusetts
regional competitive local exchange carrier and Information/Internet Service
Provider. A competitive local exchange carrier provides local telephone access
lines as opposed to long-distance or other services. An Internet service
provider provides access to the Internet. As an Internet service provider, we
currently provide a variety of Internet solutions to both commercial and
residential customers. As a local exchange carrier, we plan to offer a full
range of local telecommunication services, resulting in an ability to offer a
complete menu of Internet, voice, data, video, and cable programming solutions
to our customers.
We believe that the Northeast region provides access to attractive tier 1,
tier 2 and tier 3 demographic markets within close proximity of planned network
expansions, resulting in efficient utilization of network capacity. Tier 1
cities have populations over 2,000,000, and tier 2 and tier 3 cities have
populations between 250,000 and 2,000,000. We have an acquisition campaign
targeting Internet service providers, competitive local exchange carriers and
resellers of telecommunication services to gain market share, name recognition
and valuable industry talent. In parallel with the acquisition program, we
intend to pursue market share through an increased direct sales force, offering
an expanded product line to both commercial and residential customers. Market
penetration will require system upgrade and expansion through the purchase of
equipment and the hiring by management of addition technical personnel.
Our goal is to be a leading provider of a wide range of Internet, voice,
data, video, and cable programming solutions to a diverse customer base in the
Northeast. We believe that a strategy comprised of acquisitions and direct sales
will allow us to achieve our desired market penetration and competitive
position.
Corporate History
Log On America, Inc., a Rhode Island corporation, was formed in 1992 to
provide online Internet and related services. This company is our predecessor.
In 1997, the Rhode Island corporation sold 100% of its assets to System 4, Inc.,
a Delaware corporation and a wholly owned subsidiary of Global Telemedia
International, Inc., a Delaware corporation, and agreed to change its name to
Tekcom, Inc. Tekcom remained a Rhode Island corporation with no operations. At
the time of the acquisition, Global Telemedia was engaged in the marketing of
telecommunication services. In consideration of the sale, Global Telemedia
agreed to assume all of the Rhode Island corporation's outstanding liabilities
and to pay the Rhode Island corporation's shareholders, on the third anniversary
date of the purchase, 20% of the value of all of the Rhode Island corporation's
business as of that date. After the transfer of assets and liabilities to
System 4, Inc., System 4 changed its name to Log On America, Inc.
Wan Secure, Inc. was organized in Delaware in January 1998 to purchase
100% of the successor to System 4's outstanding capital from Global Telemedia.
As a result, we became a wholly owned subsidiary of Wan Secure. In consideration
for the purchase, Wan Secure executed a promissory note in the amount of
$100,000 to Global Telemedia. David Paolo, our president and Wan Secure's
majority shareholder, personally guaranteed this promissory note. In September
1998, Wan Secure merged with LOA, the successor to System 4. As a result of this
merger, Wan Secure was the survivor. Simultaneously with the merger, Wan Secure,
a Delaware corporation, changed its name to Log On America, Inc.
In and around February 1998, 100% of the shareholders of Tekcom, Inc.,
formerly the Rhode Island corporation, agreed to surrender and release their
rights and claims to 20% of the value of the Delaware Log On America's business
as of the third anniversary date of the Global Telemedia's purchase. As
consideration for this surrender and release, Tekcom shareholders received an
aggregate of 795,130 shares of the Delaware Log On America's common stock. In
July 1998, Global Telemedia accepted $25,000 in settlement of the $100,000 Wan
Secure note.
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Business
We are an Internet service provider, which means we provide our customers
with access to the Internet. We have been providing on-line services, and
related products, to individual and corporate clients since November 1992. We
maintain a national dial-up Internet service throughout the Northeast. The
majority of our current operations is providing dedicated access lines for the
Internet to commercial accounts. In October 1998, we were approved as a
competitive local exchange company in Rhode Island and in June, 1999, we were
approved in Massachusetts. A competitive local exchange carrier provides local
telephone access lines as opposed to long-distance or other services. We intend
to begin this service in the second quarter of 1999. As a local exchange
carrier, our customers include residential users, Internet service providers,
wireless carriers and business, government and institutional end users. We
believe that our prices will be competitive with those charged by independent
local exchange carriers. We believe our commercial customers will benefit from
our local exchange status by our ability to resell local phone services from the
area's local provider, Bell Atlantic, at a discount to certain of our
competitors. Currently, we are a retail customer of Bell Atlantic.
We are also positioned to address network security issues and provide
secure private networks for secure commerce over the Internet using secure
server applications. A secure server application is a program used to protect
electronic commerce on the Internet. We can also provide encrypted digital
transmissions and design local and wide area networks for residential or
commercial use.
Marketing and Business Strategy
Our goal is to be a leading provider of a wide range of Internet, voice,
data, video, and cable programming solutions in the Northeast. To accomplish
this goal, we intend to develop, utilize and package our services for the
marketplace at competitive prices. We have focused our efforts on high revenue,
high margin commercial clients which enter into term contracts for service,
generally 12 months in duration. We believe this approach differentiates us from
certain of our competitors who seek bulk quantities of Internet dial-up
customers for a monthly fee without contractual commitment. We also market to
customers on a monthly fee basis without contractual commitment. We rely on
service and performance to attract and to keep our clients. We also provide
equipment and security products to our clients that enhance customer service and
help us meet the demands of our customers.
We employ the following marketing strategies: targeted direct marketing,
development of brochures, trade show participation and print media, although we
decreased advertising in 1998. Upon consummation of this offering, we plan to
expand our direct marketing sales team, and to employ more sales staff in the
Northeast.
We currently offer a comprehensive range of Internet access options, web
production services and web hosting services designed to meet the needs of
businesses and individual subscribers. Our strategy is to focus on cities with a
population base large enough to provide a sufficient return on our investments.
We will also focus on cities that have not become the primary target markets for
long distance carriers or national Internet service providers such as Netcom On
Line Communication Services, Inc. and America Online, Inc. It is our objective
to provide a "one-stop-shop" to our customers for their Internet and
telecommunication needs. The "one-stop-shop" will require reliable Internet
access, guidance and training regarding the use of the Internet and support on
how to take full advantage of Internet applications pertinent to the individual
customer. We will attempt to remain competitive in the individual Internet
market with reasonably priced services.
We believe our recent approval by the Rhode Island Public Utilities
Commission and our recent approval in Massachusetts as a competitive local
exchange carrier provides us with the ability to become a full service provider
of local telecommunications services to Internet service providers, wireless
carriers and business, government and institutional end users. We believe this
status will enable us to offer products and customer service at prices
competitive with those charged by the independent local exchange carriers.
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Internet Business
Our strategy is to continue to focus on the Internet market in the
Northeast, to expand to surrounding markets and to provide direct on-site sales
contact with the business communities in those areas. We intend to continue to
expand our subscriber base by providing high quality services coupled with the
expertise to assist our customers with solutions to their Internet and
telecommunication needs. We intend to achieve our strategy by focusing on the
following key elements:
1. Focus on business customers. We believe that use of the Internet by
businesses will grow substantially over the next several years. The Internet has
the potential to enhance productivity through improved communications, access to
data, and through new ways of organizing how businesses interact, both with
other commercial enterprises and with consumers. We believe that the Internet
provides the potential for businesses, large and small, to maintain a worldwide
presence for marketing their products and making information about their
products and services available to interested parties in ways not possible
before. We believe that many businesses are aware, in general, that the Internet
provides a potential new means of conducting commerce, and that businesses do
not have the knowledge or technical expertise required to access or use the
Internet. We believe that by offering our business customers a service-oriented
relationship, we can position ourselves as a value added supplier and thus gain
a competitive advantage over certain of our larger competitors. In order to
implement this strategy, we hired a technical personnel sales staff, currently
comprised of 2 individuals.
2. Provide high-bandwidth, reliable infrastructure services. We have
contracted with Bell Atlantic to deploy our first 155Mbs OC/3 Sonnet ring around
the city of Providence, Rhode Island. Sonnet is an abbreviation for Synchronous
Optical Network, an international standard for high-speed networks. A Sonnet
ring will allow us to deliver high speed Internet access throughout all major
points of Providence, Rhode Island.
3. Provide value-added services. We offer a range of value-added services
designed to assist business customers in taking advantage of opportunities
offered by the Internet. Our current value-added services include web services
such as web hosting and consulting. Web hosting refers to the storage of a web
site or homepage on a web server so that others on the Internet can access and
interact with the site. Quality web hosting services are the foundation for a
successful Internet presence. Other value-added services include network
consulting, security consulting, data services, commercial transaction and
payment processing services, Intranet applications, and e-mail to fax services.
4. Pricing strategy. We believe that price competition will intensify as
the Internet market grows and matures. We intend to remain competitive by
pricing our services to reflect market conditions. Accordingly, we believe that
management of our costs will be critical to remaining competitive. We have made
and plan to continue to make investments in our hardware and network
infrastructure which is designed to increase efficiency and reduce the cost of
delivering our services. We intend to price all of our services in order to
remain competitive with demand, competition and market trends.
Internet Products and Services
We provide a variety of Internet access and other related services to our
clients. These services include, e-mail, web sites, the storage and construction
of web sites, and dedicated circuits with wide bandwidth to enhance data
transmission. Bandwidth is a measurement of the volume of information, usually
measured in bites per second, which can be transmitted over a network at a given
time. A larger bandwidth transmits more information and, therefore, enhances
data transmission. Clients also use our services to receive and/or send data or
to display products and services on the Internet using text, high-resolution
color photographs, video and/or audio.
Some of our current clients include educational facilities including
Providence College; international corporations including Cookson America, Inc.
and Toray Plastics, Inc.; organizations including Butler Hospital and the Bell
Atlantic Telecommunications Center; and governmental agencies including the
Rhode Island Supreme Court, the Office of the Rhode Island Attorney General and
the Rhode Island and Massachusetts Public Utilities Commission.
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We are also a domain name registration provider for Wenzhou Emy Network
Information Company, a Chinese entity that markets access to the World Wide Web
to institutions and corporations within the Zhejiang Province of the People's
Republic of China. This means that we register domain names and host web pages
on behalf of Wenzhou Emy Network, which is located in the People's Republic of
China.
The following list summarizes and defines the specific products and
services which we currently offer:
dial-up access: this is how a home user with a personal computer connects to the
Internet.
point to point: point-to-point is a communications link that directly connects
two facilities and is frequently used to access the World Wide Web.
xDSL: abbreviation for digital service lines; an emerging technology that uses
existing copper wire to carry voice and data traffic over the same telephone
line at high speeds.
domain names: the name used to identify a user on the Internet.
web page design and hosting: building, designing and construction of web sites,
including corporate web sites that reside and are served from the Internet
service provider's web server. A web server stores web sites.
equipment sales: the sale of hardware associated with the deployment of Internet
services.
banner advertisements: display ads and links listed on our web site.
secure virtual private networks: provides secure transmissions between remote
sites, such as a between a laptop computer and a network.
encrypted DS0 to DS3 transit: a process that transforms digital information into
a form that is unintelligible without a proper code.
secure network design: Our technical team can design local area or wide area
networks for small to large corporations seeking security protection and
flexibility in communications. A local area network is a network of computers
confined within a small area, such as an office building. A wide area network is
a system of connected computers spanning a large geographical area.
Intranet, Extranet, Secure Commerce: Our technical personnel can design custom
Intranet, and Extranet networks, which allow companies to communicate over an
existing Internet network, and secure commerce servers, which process financial
transaction over the Internet.
security breach investigations: We investigate compromised networks and attempt
to identify perpetrators of security breaches.
data loss insurance: We offer to our customers a "Data Loss Insurance Policy"
that insures a network from the threat of security breaches.
During 1996, we achieved our goal of having dial-up services in a total of
230 area codes. We plan to have our own network systems in operation or under
construction in a total of 20 cities by the middle of 1999, and a total of 50
cities by the end of 2000. There can be no assurance that we will meet this
goal. Our expansion into additional cities is expected to be accomplished by the
acquisition of existing networks as well as the development of new networks. By
adding networks, we believe we can increase revenues and obtain economies of
scale in our operating costs.
Strategic Alliances.
On August 3, 1999, we completed the acquisition of all the outstanding
shares of cyberTours, Inc. in exchange for 506,667 shares of our common stock,
valued at $7,600,000, to broaden our potential market penetration by
cross-selling additional services and expanded our geographic base. Pursuant to
the terms of this agreement, Cybertours has certain demand rights to register
the shares.
On June 9, 1999, we executed an $8,000,000 equipment and service agreement
with Nortel Networks Inc. for the deployment of a DMS 500 in Providence, Rhode
Island, and remote switching equipment for 15 central offices. The agreement is
for a 12 month period commencing from June 1, 1999, and is automatically renewed
on the anniversary date for 12 months.
On August 4, 1999, we secured a line of credit for $4,000,000 with Fleet
National Bank, which line of credit is secured with various marketable
securities held in our name.
Competitive Local Exchange Carrier Business.
On October 6, 1998, we received approval from the Rhode Island Public
Utilities Commission and on June 3, 1999, from the Massachusetts Public
Utilities Commission to operate as a competitive local exchange carrier. A
competitive local exchange carrier can offer local telephone access as opposed
to long-distance or other services. We intend to use this local exchange status
to provide our Rhode Island and Massachusetts' customers, through one standard
copper cable into the user's home or office, with typical phone service such as
dial tone, toll calls/in-state long distance, long distance, as well as
high-speed Internet access. We intend to become a full service provider of local
telecommunications services to Internet service providers, wireless carriers and
business, government and institutional end users in selected cities in the
Northeast. We intend to offer our products at competitive prices to those
charged by the independent local
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exchange carriers beginning in the second quarter of 1999. We plan on preparing
local exchange carrier applications for other states in the Northeast. We have
also filed for competitive local exchange carrier status in Connecticut, Maine,
New Hampshire and Vermont.
The principal elements of our competitive local exchange carrier strategy
includes:
o targeting tier 2 and tier 3 markets in the Northeast, or markets in cities
with populations between 250,000 and 2,000,000 by securing franchises and
rights-of-way in those markets, installing local exchange carrier networks
and facilities, and establishing customer relationships with Internet
service providers, wireless carriers and business, government and
institutional end users in those markets. We believe this will enable us
to take advantage of the potential growth rates for local exchange service
revenues in those markets. Currently, we have not secured, and have no
agreements to secure, any franchises, rights-of-way, installed local
exchange carrier networks, facilities, established customer relationships
with Internet service providers, wireless carriers, business, or
government and institutional end users; and
o pursuing opportunities in selected Northeast first tier markets, defined
as cities with over two million people. We intend to utilize our existing
operational capabilities in conjunction with proposed operating agreements
with Internet service provider customers.
We intend to design our networks to access at least 70% to 80% of the
business, government and institutional end user revenue base and the Internet
service provider facilities and substantially all of the central offices of the
independent local exchange carriers within our target markets.
Competitive Local Exchange Carrier Products And Services.
Through the second quarter of 1999, we made 15 voice products available to
our customers. Historically, competitive access providers were able to offer
only non-switched special access and private line services, which involve the
installation of dedicated lines to provide the following types of communications
links. Switched access means that the provider can route Internet traffic
through its own network. Non-switched access means that the provider must route
traffic through another provider's network:
Internet special access. telecommunication lines linking one Internet
service provider or several different Internet service providers in a market.
end-user/independent exchange carrier special access. telecommunication
lines between an end user, such as a business, and the local Internet service
provider.
private line. telecommunication lines connecting various locations of one
or more customers' operations, suitable for transmitting voice and data traffic
internally.
collocated special access: A dedicated line carrying switched
transmissions from the Internet service provider through the independent local
exchange carrier's central office to the end users. Switched transmission means
that the provider can route Internet traffic through its own network.
Non-switched access means that the provider must route traffic through another
provider's network
collocated independent local exchange carrier switched access: A dedicated
line carrying switched transmissions from the independent local exchange
carrier's central office to an Internet service provider.
In order to provide these services, we intend to offer various types of
dedicated fiber optic lines, maintained and operated by Bell Atlantic and MCI
Worldcom. We do not operate or maintain any fiber optic lines. These dedicated
fiber optic lines operate at different speeds and handle varying amounts of
traffic to provide tailor-made solutions to our customers' needs, including:
DS-0: A dedicated line service with transmission capacity of up to 64
kilobits of bandwidth per second. This service offers a basic low capacity
dedicated digital channel for connecting telephones, fax machines, personal
computers and other telecommunications equipment.
DS-1: A high-speed channel typically linking high volume customer
locations to Internet service providers or other customer locations. Used for
voice transmissions as well as the interconnection of local
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area networks, DS-1 service accommodates transmission speeds of up to 1.544
megabits per second. We offer this high-capacity service for customers who need
a larger communications pipeline.
DS-3: This service provides a very high capacity digital channel with
transmission capacity of 45 megabits per second. This is a digital service
typically used by Internet service providers for central office connections and
by some large commercial users to link multiple sites.
We intend to add capabilities to provide local dial tone and switched
access termination and origination services to its networks.
We expect our business customers to acquire enhanced local services and
long-distance services from us as a reseller. In order to provide these
services, we intend to purchase these services in bulk from an independent local
exchange carrier and the Internet service provider. We will then offer our
retail customers with a single source of integrated local and long distance
telecommunications services and facilities management at a discount from the
published retail independent local exchange carrier tariff rates. By using
enhanced local service from us instead of an in-house phone system, or private
branch exchange, to direct their telecommunications traffic, customers can avoid
a large investment in equipment required and the fixed costs associated with
maintaining a private branch exchange network infrastructure. Our enhanced local
service, as envisioned, will allow medium to small business customers who lack
the size or resources to support their own private branch exchange to benefit
from a telecommunications system.
We intend to provide a full range of consulting, management, engineering
and information system solutions for telephone, cable television and wireless
providers and other telecommunications infrastructure owners and operators in
our target markets.
Competition
The Internet connectivity and telecommunications business is highly
competitive, and there are no substantial barriers to entry. We believe that
competition will intensify. Our ability to successfully compete will depend on a
number of factors including market presence, capacity, reliability, the security
of our network infrastructure, our pricing of services compared to our
competitors, the timing of new products and services by us and our competitors,
our ability to react to changes in the market, and industry and economic trends.
Our competitors consist of (1) regional Internet service providers, (2) national
Internet service providers, (3) on-line service companies, (4) regional
telephone companies and national long distance carriers, (5)
hardware/software companies and cable operators, and (6) other competitive local
exchange carriers, as discussed below. Most of these competitors have
substantially greater resources, experience, and brand name recognition than we
do.
1. Regional Internet Service Providers. Our competitors include numerous
regional Internet access providers, including Bell Atlantic, The Internet
Access Company or TIAC, and Windstar Communications, Inc.
2. National Internet Service Providers. National Internet service providers
include companies such as Netcom On Line Communication Services, Inc., a
division of ICG Telecom Group, Inc., PSINet, Inc., UUNET Technologies,
Inc. and BBN Corp., a division of GTE Corp. These national competitors
have established national and international networks, providing extensive
coverage throughout the United States and select international locations.
Netcom, PSI and UUNET have established communications and network
infrastructure, adapt more swiftly to new or emerging technologies and
changes in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote more resources to the marketing and
sale of services, than we do. We believe Netcom, PSI and BBN have targeted
the individual dial-up market, while UUNET has specifically targeted the
business markets.
3. On-line Service Companies. Other competitors include the national on-line
service providers such as America On-line, Inc., Microsoft Corporation,
Delphi Information Services, Inc., a division of News Corp., and Genie, a
division of General Electric Information Services. Most of the established
on-line services are rapidly expanding their Internet access services in
order to offer more direct access to the Internet at more competitive
prices. On-line service companies are focused on the individual dial-up
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market and are becoming direct competitors with the national Internet
providers and the long distance telecommunication carriers.
4. Regional Telephone Companies and National Long Distance Companies.
Regional telephone companies such as Bell Atlantic Corp., Southern New
England Telephone Co., and national long distance carriers such as AT&T
Corp., MCI Worldcom, Inc., and Sprint Corp. all operate Internet access
services.
5. Hardware / Software Companies and Cable Operators. In 1995, Microsoft
Corporation entered into the on-line service business with "Microsoft
Network," a consumer on-line service that was released as a standard
integrated feature of the Windows 95 operating system. Cable operators
such as Cox Communications, Inc., and Tele-Communications, Inc., have also
announced their intention to utilize their cable networks to offer
Internet services. Cable modems have the capacity to transmit at speeds up
to 10 megabits per second, versus the normal telephone dial-up speed of
56.6 kilobits per second. Several cable companies are in the process of
upgrading their systems to provide access to the Internet. Each of our
primary markets is highly competitive. Many of our competitors are much
larger than us and have substantially greater resources.
6. Competitive local exchange carriers - Regional local exchange carriers
include Teleport, Inc., MCI Worldcom, Inc., and TCG, Inc.
Government Regulation.
We are currently subject to regulation by the Federal Communications
Commission and related state agencies. In so far as the Internet is a relatively
new medium, the legal obligations and First Amendment rights of service
providers and participants in the Internet, are not well defined and are
evolving. The Internet has not been subject to regulation by the FCC or other
governmental agencies, and standards applicable to print publishers and
television in respect of the law of defamation and obscenity are not clearly
applicable to the Internet. To the extent these issues have been considered by
the courts, outcomes have not been uniform.
In 1996, Congress passed a telecommunications act which, among other
things, includes protection from liability for Internet providers who take steps
to prevent defamatory material from being published on the Internet and also
includes provisions to protect children from indecent material on the Internet.
Certain provisions of that legislation regarding the imposition of criminal
penalties for publication of indecent materials on the Internet were recently
held to be unconstitutional by the United States Supreme Court.
The Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity, or due to increased governmental regulation. There can be no assurance
that the infrastructure or complementary services necessary to make the Internet
a viable commercial marketplace will be developed, or if developed, that the
Internet will become a viable commercial marketplace for services and products
like those offered by us. If the necessary infrastructure or complementary
services or facilities are not developed, or if the Internet does not become a
liable commercial marketplace, our business, results of operations and financial
condition will be materially adversely affected. In addition, the adoption of
additional laws in the United States and in foreign countries could adversely
affect our business.
Proprietary Technology.
We have filed trademark applications with the U.S. Patent and Trademark
Office for "LOA," "Log On America" and our logo. These applications are
currently pending. We have also registered the Internet domain name www.loa.com.
There can be no assurance that potential users and advertisers will not confuse
our trademarks and/or domain name with other similar trademarks and domain
names. If this confusion occurs, we may lose business to a competitor, and have
to adjust our advertising rates and service fees accordingly, or some users of
our services may have negative experiences with other companies on their web
sites that these users erroneously associate with us.
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Employees.
As of November 23, 1999, we had 114 employees. We have no collective
bargaining agreement in place and believe that our relationship with our
employees is good. We are currently negotiating to expand our existing facility
from approximately 3,000 square feet to approximately 5,000 square feet to allow
for an increase in anticipated personnel subsequent to this offering.
Facilities.
We entered into a lease agreement between us and Regency Plaza Associates
dated May 31, 1999, for the premises located at 3 Regency Plaza, Providence,
Rhode Island 02903. This lease was amended on September 10, 1999 to add an
additional 4,000 square feet to provide for rental increase, additional space,
and extension of its term. The lease currently provides for a term expiring on
May 31, 2004. Monthly rent is currently $9,750. The facilities currently
comprise approximately 8,000 square feet. We also maintain office space
comprising less than 500 square feet in Cambridge, Massachusetts through a
verbal arrangement with Snap Dragon Technologies, Inc., a customer of ours. We
discount services to the customer in consideration for the space. We provide
$500 per month in services to Snap Dragon in consideration for the lease. We use
this space to service our Massachusetts clients and customers.
Available Information
We have filed with the commission a registration statement on Form SB-2
under the Securities Act, with respect to the common stock offered by this
prospectus. In this prospectus we refer to that registration statement, together
with all amendments, exhibits and schedules to that registration statement, as
"the registration statement." This prospectus, which is part of the registration
statement, omits certain information, exhibits, schedules and undertakings set
forth in the registration statement. For further information with respect to us
and the securities offered by this prospectus, reference is made to the
registration statement. Statements contained in this prospectus concerning a
document filed as an exhibit to the registration statement is not necessarily
complete and, in each instance, reference is made to the document filed as an
exhibit to the registration statement, each statement being qualified in all
respects by this reference.
The registration statement and other information may be read and copied at
the commission's Public Reference Room at, 450 Fifth Street, NW, Room 1024,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the commission at 1-800-SEC-0330. The
commission maintains a web site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the commission.
We are a reporting company under the Securities and Exchange Act of 1934,
and therefore have filed reports with the commission. Under the Exchange Act, we
will furnish our stockholders with annual reports containing audited financial
statements reported on by independent auditors and make available quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year.
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MANAGEMENT
Directors and Officers
The following table sets forth certain information concerning each of our
directors and officers as of November 29, 1999:
Name Age Position
- ---- --- --------
David R. Paolo 31 President, CEO and Chairman
Donald J. Schattle II 33 VP of Operations and Technology
and Director
Kenneth M. Cornell 31 CFO
Raymond Paolo 53 VP of Administration, Secretary
Treasurer and Director
Steve Head 45 VP of Network Operations
Michael Murphy 24 VP of Sales
Peter Fornal 66 VP of Human Resources
Steven Gilbert 53 Executive VP, Director
Shastri Divakaruni 50 Director
David M. Robert 37 Director
David R. Paolo is our President, Chief Executive Officer, Chairman and founder.
He has served in this position since the formation of our predecessor. In 1994,
Mr. Paolo was appointed as Ambassador for the Greater Providence Chamber of
Commerce, a position he still retains. From 1996 to 1998, he was chairman of the
NYNEX Advisory Board. Mr. Paolo is currently an officer and director of Tekcom,
Inc., one of our predecessors. Tekcom, Inc. is an inactive corporation with no
operations. From 1990 to 1998, Mr. Paolo was an officer and director of
Northeast Business Associates, Inc., a Massachusetts computer equipment sale
corporation. This entity ceased operations in 1992. Prior to that, he worked as
a sales representative for Horizon Distributers, Inc., a Massachusetts
corporation. Horizon Distributers declared bankruptcy on February 1, 1993. Mr.
Paolo attended Roger Williams University from 1986 to 1990.
Donald J. Schattle II has served as our Vice President of Operations and
Technology since 1998. From 1997 to 1998, he served as Senior Systems
Administrator, Director of Operations for our predecessor. Prior to this, Mr.
Schattle owned a computer consulting and technical support firm, Cybersultants,
Inc., from 1995 to 1996, and was a systems administrator, and service and
support engineer for AAA of South Central New England from 1992 to 1996. Mr.
Schattle graduated from the University of Rhode Island in 1994 with a BA degree.
Kenneth M. Cornell has served as our Chief Financial Officer since December
1998. Mr. Cornell is President of Cornell & Associates, Inc. a company providing
financial advisory services. From July 1996 to May 1997, he served as Controller
of Global Telemedia International, Inc. From 1991 to 1996 he worked at Ernst &
Young LLP in the audit department. Mr. Cornell graduated with a BS from the
University of Florida's Fisher School of Accounting in May 1990. In 1991, he
graduated from said university with a Masters in Accounting.
Raymond Paolo has served as our VP of Administration, Secretary, Treasurer and
director since October 1998. Prior to this, he was Chief Financial Officer of
our predecessor from its inception in 1992 until October 1998. Mr. Paolo worked
as an independent sales representative for R.E.P. Enterprises from 1991 to 1992
and as President of Horizon Distributors, Inc., a consumer electronics and
computer mass merchandiser from 1985 to 1990. Horizon Distributors declared
bankruptcy on February 1, 1993. Mr. Paolo is currently an officer and director
of Tekcom, Inc., one of our predecessors. Tekcom, Inc. is an inactive
corporation with no operations. Prior to 1990, Mr. Paolo was an officer of
Interstate Trading Corp., a Massachusetts import corporation. Interstate Trading
declared bankruptcy on May 29, 1992. He was an officer and director of
Video-Eez, Inc. a Massachusetts corporation; and an officer and director of VTR
Industries, Inc., a Massachusetts corporation. Mr. Paolo graduated from the
University of Rhode Island in 1968 with a BS in Business Administration. In
1980, he graduated from the Williams School of Banking with a MA in Business
Administration.
Steve Head is acting VP of Network Operations. He has over 21 years of hands on
experience in domestic and international telecommunications. He has built and
managed cross-functional teams to implement complex telecommunications systems,
both in the United States and Asia Pacific. Mr. Head most recently held the
position of Senior Regional Program Manager for Nortel Networks from 1979 to
November, 1999, where he managed the nationwide deployment and integration of
Point to Multi-point Broadband Microwave Radio equipment into a nationwide
network. Additional credits include the management, implementation and
deployment of various telecommunications switching system programs in the United
States, Japan and Korea. More specifically, Steve worked as the Chief
Engineer in rolling out 29 DMS-100's for the US Army in Korea from the ground
up, as well as, managed the first competitive international long distance
carrier program to KDD in Japan. He has also managed other ground floor projects
with MCI Metro (now MCI Worldcom) and most recently with Teligent.
Michael Murphy, the Company's Vice President of Sales, has extensive sales
experience in the telecommunications industry. Most recently, he served as
Director of Educational Markets for Residential Communications Network from
1997, to 1998 where he managed sales and marketing efforts for new business
development for RCN's phone, cable and Internet services within New England
colleges and universities. Prior to that, Michael has held several positions in
various telecommunications roles such as leading sales and local marketing
efforts within the New England Marketplace for RCN. In addition, he has held
responsibilities in sales force recruiting, hiring and training for AT&T from
1994 to 1997. Mr. Murphy is a graduate of Providence College.
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<PAGE>
Peter Fornal is Vice President of Human Resources, and joins Log On America with
extensive senior-level human resource management experience in diversified
international and domestic businesses. He has a successful track record of
impacting profitability through customer service, continuous improvement,
organizational development and strategic planning initiatives. From 1998 to 1999
Mr. Fornal was the corporate director of Human Resources for Acushnet Rubber
Company. From 1994 to 1998 he was the Vice President of Human Resources for
Original Bedford Soaps Works. Mr. Fornal has also held several notable positions
in the human resource (HR) arena including Vice President of Personnel for the
Information Systems Group of Motorola.
Steven Gilbert has served as a director and has served as the Company's
Executive VP since August 1999. Prior to this, he was the President and founder
of cyberTours which the Company acquired from 1983 to 1996. Mr. Gilbert
graduated from MIT's Sloan School of Management. During that period he worked
extensively in the fledging field of entrepreneurial studies and helped form the
Institute for New Enterprise Development (INED). Mr. Gilbert was instrumental in
the development of the underlying structural foundation of various computer
systems driving major corporations such as NCR, Iron Mountain, and Gettysburg
Insurance. Mr. Gilbert's Library Archival System is still a mainstay for major
research libraries such as Harvard, Cornell, Yale, and the University of South
Carolina.
Shastri Divakaruni has served as a director of ours since February 1998. From
March 1996 to the present, Mr. Divakaruni has worked at Cisco Systems under
various job titles, including Director of Service Provider Marketing and
Director of Broadband Fixed Wireless Engineering. From 1987 to March 1996, Mr.
Divakaruni worked with Southern New England Telecommunications Corp. where he
served as Senior Director of Product Development and Integrated Marketing. Mr.
Divakaruni received his BS in Electronics and Telecommunications from the
University of India in 1969. He received an MS in Electrical Engineering from
the University of Iowa in 1972 and received an MBA from New York University in
1993.
David M. Robert has served as a director of ours since February 1998. Since
1985, Mr. Robert has worked for Northern Telecom, Inc. in various capacities,
including Software Systems Engineer, Product Marketing Specialist, Sales Manager
and, currently, VP of Sales for Nortel Major Accounts. Mr. Robert received a BS
in Mathematics/Computer Science from State University of New York, College at
Cortland in 1984.
Directors are elected to serve until the next annual meeting of the
stockholders and until their successors have been duly elected and qualified.
Raymond Paolo is the father of David R. Paolo.
Compensation of Directors
Directors do not receive compensation for attendance at meetings of the
Board of Directors, but will be reimbursed for certain expenses in connection
with attendance at board meetings.
Audit Committee
Our board of directors has implemented a standing audit committee. The
audit committee is comprised of the following officers and directors: Shastri
Divakaruni, David M. Robert and Kenneth Cornell. The audit committee will assist
our board of directors in exercising its fiduciary responsibilities for
oversight of audit and related matters, including corporate accounting,
reporting and control practices. It will be responsible for recommending to the
Board of Directors the independent auditors for the following year. Our board of
directors intends to have the audit committee meet periodically with management,
financial personnel and the independent auditors to review internal accounting
controls and auditing and financial reporting matters.
Executive Compensation
For the years ended December 31, 1996, 1997 and 1998, David R. Paolo, our
president, was compensated and/or received advances in the amount of $60,000,
$77,617 and $117,927, respectively. On May 15, 1998, Mr. Paolo executed a
promissory note to us in the amount of $77,617. Pursuant to the terms of this
note, we agree to forgive 25% of the principal amount each year. No other
officer or director received compensation in excess of $100,000 for each of
fiscal 1996, 1997 and 1998. Mr. Paolo also earned $25,427 in 1998, which is
included in the table below under "All Other Compensation." This figure includes
(a) $12,227 which represents the pro rated amount of the $77,617 note that we
forgave as of December 31, 1998; (b) $7,800 for a car allowance; and (c) $5,400
for a club membership.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Restricted Securities
Principal Other Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Awards Options Compensation
- -------- ---- ------ ----- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
David R. Paolo 1998 $90,000 $2,500 -0- -0- -0- $25,427
1997 $77,617 -0- -0- -0- -0- -0-
1996 $60,000 -0- -0- -0- -0- -0-
</TABLE>
Employment Agreements
On January 12, 1998, we amended an employment agreement with David R.
Paolo dated January 3, 1997, to serve as our president and chief executive
officer. The term of the agreement is for six years commencing on January 12,
1998. We increased Mr. Paolo's base compensation of $91,500 per year to $124,500
upon the consummation of a previous private offering, dated August 28, 1998.
Under the terms of the agreement, Mr. Paolo will receive an annual increase in
base compensation of 10% for the term of the agreement. We further increased Mr.
Paolo's base compensation to $136,950, effective January 1, 1999. The agreement
contains a provision for performance based bonuses, including non-qualified
stock options, car allowance, and club membership. The employment agreement
contains a non-compete clause for a period of
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<PAGE>
two years following the termination of Mr. Paolo's employment. A state court
might not enforce or only partially enforce this non-compete provision. The
employment agreement may be terminated upon 90 days written notice by either
party. In addition, if we terminate the agreement without cause, Mr. Paolo may
be entitled to receive the balance of any unpaid salary which would otherwise be
payable to him during the remainder of the term of the agreement.
On January 12, 1998, we entered into an employment agreement with Raymond
Paolo to serve as our chief financial officer. On January 1, 1999 we amended
this agreement to reflect his current position as our vice president of
administration, secretary and treasurer. The agreement's term is for six years.
We increased Mr. Paolo's base compensation of $51,500 per year to $69,500 upon
the consummation of a previous private offering, dated August 8, 1998. Under the
terms and conditions of the agreement, Mr. Paolo will receive an annual increase
in base compensation of 10% for the term of the agreement. We further increased
Mr. Paolo's base compensation to $76,450, effective January 1, 1999. The
agreement contains a provision for performance based bonuses, including
non-qualified stock options and car allowance. The agreement contains a
non-compete clause for a period of two years following the termination of Mr.
Paolo's employment. A state court might not enforce or only partially enforce
this non-compete provision. The employment agreement may be terminated upon 90
days written notice by either party. In addition, if we terminate the agreement
without cause, Mr. Paolo may be entitled to receive the balance of any unpaid
salary which would otherwise be payable to him during the remainder of the term
of the agreement.
On May 1, 1999, we entered into an employment agreement with Kenneth
Cornell to serve as our Chief Financial Officer. The agreement is for six years.
Under the terms and conditions of the agreement, Mr. Cornell will receive a base
compensation of $90,000, and an increase annually by ten percent, plus such
additional increases as may be approved from time to time by us. The agreement
contains a provision for performance based bonuses, including non-qualified
stock options and car allowance. The agreement contains a non-compete clause for
a period of one year following the termination of Mr. Cornell's employment. A
state court might not enforce or only partially enforce this non-compete
provision. The employment agreement may be terminated upon 90 days written
notice by either party. In addition, if we terminate the agreement without
cause, Mr. Cornell may be entitled to receive the balance of any unpaid salary
which would otherwise be payable to him during the remainder of the term of the
agreement.
Stock Option Plan.
In January 1999, we adopted the 1999 Stock Option Plan. The purpose of the
plan is to enable us to attract, retain and motivate key employees, directors,
and consultants, by providing them with stock options. Options granted under the
plan may be either incentive stock options, as defined in Section 422A of the
Internal Revenue Code of 1986, or non-qualified stock options. As of the date of
this prospectus, 1,234,200 options have been granted pursuant to the plan.
Our board of directors will administer the plan. Our board has the power
to determine the terms of any options granted under the plan, including the
exercise price, the number of shares subject to the option, and conditions of
exercise. Options granted under the plan are generally not transferable, and
each option is generally exercisable during the lifetime of the holder only by
the holder. The exercise price of all incentive stock options granted under the
plan must be at least equal to the fair market value of the shares of common
stock on the date of the grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of our stock, the
exercise price of any incentive stock option granted must be equal to at least
110% of the fair market value on the grant date. The term of all incentive stock
options owners. Our board of directors approves the terms of each option. These
terms are reflected in a written stock option agreement.
On December 2, 1999, we mailed to our stockholders of record at the close
of business on November 29, 1999, an information statement to inform our
stockholders of the adoption of various resolutions on November 17, 1999, by
consent of a majority of our stockholders acting pursuant to Section 228 of the
General Corporation Law of the State of Delaware. Pursuant to such resolutions,
we shall increase the number of shares which may be issued under out 1999 Stock
Option Plan from 1,000,000 to 2,500,000 shares. The increase in the number of
shares which may be issued pursuant to the 1999 Stock Option Plan will also
become effective 21 calendar days after the date of mailing of the information
statement. The Board of Directors is not soliciting proxies in connection with
the adoption of these resolutions and proxies are not requested from our
stockholders.
Right to Designate Director.
Dirks and Company, Inc. has the right, for a period of five years from the
closing of this offering, to designate a person for election to our board of
directors. Dirks and Company has not indicated who they intend to designate to
our board.
Limitations of Liability and Indemnification of Directors and Officers.
Our certificate of incorporation, as amended, and bylaws, as amended,
limit the liability of directors and officers to the maximum extent permitted by
Delaware law. We will indemnify any person who was or is a party, or is
threatened to be made a party to, an action, suit or proceeding, whether civil,
criminal, administrative or investigative, if that person is or was a director,
officer, employee or agent of us or serves or served any other enterprise at our
request.
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<PAGE>
In addition, our certificate of incorporation provides that a director
shall not be personally liable to us or our stockholders for monetary damages
for breach of the director's fiduciary duty. However, the certificate does not
eliminate or limit the liability of a director for any of the following reasons:
o breach of the directors' duty of loyalty to us or our stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
o the unlawful payment of a dividend or unlawful stock purchase or
redemption; and
o any transaction from which the director derives an improper personal
benefit.
We have purchased directors' and officers' insurance in the amount of
$5,000,000. This insurance will insure directors against any liability arising
out of the director's status as our director, regardless of whether we have the
power to indemnify the director against the liability under applicable law.
We have been advised that it is the position of the commission that
insofar as the indemnification provisions referenced above may be invoked to
disclaim liability for damages arising under the Securities Act, these
provisions are against public policy as expressed in the Securities Act and are,
therefore, unenforceable.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of November 30, 1999, and as adjusted
for the 2,200,000 shares of our common stock offered by this prospectus, the
number and percentage of outstanding shares of common stock beneficially owned
by each person who beneficially owns:
o more than 5% of the outstanding shares of our common stock;
o each of our officers and directors; and
o all of our officers and directors as a group.
Except as otherwise noted, the persons named in this table, based upon
information provided by these persons, have sole voting and investment power
with respect to all shares of common stock owned by them. Unless otherwise
indicated, the address of each beneficial owner is c/o Log On America, Inc., 3
Regency Plaza, Providence, Rhode Island 02903. The percentages shown after the
completion of this offering assumes the sale of the 2,200,000 shares of our
common stock offered in this prospectus and the exercise of the underwriter's
over-allotment option, but does not reflect the exercise of the representative's
warrants.
Number of % Beneficially
Name and Address of Shares % Beneficially Owned Owned After
Beneficial Owner Beneficially Owned Before Offering Offering
- ---------------- ------------------ --------------- --------
David R. Paolo.......... 2,434,600(1) 52.80% 30.38%
Raymond Paolo........... 200,000 4.30% 2.50%
Donald Schattle II...... 80,000 1.70% 1.00%
Kenneth Cornell......... 45,000(2) ++ ++
Steven Gilbert ......... 222,401 2.78%
Marilyn Henderson....... 375,000 8.10% 4.68%
ICC Consulting, Inc..... 250,000 5.40% 3.12%
25A Sintsink Dr. West
Port Washington, NY
Northeastern Fibercom... 250,000(3) 5.40% 3.12%
8 West 38th St.
New York, NY
Horizon Fiber, Inc...... 250,000(3) 5.40% 3.12%
22 Cherry Lane
Putnam Valley, NY
All Officers and
Directors as a
Group (7 persons)...... 2,982,001 59.30% 37.21%
** Less than 1%
(1) Includes 400,000 shares of common stock owned by the Paolo Family Trust,
of which Mr. Paolo is the sole trustee.
(2) Represents warrants for the purchase of 45,000 shares of common stock
issuable to the stockholder in consideration of accounting and other
related services rendered. Such warrants are exercisable during a
four-year period commencing December 31, 1998 at an exercise price of
$3.25 per share.
(3) Represents warrants for the purchase of 250,000 shares of common stock
during the five year period commencing January 15, 1999 at an exercise
price of $1.00 per share in consideration of business sales and promotion
services rendered.
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<PAGE>
Wayne Robbins is the sole owner of ICC Consulting, Inc. Jon A. Piazza, Jr.
is the sole owner of Northeastern Fibercom. Robert Dinollo is the sole owner of
Horizon Fiber.
CERTAIN TRANSACTIONS
In 1997, Log On America, Inc., a Rhode Island corporation, sold 100% of
its assets to System 4, Inc., a Delaware corporation and a wholly owned
subsidiary of Global Telemedia International, Inc., and agreed to change its
name to Tekcom, Inc. In consideration of the sale, Global Telemedia agreed to
assume all of the Rhode Island corporation's outstanding liabilities and to pay
the Rhode Island corporation's shareholders, on the third anniversary date of
the purchase, 20% of the value of all of the Rhode Island corporation's business
as of that date. After the transfer of assets and liabilities to System 4, Inc.,
System 4 changed its name to Log On America, Inc.
Wan Secure, Inc. was organized in Delaware in January 1998 to purchase
100% of the successor to System 4's outstanding capital from Global Telemedia.
As a result, we became a wholly owned subsidiary of Wan Secure. In consideration
for the purchase, Wan Secure executed a promissory note in the amount of
$100,000 to Global Telemedia. David Paolo, our president and Wan Secure's
majority shareholder, personally guaranteed this promissory note. In September
1998, Wan Secure effected a merger with and into LOA whereby Wan Secure was the
survivor. Simultaneously with the merger, Wan Secure, a Delaware corporation,
changed its name to Log On America, Inc.
In and around February 1998, 100% of the shareholders of Tekcom, Inc.,
formerly the Rhode Island corporation, agreed to surrender and release their
rights and claims to 20% of the value of the Delaware Log On America's business
as of the third anniversary date of Global Telemedia's purchase. As
consideration for this surrender and release, Tekcom shareholders received an
aggregate of 795,130 shares of the Delaware Log On America's common stock. In
July 1998, Global Telemedia accepted $25,000 in settlement of the $100,000 Wan
Secure note.
In May 1998, David R. Paolo, our president and CEO, and Raymond Paolo, one
of our officers and directors, executed promissory notes to us in the amounts of
$77,617.80 and $47,859.41, respectively. Under the terms of the notes, we agree
to forgive 25% of the principal amount for each note per year. Accordingly, the
notes will be completely forgiven in 2002. The notes do not bear any interest.
We believe that all of our transactions set forth above with persons
affiliated with us were made on terms no less favorable to us than could have
been obtained from unaffiliated third parties.
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<PAGE>
DESCRIPTION OF SECURITIES
The following section does not purport to be complete and is qualified in
all respects by reference to the detailed provisions of our Certificate of
Incorporation and By-laws, copies of which have been filed with our registration
statement of which this prospectus forms a part.
Our authorized capital stock consists of 20,000,000 shares of common
stock, $.01 par value. As of November 30, 1999, 8,013,383 shares of common stock
were issued and outstanding. As of this date, there were 70 record holders of
our common stock.
Common Stock
Shares of our common stock are entitled to one vote per share, either in
person or by proxy, on all matters that may be voted upon by the owners of our
shares at meetings of our shareholders. There is no provision for cumulative
voting with respect to the election of directors by the holders of common stock.
Therefore, the holders of more than 50% of our shares of outstanding common
stock can, if they choose to do so, elect all of our directors. In this event,
the holders of the remaining shares of common stock will not be able to elect
any directors.
The holders of common stock:
o have equal rights to dividends from funds legally available therefore,
when and if declared by our board of directors;
o are entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation, dissolution or
winding up of our affairs; and
o do not have preemptive rights, conversion rights, or redemption of sinking
fund provisions.
The outstanding shares of our common stock are duly authorized, validly
issued, fully paid and nonassessable.
On December 2, 1999, we mailed to our stockholders of record at the close
of business on November 29, 1999, an information statement to inform our
stockholders of the adoption of various resolutions on November 17, 1999, by
consent of a majority of our stockholders acting pursuant to Section 228 of the
General Corporation Law of the State of Delaware. Pursuant to such resolutions,
we will, file an amendment to our certificate of incorporation which will: (a)
increase the number of authorized shares of Common Stock $.01 par value per
share, to 125,000,000 shares; and (b) authorize up to 15 million shares of a new
class of undesignated Preferred Stock ("Blank Check Preferred Stock"), which
would allow our Board of Directors to issue, without further shareholder action,
one or more series of Preferred Stock. In addition, a second resolution adopted
by consent of the majority of our shareholders shall increase the number of
shares which may be issued under our 1999 Stock Option Plan from 1,000,000 to
2,500,000 shares. The amendment to our certificate of incorporation will become
effective upon filing of an amendment to the company's certificate of
incorporation with the Delaware Secretary of State which filing will be
accomplished 21 calendar days after the date of mailing of the information
statement. The increase in the number of shares which may be issued pursuant to
the 1999 Stock Option Plan will also become effective 21 calendar days after the
date of mailing of the information statement. The Board of Directors is not
soliciting proxies in connection with the adoption of these resolutions and
proxies are not requested from our stockholders.
Warrants
We currently have 795,667 common stock purchase warrants outstanding. Of
these 795,667 warrants (a) 650,000 are held in the aggregate by three beneficial
owners and are exercisable during the five- year period commencing January 15,
1999 at an exercise price of $1.00; (b) 50,000 are held by one beneficial owner
and are exercisable during the five-year period commencing December 31, 1998 at
an exercise price of $3.50 per share; and (c) 45,000 are held by one beneficial
owner and are exercisable during the four-year period commencing December 31,
1998 at an exercise price of $3.25 per share, and (d) 50,667 are held by one
beneficial owner and are exercisable during the five-year period commencing June
17, 1999, at an exercise price of $12.25 per share. Certain shares of common
stock underlying the warrants contain piggyback registration rights, which the
holders have waived with respect to this offering and the twelve-month period
following completion of this offering.
Representative's Warrants
We have agreed to sell to the representative, upon closing of this
offering, warrants for the purchase of 220,000 shares of our common stock. The
representative's warrants may be purchased for an aggregate of $22.00. The
representative's warrants are exercisable at $16.50 per share. The
representative's warrants are exercisable during the four-year period commencing
one year from the date of issuance. The representative's warrants contain
provisions to protect the holders against dilution. The exercise price and
number of shares of common stock and representative's warrants purchasable will
be subject to adjustment under certain circumstances, including, but not limited
to, stock dividends, stock splits, mergers, acquisitions and recapitalization.
In accordance with the terms of the representative's warrants, we have
agreed that for a period of five years commencing on the date of this
prospectus, we will on one occasion, upon written demand of the holders of a
majority of the representative's warrants, register for sale in a public
offering under the Securities Act all or any portion of the securities issuable
upon exercise of the representative's warrants.
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<PAGE>
Any registration of this type would be at our expense. We have also agreed to
include the underlying securities in any appropriate registration statement that
we file during the five years following the date of this prospectus.
Transfer Agent
Continental Stock Transfer & Trust Company is our transfer agent and
registrar for our shares of our common stock.
SELLING STOCKHOLDERS
The registration statement, of which this prospectus forms a part, also
relates to our registration, for the account of the selling stockholders, of an
aggregate of 2,246,116 shares of common stock and 795,667 shares of common stock
underlying warrants. The representative is not underwriting the selling
stockholders' shares. The selling stockholders agreed not to directly or
indirectly offer, sell, transfer or otherwise encumber or dispose of any of
their common stock for a period of twelve months after the date of this
prospectus. See "Shares Eligible for Future Sale" and "Underwriting."
The sale of the selling stockholders' shares by the selling stockholders
may be effected from time to time in transactions, which may include block
transactions by or for the account of the selling stockholders, in the
over-the-counter market or in negotiated transactions, or through the writing of
options on the selling stockholders' shares, a combination of these methods of
sale, or otherwise. Sales may be made at fixed prices which may be changed, at a
market prices prevailing at the time of sale, or at negotiated prices.
The selling stockholders may effect the transactions by selling the
selling stockholders' shares directly to purchasers, through broker\dealers
acting as agents for the selling stockholders, or to broker\dealers who may
purchase shares as principals and thereafter sell the selling stockholders'
shares from time to time in the over-the-counter market, in negotiated
transactions, or otherwise. These broker\dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchaser for whom which broker-dealers may act
as agents or to whom they may sell as principals or both, which compensation as
to a particular broker-dealer may be in excess of customary commissions.
The selling stockholders and broker-dealers, if any, acting in connection
with these sales might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act. Any commission they receive and any profit
upon the resale of the securities might be deemed to be underwriting discounts
and commissions under the Securities Act.
Sales of any shares of common stock by the selling stockholders may
depress the price of the common stock in any market that may develop for the
common stock.
The following table sets forth information known to us regarding ownership
of our common stock by each of the selling stockholders as of November 29, 1999
and as adjusted to reflect the sale of shares offered by this prospectus. Other
than the following persons, none of the selling stockholders has had any
position with, held any office of, or had any other material relationship with
us during the past three years. Selling stockholders who have, or have had,
material relationships with us during the past three years include:
o Paul Phillips and Deborah Stevenson - both of whom were prior directors of
us;
o Shastri Divakaruni - our director;
o Security Capital Trading, Inc., our placement agent for our December 1998
private placement;
o Kenneth M. Cornell, our chief financial officer;
o Michael Freedman, an associate with our counsel, Silverman, Collura,
Chernis & Balzano, P.C.; and
o Dalia Silverman, the wife of Peter R. Silverman who is a partner with
Silverman, Collura, Chernis & Balzano.
We believe, based on information supplied by the following persons, that
the persons named in this table have sole voting and investment power with
respect to all shares of common stock which they beneficially
35
<PAGE>
own. The last column in this table assumes the sale of all of our shares offered
in this prospectus.
* Means less than 1%.
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to Offering Common Stock After Offering
Names of Selling ----------------- Offered By --------------
Stockholders Number Beneficial Owner Number Percent
- ------------ ------ ---------------- ------ -------
<S> <C> <C> <C> <C>
Robert A. Schattle 67,500(1) 52,500 15,000 *
Brian C. Schattle 50,000 50,000 0 0
Donald J. Schattle 207,500 207,500 0 0
Vivian A. Tamburini 7,500 7,500 0 0
Arthur G. Schattle 10,000 10,000 0 0
and Sheila M. Schattle JT
Marilyn Henderson 375,000 375,000 0 0
Fred Stolle 200,000 200,000 0 0
Anthony Cattani 27,000 27,000 0 0
John K. Greim, Sr. 64,000 64,000 0 0
Victor Calderone 32,400 32,400 0 0
Robert and Shirley Henebury 20,250 20,250 0 0
Paul Phillips 13,500 13,500 0 0
Equity Mortgage 13,500 13,500 0 0
Ernest Hoffer 13,500 13,500 0 0
John Greim, Jr. 13,500 13,500 0 0
Joseph DiGianfilippo 13,500 13,500 0 0
Betty and Anthony Fiorillo 13,500 13,500 0 0
Shannon Love Eldridge 13,500 13,500 0 0
Peter Florio 20,250 20,250 0 0
Steven Marino 27,000 27,000 0 0
Mark and Deborah Stevenson 27,000 27,000 0 0
Vincent Cipriano 27,000 27,000 0 0
Karen S. Kelly 10,000 10,000 0 0
Deborah L. Peacock 100,000 100,000 0 0
Robert M. Kessler 50,000 50,000 0 0
Michael Lombardi 4,500 4,500 0 0
James and Cindy Dugan 4,500 4,500 0 0
Mitchell Cheek 4,500 4,500 0 0
David Forsley 4,500 4,500 0 0
Thomas O'Donnell 2,500 2,500 0 0
Mail Processing Concepts 4,500 4,500 0 0
Raymond T. Mancini 50,000 50,000 0 0
Donald St. Angelo 25,000 25,000 0 0
Richard St. Angelo 25,000 25,000 0 0
Charles E. Casale 30,768 30,768 0 0
Deborah Lee 15,384 15,384 0 0
Eugene I. Meyers 23,076 23,076 0 0
Clyde D. Adams TTEE 15,384 15,384 0 0
Adams Revocable Trust
Wayne B. Peacock 15,384 15,384 0 0
Larry H. Pallini 15,384 15,384 0 0
Joseph D. DiMase TTEE 15,384 15,384 0 0
Money Purchase Pension Plan
Louis J. Petrillo and
Anna Marie Mariniello JT 7,692 7,692 0 0
Shirley Lynn Gasbarro Trust 15,384 15,384 0 0
Faustin M. Kabwe 15,384 15,384 0 0
Michel Van Lierde 15,384 15,384 0 0
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to Offering Common Stock After Offering
Names of Selling ----------------- Offered By --------------
Stockholders Number Beneficial Owner Number Percent
- ------------ ------ ---------------- ------ -------
<S> <C> <C> <C> <C>
Dr. Christoph Ludz 15,384 15,384 0 0
Robert Standaert 7,692 7,692 0 0
Paul J. Gardella and 30,768 30,768 0 0
Mark Edelsberg as Tenants
In Common
Shaji Ravindranathan and 7,692 7,692 0 0
Paul K. Chang as Tenants
In Common
Robert F. Tierney and
Corinne M. Tierney JT 15,384 15,384 0 0
Kleopatra Georgiades 15,384 15,384 0 0
Dalia Silverman 63,384 63,384(2) 0 0
Edward Miller and
Diane Miller JT 7,692 7,692 0 0
Stuart Cohen and
Paul Waltzer as Tenants in
Common 15,384 15,384 0 0
Robert Manheimer 15,384 15,384 0 0
Dr. Kenneth Barton 7,692 7,692 0 0
Girolamo Sorbara 15,384 15,384 0 0
Amar C. Amar 3,846 3,846 0 0
R. Shastri Divakaruni 3,846 3,846 0 0
LOA Investment LLC 7,692 7,692 0 0
ICC Consulting, Inc. 250,000 250,000 0 0
Scofield Dennison Corp. 150,000 150,000(3) 0 0
International Technology
Marketing, Inc. 100,000 100,000 0 0
Northeastern Fibercom 250,000 250,000(3) 0 0
Horizon Fiber, Inc. 250,000 250,000(3) 0 0
Michael H. Freedman 2,000 2,000(4) 0 0
Kenneth M. Cornell 45,000 45,000(5) 0 0
</TABLE>
(1) Assumes the exercise of 15,000 stock options with an exercise price of
$10.00 per share.
(2) Includes 48,000 shares of common stock underlying a warrant exercisable
during the five year period commencing December 31, 1998 at an exercise
price of $3.50 per share.
(3) Represents shares of common stock underlying warrants for the purchase of
shares of common stock during the five-year period commencing January 15,
1999 at an exercise price of $1.00 per share.
(4) Represents shares of common stock underlying a warrant for the purchase of
2,000 shares of common stock exercisable during the five-year period
commencing December 31, 1998 at an exercise price of $3.50 per share.
(5) Represents shares of common stock underlying a warrant for the purchase of
45,000 shares of common stock during the four-year period commencing
December 31, 1998 at an exercise price of $3.25 per share.
37
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market,
or the availability of shares for sale, could adversely affect the prevailing
market price of our common stock and our ability to raise capital through an
offering of equity securities. As of the date of this prospectus, we have
approximately 70 holders of our common stock.
As of November 29, 1999, we will have 8,013,383 shares of common stock
outstanding, assuming no exercise of outstanding warrants, 4,776,116 of the
8,013,383 shares of common will be immediately tradeable without restriction
under the Securities Act, except for any shares purchased by an "affiliate" of
ours, as that term is defined in the Securities Act. Affiliates will be subject
to the resale limitations of Rule 144 under the Securities Act. In addition, an
aggregate of 745,000 shares, issuable upon the exercise of outstanding warrants
will be immediately tradeable without restriction upon the completion of this
offering, subject to the lock-up agreements described below.
We issued the remaining 2,714,600 shares of common stock in private
transactions in reliance upon one or more exemptions contained in the Securities
Act. These shares will be deemed "restricted securities" as defined in Rule 144.
All of these restricted securities have been held for more than one year as of
the date of this prospectus. Therefore, all of these shares will be eligible for
public sale beginning 90 days after the date of this prospectus in accordance
with the requirements of Rule 144, subject to the lock-up agreements described
below.
In general, under Rule 144, a stockholder, or stockholder whose shares are
aggregated, who has beneficially owned "restricted securities" for at least one
year will be entitled to sell an amount of shares within any three month period
equal to the greater of:
o 1% of the then outstanding shares of common stock, or
o the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which notice of the sale
is filed with the commission, provided certain requirements are satisfied.
In addition, our affiliates must comply with additional requirements of
Rule 144 in order to sell shares of common stock, including shares acquired by
affiliates in this offering. Under Rule 144, a stockholder who had not been our
affiliate at any time during the 90 days preceding a sale by him, would be
entitled to sell those shares without regard to the Rule 144 requirements if he
owned the restricted shares of common stock for a period of at least two years.
All of our stockholders and our warrant holders have entered into lock-up
agreements whereby they agreed to not directly or indirectly, offer, sell,
pledge, grant any option to purchase, or otherwise sell or dispose of any of our
shares for a period of twelve months after the offering without the prior
written consent of Dirks & Company and us. Dirks & Company has agreed with the
Nasdaq Stock Market not to release any of our securityholders who purchased our
securities during 1998 from the lock-up during the six(6) month period from the
date of this prospectus without the consent of the Nasdaq Stock Market.
38
<PAGE>
UNDERWRITING
The underwriters named below, for whom Dirks & Company, Inc. is acting as
representative, have severally agreed, subject to the terms and conditions
contained in the underwriting agreement, to purchase from us, and we have agreed
to sell to the underwriters on a firm commitment basis, the respective number of
shares of common stock set forth opposite their names:
Number of
Underwriters Shares
- ------------ ------
Dirks & Company, Inc.......................................... 1,200,000
Security Capital Trading, Inc. ............................... 250,000
Kashner Davidson Securities Corp. ............................ 200,000
Network One Financial Securities, Inc. ....................... 150,000
Carroll & Koster, N.V. ....................................... 100,000
EBI Securities, Inc. ......................................... 100,000
Smith Moore & Co. ............................................ 100,000
Westport Resources Investment Services ....................... 100,000
------------
Total.................................................... 2,200,000
The underwriters are committed to purchase all the securities offered by
this prospectus, if any of the securities are purchased. The underwriting
agreement provides that the obligations of the several underwriters are subject
to the conditions specified in the underwriting agreement.
The representative is not underwriting the selling stockholders' shares in
connection with this offering. The selling stockholders may sell their shares
from time to time in transactions, which may include block transactions by or
for the account of the selling stockholders, in the over-the-counter market or
in negotiated transactions or through the writing of options on the selling
stockholders shares, a combination of these methods of sale, or otherwise. Sales
may be made at fixed prices which may be changed at market prices prevailing at
the time of sale, or at negotiated prices.
The representative has advised us that it initially proposes to offer the
common stock to the public at the public offering price set forth on the cover
page of this prospectus, and to certain dealers concessions not in excess of
$0.42 per share of common stock. The dealers may reallow a concession not in
excess of $0.07 per share of common stock to certain other dealers. After
completion of the offering, the public offering price, concessions and
reallowances may be changed by the representative. The representative has
informed us that it does not expect sales to discretionary accounts by the
representative to exceed five percent of the shares of common stock offered by
us in this prospectus.
We granted to the underwriters an over-allotment option, exercisable
during the 45-day period from the date of this prospectus, to purchase from us
up to an additional 330,000 shares of common stock at the initial public
offering prices, less underwriting discounts and the non-accountable expense
allowance. This over-allotment option has been exercised by the underwriters.
This option has been for the purpose of covering over-allotments incurred in the
sale of the shares of our common stock. Each underwriter has a firm commitment,
subject to certain conditions, to purchase the number of the additional shares
of common stock proportionate to its initial commitment.
We have agreed to pay to the representative a non-accountable expense
allowance equal to three percent of the gross proceeds derived from the sale of
the shares of common stock underwritten, of which $50,000 has been paid to date.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act. The commission has advised us
that this indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Our directors and executive officers, all other holders of shares of
common stock, and all holders of warrants to acquire shares of common stock,
have agreed not to, directly or indirectly, offer, sell or otherwise dispose of
any shares of common stock for a period of twelve months following the date of
this prospectus, without the prior written consent of the representative and us.
An appropriate legend shall be placed on the certificates representing the
securities. The representative has no general policy with respect to the release
of shares prior to the expiration of the lock-up period and has no present
intention to waive or modify any of these restrictions on the sale of our
securities.
In connection with this offering, we have agreed to sell to the
representative, and/or its designees, for nominal consideration,
representative's warrants to purchase up to 220,000 shares of our common stock.
The
39
<PAGE>
representative's warrants are initially exercisable at any time during a period
of four years beginning one year from the date of the prospectus at a price of
$16.50 per share. The representative's warrants provide for adjustment in the
number of securities issuable upon the exercise thereof as a result of certain
subdivisions and combinations of the common stock. The representative's warrants
grant to the holders certain rights of registration for the securities issuable
upon exercise thereof. In addition, the representative's warrants may not be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or
in part, for a period of one year from the date of the prospectus, except to
officers of the representative.
We have has also granted to the representative, the right, for a period of
five years from the closing of the offering, to nominate a designee of the
representatives for election to our board of directors. Our officers, directors
and principal shareholders have agreed to vote their shares in favor of this
designee.
In connection with this offering, certain underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the securities. The
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which the persons may bid for or purchase
our common stock for the purpose of stabilizing their respective market prices.
The underwriters also may create a short position for the account of the
underwriters by selling more shares of common stock in connection with the
offering than they are committed to purchase from us. In that case they may
purchase shares of common stock in the open market following completion of the
offering to cover all or a portion of the short position. The underwriters may
also cover all or a portion of the short position, up to 330,000 shares of
common stock, by exercising the over-allotment option referred to above.
In addition, the representative may impose "penalty bids" under
contractual arrangements with the underwriters whereby it may reclaim from an
underwriter, or dealer participating in the offering, for the account of other
underwriters, the selling concession with respect to the shares of common stock
that are distributed in the offering but was subsequently purchased for the
account of the underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the prices of the shares of common stock at a level above that
which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken, they may
be discontinued at any time.
Prior to this offering, there was no public market for our common
stock. Consequently, the initial public offering price of the common stock has
been determined by negotiation between the us and our representative and does
not necessarily bear any relationship to our asset value, net worth or other
established criteria of value. The factors considered in these negotiations, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which we compete, an assessment of our management, our
prospects, our capital structure and other factors as were deemed relevant.
Dirks & Company commenced operations in July 1997. Dirks & Company has
co-managed only three public offerings of securities. Accordingly, the
representative has only limited experience as an underwriter of the public
offering of securities.
We undertake to disclose, by filing "sticker" supplements to this
prospectus, if the representative enters into any transactions with the selling
stockholders, or waives the lock-ups applicable to the selling stockholders, if
these transactions involve in the aggregate from 5% to 10% of the total amount
of the registered selling stockholders' securities. We will file a
post-effective amendment to this registration statement if these transactions
involve over 10% of the total amount of the selling stockholders' securities.
Accordingly, we will file a supplement if the representative releases 149,556 to
299,112 of the selling securityholders' securities from the lock-up, and a
post-effective amendment if the representative releases over 299,112 of the
securities from the applicable lock-up provisions. The supplement or
post-effective amendment will be filed within 5 business days of the agreement
to release the applicable securities. Dirks & Company has agreed with the Nasdaq
Stock Market not to release any of our securityholders who purchased our
securities during 1998 from the lock-up during the six(6) month period from the
date of this prospectus without the consent of the Nasdaq Stock Market.
On November 28, 1999, we and the representative released 470,000 of 9
non-affiliated and 25,000 of one affiliated selling securityholders' securities.
As a result of the foregoing, we filed a Post-effective amendment to the
registration statement, for which this prospectus is a part.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each agreement that is filed as an exhibit to the registration statement of
which this prospectus is a part.
40
<PAGE>
LEGAL MATTERS
The validity of the common stock being offered in this prospectus will be
passed upon for us by Silverman, Collura & Chernis, P.C. Orrick,
Herrington & Sutcliffe LLP is acting as counsel for the representatives in
connection with this offering. We have granted warrants for the purchase of an
aggregate of 50,000 shares of our common stock to certain designees of our
counsel. These warrants are exercisable during the five year period commencing
December 31, 1998 at an exercise price of $3.50 per share.
EXPERTS
Tauber & Balser, P.C., independent certified accountants, have audited our
financial statements included in this registration statement for the years ended
December 31, 1998 and 1997. Its report appears elsewhere in this prospectus. The
financial statements have been included in reliance upon that report and upon
the authority of the firm as experts in accounting and auditing.
41
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Log On America, Inc.
Providence, Rhode Island
We have audited the accompanying balance sheet of Log On America, Inc. as of
December 31, 1998 and the related statements of operations, stockholders' equity
(deficiency) and cash flows for the years ended December 31, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Log On America, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ Tauber & Balser, P.C.
Atlanta, Georgia
February 12, 1999
F-1
<PAGE>
LOG ON AMERICA, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS
Cash $ 630,131
Accounts receivable, net of allowance for doubtful
accounts of $16,239 93,160
Other current assets 5,566
----------
TOTAL CURRENT ASSETS 728,857
----------
PROPERTY & EQUIPMENT, net of accumulated depreciation
of $163,867 71,845
OTHER ASSETS
Goodwill, net of accumulated amortization of $69,67 237,060
Notes receivable - officer 98,533
Deposits 705
----------
336,298
----------
TOTAL ASSETS $1,137,000
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 16,541
Accounts payable 428,575
Accrued expenses 35,496
----------
TOTAL CURRENT LIABILITIES 480,612
----------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; authorized 20,000,000 shares,
4,610,716 issued and outstanding 21,763
Additional paid-in capital 1,056,688
Accumulated deficit (422,063)
----------
TOTAL STOCKHOLDERS' EQUITY 656,388
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,137,000
==========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
1998 1997
------------ ------------
REVENUES
Dial up $ 238,154 $ 123,680
Dedicated access service 437,083 172,734
Web services 67,601 41,895
Other 17,040 13,251
----------- -----------
Total Revenues 759,878 351,560
----------- -----------
OPERATING EXPENSES
Communication and internet services 403,508 138,524
General and administrative 776,389 491,060
----------- -----------
Total Operating Expenses 1,179,897 629,584
----------- -----------
OPERATING LOSS (420,019) (278,024)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (2,165) (1,977)
Interest income 121 --
----------- -----------
(2,044) (1,977)
----------- -----------
NET LOSS $ (422,063) $ (280,001)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES USED IN
COMPUTING BASIC AND DILUTED LOSS PER SHARE 3,853,265 2,434,600
----------- -----------
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.11) $ (.12)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
THE YEARS ENDED DECEMBER 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Issued Additional Total
------------------- Paid-In Accumulated Stockholders'
Shares Par Value Capital Deficit Equity (Deficiency)
------ --------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 102 $ 154,200 $ -- $(335,198) $ (180,998)
Acquisition of assets and assumptions of
liabilities by Global Telemedia, Inc. (102) (154,200) -- 335,198 180,998
Capital infusion by parent company 100 179,260 -- -- 179,260
Net loss -- -- -- (280,001) (280,001)
---------- --------- ---------- --------- -----------
BALANCE DECEMBER 31, 1997 100 179,260 -- (280,001) (100,741)
Acquisition of assets and assumption of
liabilities by WAN Secure, Inc. (100) (179,260) -- 280,001 100,741
Issuance of common stock to President 2,434,600 -- -- -- --
Issuance of common stocks for services 62,750 628 3,764 -- 4,392
Issuance of common stock for notes 1,150,000 11,500 24,610 -- 36,110
Issuance of common stock, net of issuing costs 644,216 6,443 1,021,484 -- 1,027,927
Issuance of common stock for settlement of
prior obligations 319,150 3,192 6,830 -- 10,022
Net loss -- -- -- (422,063) (422,063)
---------- --------- ---------- --------- -----------
BALANCE DECEMBER 31, 1998 4,610,716 $ 21,763 $1,056,688 $(422,063) $ 656,388
========== ========= ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
1998 1997
------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (422,063) $(280,001)
----------- ---------
Adjustments:
Stock issued for services 4,392 --
Stock issued for settlements of prior
obligations 10,022 --
Notes receivable forgiven related to stock
issuance 36,110 --
Notes receivable officer forgiven 31,378 --
Deprecation and amortization 79,522 71,296
Bad debt provision 3,516 903
Changes in:
Accounts receivable (37,074) (46,808)
Prepaid advertising -- 20,000
Other current assets (3,618) (1,948)
Accounts payable 112,951 105,820
Accrued expenses (65,138) 13,568
Deferred revenue (21,073) 38,262
----------- ---------
Total Adjustments 150,988 201,093
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (271,075) (78,908)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (40,821) (12,257)
Payments on note receivable officer (51,378) (78,533)
----------- ---------
NET CASH USED BY INVESTING ACTIVITIES (92,199) (90,970)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of capital infusion by parent company -- 179,260
Issuance costs (447,073) --
Proceeds from sale of common stock 1,475,000 --
Payments on note payable (31,255) (6,362)
Payments on notes payable - related party (3,267) (3,200)
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 993,405 169,698
----------- ---------
NET INCREASE IN CASH 630,131 --
CASH BEGINNING OF YEAR -- --
----------- ---------
CASH END OF YEAR $ 630,131 $ --
=========== =========
(continued)
F-5
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
(Continued)
1998 1997
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid for interest $ 1,496 $ 3,148
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Details of acquisition
Fair value of assets acquired $362,665 $134,311
======== ========
Goodwill established $125,739 $180,998
======== ========
Liabilities assumed $488,404 $315,309
======== ========
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 1998 and 1997
1. Summary of Significant Accounting Policies
Nature of Business and Operating History
Log On America, Inc. was incorporated in Rhode Island ("LOARI") in 1992 for the
purposes of providing online and Internet related services. In 1997, LOARI sold
100% of its assets to Global Telemedia International, Inc. ("GTMI"), a Delaware
corporation, and agreed to change its name to Tekcom, Inc. Tekcom remained a
Rhode Island corporation with no operations. At the time of acquisition, GTMI
was engaged in the marketing of telecommunication services. In consideration for
the sale, GTMI agreed to (i) assume all outstanding liabilities of LOARI; and
(ii) pay LOARI shareholders 20% of the value of all LOARI business on the third
anniversary of the purchase ("Contingent Sum"). Subsequently, GTMI formed System
4, Inc., a wholly owned Delaware subsidiary, in which to transfer the LOARI
assets and liabilities. System 4, Inc. was incorporated for the purpose of
providing online internet and related services. In July 1997, System 4, Inc.
changed its name to Log On America, Inc. ("LOA").
Wan Secure, Inc. ("WS") was organized in Delaware in January 1998 by the former
president of LOARI to purchase 100% of the outstanding capital stock of LOA from
GTMI. Pursuant to such acquisition, LOA became a wholly owned subsidiary of WS.
In September 1998, WS effected a merger with and into LOA whereby WS was the
survivor. Simultaneously with the merger, WS changed its name to Log On America,
Inc, and it continues to provide online and internet related services. The
results of operations for the entire year of WS are included in the 1998
financial statements as the acquisition occurred at the beginning of the year.
Fair Value of Financial Instruments
All financial instruments reported as current assets and liabilities are carried
at cost, which approximates fair value because of the short maturity of those
instruments.
Credit Risk
The Company's accounts receivable potentially subject the Company to credit
risks as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services, the use of
pre-approved charges to customer credit cards, and the ability to terminate
access on delinquent accounts.
Property and Equipment
Property and equipment are recorded at cost, and depreciated using an
accelerated method over the estimated useful lives of the assets, commencing
when the assets are installed or placed in service.
Goodwill
Goodwill is the excess of the fair value of liabilities assumed over the fair
value of identifiable net assets acquired in business combinations accounted for
as purchases. Goodwill is amortized on a straight-line basis over 7 years.
Amortization expense for the years ended December 31, 1998 and 1997 was $43,819
and $25,857, respectively.
Revenue Recognition
The Company recognizes revenue when services are provided. Services are
generally billed one month in advance. Advance billings and collections relating
to future access services are recorded as deferred revenue and recognized when
revenue is earned.
F-7
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 1998 and 1997
1. Summary of Significant Accounting Policies, continued
Advertising Expense
Advertising expense includes the cost of sales brochures, print advertising in
trade publications and trade shows. The cost of advertising is expensed as
incurred. Advertising expense for the years ended December 31, 1998 and 1997 was
$36,515 and $64,820, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
(SFAS No. 128), Earnings Per Share, which established new standards for
computing and presenting earnings per share. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earning per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of stock options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
All loss per share amounts have been presented to conform to the SFAS No. 128
presentation. Stock options and warrants have not been included in the
computation of diluted loss per share as the computation would not be dilutive.
For additional disclosure regarding stock options and warrants see Note 8.
2. Notes Receivable - Officers
Notes receivable - officers consisted of unsecured amounts loaned to officers of
the Company in the amount of $98,533 at December 31, 1998. In May 1998, David R.
Paolo, the Company's President and CEO, and Raymond Paolo, an officer and
director, executed promissory notes to the Company in the amounts of $77,617 and
$47,859, respectively ("Paolo Notes"). Pursuant to the terms of the Paolo Notes,
the Company agrees to forgive 25% of the principal amount for each note per year
if the officers remain employed by the Company. If employment is terminated, the
notes become immediately due and payable. In 1998, $31,378 was released and
reported as salaries to the Paolos.
3. Property and Equipment
Property and equipment at December 31, 1998 consist of the following:
Computer, telecommunications and office equipment $223,758
Leasehold improvements 11,954
--------
235,712
Less accumulated depreciation 163,867
--------
$ 71,845
========
Depreciation expense for the years ended December 31, 1998 and 1997 was $35,703
and $45,439, respectively.
F-8
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 1998 and 1997
4. Accrued Expenses
Accrued expenses at December 31, 1998 consist of the following:
Accrued expenses $18,307
Deferred revenue 17,189
--------
$ 35,496
========
5. Notes Payable
Notes payable at December 31, 1998 consist of the following:
Note payable to Small Business Loan Fund
Corporation at 6.98%, due October 1999,
interest and principal payable monthly
in the amount of $594, with balance due
at maturity $16,541
=======
6. Income Taxes
Deferred income taxes and the related valuation allowances result from the
potential tax benefits of tax carryforwards. The Company has recorded a
valuation allowance to reflect the uncertainty of the ultimate utilization of
the deferred tax asset as follows:
Deferred tax asset $180,220
Less valuation allowance 180,220
--------
Net deferred tax assets $ --
========
Net operating loss carryforwards of approximately $422,000 arising in 1998
expire in 2018.
7. Lease Commitments
The Company leases office space and equipment under operating leases expiring in
1999. Rental expense was $74,553 and $50,700 for the years ended December 31,
1998 and 1997, respectively. The minimum rental payments due in 1999 are
$23,961.
The Company leases office space in Massachusetts of less than 500 square feet
under a verbal arrangement with a customer. In consideration of the use of its
customer's office, the Company provides discounted services to the customer. The
office is used to service clients located in Massachusetts.
8. Stock Options and Warrants
The Company applies the intrinsic-value-based method in accounting for stock
options for employees as prescribed by Accounting Principals Board No. 25,
"Accounting for Stock Issued to Employees." It also applies the fair value
method for stock options issued to consultants. Accordingly, compensation
expense is recognized for employees only when options are granted with a
discounted exercise price. For 1998, the exercise price for all of the Company's
stock options issued equaled or exceeded the market price of the underlying
stock on the grant date. In addition, for options issued to consulants, other
consideration was paid or received by the recipient for each of the instances
when options were granted. Accordingly, the Company has determined that the fair
value of the options granted was nominal and no compensation expense was
recognized.
F-9
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 1998 and 1997
8. Stock Options and Warrants, continued
The following table summarizes option activity during 1998:
Weighted-Average
Shares Exercise Price
------ --------------
Outstanding at beginning of the year -- $ --
Granted 1,131,922 1.32
--------- ---------
Outstanding at end of the year 1,131,922 $ 1.32
========= ========
The following table summarizes information about the options outstanding at
December 31, 1998:
Range of exercise price $1.00-$3.90
Weighted-average remaining contract life 5 years
Weighted-average exercise price $1.32
All options outstanding at December 31, 1998 are exercisable.
On January 4, 1999, the Board of Directors authorized the granting of options
for up to an additional 1,000,000 shares of Common Stock to officers, directors,
and employees and certain consultants at a strike price at 85% to 90% of market
value.
9. Common Stock Transactions
During the first quarter of 1998, the Company issued 795,130 shares of common
stock in settlement of an agreement with the shareholders of a predecessor
company, LOARI, which changed its name to Tekcom. Charges to expense related to
the transaction were $10,022, which was calculated based on the fair value of
the stock at the date the obligation was settled.
In January, 1998 the board of directors of Wan Secure, Inc. approved a change in
authorized common stock from 1,000 shares at no par value to 5,000,000 shares,
subsequently increased to 20,000,000 shares, at $.01 par value. Simultaneously,
the President of the Company and then sole shareholder exchanged his 1,000
shares for 1,958,620 shares of the newly authorized $.01 par value stock. In
addition, the President received 475,980 shares of stock issued as a result of
the settlement with the Tekcom Contingent Sum holders.
10. Employment Agreements
The Company has employment agreements through 2003 with David R. Paolo,
President and CEO and Raymond Paolo, an officer and director. The agreements
call for an annual increase of base compensation of 10%, and include provisions
for performance based bonuses. The Company's commitment for base compensation
under the agreements was $1,302,833 at December 31, 1998.
11. Acquisitions
In January 1998, the Company acquired from GTMI, all of the assets and
liabilities of LOA. The transaction was recorded using the purchase method of
accounting. In accordance with the provisions of APB No. 16, all identifiable
assets acquired, including identifiable intangible assets, were assigned a
portion of the purchase price on the basis of their fair values. In connection
with the acquisition, the Company issued a note payable to GTMI in the amount of
$100,000, which was personally guaranteed by David Paolo, President and CEO. In
July 1998, GTMI accepted $25,000 for full satisfaction of the note. Based on the
settlement amount of the note, the
F-10
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 1998 and 1997
11. Acquisitions, continued
Company has recorded $25,000 as consideration paid for the purchase. The
purchase price was allocated as follows:
Assets purchased $ 362,665
Liabilities assumed $ (488,404)
Goodwill $ 125,739
During 1997, the Company acquired all of the assets and liabilities of Log On
America, Inc. (a Rhode Island corporation.) The transaction was recorded using
the purchase method of accounting. In accordance with the provisions of APB No.
16, all identifiable assets acquired, including identifiable intangible assets,
were assigned a portion of the purchase price on the basis of their fair values.
No consideration was paid. The details of the purchase are as follows:
Assets purchased $ 134,311
Liabilities assumed $ (315,309)
Goodwill $ 180,998
F-11
<PAGE>
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must not
rely on any unauthorized information. This prospectus does not offer to sell or
buy any shares in any jurisdiction where it is unlawful. The information in this
prospectus is current only as of the date of this prospectus.
Log On America, Inc.
2,200,000 Shares of Common Stock
DIRKS & COMPANY, INC.
November __, 1999
Until _________ (25 days after the date of this prospectus) all dealers that
buy, sell or trade these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee $16,185.27
Nasdaq National Market System Listing Fee $ 35,000
NASD Filing Fee $ 4,676
Printing and Engraving Expenses $ 75,000*
Legal Fees and Expenses $125,000*
Accounting Fees and Expenses $ 50,000*
Transfer Agent's Fees and Expenses $ 10,000*
Blue Sky Fees and Expenses $ 35,000*
Miscellaneous Expenses $ 10,000*
--------
TOTAL $360,861*
*Estimated
The Selling Stockholders will not pay any portion of the foregoing
expenses of issuance and distribution.
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
LOA's Certificate of Incorporation, as amended and Amended Bylaws limit
the liability of directors and officers to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a corporation will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, including gross negligence, except liability for (i) breach of the
directors' duty of loyalty; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) the
unlawful payment of a dividend or unlawful stock purchase or redemption, and
(iv) any transaction from which the director derives an improper personal
benefit. Delaware law does not permit a corporation to eliminate a director's
duty of care, and this provision of LOA's Certificate of Incorporation has no
effect on the availability of equitable remedies, such as injunction or
rescission, based upon a director's breach of the duty of care.
LOA is planning to enter into indemnification agreements with each of its
current and future directors and officers which provide for indemnification of,
and advancing of expenses to, such persons to the greatest extent permitted by
Delaware law, including by reason of action or inaction occurring in the past
and circumstances in which indemnification and the advancing of expenses are
discretionary under Delaware law.
LOA's Certificate of Incorporation authorizes LOA to purchase and maintain
insurance for the purposes of indemnification. LOA intends to apply for
directors' and officers' insurance, although there can be no assurance that LOA
will be able to obtain such insurance on reasonable
II-1
<PAGE>
terms, or at all.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of LOA
pursuant to the foregoing provisions, or otherwise, LOA has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Corporation Takeover Provisions
Section 203 of the Delaware General Corporation Law
LOA is subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that such
stockholder became an interested stockholder, unless (i) the corporation has
elected in its original certificate of incorporation not to be governed by
Section 203 (LOA did not make such an election) (ii) the business combination
was approved by the Board of Directors of the corporation before the other party
to the business combination became an interested stockholder (iii) upon
consummation of the transaction that made it an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by directors who are also officers or held in employee benefit plans in which
the employees do not have a confidential right to render or vote stock held by
the plan) or, (iv) the business combination was approved by the Board of
Directors of the corporation and ratified by two-thirds of the voting stock
which the interested stockholder did not own. The three-year prohibition also
does not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during t he previous three years or who became an
interested stockholder with the approval of the majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an "interested
stockholder," transactions with an "interested stockholder" involving the assets
or stock of the corporation or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as a stockholder who,
together with affiliates and associates, owns (or, within three years prior, did
own) 15% or more of a Delaware corporation's voting stock. Section 203 could
prohibit or delay a merger, takeover or other change in control of LOA and
therefore could discourage attempts to acquire LOA.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
December 1998 Private Placement (December Placement)
II-2
<PAGE>
In December 1998 LOA closed a private placement of 24 units ("Units"),
each unit consisting of 15,384 shares of Common Stock, at a price of $50,000 per
Unit. LOA sold 369,216 shares of its Common Stock to "accredited investors," as
that term is defined in the Securities Act, and raised gross proceeds of
$1,200,000. The placement agent for the December Placement was Security Capital
Trading, Inc., which received a commission of 10% of the $1,200,000 raised and a
non-accountable expense allowance of 3% per Unit sold. Security Capital Trading,
Inc. was granted warrants to purchase (a) 13,076 shares of Common Stock reserved
for issuance upon the exercise of outstanding warrants granted on December 3,
1998, exercisable during the four year period commencing December 1999 and
expiring December 2003 at $3.90 per share; and (b) 23,845 shares of Common Stock
reserved for issuance upon the exercise of outstanding warrants, granted on
December 23, 1998, exercisable during the four year period commencing December,
1999 and expiring December 2003 at $3.90 per share. The December Placement was
exempt from state and federal registration pursuant to Rule 506 of Regulation D,
and Section 4(2) of the Securities Act.
July 1998 Private Placement
In July 1998 LOA closed a private placement of shares of Common Stock at a
price of $1.00 per share. LOA sold 275,000 shares of Common Stock to accredited
investors and received gross proceeds of $275,000. The private placement was
offered by LOA's officers and directors, none of whom received commissions for
the sales. The private placement was exempt from state and federal registration
pursuant to Rule 506 of Regulation D, and Section 4(2) of the Securities Act.
Recent Acquisitions.
On August 3, 1999, we completed the acquisition of all the outstanding
shares of Cybertours, Inc. in exchange for 506,667 shares of our Common Stock
valued at $7,600,000. Pursuant to the terms of this agreement, dated July 2,
1999, Cybertours has certain demand rights to register the shares.
On September 20, 1999, we acquired certain assets of Netquarters Inc. in
exchange for $256,000 in cash and 16,000 shares of our Common Stock valued at
$256,000, pursuant to an agreement, dated August 24, 1999.
Warrants
In June 1999, LOA granted warrants for the purchase of 50,667 shares of
common stock at an exercise price of $12.25 per share to one entity,
International Technology Marketing Inc. in consideration of services rendered.
The warrants provide for piggyback registration rights and are exercisable
during the 5 year period commencing June 17, 1999. No information was given to
this accredited entity but it was provided with the opportunity to review LOA's
corporate records.
In August 1998, LOA granted warrants for the purchase of 1,000,000 shares
of Common Stock at an exercise price of $1.00 per share to four entities, ICC
Consulting, Inc., Scofield Dennison Corp., Northeastern Fibercom and Horizon
Fiber, Inc. in consideration of certain business promotion and sales. The
warrants provide for piggyback registration rights and are exercisable during
the four year period commencing January 15, 1999. No information about LOA was
given to these entities, but they were provided with the opportunity to review
LOA's corporate records.
In December 1998, LOA granted warrants for the purchase of 50,000 shares
of Common Stock to Silverman, Collura, Chernis & Balzano, P.C. ("SCCB"), LOA's
legal counsel, for services rendered. The warrants provide for cashless exercise
and piggy-back registration rights. The warrants are exercisable during the five
year period commencing December 31, 1998 at an exercise price of $3.50 per
share. LOA had a pre-existing relationship with SCCB prior to the warrant
issuance. SCCB was provided with complete due diligence documents relating to
LOA prior to the issuance of the warrants.
In December 1998, LOA granted warrants for the purchase of 45,000 shares
of Common Stock to Kenneth M. Cornell, LOA's interim CFO, for services rendered.
The warrants provide for piggy-back registration rights and are exercisable
during the four year period commencing December 31, 1998 at an exercise price of
$3.25 per share. Mr. Cornell
II-3
<PAGE>
was given access to all corporate records prior to the issuance of the warrants.
All of the above warrants were issued pursuant to an exemption under
Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS
Exhibit No. Description
- ----------- -----------
1.1* Form of Underwriting Agreement
1.2* Form of Underwriter's Warrant Agreement
3.1* Certificate of Incorporation of Registrant, as amended
3.2* By-laws of Registrant, as amended
4.1* Specimen certificate representing Registrant's Common Stock
5.1* Opinion of Silverman, Collura, Chernis & Balzano, P.C. with
respect to legality of the securities of the Registrant
being registered
10.1* David R. Paolo Employment Agreement
10.2* Raymond Paolo Employment Agreement
10.3* Form of Lock-up Agreement
10.4* Lease Agreement for premises located at 3 Regency Plaza,
Providence, Rhode Island.
10.5* 1999 Stock Option Plan
10.6 Kenneth M. Cornell Employment Agreement
10.7 Acquisition agreement between Cybertours, Inc. and Log On
America, Inc.
10.8 Equipment and Service Agreement with Nortel Networks
10.9 Line of Credit Agreement between Log On America, Inc. and
Fleet National Bank
23.1* Consent of Silverman, Collura, Chernis & Balzano, P.C.
(included in Exhibit 5.1)
23.2 Consent of Tauber & Balser, P.C.
24.1 Power of Attorney (set forth on signature page of the
Registration Statement)
27 Financial Data Schedule
II-4
<PAGE>
* previously filed.
b. Financial Statement Schedules.
None
ITEM 28. UNDERTAKINGS.
(a) Rule 415 Offerings.
The undersigned issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
Registration Statement; and
(iii) Includes any additional or changed material information on the plan
of distribution.
provided, however, the paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
in a post-effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Request for acceleration of effective date.
(1) Insofar as indemnification for liabilities arising under the
Securities Act, may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the issuer has been advised that in the opinion of the
II-5
<PAGE>
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the issuer of expenses incurred or paid by a director, officer or
controlling person of the issuer in the successful defense of any action, suit
or proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such court.
(2) For determining liability under the Securities Act, treat the
information in the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in the form of prospectus
file by the small business issuer under rule 424(b)(1), or (4) or 457(h) under
the Securities Act as part of this registration statement as at the time the
Commission declares it effective.
(3) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing this Post Effective Amendment No. 1 to Form SB-2
and authorized this registration statement to be signed on its behalf by the
undersigned, in the City of Providence, State of Rhode Island, on December 1,
1999.
LOG ON AMERICA, INC.
By:s/ David R. Paolo
---------------------------------
David R. Paolo, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in their
respective capacities with LOA and on the dates indicated.
Signature Title Date
--------- ----- ----
s/ David R. Paolo President, CEO and Chairman December 1, 1999
- --------------------------
David R. Paolo
* Principal Financial Officer and December 1, 1999
- -------------------------- Principal Accounting Officer
Kenneth M. Cornell
Vice President of Administration,
* Secretary, Treasurer and Director December 1, 1999
- --------------------------
Raymond E. Paolo
- -------------------------- Vice President of Operations and December 1, 1999
Donald J. Schattle II Technology, Director
s/ Shastri Divakaruni Director December 1, 1999
- --------------------------
Shastri Divakaruni
s/ David M. Robert Director December 1, 1999
- --------------------------
David M. Robert
s/ Steven Gilbert
- --------------------------
Steven Gilbert Executive Vice President, December 1, 1999
Director
* David Paolo as attorney-in-fact
Exhibit 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into and made effective as of
May 1, 1999, by and among Log On America, Inc., a Delaware corporation
("Employer") and Kenneth M. Cornell ("Employee").
R E C I T A L S
WHEREAS, Employer is desirous of hiring Employee as one of its key employees;
WHEREAS, Employee is willing to accept employment as an employee of Employer;
and WHEREAS, the parties hereto desire to delineate the responsibilities of
Employee and the expectations of Employer;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and obligations herein contained, the parties hereto agree as follows:
AGREEMENT
1. EMPLOYMENT. Employer hereby employs Employee, and Employee hereby accepts
employment with Employer, upon the terms and conditions set forth in this
Agreement.
2. TERM OF EMPLOYMENT. The employment of Employee pursuant to the terms of
this Agreement shall commence as of May 1, 1999, and shall continue for a
period of Six (6) years, unless sooner terminated pursuant to the
provisions hereof; PROVIDED, HOWEVER, that this Agreement shall, unless
earlier terminated, as of the fifteenth of each month of the term of this
Agreement, be automatically extended for an additional month.
3. DUTIES.
3.1. BASIC DUTIES. Subject to the direction and control of the Board of
Directors of Employer, Employee shall serve as the Chief Financial
Officer of Employer and shall fulfill all duties and obligations of
such office.
3.2. OTHER DUTIES OF EMPLOYEE. In addition to the foregoing, Employee
shall perform such other or different duties related to those set
forth in Paragraph 3.1 as may be assigned to him from time to time
by Employer; PROVIDED, HOWEVER, that any such additional assignment
shall be at a level of responsibility commensurate with that set
forth in Paragraph 3.1 and PROVIDED, FURTHER, that Employee may
serve, or continue to serve, on the boards of directors of and hold
any other offices or positions in, companies or entities that in the
judgment of Employer will not present any conflict of interest with
Employer or any of its operations or adversely affect the
performance of Employee's duties pursuant to this Agreement.
3.3. TIME DEVOTED TO EMPLOYMENT. Employee shall devote his full time to
the business of Employer during the term of this Agreement to
fulfill his obligations hereunder.
<PAGE>
3.4. PLACE OF PERFORMANCE OF DUTIES. The services of Employee shall be
performed at Employer's place of business, Gainesville Florida, and
at such other locations as shall be designated from time to time by
Employer.
4) COMPENSATION AND METHOD OF PAYMENT.
4.1 TOTAL COMPENSATION. As compensation under this Agreement, Employer
shall pay and Employee shall accept the following:
1) For each year of this Agreement, measured from the effective date
hereof, base compensation of ninety thousand dollars ($90.000), and
further increased annually by ten percent (10%) per year, plus such
additional increases as may be approved from time to time by the
Employer. All such increases shall be effective as of the beginning
of such calendar year in which the increase becomes effective
pursuant to the terms hereof or is approved by the Employer, as the
case may be. Such adjustments may be based on the performance of
Employer, the value of Employee to Employer or any other factors
considered relevant by Employer.
(2) For each year:
(i) an income performance based bonus ("Income Performance
Bonus"), payable quarterly, as stated in the 1998 management
incentive plan
(3) Reimbursement of such discretionary expenses as are reasonable and
necessary, in the judgment of the Employer, for Employee's
performance of his responsibilities under this Agreement.
(4) Nonqualified options issued at the discretion of the Employer.
(5) Participation in Employer's employee fringe benefit programs in
effect from time to time for employees at comparable levels of
responsibility. Participation will be in accordance with any
applicable policies adopted by Employer. Employee shall be entitled
to vacations, absences for illness, and to similar benefits of
employment, and shall be subject to such policies and procedures as
may be adopted by Employer. Without limiting the generality of the
foregoing, it is initially anticipated that such benefits of
employment shall include four (4) weeks' vacation during each
12-month period of employment with Employer (which shall accrue
monthly on a PRO RATA basis and which shall be carried forward for a
period not to exceed three (3) years and otherwise in accordance
with Employer's policies); major medical and health insurance; life
and disability insurance; and stock option plans for employees and
members of the Board of Directors. Employer further agrees that in
the event it offers disability insurance to its employees, Employer
shall arrange for Employee to be covered by similar insurance.
(6) In addition, Employee shall be entitled to: (a) a car allowance of
$750 per month, (b) if for any reason Employee shall not be covered
by a health insurance policy of Employer, a medical insurance
coverage expense allowance of $800 per month.
(7) In the event of a Change of Control of Employer (as such term is
defined in Section 4.3(2) hereof), Employee shall be entitled to
receive the balance of the unpaid base compensation ("Unpaid Base
Compensation") which would otherwise be payable to
<PAGE>
Employee during the remainder of the term of this Agreement pursuant
to Section 4.1(1) hereof within thirty (30) days of the date of such
Change of Control and any and all options granted to Employee
pursuant to Section 4.1(4) hereof and otherwise shall vest
immediately upon the date of such Change of Control; PROVIDED,
HOWEVER, in the event of such Change of Control of Employer, the
term of this Agreement shall automatically be extended to a period
of five (5) years from the date of such Change of Control of
Employer for purposes of this Section 4.1(7).
4.2 PAYMENT OF COMPENSATION. Employer shall pay the compensation provided for
in Section 4.1 hereof as follows:
(1) Employer shall pay the base compensation in cash in twenty-six equal
installments or in accordance with Employer's payroll practices for
all its employees, but in no event less frequently than bimonthly.
(2) Employer shall pay in cash the reimbursement of such discretionary
expenses provided in Section 4.1(3) hereof.
5. TERMINATION OF AGREEMENT.
5.1. BY NOTICE. This Agreement, and the employment of Employee hereunder,
may be terminated by Employee or Employer upon ninety (90) days'
written notice of termination; PROVIDED, HOWEVER, in the event
Employer terminates this Agreement for any reason other than the
occurrence of any of the events set forth in Sections 5.2(2), (3),
(4), (6), or (8), and subject to Section 4.1(7) hereof. Employee
shall be entitled to receive the balance of the unpaid base salary
which would otherwise be payable to Employer during the remainder of
the term of this Agreement pursuant to Sections 4.1(1) and 4.1(6)
hereof within thirty (30) days after such ninety (90) day notice
period.
5.2. OTHER TERMINATION. This Agreement, and the employment of Employee
hereunder, shall terminate immediately upon the occurrence of any
one of the following events:
(1) The death or mental or physical incapacity of Employee.
(2) The loss by Employee of legal capacity (other than as
described in Section 5.2(l) hereof).
(3) The willful engaging by Employee in an act of dishonesty
constituting a felony under the laws of the state in which
Employer's principal place of business is located, resulting
or intending to result in gain or personal enrichment at the
expense of Employer or to the detriment of Employer's business
and to which Employee is not legally entitled.
(4) The continued incapacity in excess of one hundred eighty (180)
days on the part of Employee to perform his duties, unless
waived by Employer.
(5) The mutual written agreement of Employee and Employer.
(6) The expiration of the term of this Agreement.
<PAGE>
(7) The involuntary termination of Employee as a director of
Employer.
(8) Employee's breach of this Agreement.
5.3 EFFECT OF TERMINATION BY REASON OF DEATH OR INCAPACITY. In the event
of the termination of Employee's employment pursuant to Sections
5.2(l) or (4) of this Agreement prior to the completion of the term
of employment specified herein, and subject to Section 4.1(7)
hereof, Employee shall be entitled to receive the balance of the
unpaid compensation (including any Incentive Compensation pursuant
to Section 4.4 hereof) which is not covered by disability or other
insurance and which would otherwise be payable to Employee during
the term of this Agreement pursuant to Section 4.1(1) hereof within
60 days after such termination.
5.4. REMEDIES. No termination of the employment of Employee pursuant to
the terms of this Agreement shall prejudice any other remedy to
which any party to this Agreement may be entitled either at law, in
equity, or under this Agreement.
6. PROPERTY RIGHTS AND OBLIGATIONS OF EMPLOYEE.
6.1. TRADE SECRETS. For purposes of this Agreement, "trade secrets" shall
include without limitation any and all financial, cost and pricing
information and any and all information contained in any drawings,
designs, plans, proposals, customer lists, records of any kind,
data, formulas, specifications, concepts or ideas, where such
information is reasonably related to the business of Employer and
has not previously been publicly released by duly authorized
representatives of Employer or Parent or otherwise lawfully entered
the public domain.
6.2. PRESERVATION OF TRADE SECRETS. Employee will preserve as
confidential all trade secrets pertaining to Employer's business
that have been or may be obtained or learned by him by reason of his
employment or otherwise. Employee will not, without the written
consent of Employer, either use for his own benefit or purposes or
disclose or permit disclosure to any third parties, either during
the term of his employment hereunder or thereafter (except as
required in fulfilling the duties of his employment), any trade
secret connected with the business of Employer.
6.3. TRADE SECRETS OF OTHERS. Employee agrees that he will not disclose
to Employer or induce Employer to use any trade secrets belonging to
any third party.
6.4. PROPERTY OF EMPLOYER. Employee agrees that all documents, reports,
files, analyses, drawings, designs, tools, equipment, plans
(including, without limitation, marketing and sales plans),
proposals, customer lists, computer software or hardware, and
similar materials that are made by him or come into his possession
by reason of his employment with Employer are the property of
Employer and shall not be used by him in any way adverse to
Employer's interests. Employee will not allow any such documents or
things, or any copies, reproductions or summaries thereof to be
delivered to or used by any third party without the specific consent
of Employer. Employee agrees to deliver to the Board of Directors of
Employer or its designee, upon demand, and in any event upon the
termination of Employee's employment, all of such documents and
things which are in Employee's possession or under his control.
<PAGE>
6.5 NONCOMPETITION BY EMPLOYEE. During the term of this Agreement, and
for a period of one (1) year following the termination of this
Agreement, Employee shall not, directly or indirectly, either as an
employee, employer, consultant, agent, principal, partner, principal
stockholder, corporate officer, director, or in any other individual
or representative capacity: (i) engage or participate in any
business that is in competition in any manner with the business of
Employer; (ii) divert, take away or attempt to divert or take away
(and during the one year period, call on or solicit) any of
Employer's clients within the United States. For purposes of this
Agreement, the term "Employer's clients" shall mean clients who had
a business relationship with Employer prior to Employee's employment
with Employer and those who develop a business relationship with
Employer, during Employee's employment with Employer; (iii)
undertake planning for or organization of any business within the
United States or in any other country in which Employer is engaged
in business activity competitive with Employer's business within the
United States or in any other country in which Employer is engaged
in business or combine or conspire with employees or other
representative of Employer's business within the United States or in
any other country in which Employer is engaged in business for the
purpose of organizing any such competitive activity within the
United States or in any other country in which Employer is engaged
in business; or (iv) induce or influence (or seek to induce or
influence) any person who is engaged, as an employee, agent,
independent contractor or otherwise by Employer within the United
States or in any other country in which Employer is engaged in
business to terminate his or her employment or engagement.
6.6 SURVIVAL PROVISIONS AND CERTAIN REMEDIES. Unless otherwise agreed to
in writing between the parties hereto, the provisions of this
Section 6 shall survive the termination of this Agreement. The
covenants in this Section 6 shall be construed as separate covenants
and to the extent any covenant shall be judicially unenforceable, it
shall not affect the enforcement of any other covenant. In the event
Employee breaches any of the provisions of this Section 6, Employee
agrees that Employer shall be entitled to injunctive relief in
addition to any other remedy to which Employer may be entitled.
7. GENERAL PROVISIONS.
7.1. NOTICES. Any notices or other communications required or permitted
to be given hereunder shall be given sufficiently only if in writing
and served personally or sent by certified mail, postage prepaid and
return receipt requested, addressed as follows:
If to Employer: Log On America, Inc.
3 Regency Plaza
Providence, RI 02903
Attn: Raymond E. Paolo
Tel: 401-453-6100 Ext: 2
Fax: 401-459-6222
If to Employee: Kenneth M. Cornell
9217 SW 43rd Lane
Gainesville, FL 32608
Tel: 352-371-3125
Fax: 352-377-9785
<PAGE>
However, either party may change his/its address for purposes of this Agreement
by giving written notice of such change to the other party in accordance with
this Paragraph 7.1. Notices delivered personally shall be deemed effective as of
the day delivered and notices delivered by mail shall be deemed effective as of
three days after mailing (excluding weekends and federal holidays).
7.2. CHOICE OF LAW AND FORUM. Except as expressly provided otherwise in
this Agreement, this Agreement shall be governed by and construed in
accordance with the laws of the State of Rhode Island. The parties
agree that any dispute arising under this Agreement, whether during
the term of this Agreement or at any subsequent time, shall be
resolved exclusively in the courts of the State of Rhode Island and
the parties hereby submit to the jurisdiction of such courts for all
purposes provided herein and appoint the Secretary of State of the
State of Rhode Island as agent for service of process for ail
purposes provided herein.
7.3. ENTIRE AGREEMENT; MODIFICATION AND WAIVER, This Agreement supersedes
any and all other agreements, whether oral or in writing, between
the parties hereto with respect to the employment of Employee by
Employer and contains all covenants and agreements between the
parties relating to such employment in any manner whatsoever. Each
party to this Agreement acknowledges that no representations,
inducements, promises, or agreements, oral or written, have been
made by any party, or anyone acting on behalf of any party, which
are not embodied herein, and that no other agreement, statement, or
promise not contained in this Agreement shall be valid or binding.
Any modification of this Agreement shall be effective only if it is
in writing signed by the party to be charged. No waiver of any of
the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. No waiver shall
be binding unless executed in writing by the party making the
waiver.
7.4. ASSIGNMENT. Because of the personal nature of the services to be
rendered hereunder, this Agreement may not be assigned in whole or
in part by Employee without the prior written consent of Employer.
However, subject to the foregoing limitation, this Agreement shall
be binding on, and shall inure to the benefit of, the parties hereto
and their respective heirs, legatees, executors, administrators,
legal representatives, successors and assigns.
7.5. SEVERABILITY. If for any reason whatsoever, any one or more of the
provisions of this Agreement shall be held or deemed to be
inoperative, unenforceable, or invalid as applied to any particular
case or in all cases, such circumstances shall not have the effect
of rendering any such provision inoperative, unenforceable, or
invalid in any other case or of rendering any of the other
provisions of this Agreement inoperative, unenforceable or invalid.
7.6 CORPORATE AUTHORITY. Employer represents and warrants as of the date
hereof that Employer's execution and delivery of this Agreement to
Employee and the carrying out of the provisions hereof have been
duly authorized by Employer's Board of Directors and authorized by
Employer's shareholders and further represents and warrants that
neither the execution and delivery of this Agreement, nor the
compliance with the terms and provisions thereof by Employer will
result in the breach of any state regulation, administrative or
court order, nor will such compliance conflict with, or result in
the breach of, any of the terms or conditions of Employer's Articles
of Incorporation or Bylaws, as amended, or any agreement or other
instrument to which Employer is a party, or by which Employer is or
may be bound,
<PAGE>
or constitute an event of default thereunder, or with the lapse of
time or the giving of notice or both constitute an event of default
thereunder.
7.7. ATTORNEYS' FEES. In any action at law or in equity to enforce or
construe any provisions or rights under this Agreement, the
unsuccessful party or parties to such litigation, as determined by
the courts pursuant to a final judgment or decree, shall pay the
successful party or parties all costs, expenses, and reasonable
attorneys' fees incurred by such successful party or parties
(including, without limitation, such costs, expenses, and fees on
any appeals), and if such successful party or parties shall recover
judgment in any such action or proceedings, such costs, expenses,
and attorneys' fees shall be included as part of such judgement.
7.8. COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
7.9. HEADINGS AND CAPTIONS. Headings and captions are included for
purposes of convenience only and are not a part hereof.
7.10. CONSULTATION WITH COUNSEL. Employee acknowledges that he has had the
opportunity to consult with counsel independent of Employer or
Employer's counsel, Fredrick Stolle Esq., regarding the entering
into of this Agreement and has done so to the extent he sees fit.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the day and year first written above at Providence, Rhode Island.
"Employer"
Log On America, Inc.,
a Delaware corporation
By: /s/ David R. Paolo 5/1/99
----------------------------------
David R. Paolo Chief Executive Officer
"Employee"
By: Kenneth M. Cornell 5/1/99
----------------------------------
Kenneth M. Cornell
Exhibit 10.7
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of July 2, 1999, by
and among Log on America, Inc., a Delaware corporation ("Buyer"), Philip Freed,
an individual resident in Massachusetts, Steven J. Gilbert, an individual
resident in Maine, and Gary Seekins, an individual resident in Maine
(collectively, "Sellers").
RECITALS
Sellers desire to sell, and Buyer desires to purchase, all of the issued and
outstanding shares (the "Shares") of capital stock of cyberTours, Inc., a Maine
corporation (the "Company"), for the consideration and on the terms set forth in
this Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings specified
or referred to in this Section 1:
"Acquired Companies"--the Company and its Subsidiaries, collectively.
"Adjustment Amount"--as defined in Section 2.5.
"Annualized Revenues" -means the product of multiplying the revenues of the
Company from the operation of its business for the period covering January 1,
1999 through June 30, 1999, as audited in accordance with GAAP consistently
applied, times 2.0.
"Applicable Contract"--any Contract (a) under which any Acquired Company has or
may acquire any rights, (b) under which any Acquired Company has or may become
subject to any obligation or liability, or (c) by which any Acquired Company or
any of the assets owned or used by it is or may become bound.
"Balance Sheet"--as defined in Section 3.4.
"Breach"--a "Breach" of a representation, warranty, covenant, obligation, or
other provision of this Agreement or any instrument delivered pursuant to this
Agreement will be deemed to have occurred if there is or has been (a) any
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision, or (b) any
claim (by any Person) or other occurrence or circumstance that is or was
inconsistent with such representation, warranty, covenant, obligation, or other
provision, and the term "Breach" means any such inaccuracy, breach, failure,
claim, occurrence, or circumstance.
"Buyer"--as defined in the first paragraph of this Agreement.
"Closing"--as defined in Section 2.3.
<PAGE>
"Closing Date"--the date and time as of which the Closing actually takes place.
"Company"--as defined in the Recitals of this Agreement.
"Consent"--any approval, consent, ratification, waiver, or other authorization
(including any Governmental Authorization).
"Contemplated Transactions"--all of the transactions contemplated by this
Agreement, including:
(a) the sale of the Shares by Sellers to Buyer;
(b) the execution, delivery, and performance of the Employment Agreement, the
Noncompetition Agreements, the Sellers' Releases, and the Escrow Agreement;
(c) the performance by Buyer and Sellers of their respective covenants and
obligations under this Agreement; and
(d) Buyer's acquisition and ownership of the Shares and exercise of control over
the Acquired Companies.
"Contract"--any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"Damages"--as defined in Section 10.2.
"Debt" -means any liability or obligation of the Company of any kind, character,
or description, absolute or contingent, accrued or unaccrued, secured or
unsecured, joint or several, due or to become due, vested or unvested, or
executory, after crediting accounts receivable, prepaid expenses and cash on
hand, as audited through June 30, 1999 in accordance with GAAP consistently
applied.
"Disclosure Letter"--the disclosure letter to be delivered by Sellers to Buyer
within five (5) of the execution and delivery of this Agreement.
"Employment Agreements"--as defined in Section 2.4(a)(iii).
"Encumbrance"--any charge, claim, community property interest, condition,
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
"Environment"--soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"Environmental, Health, and Safety Liabilities"--any cost, damages, expense,
liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational
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<PAGE>
Safety and Health Law and consisting of or relating to:
(a) any environmental, health, or safety matters or conditions (including
on-site or off-site contamination, occupational safety and health, and
regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or administrative
proceedings, damages, losses, claims, demands and response, investigative,
remedial, or inspection costs and expenses arising under Environmental Law or
Occupational Safety and Health Law;
(c) financial responsibility under Environmental Law or Occupational Safety and
Health Law for cleanup costs or corrective action, including any investigation,
cleanup, removal, containment, or other remediation or response actions
("Cleanup") required by applicable Environmental Law or Occupational Safety and
Health Law (whether or not such Cleanup has been required or requested by any
Governmental Body or any other Person) and for any natural resource damages; or
(d) any other compliance, corrective, investigative, or remedial measures
required under Environmental Law or Occupational Safety and Health Law.
The terms "removal," "remedial," and "response action," include the types of
activities covered by the United States Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. ss. 9601 et seq., as amended
("CERCLA").
"Environmental Law"--any Legal Requirement that requires or relates to:
(a) advising appropriate authorities, employees, and the public of intended or
actual releases of pollutants or hazardous substances or materials, violations
of discharge limits, or other prohibitions and of the commencements of
activities, such as resource extraction or construction, that could have
significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of pollutants or
hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing the hazardous
characteristics of wastes that are generated;
(d) assuring that products are designed, formulated, packaged, and used so that
they do not present unreasonable risks to human health or the Environment when
used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the transportation of
hazardous substances, pollutants, oil, or other potentially harmful substances;
(g) cleaning up pollutants that have been released, preventing the threat of
release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of them, for
damages done to their health or the Environment, or permitting self-appointed
representatives of the public interest to recover for injuries done to public
assets.
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<PAGE>
"ERISA"--the Employee Retirement Income Security Act of 1974 or any successor
law, and regulations and rules issued pursuant to that Act or any successor law.
"Escrow Agreement"--as defined in Section 2.4.
"Facilities"--any leaseholds, or other interests currently or formerly owned or
operated by any Acquired Company and any equipment (including motor vehicles)
currently or formerly owned or operated by any Acquired Company.
"GAAP"--generally accepted United States accounting principles, applied on a
basis consistent with the basis on which the Balance Sheet and the other
financial statements referred to in Section 3.4(b) were prepared.
"Governmental Authorization"--any approval, consent, license, permit, waiver, or
other authorization issued, granted, given, or otherwise made available by or
under the authority of any Governmental Body or pursuant to any Legal
Requirement.
"Governmental Body"--any:
(a) nation, state, county, city, town, village, district, or other jurisdiction
of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature (including any
governmental agency, branch, department, official, or entity and any court or
other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative, executive,
judicial, legislative, police, regulatory, or taxing authority or power of any
nature.
"Hazardous Activity"--the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release, storage,
transfer, transportation, treatment, or use (including any withdrawal or other
use of groundwater) of Hazardous Materials in, on, under, about, or from the
Facilities or any part thereof into the Environment, and any other act,
business, operation, or thing that increases the danger, or risk of danger, or
poses an unreasonable risk of harm to persons or property on or off the
Facilities, or that may affect the value of the Facilities or the Acquired
Companies.
"Hazardous Materials"--any waste or other substance that is listed, defined,
designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
"Intellectual Property Assets" --as defined in Section 3.22.
"Interim Balance Sheet"--as defined in Section 3.4.
"IRC"--the Internal Revenue Code of 1986 or any successor law, and regulations
issued by the
4
<PAGE>
IRS pursuant to the Internal Revenue Code or any successor law.
"IRS"--the United States Internal Revenue Service or any successor agency, and,
to the extent relevant, the United States Department of the Treasury.
"Knowledge"--an individual will be deemed to have "Knowledge" of a particular
fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual could be expected to discover or otherwise become aware
of such fact or other matter in the course of conducting a reasonably
comprehensive investigation concerning the existence of such fact or other
matter.
A Person (other than an individual) will be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director, officer, partner, executor, or trustee of such
Person (or in any similar capacity) has, or at any time had, Knowledge of such
fact or other matter.
"Legal Requirement"--any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
"Noncompetition Agreements"--as defined in Section 2.4(a)(iv).
"Occupational Safety and Health Law"--any Legal Requirement designed to provide
safe and healthful working conditions and to reduce occupational safety and
health hazards, and any program, whether governmental or private (including
those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.
"Order"--any award, decision, injunction, judgment, order, ruling, subpoena, or
verdict entered, issued, made, or rendered by any court, administrative agency,
or other Governmental Body or by any arbitrator.
"Ordinary Course of Business"--an action taken by a Person will be deemed to
have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person and is
taken in the ordinary course of the normal day-to-day operations of such Person;
(b) such action is not required to be authorized by the board of directors of
such Person (or by any Person or group of Persons exercising similar authority);
and
(c) such action is similar in nature and magnitude to actions customarily taken,
without any authorization by the board of directors (or by any Person or group
of Persons exercising similar authority), in the ordinary course of the normal
day-to-day operations of other Persons that are in the same line of business as
such Person.
"Organizational Documents"--(a) the articles or certificate of incorporation and
the bylaws of a corporation; (b) the partnership agreement and any statement of
partnership of a general
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<PAGE>
partnership; (c) the limited partnership agreement and the certificate of
limited partnership of a limited partnership; (d) any charter or similar
document adopted or filed in connection with the creation, formation, or
organization of a Person; and (e) any amendment to any of the foregoing.
"Person"--any individual, corporation (including any non-profit corporation),
general or limited partnership, limited liability company, joint venture,
estate, trust, association, organization, labor union, or other entity or
Governmental Body.
"Plan"--as defined in Section 3.13.
"Proceeding"--any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"Projected Financial Statements"-means the balance sheets and profit/loss
statements provided to Buyer and attached hereto as Exhibit 1-Projected
Financial Statements.
"Related Person"--with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such individual or
one or more members of such individual's Family;
(c) any Person in which such individual or members of such individual's Family
hold (individually or in the aggregate) a Material Interest; and
(d) any Person with respect to which such individual or one or more members of
such individual's Family serves as a director, officer, partner, executor, or
trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or indirectly
controlled by, or is directly or indirectly under common control with such
specified Person;
(b) any Person that holds a Material Interest in such specified Person;
(c) each Person that serves as a director, officer, partner, executor, or
trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material Interest;
(e) any Person with respect to which such specified Person serves as a general
partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or (c).
For purposes of this definition, (a) the "Family" of an individual includes (i)
the individual, (ii)
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<PAGE>
the individual's spouse, (iii) any other natural person who is related to the
individual or the individual's spouse within the second degree, and (iv) any
other natural person who resides with such individual, and (b) "Material
Interest" means direct or indirect beneficial ownership (as defined in Rule
13d-3 under the Securities Exchange Act of 1934) of voting securities or other
voting interests representing at least 5% of the outstanding voting power of a
Person or equity securities or other equity interests representing at least 5%
of the outstanding equity securities or equity interests in a Person.
"Release"--any spilling, leaking, emitting, discharging, depositing, escaping,
leaching, dumping, or other releasing into the Environment, whether intentional
or unintentional.
"Representative"--with respect to a particular Person, any director, officer,
employee, agent, consultant, advisor, or other representative of such Person,
including legal counsel, accountants, and financial advisors.
"Securities Act"--the Securities Act of 1933 or any successor law, and
regulations and rules issued pursuant to that Act or any successor law.
"Sellers"--as defined in the first paragraph of this Agreement.
"Sellers' Releases"--as defined in Section 2.4.
"Shares"--as defined in the Recitals of this Agreement.
"Subsidiary"--with respect to any Person (the "Owner"), any corporation or other
Person of which securities or other interests having the power to elect a
majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having such power only upon the happening of a contingency that has
not occurred) are held by the Owner or one or more of its Subsidiaries; when
used without reference to a particular Person, "Subsidiary" means a Subsidiary
of the Company.
"Tax Return"--any return (including any information return), report, statement,
schedule, notice, form, or other document or information filed with or submitted
to, or required to be filed with or submitted to, any Governmental Body in
connection with the determination, assessment, collection, or payment of any Tax
or in connection with the administration, implementation, or enforcement of or
compliance with any Legal Requirement relating to any Tax.
"Threat of Release"--a substantial likelihood of a Release that may require
action in order to prevent or mitigate damage to the Environment that may result
from such Release.
"Threatened"--a claim, Proceeding, dispute, action, or other matter will be
deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
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<PAGE>
2. SALE AND TRANSFER OF SHARES; CLOSING
2.1 SHARES
Subject to the terms and conditions of this Agreement, at the Closing, Sellers
will sell and transfer the Shares to Buyer, and Buyer will purchase the Shares
from Sellers.
2.2 PURCHASE PRICE
The purchase price (the "Purchase Price") for the Shares will be the product of
Annualized Revenues, plus gross billing derived from 1999-2000 UNE sales
contracts, dated as of July 1, 1999 times 2.0, less Debt as of June 30, 1999,
subject to the Adjustment Amount set forth in Section 2.5 hereof.
2.3 CLOSING
The purchase and sale (the "Closing") provided for in this Agreement will take
place at the offices of Buyer's counsel at 170 Westminster Street, 10th Fl.,
Providence, Rhode Island, at 10:00 a.m. (local time) on August 15, 1999, or at
such other time and place as the parties may agree. Subject to the provisions of
Section 9, failure to consummate the purchase and sale provided for in this
Agreement on the date and time and at the place determined pursuant to this
Section 2.3 will not result in the termination of this Agreement and will not
relieve any party of any obligation under this Agreement.
2.4 CLOSING OBLIGATIONS
At the Closing:
(a) Sellers will deliver to Buyer:
(i) certificates representing the Shares, duly endorsed (or accompanied by duly
executed stock powers), with signatures guaranteed by a commercial bank or by a
member firm of the New York Stock Exchange, for transfer to Buyer;
(ii) releases in the form of Exhibit 2.4(a)(ii) executed by Sellers
(collectively, "Seller's Releases");
(iii) an employment agreement executed by Steven J. Gilbert ("Employment
Agreement");
(iv) noncompetition agreements in the form of Exhibit 2.4(a)(iv), executed by
Sellers (collectively, the "Noncompetition Agreements"); and
(v) a certificate executed by Sellers representing and warranting to Buyer that
each of Sellers' representations and warranties in this Agreement was accurate
in all respects as of the date of this Agreement and is accurate in all respects
as of the Closing Date as if made on the Closing Date (giving full effect to any
supplements to the Disclosure Letter that were delivered by Sellers to Buyer
prior to the Closing Date in accordance with Section 5.5); and
(b) Buyer will deliver to Sellers:
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(i) 433,333 share certificates in the form of Rule 144 of the Securities Act
stock of Buyer, which stock shall be registered with the Security Exchange
Commission pursuant to Section 4.6 hereof ("Registered Stock"), and distributed
amongst the Sellers;
(ii) share certificates in the form of Rule 144 of the Securities Act stock of
Buyer equal to the balance of the Purchase Price, with such Section 144 stock
being valued at $15.00 per share ("Rule 144 Stock"), to be held by the escrow
agent referred to in Section 2.4(c);
(iii) a certificate executed by Buyer to the effect that, except as otherwise
stated in such certificate, each of Buyer's representations and warranties in
this Agreement was accurate in all respects as of the date of this Agreement and
is accurate in all respects as of the Closing Date as if made on the Closing
Date; and
(iv) the Employment Agreement, executed by Buyer.
(c) Buyer and Sellers will enter into an escrow agreement in the form of Exhibit
2.4(c) (the "Escrow Agreement") with Kevin G. Grimes.
2.5 ADJUSTMENT AMOUNT
The Adjustment Amount shall equal any Debt not set forth on the balance sheet as
of June 30, 1999, as audited in accordance with GAAP consistently applied It
being understood that the Company is in the process of expending sums for
network capacity beyond June 30, 1999; and, the parties will agree whether or
not said sums will constitute Debt hereunder.
2.6 ADJUSTMENT PROCEDURE
(a) Sellers will prepare and will cause Cummins, Lamont & McNamee, PA, the
Company's certified public accountants, to audit consolidated financial
statements ("Closing Financial Statements") of the Company as of June 30, 1999,
including a computation of Debt as of June 30, 1999. Sellers will deliver the
Closing Financial Statements to Buyer Date.by July 15, 1999. Said Closing
Financial Statements will then be forwarded by Buyer to Ernest & Young, the
Buyer's certified public accountants, to review same to Buyer's satisfaction. If
within forty-five (45) days following delivery of the Closing Financial
Statements, Buyer has not given Sellers notice of its objection to the Closing
Financial Statements (such notice must contain a statement of the basis of
Buyer's objection), then the Debt reflected in the Closing Financial Statements
will be used in computing the Adjustment Amount. If Buyer gives such notice of
objection, then the issues in dispute will be submitted to mutually agreed upon
certified public accountants selected by the parties (the "Accountants"), for
resolution. If issues in dispute are submitted to the Accountants for
resolution, (i) each party will furnish to the Accountants such workpapers and
other documents and information relating to the disputed issues as the
Accountants may request and are available to that party or its Subsidiaries (or
its independent public accountants), and will be afforded the opportunity to
present to the Accountants any material relating to the determination and to
discuss the determination with the Accountants; (ii) the determination by the
Accountants, as set forth in a notice delivered to both parties by the
Accountants, will be binding and conclusive on the parties; and (iii) Buyer and
Sellers will each bear 50% of the fees of the Accountants for such
determination.
(b) On the tenth business day following the final determination of the
Adjustment Amount, if the Purchase Price is less than the aggregate of the
payments made pursuant to Sections 2.4(b), the Rule 144 Stock issued to Sellers
shall be reduced on the basis of $15.00 per share,
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whereupon the shares shall be released from specify Escrow and delivered to
Sellers and to Buyer pursuant to the Escrow Agreement.
3. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers represent and warrant to Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING
(a) Part 3.1 of the Disclosure Letter contains a complete and accurate list for
each Acquired Company of its name, its jurisdiction of incorporation, other
jurisdictions in which it is authorized to do business, and its capitalization
(including the identity of each stockholder and the number of shares held by
each). Each Acquired Company is a corporation duly organized, validly existing,
and in good standing under the laws of its jurisdiction of incorporation, with
full corporate power and authority to conduct its business as it is now being
conducted, to own or use the properties and assets that it purports to own or
use, and to perform all its obligations under Applicable Contracts. Each
Acquired Company is duly qualified to do business as a foreign corporation and
is in good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the nature
of the activities conducted by it, requires such qualification.
(b) Sellers have delivered to Buyer copies of the Organizational Documents of
each Acquired Company, as currently in effect.
3.2 AUTHORITY; NO CONFLICT; OWN ACCOUNT
(a) This Agreement constitutes the legal, valid, and binding obligation of
Sellers, enforceable against Sellers in accordance with its terms. Upon the
execution and delivery by Sellers of the Escrow Agreement, the Employment
Agreement, the Sellers' Releases, and the Noncompetition Agreements
(collectively, the "Sellers' Closing Documents"), the Sellers' Closing Documents
will constitute the legal, valid, and binding obligations of Sellers,
enforceable against Sellers in accordance with their respective terms. Sellers
have the absolute and unrestricted right, power, authority, and capacity to
execute and deliver this Agreement and the Sellers' Closing Documents and to
perform their obligations under this Agreement and the Sellers' Closing
Documents.
(b) Except as set forth in Part 3.2 of the Disclosure Letter, neither the
execution and delivery of this Agreement nor the consummation or performance of
any of the Contemplated Transactions will, directly or indirectly (with or
without notice or lapse of time):
(i) contravene, conflict with, or result in a violation of (A) any provision of
the Organizational Documents of the Acquired Companies, or (B) any resolution
adopted by the board of directors or the stockholders of any Acquired Company;
(ii) contravene, conflict with, or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the Contemplated
Transactions or to exercise any remedy or obtain any relief under, any Legal
Requirement or any Order to which any Acquired Company or either Seller, or any
of the assets owned or used by any Acquired Company, may be subject;
(iii) contravene, conflict with, or result in a violation of any of the terms or
requirements of, or
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give any Governmental Body the right to revoke, withdraw, suspend, cancel,
terminate, or modify, any Governmental Authorization that is held by any
Acquired Company or that otherwise relates to the business of, or any of the
assets owned or used by, any Acquired Company;
(iv) cause Buyer or any Acquired Company to become subject to, or to become
liable for the payment of, any Tax;
(v) cause any of the assets owned by any Acquired Company to be reassessed or
revalued by any taxing authority or other Governmental Body;
(vi) contravene, conflict with, or result in a violation or breach of any
provision of, or give any Person the right to declare a default or exercise any
remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any Applicable Contract; or
(vii) result in the imposition or creation of any Encumbrance upon or with
respect to any of the assets owned or used by any Acquired Company.
Except as set forth in Part 3.2 of the Disclosure Letter, no Seller or Acquired
Company is or will be required to give any notice to or obtain any Consent from
any Person in connection with the execution and delivery of this Agreement or
the consummation or performance of any of the Contemplated Transactions.
(c) Sellers are acquiring the Rule 144 Stock and, initially, until its
registration pursuant to Section 4.6 hereof, the Registered Stock for their own
account and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act. Each Seller is an "accredited investor" as such
term is defined in Rule 501(a) under the Securities Act. Each Seller is relying
solely on the public information on the Company as filed with the Securities
Exchange Commission, including its Form 10-Q for the quarter ended March 31,
1999, to determine whether or not to acquire said stock. Sellers understand and
agree that the certificates representing the Rule 144 Stock and the Registered
Stock shall bear the legend to the effect that said shares have not been
registered under the Securities Act or state securities laws in reliance on
exemptions therefrom and, therefore, the Rule 144 Stock or Registered Stock may
not be resold unless an exemption from registration is available, as opined to
by counsel satisfactory to Buyer, or registration takes place.
3.3 CAPITALIZATION
The authorized equity securities of the Company consist of 4,000 shares of
common stock, no par value per share, of which 3,000 shares are issued and
outstanding and constitute the Shares. Sellers are and will be on the Closing
Date the record and beneficial owners and holders of the Shares, free and clear
of all Encumbrances. Philip Freed owns 1,000 of the Shares; Steven J. Gilbert
owns 1,000 of the Shares; and, Gary Seekins owns 1,000 of the Shares. All of the
outstanding equity securities and other securities of each Acquired Company are
owned of record and beneficially by one or more of the Acquired Companies, free
and clear of all Encumbrances. No legend or other reference to any purported
Encumbrance appears upon any certificate representing equity securities of any
Acquired Company. All of the outstanding equity securities of each Acquired
Company have been duly authorized and validly issued and are fully paid and
nonassessable. There are no Contracts relating to the issuance, sale, or
transfer of any equity securities or other securities of any Acquired Company.
None of the outstanding equity securities or other securities of any Acquired
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Company was issued in violation of the Securities Act or any other Legal
Requirement. No Acquired Company owns, or has any Contract to acquire, any
equity securities or other securities of any Person (other than Acquired
Companies) or any direct or indirect equity or ownership interest in any other
business.
There are no options, warrants or other rights, agreements, arrangements for
commitment of any character to which the Company is a party or obligating the
Company to issue or sell any shares of capital stock of, or other equity
interests in, the Company. There are no outstanding contractual obligations of
the Company to repurchase, redeem or otherwise acquire any of the capital stock
of the Company or to provide funds to or make any investment in the form of a
loan, capital contribution or otherwise) in any other entity. The Company is not
a party to any agreement granting registration rights to any person or entity
with respect to any equity or debt securities of the Company.
3.4 FINANCIAL STATEMENTS
Sellers have delivered to Buyer: (a) audited consolidated balance sheets of the
Acquired Companies as of December 31 in each of the years 1997 through 1998, and
the related audited consolidated statements of income, changes in stockholders'
equity, and cash flow for each of the fiscal years then ended, together with the
report thereon of Cummins, Lamont & McNanamee, PA, independent certified public
accountants and (b) an audited consolidated balance sheet of the Acquired
Companies as of June 30, 1999 (including the notes thereto, the "Balance
Sheet"), and the related consolidated statements of income, changes in
stockholders' equity, Debt and cash flow for the fiscal year then ended,
together with the report thereon of Cummins, Lamont & McNamee, PA, independent
certified public accountants.
Such financial statements and notes fairly present the financial condition and
the results of operations, changes in stockholders' equity, Debt and cash flow
of the Acquired Companies as at the respective dates of and for the periods
referred to in such financial statements, all in accordance with GAAP, subject,
in the case of interim financial statements, to normal recurring year-end
adjustments (the effect of which will not, individually or in the aggregate, be
materially adverse) and the absence of notes (that, if presented, would not
differ materially from those included in the Balance Sheet); the financial
statements referred to in this Section 3.4 reflect the consistent application of
such accounting principles throughout the periods involved, except as disclosed
in the notes to such financial statements. No financial statements of any Person
other than the Acquired Companies are required by GAAP to be included in the
consolidated financial statements of the Company.
3.5 BOOKS AND RECORDS
The books of account, minute books, stock record books, and other records of the
Acquired Companies, all of which have been made available to Buyer, are complete
and correct and have been maintained in accordance with sound business practices
and the requirements of Section 13(b)(2) of the Securities Act, as amended
(regardless of whether or not the Acquired Companies are subject to that
Section), including the maintenance of an adequate system of internal controls.
The minute books of the Acquired Companies contain accurate and complete records
of all meetings held of, and corporate action taken by, the stockholders, the
Boards of Directors, and committees of the Boards of Directors of the Acquired
Companies, and no meeting of any such stockholders, Board of Directors, or
committee has been held for which minutes have not been prepared and are not
contained in such minute books. At the Closing, all of those books and records
will be in the possession of the Acquired Companies.
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3.6 TITLE TO PROPERTY; ENCUMBRANCES
Part 3.6 of the Disclosure Letter contains a complete and accurate list of all
leaseholds, or other interests therein owned by any Acquired Company. The
Acquired Companies own all the property and assets (whether real, personal, or
mixed and whether tangible or intangible) that they purport to own, including
all of the properties and assets reflected in the Balance Sheet and the Interim
Balance Sheet (except for assets held under capitalized leases disclosed or not
required to be disclosed in Part 3.6 of the Disclosure Letter and personal
property sold since the date of the Balance Sheet and the Interim Balance Sheet,
as the case may be, in the Ordinary Course of Business), and all of the property
and assets purchased or otherwise acquired by the Acquired Companies since the
date of the Balance Sheet (except for personal property acquired and sold since
the date of the Balance Sheet in the Ordinary Course of Business and consistent
with past practice). All material properties and assets reflected in the Balance
Sheet and the Interim Balance Sheet are free and clear of all Encumbrances,
except, with respect to all such property and assets, (a) security interests
shown on the Balance Sheet or the Interim Balance Sheet as securing specified
liabilities or obligations, with respect to which no default (or event that,
with notice or lapse of time or both, would constitute a default) exists, (b)
security interests incurred in connection with the purchase of property or
assets after the date of the Interim Balance Sheet (such mortgages and security
interests being limited to the property or assets so acquired), with respect to
which no default (or event that, with notice or lapse of time or both, would
constitute a default) exists, and (c) liens for current taxes not yet due.
3.7 CONDITION AND SUFFICIENCY OF ASSETS
The equipment of the Acquired Companies are structurally sound, are in good
operating condition and repair, and are adequate for the uses to which they are
being put, and none of such equipment is in need of maintenance or repairs
except for ordinary, routine maintenance and repairs that are not material in
nature or cost. The building, plants, structures, and equipment of the Acquired
Companies are sufficient for the continued conduct of the Acquired Companies'
businesses after the Closing in substantially the same manner as conducted prior
to the Closing.
3.8 ACCOUNTS RECEIVABLE
All accounts receivable of the Acquired Companies that are reflected on the
Balance Sheet or the Interim Balance Sheet or on the accounting records of the
Acquired Companies as of the Closing Date (collectively, the "Accounts
Receivable") represent or will represent valid obligations arising from sales
actually made or services actually performed in the Ordinary Course of Business.
Unless paid prior to the Closing Date, the Accounts Receivable are or will be as
of the Closing Date current and collectible net of the respective reserves shown
on the Balance Sheet or the Interim Balance Sheet or on the accounting records
of the Acquired Companies as of the Closing Date (which reserves are adequate
and calculated consistent with past practice and, in the case of the reserve as
of the Closing Date, will not represent a greater percentage of the Accounts
Receivable as of the Closing Date than the reserve reflected in the Interim
Balance Sheet represented of the Accounts Receivable reflected therein and will
not represent a material adverse change in the composition of such Accounts
Receivable in terms of aging). Subject to such reserves, each of the Accounts
Receivable either has been or will be collected in full, without any set-off,
within ninety (90) days after the day on which it first becomes due and payable.
There is no contest, claim, or right of set-off, other than returns in
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the Ordinary Course of Business, under any Contract with any obligor of an
Accounts Receivable relating to the amount or validity of such Accounts
Receivable. Part 3.8 of the Disclosure Letter contains a complete and accurate
list of all Accounts Receivable as of the date of the Interim Balance Sheet,
which list sets forth the aging of such Accounts Receivable.
3.9 INVENTORY
All inventory of the Acquired Companies, whether or not reflected in the Balance
Sheet or the Interim Balance Sheet, consists of a quality and quantity usable
and salable in the Ordinary Course of Business, except for obsolete items and
items of below-standard quality, all of which have been written off or written
down to net realizable value in the Balance Sheet or the Interim Balance Sheet
or on the accounting records of the Acquired Companies as of the Closing Date,
as the case may be. All inventories not written off have been priced at the
lower of cost or [market] [net realizable value] on a [last in, first out]
[first in, first out] basis. The quantities of each item of inventory (whether
raw materials, work-in-process, or finished goods) are not excessive, but are
reasonable in the present circumstances of the Acquired Companies.
3.10 NO UNDISCLOSED LIABILITIES
Except as set forth in Part 3.10 of the Disclosure Letter, the Acquired
Companies have no liabilities or obligations of any nature (whether known or
unknown and whether absolute, accrued, contingent, or otherwise) except for
liabilities or obligations reflected or reserved against in the Balance Sheet or
the Interim Balance Sheet and current liabilities incurred in the Ordinary
Course of Business since the respective dates thereof.
3.11 TAXES
(a) The Acquired Companies have filed or caused to be filed all Tax Returns that
are or were required to be filed by or with respect to any of them, either
separately or as a member of a group of corporations, pursuant to applicable
Legal Requirements. Sellers have delivered or made available to Buyer copies of,
and Part 3.11 of the Disclosure Letter contains a complete and accurate list of,
all such Tax Returns relating to income or franchise taxes filed since January
1, 1996. The Acquired Companies have paid, or made provision for the payment of,
all Taxes that have or may have become due pursuant to those Tax Returns or
otherwise, or pursuant to any assessment received by Sellers or any Acquired
Company, except such Taxes, if any, as are listed in Part 3.11 of the Disclosure
Letter and are being contested in good faith and as to which adequate reserves
(determined in accordance with GAAP) have been provided in the Balance Sheet and
the Interim Balance Sheet.
(b) The United States federal and state income Tax Returns of each Acquired
Company subject to such Taxes have been audited by the IRS or relevant state tax
authorities or are closed by the applicable statute of limitations for all
taxable years through December 31, 1997. Part 3.11 of the Disclosure Letter
contains a complete and accurate list of all audits of all such Tax Returns,
including a reasonably detailed description of the nature and outcome of each
audit. All deficiencies proposed as a result of such audits have been paid,
reserved against, settled, or, as described in Part 3.11 of the Disclosure
Letter, are being contested in good faith by appropriate proceedings. Part 3.11
of the Disclosure Letter describes all adjustments to the United States federal
income Tax Returns filed by any Acquired Company or any group of corporations
including any Acquired Company for all taxable years since December 31, 1996,
and the resulting deficiencies proposed by the IRS. Except as described in Part
3.11 of the
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Disclosure Letter, no Seller or Acquired Company has given or been requested to
give waivers or extensions (or is or would be subject to a waiver or extension
given by any other Person) of any statute of limitations relating to the payment
of Taxes of any Acquired Company or for which any Acquired Company may be
liable.
(c) The charges, accruals, and reserves with respect to Taxes on the respective
books of each Acquired Company are adequate (determined in accordance with GAAP)
and are at least equal to that Acquired Company's liability for Taxes. There
exists no proposed tax assessment against any Acquired Company except as
disclosed in the Balance Sheet or in Part 3.11 of the Disclosure Letter. No
consent to the application of Section 341(f)(2) of the IRC has been filed with
respect to any property or assets held, acquired, or to be acquired by any
Acquired Company. All Taxes that any Acquired Company is or was required by
Legal Requirements to withhold or collect have been duly withheld or collected
and, to the extent required, have been paid to the proper Governmental Body or
other Person.
(d) All Tax Returns filed by (or that include on a consolidated basis) any
Acquired Company are true, correct, and complete. There is no tax sharing
agreement that will require any payment by any Acquired Company after the date
of this Agreement. No Acquired Company is, or within the five-year period
preceding the Closing Date has been, an "S" corporation] During the consistency
period (as defined in Section 338(h)(4) of the IRC with respect to the sale of
the Shares to Buyer), no Acquired Company or target affiliate (as defined in
Section 338(h)(6) of the IRC with respect to the sale of the Shares to Buyer)
has sold or will sell any property or assets to Buyer or to any member of the
affiliated group (as defined in Section 338(h)(5) of the IRC) that includes
Buyer. Part 3.11 of the Disclosure Letter lists all such target affiliates.
3.12 NO MATERIAL ADVERSE CHANGE
Since the date of the Balance Sheet, as audited in accordance with GAAP
consistently applied, there has not been any material adverse change in the
business, operations, properties, prospects, assets, or condition of any
Acquired Company, and no event has occurred or circumstance exists that may
result in such a material adverse change.
3.13 EMPLOYEE BENEFITS
(a) As used in this Section 3.13, the following terms have the meanings set
forth below.
"Company Other Benefit Obligation" means an Other Benefit Obligation owed,
adopted, or followed by an Acquired Company or an ERISA Affiliate of an Acquired
Company.
"Company Plan" means all Plans of which an Acquired Company or an ERISA
Affiliate of an Acquired Company is or was a Plan Sponsor, or to which an
Acquired Company or an ERISA Affiliate of an Acquired Company otherwise
contributes or has contributed, or in which an Acquired Company or an ERISA
Affiliate of an Acquired Company otherwise participates or has participated. All
references to Plans are to Company Plans unless the context requires otherwise.
"Company VEBA" means a VEBA whose members include employees of any Acquired
Company or any ERISA Affiliate of an Acquired Company.
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"ERISA Affiliate" means, with respect to an Acquired Company, any other person
that, together with the Company, would be treated as a single employer under IRC
ss. 414.
"Multi-Employer Plan" has the meaning given in ERISA ss. 3(37)(A).
"Other Benefit Obligations" means all obligations, arrangements, or customary
practices, whether or not legally enforceable, to provide benefits, other than
salary, as compensation for services rendered, to present or former directors,
employees, or agents, other than obligations, arrangements, and practices that
are Plans. Other Benefit Obligations include consulting agreements under which
the compensation paid does not depend upon the amount of service rendered,
sabbatical policies, severance payment policies, and fringe benefits within the
meaning of IRC ss. 132.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto.
"Pension Plan" has the meaning given in ERISA ss. 3(2)(A).
"Plan" has the meaning given in ERISA ss. 3(3).
"Plan Sponsor" has the meaning given in ERISA ss. 3(16)(B).
"Qualified Plan" means any Plan that meets or purports to meet the requirements
of IRC ss. 401(a).
"Title IV Plans" means all Pension Plans that are subject to Title IV of ERISA,
29 U.S.C. ss. 1301 et seq., other than Multi-Employer Plans.
"VEBA" means a voluntary employees' beneficiary association under IRC ss.
501(c)(9).
"Welfare Plan" has the meaning given in ERISA ss. 3(1).
(b) (i) Part 3.13(i) of the Disclosure Letter contains a complete and accurate
list of all Company Plans, Company Other Benefit Obligations, and Company VEBAs,
and identifies as such all Company Plans that are (A) defined benefit Pension
Plans, (B) Qualified Plans, (C) Title IV Plans, or (D) Multi-Employer Plans.
(ii) Part 3.13(ii) of the Disclosure Letter contains a complete and accurate
list of (A) all ERISA Affiliates of each Acquired Company, and (B) all Plans of
which any such ERISA Affiliate is or was a Plan Sponsor, in which any such ERISA
Affiliate participates or has participated, or to which any such ERISA Affiliate
contributes or has contributed.
(iii) Part 3.13(iii) of the Disclosure Letter sets forth, for each
Multi-Employer Plan, as of its last valuation date, the amount of potential
withdrawal liability of the Acquired Companies and the Acquired Companies' other
ERISA Affiliates, calculated according to information made available pursuant to
ERISA ss. 4221(e).
(iv) Part 3.13(iv) of the Disclosure Letter sets forth a calculation of the
liability of the Acquired Companies for post-retirement benefits other than
pensions, made in accordance with Financial Accounting Statement 106 of the
Financial Accounting Standards Board, regardless
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of whether any Acquired Company is required by this Statement to disclose such
information.
(v) Part 3.13(v) of the Disclosure Letter sets forth the financial cost of all
obligations owed under any Company Plan or Company Other Benefit Obligation that
is not subject to the disclosure and reporting requirements of ERISA.
(c) Sellers have delivered to Buyer, or will deliver to Buyer within ten (10)
days of the date of this Agreement:
(i) all documents that set forth the terms of each Company Plan, Company Other
Benefit Obligation, or Company VEBA and of any related trust, including (A) all
plan descriptions and summary plan descriptions of Company Plans for which
Sellers or the Acquired Companies are required to prepare, file, and distribute
plan descriptions and summary plan descriptions, and (B) all summaries and
descriptions furnished to participants and beneficiaries regarding Company
Plans, Company Other Benefit Obligations, and Company VEBAs for which a plan
description or summary plan description is not required;
(ii) all personnel, payroll, and employment manuals and policies;
(iii) all collective bargaining agreements pursuant to which contributions have
been made or obligations incurred (including both pension and welfare benefits)
by the Acquired Companies and the ERISA Affiliates of the Acquired Companies,
and all collective bargaining agreements pursuant to which contributions are
being made or obligations are owed by such entities;
(iv) a written description of any Company Plan or Company Other Benefit
Obligation that is not otherwise in writing;
(v) all registration statements filed with respect to any Company Plan;
(vi) all insurance policies purchased by or to provide benefits under any
Company Plan;
(vii) all contracts with third party administrators, actuaries, investment
managers, consultants, and other independent contractors that relate to any
Company Plan, Company Other Benefit Obligation, or Company VEBA;
(viii) all reports submitted within the four years preceding the date of this
Agreement by third party administrators, actuaries, investment managers,
consultants, or other independent contractors with respect to any Company Plan,
Company Other Benefit Obligation, or Company VEBA;
(ix) all notifications to employees of their rights under ERISA ss. 601 et seq.
and IRC ss. 4980B;
(x) the Form 5500 filed in each of the most recent three plan years with respect
to each Company Plan, including all schedules thereto and the opinions of
independent accountants;
(xi) all notices that were given by any Acquired Company or any ERISA Affiliate
of an Acquired Company or any Company Plan to the IRS, the PBGC, or any
participant or beneficiary, pursuant to statute, within the four years preceding
the date of this Agreement, including notices that are expressly mentioned
elsewhere in this Section 3.13;
(xii) all notices that were given by the IRS, the PBGC, or the Department of
Labor to any
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Acquired Company, any ERISA Affiliate of an Acquired Company, or any Company
Plan within the four years preceding the date of this Agreement;
(xiii) with respect to Qualified Plans and VEBAs, the most recent determination
letter for each Plan of the Acquired Companies that is a Qualified Plan; and
(xiv) with respect to Title IV Plans, the Form PBGC-1 filed for each of the
three most recent plan years.
(d) Except as set forth in Part 3. 13(vi) of the Disclosure Letter:
(i) The Acquired Companies have performed all of their respective obligations
under all Company Plans, Company Other Benefit Obligations, and Company VEBAs.
The Acquired Companies have made appropriate entries in their financial records
and statements for all obligations and liabilities under such Plans, VEBAs, and
Obligations that have accrued but are not due.
(ii) No statement, either written or oral, has been made by any Acquired Company
to any Person with regard to any Plan or Other Benefit Obligation that was not
in accordance with the Plan or Other Benefit Obligation and that could have an
adverse economic consequence to any Acquired Company or to Buyer.
(iii) The Acquired Companies, with respect to all Company Plans, Company Other
Benefits Obligations, and Company VEBAs, are, and each Company Plan, Company
Other Benefit Obligation, and Company VEBA is, in full compliance with ERISA,
the IRC, and other applicable Laws including the provisions of such Laws
expressly mentioned in this Section 3.13, and with any applicable collective
bargaining agreement.
(A) No transaction prohibited by ERISA ss. 406 and no "prohibited transaction"
under IRC ss. 4975 (c) have occurred with respect to any Company Plan.
(B) No Seller or Acquired Company has any liability to the IRS with respect to
any Plan, including any liability imposed by Chapter 43 of the IRC.
(C) No Seller or Acquired Company has any liability to the PBGC with respect to
any Plan or has any liability under ERISA ss. 502 or ss. 4071.
(D) All filings required by ERISA and the IRC as to each Plan have been timely
filed, and all notices and disclosures to participants required by either ERISA
or the IRC have been timely provided.
(E) All contributions and payments made or accrued with respect to all Company
Plans, Company Other Benefit Obligations, and Company VEBAs are deductible under
IRC ss. 162 or ss. 404. No amount, or any asset of any Company Plan or Company
VEBA, is subject to tax as unrelated business taxable income.
(iv) Each Company Plan can be terminated within thirty (30) days, without
payment of any additional contribution or amount and without the vesting or
acceleration of any benefits promised by such Plan.
(v) There has been no establishment or amendment of any Company Plan, Company
VEBA, or
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Company Other Benefit Obligation.
(vi) No event has occurred or circumstance exists that could result in a
material increase in premium costs of Company Plans and Company Other Benefit
Obligations that are insured, or a material increase in benefit costs of such
Plans and Obligations that are self-insured.
(vii) Other than claims for benefits submitted by participants or beneficiaries,
no claim against, or legal proceeding involving, any Company Plan, Company Other
Benefit Obligation, or Company VEBA is pending or, to Sellers' Knowledge, is
Threatened.
(viii) No Company Plan is a stock bonus, pension, or profit-sharing plan within
the meaning of IRC ss. 401(a).
(ix) Each Qualified Plan of each Acquired Company is qualified in form and
operation under IRC ss. 401(a); each trust for each such Plan is exempt from
federal income tax under IRC ss. 501(a). Each Company VEBA is exempt from
federal income tax. No event has occurred or circumstance exists that will or
could give rise to disqualification or loss of tax-exempt status of any such
Plan or trust.
(x) Each Acquired Company and each ERISA Affiliate of an Acquired Company has
met the minimum funding standard, and has made all contributions required, under
ERISA ss. 302 and IRC ss. 402.
(xi) No Company Plan is subject to Title IV of ERISA.
(xii) The Acquired Companies have paid all amounts due to the PBGC pursuant to
ERISA ss. 4007.
(xiii) No Acquired Company or any ERISA Affiliate of an Acquired Company has
ceased operations at any facility or has withdrawn from any Title IV Plan in a
manner that would subject to any entity or Sellers to liability under ERISA ss.
4062(e), ss. 4063, or ss. 4064.
(xiv) No Acquired Company or any ERISA Affiliate of an Acquired Company has
filed a notice of intent to terminate any Plan or has adopted any amendment to
treat a Plan as terminated. The PBGC has not instituted proceedings to treat any
Company Plan as terminated. No event has occurred or circumstance exists that
may constitute grounds under ERISA ss. 4042 for the termination of, or the
appointment of a trustee to administer, any Company Plan.
(xv) No amendment has been made, or is reasonably expected to be made, to any
Plan that has required or could require the provision of security under ERISA
ss. 307 or IRC ss. 401(a)(29).
(xvi) No accumulated funding deficiency, whether or not waived, exists with
respect to any Company Plan; no event has occurred or circumstance exists that
may result in an accumulated funding deficiency as of the last day of the
current plan year of any such Plan.
(xvii) The actuarial report for each Pension Plan of each Acquired Company and
each ERISA Affiliate of each Acquired Company fairly presents the financial
condition and the results of operations of each such Plan in accordance with
GAAP.
(xviii) Since the last valuation date for each Pension Plan of each Acquired
Company and each ERISA Affiliate of an Acquired Company, no event has occurred
or circumstance exists that
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would increase the amount of benefits under any such Plan or that would cause
the excess of Plan assets over benefit liabilities (as defined in ERISA ss.
4001) to decrease, or the amount by which benefit liabilities exceed assets to
increase.
(xiv) No reportable event (as defined in ERISA ss. 4043 and in regulations
issued thereunder) has occurred.
(xx) No Seller or Acquired Company has Knowledge of any facts or circumstances
that may give rise to any liability of any Seller, any Acquired Company, or
Buyer to the PBGC under Title IV of ERISA.
(xxi) No Acquired Company or any ERISA Affiliate of an Acquired Company has ever
established, maintained, or contributed to or otherwise participated in, or had
an obligation to maintain, contribute to, or otherwise participate in, any
Multi-Employer Plan.
(xxii) No Acquired Company or any ERISA Affiliate of an Acquired Company has
withdrawn from any Multi-Employer Plan with respect to which there is any
outstanding liability as of the date of this Agreement. No event has occurred or
circumstance exists that presents a risk of the occurrence of any withdrawal
from, or the participation, termination, reorganization, or insolvency of, any
Multi-Employer Plan that could result in any liability of either any Acquired
Company or Buyer to a Multi-Employer Plan.
(xxiii) No Acquired Company or any ERISA Affiliate of an Acquired Company has
received notice from any Multi-Employer Plan that it is in reorganization or is
insolvent, that increased contributions may be required to avoid a reduction in
plan benefits or the imposition of any excise tax, or that such Plan intends to
terminate or has terminated.
(xxiv) No Multi-Employer Plan to which any Acquired Company or any ERISA
Affiliate of an Acquired Company contributes or has contributed is a party to
any pending merger or asset or liability transfer or is subject to any
proceeding brought by the PBGC.
(xxv) Except to the extent required under ERISA ss. 601 et seq. and IRC ss.
4980B, no Acquired Company provides health or welfare benefits for any retired
or former employee or is obligated to provide health or welfare benefits to any
active employee following such employee's retirement or other termination of
service.
(xxvi) Each Acquired Company has the right to modify and terminate benefits to
retirees (other than pensions) with respect to both retired and active
employees.
(xxii) Sellers and all Acquired Companies have complied with the provisions of
ERISA ss. 601 et seq. and IRC ss. 4980B.
(xxviii) No payment that is owed or may become due to any director, officer,
employee, or agent of any Acquired Company will be non-deductible to the
Acquired Companies or subject to tax under IRC ss. 280G or ss. 4999; nor will
any Acquired Company be required to "gross up" or otherwise compensate any such
person because of the imposition of any excise tax on a payment to such person.
(xxiv) The consummation of the Contemplated Transactions will not result in the
payment, vesting, or acceleration of any benefit.
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3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS
(a) Except as set forth in Part 3.14 of the Disclosure Letter:
(i) each Acquired Company is in full compliance with each Legal Requirement that
is or was applicable to it or to the conduct or operation of its business or the
ownership or use of any of its assets;
(ii) no event has occurred or circumstance exists that (with or without notice
or lapse of time) (A) may constitute or result in a violation by any Acquired
Company of, or a failure on the part of any Acquired Company to comply with, any
Legal Requirement, or (B) may give rise to any obligation on the part of any
Acquired Company to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature; and
(iii) no Acquired Company has received any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible, or potential violation of, or
failure to comply with, any Legal Requirement, or (B) any actual, alleged,
possible, or potential obligation on the part of any Acquired Company to
undertake, or to bear all or any portion of the cost of, any remedial action of
any nature.
(b) Part 3.14 of the Disclosure Letter contains a complete and accurate list of
each Governmental Authorization that is held by any Acquired Company or that
otherwise relates to the business of, or to any of the assets owned or used by,
any Acquired Company. Each Governmental Authorization listed or required to be
listed in Part 3.14 of the Disclosure Letter is valid and in full force and
effect. Except as set forth in Part 3. 14 of the Disclosure Letter:
(i) each Acquired Company is in full compliance with all of the terms and
requirements of each Governmental Authorization identified or required to be
identified in Part 3.14 of the Disclosure Letter;
(ii) no event has occurred or circumstance exists that may (with or without
notice or lapse of time) (A) constitute or result directly or indirectly in a
violation of or a failure to comply with any term or requirement of any
Governmental Authorization listed or required to be listed in Part 3.14 of the
Disclosure Letter, or (B) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation, or termination of, or any modification to,
any Governmental Authorization listed or required to be listed in Part 3.14 of
the Disclosure Letter;
(iii) no Acquired Company has received any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible, or potential violation of or
failure to comply with any term or requirement of any Governmental
Authorization, or (B) any actual, proposed, possible, or potential revocation,
withdrawal, suspension, cancellation, termination of, or modification to any
Governmental Authorization; and
(iv) all applications required to have been filed for the renewal of the
Governmental Authorizations listed or required to be listed in Part 3.14 of the
Disclosure Letter have been duly filed on a timely basis with the appropriate
Governmental Bodies, and all other filings required to have been made with
respect to such Governmental Authorizations have been duly made on a timely
basis with the appropriate Governmental Bodies.
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The Governmental Authorizations listed in Part 3.14 of the Disclosure Letter
collectively constitute all of the Governmental Authorizations necessary to
permit the Acquired Companies to lawfully conduct and operate their businesses
in the manner they currently conduct and operate such businesses and to permit
the Acquired Companies to own and use their assets in the manner in which they
currently own and use such assets.
3.15 LEGAL PROCEEDINGS; ORDERS
(a) Except as set forth in Part 3.15 of the Disclosure Letter, there is no
pending Proceeding:
(i) that has been commenced by or against any Acquired Company or that otherwise
relates to or may affect the business of, or any of the assets owned or used by,
any Acquired Company; or
(ii) that challenges, or that may have the effect of preventing, delaying,
making illegal, or otherwise interfering with, any of the Contemplated
Transactions.
To the Knowledge of Sellers and the Acquired Companies, (1) no such Proceeding
has been Threatened, and (2) no event has occurred or circumstance exists that
may give rise to or serve as a basis for the commencement of any such
Proceeding. Sellers have delivered to Buyer copies of all pleadings,
correspondence, and other documents relating to each Proceeding listed in Part
3.15 of the Disclosure Letter. The Proceedings listed in Part 3.15 of the
Disclosure Letter will not have a material adverse effect on the business,
operations, assets, condition, or prospects of any Acquired Company.
(b) Except as set forth in Part 3.15 of the Disclosure Letter:
(i) there is no Order to which any of the Acquired Companies, or any of the
assets owned or used by any Acquired Company, is subject;
(ii) neither Seller is subject to any Order that relates to the business of, or
any of the assets owned or used by, any Acquired Company; and
(iii) to the Knowledge of Sellers and the Acquired Companies, no officer,
director, agent, or employee of any Acquired Company is subject to any Order
that prohibits such officer, director, agent, or employee from engaging in or
continuing any conduct, activity, or practice relating to the business of any
Acquired Company.
(c) Except as set forth in Part 3.15 of the Disclosure Letter:
(i) each Acquired Company is in full compliance with all of the terms and
requirements of each Order to which it, or any of the assets owned or used by
it, is or has been subject;
(ii) no event has occurred or circumstance exists that may constitute or result
in (with or without notice or lapse of time) a violation of or failure to comply
with any term or requirement of any Order to which any Acquired Company, or any
of the assets owned or used by any Acquired Company, is subject; and
(iii) no Acquired Company has received any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding any actual, alleged,
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possible, or potential violation of, or failure to comply with, any term or
requirement of any Order to which any Acquired Company, or any of the assets
owned or used by any Acquired Company, is or has been subject.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in Part 3.16 of the Disclosure Letter, since the date of the
Balance Sheet, as of June 30, 1999 as audited in accordance with GAAP
consistently applied, the Acquired Companies have conducted their businesses
only in the Ordinary Course of Business and there has not been any:
(a) change in any Acquired Company's authorized or issued capital stock; grant
of any stock option or right to purchase shares of capital stock of any Acquired
Company; issuance of any security convertible into such capital stock; grant of
any registration rights; purchase, redemption, retirement, or other acquisition
by any Acquired Company of any shares of any such capital stock; or declaration
or payment of any dividend or other distribution or payment in respect of shares
of capital stock;
(b) amendment to the Organizational Documents of any Acquired Company;
(c) payment or increase by any Acquired Company of any bonuses, salaries, or
other compensation to any stockholder, director, officer, or (except in the
Ordinary Course of Business) employee or entry into any employment, severance,
or similar Contract with any director, officer, or employee;
(d) adoption of, or increase in the payments to or benefits under, any profit
sharing, bonus, deferred compensation, savings, insurance, pension, retirement,
or other employee benefit plan for or with any employees of any Acquired
Company;
(e) damage to or destruction or loss of any asset or property of any Acquired
Company, whether or not covered by insurance, materially and adversely affecting
the properties, assets, business, financial condition, or prospects of the
Acquired Companies, taken as a whole;
(f) entry into, termination of, or receipt of notice of termination of (i) any
license, distributorship, dealer, sales representative, joint venture, credit,
or similar agreement, or (ii) any Contract or transaction involving a total
remaining commitment by or to any Acquired Company of at least $1,000;
(g) sale (other than sales of inventory in the Ordinary Course of Business),
lease, or other disposition of any asset or property of any Acquired Company or
mortgage, pledge, or imposition of any lien or other encumbrance on any material
asset or property of any Acquired Company, including the sale, lease, or other
disposition of any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value to any Acquired
Company in excess of $1,000;
(i) material change in the accounting methods used by any Acquired Company; or
(j) agreement, whether oral or written, by any Acquired Company to do any of the
foregoing.
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3.17 CONTRACTS; NO DEFAULTS
(a) Part 3.17(a) of the Disclosure Letter contains a complete and accurate list,
and Sellers have delivered to Buyer true and complete copies, of:
(i) each Applicable Contract that involves performance of services or delivery
of goods or materials by one or more Acquired Companies of an amount or value in
excess of $1,000;
(ii) each Applicable Contract that involves performance of services or delivery
of goods or materials to one or more Acquired Companies of an amount or value in
excess of $1,000;
(iii) each Applicable Contract that was not entered into in the Ordinary Course
of Business and that involves expenditures or receipts of one or more Acquired
Companies in excess of $1,000;
(iv) each lease, rental or occupancy agreement, license, installment and
conditional sale agreement, and other Applicable Contract affecting the
ownership of, leasing of, title to, use of, or any leasehold or other interest
in, any real or personal property (except personal property leases and
installment and conditional sales agreements having a value per item or
aggregate payments of less than $1,000 and with terms of less than one year);
(v) each licensing agreement or other Applicable Contract with respect to
patents, trademarks, copyrights, or other intellectual property, including
agreements with current or former employees, consultants, or contractors
regarding the appropriation or the non-disclosure of any of the Intellectual
Property Assets;
(vi) each collective bargaining agreement and other Applicable Contract to or
with any labor union or other employee representative of a group of employees;
(vii) each joint venture, partnership, and other Applicable Contract (however
named) involving a sharing of profits, losses, costs, or liabilities by any
Acquired Company with any other Person;
(viii) each Applicable Contract containing covenants that in any way purport to
restrict the business activity of any Acquired Company or any Affiliate of an
Acquired Company or limit the freedom of any Acquired Company or any Affiliate
of an Acquired Company to engage in any line of business or to compete with any
Person;
(ix) each Applicable Contract providing for payments to or by any Person based
on sales, purchases, or profits, other than direct payments for goods;
(x) each power of attorney that is currently effective and outstanding;
(xi) each Applicable Contract entered into other than in the Ordinary Course of
Business that contains or provides for an express undertaking by any Acquired
Company to be responsible for consequential damages;
(xii) each Applicable Contract for capital expenditures in excess of $5,000;
(xiii) each written warranty, guaranty, and or other similar undertaking with
respect to contractual performance extended by any Acquired Company other than
in the Ordinary Course of Business; and
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(xiv) each amendment, supplement, and modification (whether oral or written) in
respect of any of the foregoing.
Part 3.17(a) of the Disclosure Letter sets forth reasonably complete details
concerning such Contracts, including the parties to the Contracts, the amount of
the remaining commitment of the Acquired Companies under the Contracts, and the
Acquired Companies' office where details relating to the Contracts are located.
(b) Except as set forth in Part 3.17(b) of the Disclosure Letter:
(i) neither Seller (and no Related Person of either Seller) has or may acquire
any rights under, and neither Seller has or may become subject to any obligation
or liability under, any Contract that relates to the business of, or any of the
assets owned or used by, any Acquired Company; and
(ii) to the Knowledge of Sellers and the Acquired Companies, no officer,
director, agent, employee, consultant, or contractor of any Acquired Company is
bound by any Contract that purports to limit the ability of such officer,
director, agent, employee, consultant, or contractor to (A) engage in or
continue any conduct, activity, or practice relating to the business of any
Acquired Company, or (B) assign to any Acquired Company or to any other Person
any rights to any invention, improvement, or discovery.
(c) Except as set forth in Part 3.17(c) of the Disclosure Letter, each Contract
identified or required to be identified in Part 3.17(a) of the Disclosure Letter
is in full force and effect and is valid and enforceable in accordance with its
terms.
(d) Except as set forth in Part 3.17(d) of the Disclosure Letter:
(i) each Acquired Company is materially in full compliance with all applicable
terms and requirements of each Contract under which such Acquired Company has or
had any obligation or liability or by which such Acquired Company or any of the
assets owned or used by such Acquired Company is or was bound;
(ii) each other Person that has or had any obligation or liability under any
Contract under which an Acquired Company has or had any rights is materially in
full compliance with all applicable terms and requirements of such Contract;
(iii) no event has occurred or circumstance exists that (with or without notice
or lapse of time) may contravene, conflict with, or result in a violation or
breach of, or give any Acquired Company or other Person the right to declare a
default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Applicable Contract; and
(iv) no Acquired Company has given to or received from any other Person any
notice or other communication (whether oral or written) regarding any actual,
alleged, possible, or potential violation or breach of, or default under, any
Contract.
(e) There are no renegotiations of, attempts to renegotiate, or outstanding
rights to renegotiate any material amounts paid or payable to any Acquired
Company under current or completed Contracts with any Person and, to the
Knowledge of Sellers and the Acquired Companies, no
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such Person has made written demand for such renegotiation.
(f) The Contracts relating to the sale, design, manufacture, or provision of
products or services by the Acquired Companies have been entered into in the
Ordinary Course of Business and have been entered into without the commission of
any act alone or in concert with any other Person, or any consideration having
been paid or promised, that is or would be in violation of any Legal
Requirement.
3.18 INSURANCE
(a) Sellers have delivered to Buyer:
(i) true and complete copies of all policies of insurance to which any Acquired
Company is a party or under which any Acquired Company, or any director of any
Acquired Company, is or has been covered at any time within the three (3) years
preceding the date of this Agreement;
(ii) true and complete copies of all pending applications for policies of
insurance; and
(iii) any statement by the auditor of any Acquired Company's financial
statements with regard to the adequacy of such entity's coverage or of the
reserves for claims.
(b) Part 3.18(b) of the Disclosure Letter describes:
(i) any self-insurance arrangement by or affecting any Acquired Company,
including any reserves established thereunder;
(ii) any contract or arrangement, other than a policy of insurance, for the
transfer or sharing of any risk by any Acquired Company; and
(iii) all obligations of the Acquired Companies to third parties with respect to
insurance (including such obligations under leases and service agreements) and
identifies the policy under which such coverage is provided.
(c) Part 3.18(c) of the Disclosure Letter sets forth, by year, for the current
policy year and each of the three (3) preceding policy years:
(i) a summary of the loss experience under each policy;
(ii) a statement describing each claim under an insurance policy for an amount
in excess of $10,000, which sets forth:
(A) the name of the claimant;
(B) a description of the policy by insurer, type of insurance, and period of
coverage; and
(C) the amount and a brief description of the claim; and
(iii) a statement describing the loss experience for all claims that were
self-insured, including the number and aggregate cost of such claims.
(d) Except as set forth on Part 3.18(d) of the Disclosure Letter:
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(i) All policies to which any Acquired Company is a party or that provide
coverage to either Seller, any Acquired Company, or any director or officer of
an Acquired Company:
(A) are valid, outstanding, and enforceable;
(B) are issued by an insurer that is financially sound and reputable;
(C) taken together, provide adequate insurance coverage for the assets and the
operations of the Acquired Companies for all risks normally insured against by a
Person carrying on the same business or businesses as the Acquired Companies for
all risks to which the Acquired Companies are normally exposed;
(D) are sufficient for compliance with all Legal Requirements and Contracts to
which any Acquired Company is a party or by which any of them is bound;
(E) will continue in full force and effect following the consummation of the
Contemplated Transactions; and
(F) do not provide for any retrospective premium adjustment or other
experienced-based liability on the part of any Acquired Company.
(ii) No Seller or Acquired Company has received (A) any refusal of coverage or
any notice that a defense will be afforded with reservation of rights, or (B)
any notice of cancellation or any other indication that any insurance policy is
no longer in full force or effect or will not be renewed or that the issuer of
any policy is not willing or able to perform its obligations thereunder.
(iii) The Acquired Companies have paid all premiums due, and have otherwise
performed all of their respective obligations, under each policy to which any
Acquired Company is a party or that provides coverage to any Acquired Company or
director thereof.
(iv) The Acquired Companies have given notice to the insurer of all claims that
may be insured thereby.
3.19 ENVIRONMENTAL MATTERS
Except as set forth in part 3.19 of the disclosure letter:
(a) Each Acquired Company is, and at all times has been, in full compliance
with, and has not been and is not in violation of or liable under, any
Environmental Law. No Seller or Acquired Company has any basis to expect, nor
has any of them or any other Person for whose conduct they are or may be held to
be responsible received, any actual or Threatened order, notice, or other
communication from (i) any Governmental Body or private citizen acting in the
public interest, or (ii) the current or prior owner or operator of any
Facilities, of any actual or potential violation or failure to comply with any
Environmental Law, or of any actual or Threatened obligation to undertake or
bear the cost of any Environmental, Health, and Safety Liabilities with respect
to any of the Facilities or any other properties or assets (whether real,
personal, or mixed) in which Sellers or any Acquired Company has had an
interest, or with respect to any property or Facility at or to which Hazardous
Materials were generated, manufactured, refined, transferred, imported, used, or
processed by Sellers, any Acquired
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Company, or any other Person for whose conduct they are or may be held
responsible, or from which Hazardous Materials have been transported, treated,
stored, handled, transferred, disposed, recycled, or received.
(b) There are no pending or, to the Knowledge of Sellers and the Acquired
Companies, Threatened claims, Encumbrances, or other restrictions of any nature,
resulting from any Environmental, Health, and Safety Liabilities or arising
under or pursuant to any Environmental Law, with respect to or affecting any of
the Facilities or any other properties and assets (whether real, personal, or
mixed) in which Sellers or any Acquired Company has or had an interest.
(c) No Seller or Acquired Company has Knowledge of any basis to expect, nor has
any of them or any other Person for whose conduct they are or may be held
responsible, received, any citation, directive, inquiry, notice, Order, summons,
warning, or other communication that relates to Hazardous Activity, Hazardous
Materials, or any alleged, actual, or potential violation or failure to comply
with any Environmental Law, or of any alleged, actual, or potential obligation
to undertake or bear the cost of any Environmental, Health, and Safety
Liabilities with respect to any of the Facilities or any other properties or
assets (whether real, personal, or mixed) in which Sellers or any Acquired
Company had an interest, or with respect to any property or facility to which
Hazardous Materials generated, manufactured, refined, transferred, imported,
used, or processed by Sellers, any Acquired Company, or any other Person for
whose conduct they are or may be held responsible, have been transported,
treated, stored, handled, transferred, disposed, recycled, or received.
(d) No Seller or Acquired Company, or any other Person for whose conduct they
are or may be held responsible, has any Environmental, Health, and Safety
Liabilities with respect to the Facilities or, to the Knowledge of Sellers and
the Acquired Companies, with respect to any other properties and assets (whether
real, personal, or mixed) in which Sellers or any Acquired Company (or any
predecessor), has or had an interest, or at any property geologically or
hydrologically adjoining the Facilities or any such other property or assets.
(e) There are no Hazardous Materials present on or in the Environment at the
Facilities or at any geologically or hydrologically adjoining property,
including any Hazardous Materials contained in barrels, above or underground
storage tanks, landfills, land deposits, dumps, equipment (whether moveable or
fixed) or other containers, either temporary or permanent, and deposited or
located in land, water, sumps, or any other part of the Facilities or such
adjoining property, or incorporated into any structure therein or thereon. No
Seller, Acquired Company, any other Person for whose conduct they are or may be
held responsible, or to the Knowledge of Sellers and the Acquired Companies, any
other Person, has permitted or conducted, or is aware of, any Hazardous Activity
conducted with respect to the Facilities or any other properties or assets
(whether real, personal, or mixed) in which Sellers or any Acquired Company has
or had an interest except in full compliance with all applicable Environmental
Laws.
(f) There has been no Release or, to the Knowledge of Sellers and the Acquired
Companies, Threat of Release, of any Hazardous Materials at or from the
Facilities or at any other locations where any Hazardous Materials were
generated, manufactured, refined, transferred, produced, imported, used, or
processed from or by the Facilities, or from or by any other properties and
assets (whether real, personal, or mixed) in which Sellers or any Acquired
Company has or had an interest, or to the Knowledge of Sellers and the Acquired
Companies any geologically or hydrologically adjoining property, whether by
Sellers, any Acquired
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Company, or any other Person.
(g) Sellers have delivered to Buyer true and complete copies and results of any
reports, studies, analyses, tests, or monitoring possessed or initiated by
Sellers or any Acquired Company pertaining to Hazardous Materials or Hazardous
Activities in, on, or under the Facilities, or concerning compliance by Sellers,
any Acquired Company, or any other Person for whose conduct they are or may be
held responsible, with Environmental Laws.
3.20 EMPLOYEES
(a) Part 3.20 of the Disclosure Letter contains a complete and accurate list of
the following information for each employee or director of the Acquired
Companies, including each employee on leave of absence or layoff status:
employer; name; job title; current compensation paid or payable and any change
in compensation since January 1, 1999; vacation accrued; and service credited
for purposes of vesting and eligibility to participate under any Acquired
Company's pension, retirement, profit-sharing, thrift-savings, deferred
compensation, stock bonus, stock option, cash bonus, employee stock ownership
(including investment credit or payroll stock ownership), severance pay,
insurance, medical, welfare, or vacation plan, other Employee Pension Benefit
Plan or Employee Welfare Benefit Plan, or any other employee benefit plan or any
Director Plan.
(b) No employee or director of any Acquired Company is a party to, or is
otherwise bound by, any agreement or arrangement, including any confidentiality,
noncompetition, or proprietary rights agreement, between such employee or
director and any other Person ("Proprietary Rights Agreement") that in any way
adversely affects or will affect (i) the performance of his duties as an
employee or director of the Acquired Companies, or (ii) the ability of any
Acquired Company to conduct its business, including any Proprietary Rights
Agreement with Sellers or the Acquired Companies by any such employee or
director. To Sellers' Knowledge, no director, officer, or other key employee of
any Acquired Company intends to terminate his employment with such Acquired
Company.
(c) Part 3.20 of the Disclosure Letter also contains a complete and accurate
list of the following information for each retired employee or director of the
Acquired Companies, or their dependents, receiving benefits or scheduled to
receive benefits in the future: name, pension benefit, pension option election,
retiree medical insurance coverage, retiree life insurance coverage, and other
benefits.
3.21 LABOR RELATIONS; COMPLIANCE
Since January 1, 1999, no Acquired Company has been or is a party to any
collective bargaining or other labor Contract. Since January 1, 1999, there has
not been, there is not presently pending or existing, and to Sellers' Knowledge
there is not Threatened, (a) any strike, slowdown, picketing, work stoppage, or
employee grievance process, (b) any Proceeding against or affecting any Acquired
Company relating to the alleged violation of any Legal Requirement pertaining to
labor relations or employment matters, including any charge or complaint filed
by an employee or union with the National Labor Relations Board, the Equal
Employment Opportunity Commission, or any comparable Governmental Body,
organizational activity, or other labor or employment dispute against or
affecting any of the Acquired Companies or their premises, or (c) any
application for certification of a collective bargaining agent. To Sellers'
Knowledge no event has occurred or circumstance exists that could provide the
basis for any work stoppage or other labor dispute. There is no lockout of
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any employees by any Acquired Company, and no such action is contemplated by any
Acquired Company. Each Acquired Company has complied in all respects with all
Legal Requirements relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining,
the payment of social security and similar taxes, occupational safety and
health, and plant closing. No Acquired Company is liable for the payment of any
compensation, damages, taxes, fines, penalties, or other amounts, however
designated, for failure to comply with any of the foregoing Legal Requirements.
3.22 INTELLECTUAL PROPERTY
(a) Intellectual Property Assets--The term "Intellectual Property Assets"
includes:
(i) the name cyberTours, Inc., all fictional business names, trading names,
registered and unregistered trademarks, service marks, and applications
(collectively, "Marks");
(ii) all patents, patent applications, and inventions and discoveries that may
be patentable (collectively, "Patents");
(iii) all copyrights in both published works and unpublished works
(collectively, "Copyrights");
(iv) all rights in mask works (collectively, "Rights in Mask Works"); and
(v) all know-how, trade secrets, confidential information, customer lists,
software, technical information, data, process technology, plans, drawings, and
blue prints (collectively, "Trade Secrets"); owned, used, or licensed by any
Acquired Company as licensee or licensor.
(b) Agreements--Part 3.22(b) of the Disclosure Letter contains a complete and
accurate list and summary description, including any royalties paid or received
by the Acquired Companies, of all Contracts relating to the Intellectual
Property Assets to which any Acquired Company is a party or by which any
Acquired Company is bound, except for any license implied by the sale of a
product and perpetual, paid-up licenses for commonly available software programs
with a value of less than $1,000 under which an Acquired Company is the
licensee. There are no outstanding and, to Sellers' Knowledge, no Threatened
disputes or disagreements with respect to any such agreement.
(c) Know-How Necessary for the Business
(i) The Intellectual Property Assets are all those necessary for the operation
of the Acquired Companies' businesses as they are currently conducted or as
reflected in the business plan given to Buyer. One or more of the Acquired
Companies is the owner of all right, title, and interest in and to each of the
Intellectual Property Assets, free and clear of all liens, security interests,
charges, encumbrances, equities, and other adverse claims, and has the right to
use without payment to a third party all of the Intellectual Property Assets.
(ii) Except as set forth in Part 3.22(c) of the Disclosure Letter, all former
and current employees of each Acquired Company have executed written Contracts
with one or more of the Acquired Companies that assign to one or more of the
Acquired Companies all rights to any inventions, improvements, discoveries, or
information relating to the business of any Acquired Company. No employee of any
Acquired Company has entered into any Contract that restricts
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or limits in any way the scope or type of work in which the employee may be
engaged or requires the employee to transfer, assign, or disclose information
concerning his work to anyone other than one or more of the Acquired Companies.
(d) Patents
(i) Part 3.22(d) of the Disclosure Letter contains a complete and accurate list
and summary description of all Patents. One or more of the Acquired Companies is
the owner of all right, title, and interest in and to each of the Patents, free
and clear of all liens, security interests, charges, encumbrances, entities, and
other adverse claims.
(ii) All of the issued Patents are currently in compliance with formal legal
requirements (including payment of filing, examination, and maintenance fees and
proofs of working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety days after the
Closing Date.
(iii) No Patent has been or is now involved in any interference, reissue,
reexamination, or opposition proceeding. To Sellers' Knowledge, there is no
potentially interfering patent or patent application of any third party.
(iv) No Patent is infringed or, to Sellers' Knowledge, has been challenged or
threatened in any way. None of the products manufactured and sold, nor any
process or know-how used, by any Acquired Company infringes or is alleged to
infringe any patent or other proprietary right of any other Person.
(v) All products made, used, or sold under the Patents have been marked with the
proper patent notice.
(e) Trademarks
(i) Part 3.22(e) of Disclosure Letter contains a complete and accurate list and
summary description of all Marks. One or more of the Acquired Companies is the
owner of all right, title, and interest in and to each of the Marks, free and
clear of all liens, security interests, charges, encumbrances, equities, and
other adverse claims.
(ii) All Marks that have been registered with the United States Patent and
Trademark Office are currently in compliance with all formal legal requirements
(including the timely post-registration filing of affidavits of use and
incontestability and renewal applications), are valid and enforceable, and are
not subject to any maintenance fees or taxes or actions falling due within
ninety days after the Closing Date.
(iii) No Mark has been or is now involved in any opposition, invalidation, or
cancellation and, to Sellers' Knowledge, no such action is Threatened with the
respect to any of the Marks.
(iv) To Sellers' Knowledge, there is no potentially interfering trademark or
trademark application of any third party.
(v) No Mark is infringed or, to Sellers' Knowledge, has been challenged or
threatened in any way. None of the Marks used by any Acquired Company infringes
or is alleged to infringe any trade name, trademark, or service mark of any
third party.
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(vi) All products and materials containing a Mark bear the proper federal
registration notice where permitted by law.
(f) Copyrights
(i) Part 3.22(f) of the Disclosure Letter contains a complete and accurate list
and summary description of all Copyrights. One or more of the Acquired Companies
is the owner of all right, title, and interest in and to each of the Copyrights,
free and clear of all liens, security interests, charges, encumbrances,
equities, and other adverse claims.
(ii) All the Copyrights have been registered and are currently in compliance
with formal legal requirements, are valid and enforceable, and are not subject
to any maintenance fees or taxes or actions falling due within ninety (90) days
after the date of Closing.
(iii) No Copyright is infringed or, to Sellers' Knowledge, has been challenged
or threatened in any way. None of the subject matter of any of the Copyrights
infringes or is alleged to infringe any copyright of any third party or is a
derivative work based on the work of a third party.
(iv) All works encompassed by the Copyrights have been marked with the proper
copyright notice.
(g) Trade Secrets
(i) With respect to each Trade Secret, the documentation relating to such Trade
Secret is current, accurate, and sufficient in detail and content to identify
and explain it and to allow its full and proper use without reliance on the
knowledge or memory of any individual.
(ii) Sellers and the Acquired Companies have taken all reasonable precautions to
protect the secrecy, confidentiality, and value of their Trade Secrets.
(iii) One or more of the Acquired Companies has good title and an absolute (but
not necessarily exclusive) right to use the Trade Secrets. The Trade Secrets are
not part of the public knowledge or literature, and, to Sellers' Knowledge, have
not been used, divulged, or appropriated either for the benefit of any Person
(other than one or more of the Acquired Companies) or to the detriment of the
Acquired Companies. No Trade Secret is subject to any adverse claim or has been
challenged or threatened in any way.
3.23 CERTAIN PAYMENTS
No Acquired Company or director, officer, agent, or employee of any Acquired
Company, or to Sellers' Knowledge any other Person associated with or acting for
or on behalf of any Acquired Company, has directly or indirectly (a) made any
contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other
payment to any Person, private or public, regardless of form, whether in money,
property, or services (i) to obtain favorable treatment in securing business,
(ii) to pay for favorable treatment for business secured, (iii) to obtain
special concessions or for special concessions already obtained, for or in
respect of any Acquired Company or any Affiliate of an Acquired Company, or (iv)
in violation of any Legal Requirement, (b) established or maintained any fund or
asset that has not been recorded in the books and records of the Acquired
Companies.
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3.24 DISCLOSURE
(a) No representation or warranty of Sellers in this Agreement and no statement
in the Disclosure Letter omits to state a material fact necessary to make the
statements herein or therein, in light of the circumstances in which they were
made, not misleading.
(b) No notice given pursuant to Section 5.5 will contain any untrue statement or
omit to state a material fact necessary to make the statements therein or in
this Agreement, in light of the circumstances in which they were made, not
misleading.
(c) There is no fact known to either Seller that has specific application to
either Seller or any Acquired Company (other than general economic or industry
conditions) and that materially adversely affects or, as far as either Seller
can reasonably foresee, materially threatens, the assets, business, prospects,
financial condition, or results of operations of the Acquired Companies (on a
consolidated basis) that has not been set forth in this Agreement or the
Disclosure Letter.
3.25 RELATIONSHIPS WITH RELATED PERSONS
No Seller or any Related Person of Sellers or of any Acquired Company has, or
since the first day of the next to last completed fiscal year of the Acquired
Companies has had, any interest in any property (whether real, personal, or
mixed and whether tangible or intangible), used in or pertaining to the Acquired
Companies' businesses. No Seller or any Related Person of Sellers or of any
Acquired Company is, or since the first day of the next to last completed fiscal
year of the Acquired Companies has owned (of record or as a beneficial owner) an
equity interest or any other financial or profit interest in, a Person that has
(i) had business dealings or a material financial interest in any transaction
with any Acquired Company other than business dealings or transactions conducted
in the Ordinary Course of Business with the Acquired Companies at substantially
prevailing market prices and on substantially prevailing market terms, or (ii)
engaged in competition with any Acquired Company with respect to any line of the
products or services of such Acquired Company (a "Competing Business") in any
market presently served by such Acquired Company. Except as set forth in Part
3.25 of the Disclosure Letter, no Seller or any Related Person of Sellers or of
any Acquired Company is a party to any Contract with, or has any claim or right
against, any Acquired Company.
3.26 BROKERS OR FINDERS
Sellers and their agents have incurred no obligation or liability, contingent or
otherwise, for brokerage or finders' fees or agents' commissions or other
similar payment in connection with this Agreement and will indemnify and hold
Buyer harmless from any such payment alleged to be due by or through Sellers as
a result of the action of Sellers or its officers or agents.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers as follows:
4.1 ORGANIZATION AND GOOD STANDING
Buyer is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Delaware.
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4.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms. Upon the
execution and delivery by Buyer of the Escrow Agreement, and the Employment
Agreement (collectively, the "Buyer's Closing Documents"), the Buyer's Closing
Documents will constitute the legal, valid, and binding obligations of Buyer,
enforceable against Buyer in accordance with their respective terms. Buyer has
the absolute and unrestricted right, power, and authority to execute and deliver
this Agreement and the Buyer's Closing Documents and to perform its obligations
under this Agreement and the Buyer's Closing Documents.
(b) Except as set forth in Schedule 4.2, neither the execution and delivery of
this Agreement by Buyer nor the consummation or performance of any of the
Contemplated Transactions will give any Person the right to prevent, delay, or
otherwise interfere with any of the Contemplated Transactions pursuant to:
(i) any provision of Buyer's Organizational Documents;
(ii) any resolution adopted by the board of directors or the stockholders of
Buyer;
(iii) any Legal Requirement or Order to which Buyer may be subject; or
(iv) any Contract to which Buyer is a party or by which Buyer may be bound.
Except as set forth in Schedule 4.2, Buyer is not and will not be required to
obtain any Consent from any Person in connection with the execution and delivery
of this Agreement or the consummation or performance of any of the Contemplated
Transactions.
4.3 INVESTMENT INTENT
As acknowledged in Section 3.2(c) hereof, each Seller represents that he is
acquiring the common stock of Buyer for investment purposes only and not with
the view to the distribution, resale, subdivision or fractionalization thereof,
and that the transaction contemplated hereby is exempt from the registration
provisions of the Securities Act. Each Seller acknowledges that the Rule 144
Stock and, initially, the Registered Stock are restricted securities as that
term is defined in Rule 144 adopted under the Securities Act and that each
Seller's right to resell said shares is subject to said Rule 144.
4.4 CERTAIN PROCEEDINGS
There is no pending Proceeding that has been commenced against Buyer and that
challenges, or may have the effect of preventing, delaying, making illegal, or
otherwise interfering with, any of the Contemplated Transactions. To Buyer's
Knowledge, no such Proceeding has been Threatened.
4.5 BROKERS OR FINDERS
Buyer and its officers and agents have incurred no obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement, except with
International Technology Marketing, Inc. Buyer will indemnify and hold Sellers
harmless from the claim of International Technology
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Marketing, Inc. and any other such payment alleged to be due by or through Buyer
as a result of the action of Buyer or its officers or agents.
4.6 REGISTRATION OF REGISTERD STOCK; PUT ELECTION
Buyer hereby agrees to file, no later than ninety (90) days from the Closing
Date, a registration statement under the Securities Act ("Registration Act"),
with the Securities Exchange Commission ("Commission") registering the
Registered Stock for resale. Buyer shall use its reasonable best efforts to
cause the Registration Statement to be declared effective as soon as possible.
Buyer agrees to advise Sellers, within two (2) business days written notice,
when the Registered Stock may be sold pursuant to the Registration Statement.
Buyer may require each of the Sellers to furnish to Buyer such information
regarding such Sellers as Buyer may from time to time reasonably request in
writing with respect to matters concerning Buyer's compliance with the
Securities Act and the Registration Statement filed thereunder. If a Seller does
not furnish such requested information to Buyer or otherwise fails to cooperate
with Buyer to the extent necessary to enable Buyer to comply with its
obligations under the Securities Act, Buyer shall not be obligated to register
Seller's Registered Stock, but shall continue to be obligated to register the
remainder of the Registered Stock. All expenses incident to Buyer's performance
of or compliance with this Section 4.6, including, without limitation, all
Commission and securities exchange or National Association of Securities Dealers
registration and filing fees, fees and expenses or compliance with securities or
blue sky laws, and printing expenses, shall be borne by Buyer.
Buyer agrees that if (a) the closing price of Buyer's common stock, as reflected
on Nasdaq National Market System, is less than $15.00 on the same day that the
Registration Statement is declared effective by the Commission ("Registration
Effective Date"); and (b) the Seller's notify the Buyer by facsimile or
otherwise by 10:00 AM the morning after the Registration Effective Date of their
intention to exercise its put option, the Buyer shall repurchase up to 333,333
shares of the Registered Stock at a price of $15.00 per share.
5. COVENANTS OF SELLERS PRIOR TO CLOSING DATE
5.1 ACCESS AND INVESTIGATION
Between the date of this Agreement and the Closing Date, Sellers will, and will
cause each Acquired Company and its Representatives to, (a) afford Buyer and its
Representatives and prospective lenders and their Representatives (collectively,
"Buyer's Advisors") full and free access to each Acquired Company's personnel,
properties (including subsurface testing), contracts, books and records, and
other documents and data, (b) furnish Buyer and Buyer's Advisors with copies of
all such contracts, books and records, and other existing documents and data as
Buyer may reasonably request, and (c) furnish Buyer and Buyer's Advisors with
such additional financial, operating, and other data and information as Buyer
may reasonably request.
5.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES
Between the date of this Agreement and the Closing Date, Sellers will, and will
cause each Acquired Company to:
(a) conduct the business of such Acquired Company only in the Ordinary Course of
Business;
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(b) use their Best Efforts to preserve intact the current business organization
of such Acquired Company, keep available the services of the current officers,
employees, and agents of such Acquired Company, and maintain the relations and
good will with suppliers, customers, landlords, creditors, employees, agents,
and others having business relationships with such Acquired Company;
(c) confer with Buyer concerning operational matters of a material nature; and
(d) otherwise report periodically to Buyer concerning the status of the
business, operations, and finances of such Acquired Company.
5.3 NEGATIVE COVENANT
Except as otherwise expressly permitted by this Agreement, between the date of
this Agreement and the Closing Date, Sellers will not, and will cause each
Acquired Company not to, without the prior consent of Buyer, take any
affirmative action, or fail to take any reasonable action within their or its
control, as a result of which any of the changes or events listed in Section
3.16 is likely to occur.
5.4 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, Sellers will, and
will cause each Acquired Company to, make all filings required by Legal
Requirements to be made by them in order to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Sellers
will, and will cause each Acquired Company to, (a) cooperate with Buyer with
respect to all filings that Buyer elects to make or is required by Legal
Requirements to make in connection with the Contemplated Transactions, and (b)
cooperate with Buyer in obtaining all consents identified in Schedule 4.2.
5.5 NOTIFICATION
Between the date of this Agreement and the Closing Date, each Seller will
promptly notify Buyer in writing if such Seller or any Acquired Company becomes
aware of any fact or condition that causes or constitutes a Breach of any of
Sellers' representations and warranties as of the date of this Agreement, or if
such Seller or any Acquired Company becomes aware of the occurrence after the
date of this Agreement of any fact or condition that would (except as expressly
contemplated by this Agreement) cause or constitute a Breach of any such
representation or warranty had such representation or warranty been made as of
the time of occurrence or discovery of such fact or condition. Should any such
fact or condition require any change in the Disclosure Letter if the Disclosure
Letter were dated the date of the occurrence or discovery of any such fact or
condition, Sellers will promptly deliver to Buyer a supplement to the Disclosure
Letter specifying such change. During the same period, each Seller will promptly
notify Buyer of the occurrence of any Breach of any covenant of Sellers in this
Section 5 or of the occurrence of any event that may make the satisfaction of
the conditions in Section 7 impossible or unlikely.
5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS
Except as expressly provided in this Agreement, Sellers will cause all
indebtedness owed to an Acquired Company by either Seller or any Related Person
of either Seller to be paid in full prior to Closing.
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5.7 NO NEGOTIATION
Until such time, if any, as this Agreement is terminated pursuant to Section 9,
Sellers will not, and will cause each Acquired Company and each of their
Representatives not to, directly or indirectly solicit, initiate, or encourage
any inquiries or proposals from, discuss or negotiate with, provide any
non-public information to, or consider the merits of any unsolicited inquiries
or proposals from, any Person (other than Buyer) relating to any transaction
involving the sale of the business or assets (other than in the Ordinary Course
of Business) of any Acquired Company, or any of the capital stock of any
Acquired Company, or any merger, consolidation, business combination, or similar
transaction involving any Acquired Company.
6. COVENANTS OF BUYER PRIOR TO CLOSING DATE
6.1 APPROVALS OF GOVERNMENTAL BODIES
As promptly as practicable after the date of this Agreement, Buyer will, and
will cause each of its Related Persons to, make all filings required by Legal
Requirements to be made by them to consummate the Contemplated Transactions.
Between the date of this Agreement and the Closing Date, Buyer will, and will
cause each Related Person to, cooperate with Sellers with respect to all filings
that Sellers are required by Legal Requirements to make in connection with the
Contemplated Transactions, and (ii) cooperate with Sellers in obtaining all
consents identified in Part 3.2 of the Disclosure Letter; provided that this
Agreement will not require Buyer to dispose of or make any change in any portion
of its business or to incur any other burden to obtain a Governmental
Authorization.
7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Shares and to take the other actions required
to be taken by Buyer at the Closing is subject to the satisfaction, at or prior
to the Closing, of each of the following conditions (any of which may be waived
by Buyer, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
(a) All of Sellers' representations and warranties in this Agreement (considered
collectively), and each of these representations and warranties (considered
individually), must have been accurate in all material respects as of the date
of this Agreement, and must be accurate in all material respects as of the
Closing Date as if made on the Closing Date, without giving effect to any
supplement to the Disclosure Letter.
(b) Each of Sellers' representations and warranties in Sections 3.3, 3.4, 3.12,
and 3.24 must have been accurate in all respects as of the date of this
Agreement, and must be accurate in all respects as of the Closing Date as if
made on the Closing Date, without giving effect to any supplement to the
Disclosure Letter.
7.2 SELLERS' PERFORMANCE
(a) All of the covenants and obligations that Sellers are required to perform or
to comply with pursuant to this Agreement at or prior to the Closing (considered
collectively), and each of these covenants and obligations (considered
individually), must have been duly performed and complied with in all material
respects.
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(b) Each document required to be delivered pursuant to Section 2.4 must have
been delivered, and each of the other covenants and obligations in Sections 5.4
and 5.8 must have been performed and complied with in all respects.
7.3 CONSENTS
Each of the Consents identified in Part 3.2 of the Disclosure Letter, and each
Consent identified in Schedule 4.2, must have been obtained and must be in full
force and effect.
7.4 ADDITIONAL DOCUMENTS
Each of the following documents must have been delivered to Buyer:
(a) an opinion of Kevin G. Grimes, Attorney at Law, dated the Closing Date, in
the form of Exhibit 7.4(a);
(b) consent as to the transaction from Kennebunk Savings Bank and Bar Harbor
Trust Company (both parties shall fully cooperate with one another in obtaining
said consent); and
(c) such other documents as Buyer may reasonably request for the purpose of (i)
enabling its counsel to provide the opinion referred to in Section 8.4(a), (ii)
evidencing the accuracy of any of Sellers' representations and warranties, (iii)
evidencing the performance by either Seller of, or the compliance by either
Seller with, any covenant or obligation required to be performed or complied
with by such Seller, (iv) evidencing the satisfaction of any condition referred
to in this Section 7, or (v) otherwise facilitating the consummation or
performance of any of the Contemplated Transactions.
7.5 NO PROCEEDINGS
Since the date of this Agreement, there must not have been commenced or
Threatened against Buyer, or against any Person affiliated with Buyer, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS
There must not have been made or Threatened by any Person any claim asserting
that such Person (a) is the holder or the beneficial owner of, or has the right
to acquire or to obtain beneficial ownership of, any stock of, or any other
voting, equity, or ownership interest in, any of the Acquired Companies, or (b)
is entitled to all or any portion of the Purchase Price payable for the Shares.
7.7 NO PROHIBITION
Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), materially contravene, or conflict with, or result in a material
violation of, or cause Buyer or any Person affiliated with Buyer to suffer any
material adverse consequence under, (a) any applicable Legal Requirement or
Order, or (b) any Legal Requirement or Order that has been published,
introduced, or
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otherwise proposed by or before any Governmental Body.
8. CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE
Sellers' obligation to sell the Shares and to take the other actions required to
be taken by Sellers at the Closing is subject to the satisfaction, at or prior
to the Closing, of each of the following conditions (any of which may be waived
by Sellers, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS
All of Buyer's representations and warranties in this Agreement (considered
collectively), and each of these representations and warranties (considered
individually), must have been accurate in all material respects as of the date
of this Agreement and must be accurate in all material respects as of the
Closing Date as if made on the Closing Date.
8.2 BUYER'S PERFORMANCE
(a) All of the covenants and obligations that Buyer is required to perform or to
comply with pursuant to this Agreement at or prior to the Closing (considered
collectively), and each of these covenants and obligations (considered
individually), must have been performed and complied with in all material
respects.
(b) Buyer must have delivered each of the documents required to be delivered by
Buyer pursuant to Section 2.4.
8.3 CONSENTS
Each of the Consents identified in Part 3.2 of the Disclosure Letter must have
been obtained and must be in full force and effect.
8.4 ADDITIONAL DOCUMENTS
Buyer must have caused the following documents to be delivered to Sellers:
(a) an opinion of Frederick W. Stolle and Associates, dated the Closing Date, in
the form of Exhibit 8.4(a); and
(b) such other documents as Sellers may reasonably request for the purpose of
(i) enabling their counsel to provide the opinion referred to in Section 7.4(a),
(ii) evidencing the accuracy of any representation or warranty of Buyer, (iii)
evidencing the performance by Buyer of, or the compliance by Buyer with, any
covenant or obligation required to be performed or complied with by Buyer, (ii)
evidencing the satisfaction of any condition referred to in this Section 8, or
(v) otherwise facilitating the consummation of any of the Contemplated
Transactions.
8.5 NO INJUNCTION
There must not be in effect any Legal Requirement or any injunction or other
Order that (a) prohibits the sale of the Shares by Sellers to Buyer, and (b) has
been adopted or issued, or has otherwise become effective, since the date of
this Agreement.
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9. TERMINATION
9.1 TERMINATION EVENTS
This Agreement may, by notice given prior to or at the Closing, be terminated:
(a) by either Buyer or Sellers if a material Breach of any provision of this
Agreement has been committed by the other party and such Breach has not been
waived;
(b) (i) by Buyer if any of the conditions in Section 7 has not been satisfied as
of the Closing Date or if satisfaction of such a condition is or becomes
impossible (other than through the failure of Buyer to comply with its
obligations under this Agreement) and Buyer has not waived such condition on or
before the Closing Date; or (ii) by Sellers, if any of the conditions in Section
8 has not been satisfied of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of Sellers to
comply with their obligations under this Agreement) and Sellers have not waived
such condition on or before the Closing Date;
(c) by mutual consent of Buyer and Sellers; or
(d) by Buyer in the event that the Balance Sheet, as of June 30, 1999 as audited
in accordance with GAAP consistently applied, is materially different that the
Projected Financial Statements; or,
(e) by Buyer if the Disclosure Letter reveals any material condition not
satisfactory to Buyer and not cured by Sellers.
9.2 EFFECT OF TERMINATION
Each party's right of termination under Section 9.1 is in addition to any other
rights it may have under this Agreement or otherwise, and the exercise of a
right of termination will not be an election of remedies. If this Agreement is
terminated pursuant to Section 9.1, all further obligations of the parties under
this Agreement will terminate, except that the obligations in Sections 11.1 and
11.3 will survive; provided, however, that if this Agreement is terminated by a
party because of the Breach of the Agreement by the other party or because one
or more of the conditions to the terminating party's obligations under this
Agreement is not satisfied as a result of the other party's failure to comply
with its obligations under this Agreement, the terminating party's right to
pursue all legal remedies will survive such termination unimpaired; provided,
further, that not withstanding anything to the contrary contained herein,
Buyer's liability herein shall be liquidated in the sum of $200,000, which sum
may be set-off by forgiveness of the principal and interest owed to Buyer by
Company under that certain demand promissory note dated June 25, 1999 evidencing
the principal indebtedness of $200,000 of Company to Buyer.
10. INDEMNIFICATION; REMEDIES
10.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE
All representations, warranties, covenants, and obligations in this Agreement,
the Disclosure Letter, the supplements to the Disclosure Letter, the certificate
delivered pursuant to Section
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2.4(a)(v), and any other certificate or document delivered pursuant to this
Agreement will survive the Closing. The right to indemnification, payment of
Damages or other remedy based on such representations, warranties, covenants,
and obligations will not be affected by any investigation conducted with respect
to, or any Knowledge acquired (or capable of being acquired) at any time,
whether before or after the execution and delivery of this Agreement or the
Closing Date, with respect to the accuracy or inaccuracy of or compliance with,
any such representation, warranty, covenant, or obligation. The waiver of any
condition based on the accuracy of any representation or warranty, or on the
performance of or compliance with any covenant or obligation, will not affect
the right to indemnification, payment of Damages, or other remedy based on such
representations, warranties, covenants, and obligations.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS
Sellers, jointly and severally, will indemnify and hold harmless Buyer, the
Acquired Companies, and their respective Representatives, stockholders,
controlling persons, and affiliates (collectively, the "Indenmified Persons")
for, and will pay to the Indemnified Persons the amount of, any loss, liability,
claim, damage (including incidental and consequential damages), expense
(including costs of investigation and defense and reasonable attorneys' fees) or
diminution of value, whether or not involving a third-party claim (collectively,
"Damages"), arising, directly or indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by Sellers in this
Agreement (without giving effect to any supplement to the Disclosure Letter),
the Disclosure Letter, the supplements to the Disclosure Letter, or any other
certificate or document delivered by Sellers pursuant to this Agreement;
(b) any Breach of any representation or warranty made by Sellers in this
Agreement as if such representation or warranty were made on and as of the
Closing Date without giving effect to any supplement to the Disclosure Letter,
other than any such Breach that is disclosed in a supplement to the Disclosure
Letter and is expressly identified in the certificate delivered pursuant to
Section 2.4(a)(v) as having caused the condition specified in Section 7.1 not to
be satisfied;
(c) any Breach by either Seller of any covenant or obligation of such Seller in
this Agreement;
(d) any product shipped or manufactured by, or any services provided by, any
Acquired Company prior to the Closing Date;
(e) any claim by any Person for brokerage or finder's fees or commissions or
similar payments based upon any agreement or understanding alleged to have been
made by any such Person with either Seller or any Acquired Company (or any
Person acting on their behalf) in connection with any of the Contemplated
Transactions.
The remedies provided in this Section 10.2 will not be exclusive of or limit any
other remedies that may be available to Buyer or the other Indemnified Persons.
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS--ENVIRONMENTAL MATTERS
In addition to the provisions of Section 10.2, Sellers, jointly and severally,
will indemnify and hold harmless Buyer, the Acquired Companies, and the other
Indemnified Persons for, and
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will pay to Buyer, the Acquired Companies, and the other Indemnified Persons the
amount of, any Damages (including costs of cleanup, containment, or other
remediation) arising, directly or indirectly, from or in connection with:
(a) any Environmental, Health, and Safety Liabilities arising out of or relating
to: (i) (A) the ownership, operation, or condition at any time on or prior to
the Closing Date of the Facilities or any other properties and assets (whether
real, personal, or mixed and whether tangible or intangible) in which Sellers or
any Acquired Company has or had an interest, or (B) any Hazardous Materials or
other contaminants that were present on the Facilities or such other properties
and assets at any time on or prior to the Closing Date; or (ii) (A) any
Hazardous Materials or other contaminants, wherever located, that were, or were
allegedly, generated, transported, stored, treated, Released, or otherwise
handled by Sellers or any Acquired Company or by any other Person for whose
conduct they are or may be held responsible at any time on or prior to the
Closing Date, or (B) any Hazardous Activities that were, or were allegedly,
conducted by Sellers or any Acquired Company or by any other Person for whose
conduct they are or may be held responsible; or
(b) any bodily injury (including illness, disability, and death, and regardless
of when any such bodily injury occurred, was incurred, or manifested itself),
personal injury, property damage (including trespass, nuisance, wrongful
eviction, and deprivation of the use of real property), or other damage of or to
any Person, including any employee or former employee of Sellers or any Acquired
Company or any other Person for whose conduct they are or may be held
responsible, in any way arising from or allegedly arising from any Hazardous
Activity conducted or allegedly conducted with respect to the Facilities or the
operation of the Acquired Companies prior to the Closing Date, or from Hazardous
Material that was (i) present or suspected to be present on or before the
Closing Date on or at the Facilities (or present or suspected to be present on
any other property, if such Hazardous Material emanated or allegedly emanated
from any of the Facilities and was present or suspected to be present on any of
the Facilities on or prior to the Closing Date) or (ii) Released or allegedly
Released by Sellers or any Acquired Company or any other Person for whose
conduct they are or may be held responsible, at any time on or prior to the
Closing Date.
Buyer will be entitled to control any Cleanup, any related Proceeding, and,
except as provided in the following sentence, any other Proceeding with respect
to which indemnity may be sought under this Section 10.3. The procedure
described in Section 10.9 will apply to any claim solely for monetary damages
relating to a matter covered by this Section 10.3.
10.4 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER
Buyer will indemnify and hold harmless Sellers, and will pay to Sellers the
amount of any Damages arising, directly or indirectly, from or in connection
with (a) any Breach of any representation or warranty made by Buyer in this
Agreement or in any certificate delivered by Buyer pursuant to this Agreement,
(b) any Breach by Buyer of any covenant or obligation of Buyer in this
Agreement, (c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Buyer (or any Person acting on its
behalf) in connection with any of the Contemplated Transactions, or (d) any
claim against the Sellers arising from their guarantys of the Company's
borrowing debt with Kennebunk Savings Bank and Bar Harbor Trust Bank, the
Company's capital leases with Cisco Systems, Rave, Advanta, UST Leasing and
Imperial, which debt and leases total approximately $1,154,651 as of July 1,
1999, as well as the following operating leases: Utilities, Inc., Bell Atlantic,
Cable & Wireless, Pitney
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Credit Corporation, and ATT (Lucent technologies).
10.5 TIME LIMITATIONS
If the Closing occurs, Sellers will have no liability (for indemnification or
otherwise) with respect to any representation or warranty, or covenant or
obligation to be performed and complied with prior to the Closing Date, other
than those in Sections 3.3, 3.11, 3.13, and 3.19, unless on or before August 15,
2000 Buyer notifies Sellers of a claim specifying the factual basis of that
claim in reasonable detail to the extent then known by Buyer; a claim with
respect to Section 3.3, 3.11, 3.13, or 3.19, or a claim for indemnification
or reimbursement not based upon any representation or warranty or any covenant
or obligation to be performed and complied with prior to the Closing Date, may
be made at any time. If the Closing occurs, Buyer will have no liability (for
indemnification or otherwise) with respect to any representation or warranty, or
covenant or obligation to be performed and complied with prior to the Closing
Date, unless on or before August 15, 2000 Sellers notify Buyer of a claim
specifying the factual basis of that claim in reasonable detail to the extent
then known by Sellers.
10.6 LIMITATIONS ON AMOUNT--SELLERS
Sellers will have no liability (for indemnification or otherwise) with respect
to the matters described in clause (a), clause (b) or, to the extent relating to
any failure to perform or comply prior to the Closing Date, clause (c) of
Section 10.2 until the total of all Damages with respect to such matters exceeds
$5,000, and then only for the amount by which such Damages exceed $5,000.
Sellers will have no liability (for indemnification or otherwise) with respect
to the matters described in clause (d) of Section 10.2 until the total of all
Damages with respect to such matters exceeds $5,000, and then only for the
amount by which such Damages exceed $5,000. However, this Section 10.6 will not
apply to any Breach of any of Sellers' representations and warranties of which
either Seller had Knowledge at any time prior to the date on which such
representation and warranty is made or any intentional Breach by either Seller
of any covenant or obligation, and Sellers will be jointly and severally liable
for all Damages with respect to such Breaches.
10.7 LIMITATIONS ON AMOUNT--BUYER
Buyer will have no liability (for indemnification or otherwise) with respect to
the matters described in clause (a) or (b) of Section 10.4 until the total of
all Damages with respect to such matters exceeds $5,000, and then only for the
amount by which such Damages exceed $5,000. However, this Section 10.7 will not
apply to any Breach of any of Buyer's representations and warranties of which
Buyer had Knowledge at any time prior to the date on which such representation
and warranty is made or any intentional Breach by Buyer of any covenant or
obligation, and Buyer will be liable for all Damages with respect to such
Breaches.
10.8 ESCROW; RIGHT OF SET-OFF
Upon notice to Sellers specifying in reasonable detail the basis for such
set-off, Buyer may set off any amount to which it may be entitled under this
Section 10 against the Escrow Account by giving notice of a Claim in such amount
under the Escrow Agreement. Neither the exercise of nor the failure to exercise
such right of set-off or to give a notice of a Claim under the Escrow Agreement
will constitute an election of remedies or limit Buyer in any manner in the
enforcement of any other remedies that may be available to it.
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10.9 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS
(a) Promptly after receipt by an indemnified party under Section 10.2, 10.4, or
(to the extent provided in the last sentence of Section 10.3) Section 10.3 of
notice of the commencement of any Proceeding against it, such indemnified party
will, if a claim is to be made against an indemnifying party under such Section,
give notice to the indemnifying party of the commencement of such claim, but the
failure to notify the indemnifying party will not relieve the indemnifying party
of any liability that it may have to any indemnified party, except to the extent
that the indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnifying party's failure to give such notice.
(b) If any Proceeding referred to in Section 10.9(a) is brought against an
indemnified party and it gives notice to the indemnifying party of the
commencement of such Proceeding, the indemnifying party will, unless the claim
involves Taxes, be entitled to participate in such Proceeding and, to the extent
that it wishes (unless (i) the indemnifying party is also a party to such
Proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with counsel satisfactory
to the indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Section 10 for any fees of other
counsel or any other expenses with respect to the defense of such Proceeding, in
each case subsequently incurred by the indemnified party in connection with the
defense of such Proceeding, other than reasonable costs of investigation. If the
indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or settlement of such claims may be effected by the indemnifying
party without the indemnified party's consent unless (A) there is no finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any Proceeding and the indemnifying party does not, within ten
days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party determines in good
faith that there is a reasonable probability that a Proceeding may adversely
affect it or its affiliates other than as a result of monetary damages for which
it would be entitled to indemnification under this Agreement, the indemnified
party may, by notice to the indemnifying party, assume the exclusive right to
defend, compromise, or settle such Proceeding, but the indemnifying party will
not be bound by any determination of a Proceeding so defended or any compromise
or settlement effected without its consent (which may not be unreasonably
withheld).
(d) Sellers hereby consent to the non-exclusive jurisdiction of any court in
which a Proceeding is brought against any Indemnified Person for purposes of any
claim that an Indemnified
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Person may have under this Agreement with respect to such Proceeding or the
matters alleged therein, and agree that process may be served on Sellers with
respect to such a claim anywhere in the world.
10.10 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS
A claim for indemnification for any matter not involving a third-party claim may
be asserted by notice to the party from whom indemnification is sought.
11. GENERAL PROVISIONS
11.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to this
Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives,
counsel, and accountants. Sellers will cause the Acquired Companies not to incur
any out-of-pocket expenses in connection with this Agreement. In the event of
termination of this Agreement, the obligation of each party to pay its own
expenses will be subject to any rights of such party arising from a breach of
this Agreement by another party.
11.2 PUBLIC ANNOUNCEMENTS
Any public announcement or similar publicity with respect to this Agreement or
the Contemplated Transactions will be issued, if at all, at such time and in
such manner as Buyer determines. Unless consented to by Buyer in advance or
required by Legal Requirements, prior to the Closing Sellers shall, and shall
cause the Acquired Companies to, keep this Agreement strictly confidential and
may not make any disclosure of this Agreement to any Person. Sellers and Buyer
will consult with each other concerning the means by which the Acquired
Companies' employees, customers, and suppliers and others having dealings with
the Acquired Companies will be informed of the Contemplated Transactions, and
Buyer will have the right to be present for any such communication.
11.3 CONFIDENTIALITY
Between the date of this Agreement and the Closing Date, Buyer and Sellers will
maintain in confidence, and will cause the directors, officers, employees,
agents, and advisors of Buyer and the Acquired Companies to maintain in
confidence, and not use to the detriment of another party or an Acquired Company
any written, oral, or other information obtained in confidence from written
information stamped "confidential" when originally furnished by another party or
an Acquired Company in connection with this Agreement or the Contemplated
Transactions, unless (a) such information is already known to such party or to
others not bound by a duty of confidentiality or such information becomes
publicly available through no fault of such party, (b) the use of such
information is necessary or appropriate in making any filing or obtaining any
consent or approval required for the consummation of the Contemplated
Transactions, or (c) the furnishing or use of such information is required by
legal proceedings.
If the Contemplated Transactions are not consummated, each party will return or
destroy as much of such written information as the other party may reasonably
request. Whether or not the Closing takes place, Sellers waive, and will upon
Buyer's request cause the Acquired
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Companies to waive, any cause of action, right, or claim arising out of the
access of Buyer or its representatives to any trade secrets or other
confidential information of the Acquired Companies except for the intentional
competitive misuse by Buyer of such trade secrets or confidential information.
11.4 NOTICES
All notices, consents, waivers, and other communications under this Agreement
must be in writing and will be deemed to have been duly given when (a) delivered
by hand (with written confirmation of receipt), (b) sent by telecopier (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
each case to the appropriate addresses and telecopier numbers set forth below
(or to such other addresses and telecopier numbers as a party may designate by
notice to the other parties):
Sellers: Philip Freed
2 Abbot Street
Danvers, Massachusetts 01923
Steven J. Gilbert
9 Rosewood Circle
Kennebunk, Maine 04043
Gary Seekins
Main Street West
Kennebunk, Maine 04043
Buyer: Log On America, Inc.
3 Regency Plaza
Providence, Rhode Island 02903
Attention: Chief Financial Officer
with a copy to: Frederick W. Stolle, Esq.
170 Westminster Street, 10th Fl.
Providence, Rhode Island 02903
Facsimile No.: 401.751.0031
11.5 JURISDICTION; SERVICE OF PROCESS
Any action or proceeding seeking to enforce any provision of, or based on any
right arising out of, this Agreement may be brought against any of the parties
in the courts of the State of Rhode Island, County of Providence, or, if it has
or can acquire jurisdiction, in the United States District Court for the
District of Rhode Island, and each of the parties consents to the jurisdiction
of such courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any action
or proceeding referred to in the preceding sentence may be served on any party
anywhere in the world.
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11.6 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
11.7 WAIVER
The rights and remedies of the parties to this Agreement are cumulative and not
alternative. Neither the failure nor any delay by any party in exercising any
right, power, or privilege under this Agreement or the documents referred to in
this Agreement will operate as a waiver of such right, power, or privilege, and
no single or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or privilege or the
exercise of any other right, power, or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right arising out of this Agreement
or the documents referred to in this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a party
will be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement or the documents referred to in this Agreement.
11.8 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with respect
to its subject matter (including the Letter of Intent between Buyer and Sellers
dated June 1999) and constitutes (along with the documents referred to in this
Agreement) a complete and exclusive statement of the terms of the agreement
between the parties with respect to its subject matter. This Agreement may not
be amended except by a written agreement executed by the party to be charged
with the amendment.
11.9 DISCLOSURE LETTER
(a) The disclosures in the Disclosure Letter, and those in any Supplement
thereto, must relate only to the representations and warranties in the Section
of the Agreement to which they expressly relate and not to any other
representation or warranty in this Agreement.
(b) In the event of any inconsistency between the statements in the body of this
Agreement and those in the Disclosure Letter (other than an exception expressly
set forth as such in the Disclosure Letter with respect to a specifically
identified representation or warranty), the statements in the body of this
Agreement will control.
11.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
Neither party may assign any of its rights under this Agreement without the
prior consent of the other parties, which will not be unreasonably withheld,
except that Buyer may assign any of its rights under this Agreement to any
Subsidiary of Buyer. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the benefit of the
successors and permitted assigns of the parties. Nothing expressed or referred
to in this
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Agreement will be construed to give any Person other than the parties to this
Agreement any legal or equitable right, remedy, or claim under or with respect
to this Agreement or any provision of this Agreement. This Agreement and all of
its provisions and conditions are for the sole and exclusive benefit of the
parties to this Agreement and their successors and assigns.
11.11 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by any court
of competent jurisdiction, the other provisions of this Agreement will remain in
full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
11.12 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience only and
will not affect its construction or interpretation. All references to "Section"
or "Sections" refer to the corresponding Section or Sections of this Agreement.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
11.13 TIME OF ESSENCE
With regard to all dates and time periods set forth or referred to in this
Agreement, time is of the essence.
11.14 GOVERNING LAW
This Agreement will be governed by the laws of the State of Rhode Island without
regard to conflicts of laws principles.
11.15 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which will
be deemed to be an original copy of this Agreement and all of which, when taken
together, will be deemed to constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed or caused to be executed and
delivered this Agreement as of the date first written above.
Sellers: /s/ Philip Freed /s/ Stephen J. Gilbert
----------------------------- ------------------------------
Philip Freed Stephen J. Gilbert
/s/ Gary Seekins
-----------------------------
Gary Seekins
Buyer:
Log On America, Inc.
By: /s/ David R. Paolo
-------------------------
David R. Paolo, President
48
Exhibit 10.8
Nortel Networks Inc.
Purchase Agreement
THIS AGREEMENT ("Agreement") by and between NORTEL NETWORKS INC., a Delaware
corporation ("Nortel Networks"), and LOG ON AMERICA, INC., a Delaware
corporation ("Company") is effective on the date last signed ("Effective Date").
The parties hereto agree as follows:
I. SCOPE
a) This Agreement sets forth the terms and conditions of Company's purchase of
Nortel Networks hardware ("Hardware") and the licensing of any software,
including associated documentation, ("Software") and any associated services,
including but not limited to, engineering, installation, maintenance, training
or repair ("Services"). "Products" shall mean individually and collectively, the
Hardware and Software.
b) Company shall purchase and/or license Products and Services with delivery and
installation in the United States for its own use and not for resale.
c) Supplemental terms for Company's purchase and/or license of various types of
Products may be incorporated herein by mutual written consent ("Supplemental
Terms Annex").
d) Company commits to purchase Products and Services as identified in Exhibit B,
to be shipped ("Committed Products") prior to March 31, 2000. Such Committed
Products shall be purchased under the terms and conditions of this Agreement, or
under the superseding provisions of a lease or loan agreement ("Financing
Agreement") which the parties intend to negotiate prior to shipment of those
Committed Products. Any Committed Products for which Company chooses to use
funds from the Financing Agreement shall hereinafter be referred to as "Financed
Product." The total purchase of the Committed Products shall be for an amount of
eight million ninety-three thousand six hundred and ninety-three dollars
($8,093,693) ("Commitment"). In the event Company does not submit Order(s) for
the total amount of the Commitment by March 1, 2000, then Nortel Networks shall,
on or about March 1, 2000 invoice Company for an amount equal to the difference
between the aggregate amount of the Commitment then due and the amount of the
Order(s) submitted against the Commitment by March 1, 2000, less any On-Site
Field Maintenance Services not utilized. The parties may mutually agree to
extend the March 31, 2000 date in the event there are circumstances beyond
either party's control.
2. TERM AND RENEWAL
This Agreement commences on the Effective Date and continues in effect for
twelve (12) months. Thereafter, it will automatically renew on the anniversary
hereof for additional terms of twelve (12) months each, unless either party
receives written notice from the other of its intent to terminate at least
thirty (30) days prior to the end of the then current term. Termination of this
Agreement shall not affect the rights or obligations of either party under any
accepted Order.
3. ORDERS
a) Nortel Networks may provide Company with a written quotation for Products and
Services ("Quotation"). Unless otherwise specified, the Quotation shall be valid
for ninety (90) days.
b) To purchase and/or license Products and/or Services, Company shall submit a
purchase order ("Order") to Nortel Networks specifying the following, if
applicable: (i) the types and quantities of Products and Services; (ii) the
applicable prices, charges and fees with respect to such Products and/or
Services; (iii) the Quotation number with respect to such Products and/or
Services; (iv) the addresses for delivery, performance and installation; (v) the
incorporation by reference of this Agreement; (vi) the requested ship date and
turnover date; (vii) the incorporation by reference of the Financing Agreement,
if all or part of the Order is for Financed Product; and (viii) any other
information required under this Agreement to be included in an Order.
c) Company, by issuing an Order for Products and/or Services, agrees to be bound
exclusively by the terms and conditions set forth herein. Any other terms and
conditions shown on any Order shall be deemed deleted and of no force and
effect. Orders are subject to acceptance by Nortel Networks; however, any Order
not rejected within fifteen (15) days of receipt by Nortel Networks shall be
deemed accepted. In the first Order for Financed Product, Company shall specify
the type of financing arrangement, by way of example, an operating or capital
lease, permitted under the Financing Agreement. All Orders for Financed Product
placed thereafter shall be governed by the same financing arrangement as
specified in such first Order.
d) Accepted Orders are non-cancellable without Nortel Networks' written consent.
Alterations, deductions or rescheduling to an accepted Order shall be mutually
agreed in writing, and Company may be subject to additional charges.
Privileged and Confidential Page 1
3/24/99
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e) Upon request, Company shall periodically submit to Nortel Networks a
non-binding forecast of specified Products that Company anticipates purchasing.
4. PAYMENT
Nortel Networks shall charge Company for any Product or Service ordered
hereunder in accordance with the price list then in effect or per written mutual
agreement. Company shall be invoiced as follows:
a) Invoices for any Product, including freight and insurance, are issued upon
delivery to the carrier at Nortel Networks' shipping point.
b) Invoices for Services are issued upon completion of the Services, except for
recurring Services which are invoiced quarterly or annually in advance.
c) All invoices shall be paid in full within thirty (30) days of the date
thereof, unless otherwise determined by a Financing Agreement, except that
payment for DMS Products shall be due as follows: twenty percent (20%) thirty
(30) days after Nortel Networks' receipt of the Order, forty percent (40%)
thirty (30) days after shipment of the Products, and forty percent (40%) thirty
(30) days after turnover of the Product to Company by Nortel Networks. For any
overdue payments, Nortel Networks shall be entitled to collect from company
interest charges, calculated daily from the date due, at one and one half
percent (1 1/2%) per month or such lesser rate as may be the maximum permissible
rate under applicable law.
5. TAXES
Company shall promptly pay directly or reimburse Nortel Networks all taxes and
charges imposed by any federal, state, or local governmental or taxing authority
relating to the purchase, ownership, possession, use, operation or relocation of
Products, excluding all taxes computed upon the net income of Nortel Networks,
unless Company provides a certificate of exemption for the applicable taxes
thirty (30) days prior to Product shipment.
6. SOFTWARE LICENSE
a) Subject to Company's payment to Nortel Networks of the applicable fees,
Nortel Networks hereby grants to Company, a personal, non-exclusive, right to
use the Software furnished to Company only in conjunction with Company's use of
the Hardware or other Nortel Networks' authorized material ("Licensed
Software"). Company is granted no title or ownership rights to the Software.
b) All Software shall be treated by Company as exclusive property of,
proprietary to, and a trade secret of Nortel Networks and/or its suppliers, as
appropriate, and Company shall: i) hold the Software, including any methods or
concepts utilized therein, in confidence for the benefit of Nortel Networks
and/or its suppliers; ii) not provide or make the Software available to any
person except to its employees on a 'need to know' basis and under the
confidentiality obligations set forth herein; iii) not reproduce, copy,
translate or modify the Software in whole or in part except as authorized by
Nortel Networks; iv) not attempt to decompile, reverse engineer, disassemble, or
in any other manner decode the Software; and v) upon termination of the license
for any reason, forthwith return the Software to Nortel Networks or certify the
destruction of the Software. In addition, Company shall abide by any additional
terms and conditions provided by Nortel Networks with respect to any Software of
any third party vendor or with respect to any Software accompanied by a
click-wrap or shrink-wrap license.
c) Company shall not have the right to (i) assign this license to use the
Licensed Software to any other person who acquires legal title to such Hardware
without the written consent of Nortel Networks, such consent not to be
unreasonably withheld; or (ii) sublicense the rights herein granted as to such
Licensed Software to any person who subsequently acquires the right to use such
Hardware without the written consent of Nortel Networks, such consent not to be
unreasonably withheld. Company shall indemnify and hold Nortel Networks and its
suppliers harmless from any loss or damage resulting from a breach of this
Article.
d) Certain Licensed Software, identified by Nortel Networks in the applicable
documentation, is based upon modular software architecture that by its nature is
intended to be modified ("Modifiable Software") to create derivative software
applications or files ("Applications"). Unless otherwise mutually agreed in
writing, Nortel Networks owns all intellectual property rights for any
Applications created by Nortel Networks, and Company shall own all intellectual
property rights for any Applications created by Company, provided that Company
shall have no intellectual property right in the Licensed Software from which
such Application was derived. NORTEL NETWORKS SHALL HAVE NO LIABILITY TO COMPANY
OR ANY THIRD PARTY WITH RESPECT TO ANY CLAIMS OR DAMAGES ARISING OUT OF THE
MODIFICATION OR CREATION OF ANY APPLICATION BY COMPANY.
e) Software may include "Non-Licensed Software" defined as (i) Software for
which the applicable right to use fees have not been paid; (ii) Software for
which a periodic right to use fee has expired; or (iii) Software for which the
incremental right to use fee is based upon additional feature activation or a
measure of usage (based upon the number of lines, ports, sites, users, or
assigned terminals or some other measure). Company shall submit to Nortel
Networks an Order for any Non-Licensed Software that Company desires to license,
renew or expand beyond the specified
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<PAGE>
usage level. The incremental or additional right to use fee shall be invoiced
upon Nortel Networks providing the additional Software to Company, whether via
issuance of a new activation code, electronically downloading or by shipment of
Software media. The activation of Non-Licensed Software shall not extend the
warranty period of the Software.
f) Nortel Networks may access by remote polling any site in which Software has
been installed to determine if any Non-Licensed Software has been activated.
Nortel Networks shall issue invoices to Company, in addition to those amounts
previously invoiced, for amounts payable including interest charges at the rate
specified in Article 4 hereof, as applicable, as a result of Company's
activation and/or usage of any Non-Licensed Software which Nortel Networks
determines as a result of remote polling. Nortel Networks shall be responsible
for any damages caused by such polling activity to the extent permitted
hereunder.
g) For support and warranty to be applicable, Company shall operate the Software
at Nortel Networks' current Software release level or within at least two (2)
previous Software release levels unless specified otherwise in Nortel Networks'
documentation.
7. TITLE AND DELIVERY
Risk of loss or damage to Products shall pass to Company upon delivery to the
initial delivery location. Title to the Hardware shall pass to Company upon
Company's final payment of the total purchase price and any additional monies
due. Notwithstanding the above, good title to any Hardware that is Financed
Product shall vest in Company only at such time as when Company has fulfilled
all financial and other requirements associated with the passage of title under
the Financing Agreement. Freight and insurance shall be invoiced to Company.
Company hereby grants Nortel Networks a purchase money security interest in the
Products and proceeds thereof until the total amount payable to Nortel Networks
on account of such Products is satisfied. Company shall cooperate in the
execution, preparation and filing of such instruments as Nortel Networks deems
necessary to perfect and maintain such security interest. Company authorizes
Nortel Networks to file financing or continuation statements and amendments
thereto, relating to all or any part of the Products in an Order without
signature of the Company where permitted by law. A reproduction of any financing
statement covering the Products or any part thereof shall be sufficient as a
financing statement and may be filed as such.
8. ACCEPTANCE
a) If Nortel Networks accepts a furnish-only Order from Company, Nortel Networks
shall, prior to delivery, perform such factory tests as Nortel Networks deems
appropriate to confirm that such Products are in accordance with the standard
applicable specifications identified by Nortel Networks ("Specifications").
Company shall be deemed to have accepted such Products upon receipt thereof at
the initial delivery location.
b) When an accepted Order requires installation Services, Company shall have the
installation sites(s) ready on time and in accordance with Nortel Networks'
requirements. Company shall reimburse Nortel Networks for additional expenses,
including storage costs, and all Products shall be deemed shipped and delivered
for all purposes upon storage. Acceptance by Company of an installed Product
shall be deemed to have occurred upon completion of Nortel Networks'
installation Services in accordance with Nortel Networks' procedures and
practices, as evidenced by test results showing that the Product meets the
applicable parameters in the Specifications. Acceptance shall not be postponed
due to any deficiencies not imputable to Nortel Networks, including but not
limited to, incompleteness or inaccuracy of information provided by Company and
inadequacy or deficiencies of equipment or services supplied by Company and
tested in conjunction with the Product. Unless it occurs earlier, acceptance
shall be deemed upon placement of any Product into revenue-generating service.
c) To the best of Company's knowledge and prior to issuing any Order for
Services, Company shall notify Nortel Networks in writing of the existence of
all hazardous materials as defined in any applicable federal, state or local
environmental law, ordinance, rule or regulation ("Hazardous Materials") that
Nortel Networks may encounter during the performance of such Services. If
Company breaches such obligations, (i) Nortel Networks may discontinue the
performance of the Services until all Hazardous Materials have been removed at
Company's expense; and (ii) Company shall defend, indemnify and hold Nortel
Networks harmless from any and all damages, claims, losses, liabilities and
expenses, including attorney's fees, which arise out of Company's breach of such
obligations.
9. PRODUCT WARRANTY
a) Nortel Networks warrants (i) the Hardware to be free from defective materials
and faulty workmanship attributable to Nortel Networks; (ii) the Licensed
Software to be free from any material, service-affecting nonconformance to the
Specifications; and (iii) the installation Services to be free from defects in
workmanship during the warranty period ("Warranty Period"). The Warranty Period
varies based upon Product type. Unless otherwise specified in writing in the
Quotation, Supplemental Terms Annex, price list or Specifications, the Warranty
Period for Hardware and Software shall be twelve (12) months from the ship date
and the Warranty Period for installation Services shall be twelve (12) months
from the completion date.
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<PAGE>
b) Warranty coverage shall be limited to the repair or replacement, at Nortel
Networks' discretion, of defective hardware and for labor associated with
Hardware replacement. Any Hardware repaired or replaced during the Warranty
Period shall be warranted in accordance herewith for the greater of ninety (90)
days from the date the repair is effected or the replacement is shipped or the
balance of the original Hardware Warranty Period. Replacement Hardware may be
new or reconditioned to perform as new, at Nortel Networks' option.
c) If Licensed Software fails to so function, Nortel Networks' sole obligation
under this warranty is to, at Nortel Networks' option, repair, modify or take
such other action as Nortel Networks deems appropriate to remedy such failure.
d) The warranties provided herein shall not apply where the non-conformance is
due to (i) accident, fire, explosion, power failure, power surge or other power
irregularity not attributable to Nortel Networks provided equipment, lightning,
alteration, abuse, misuse or repair not performed by Nortel Networks; (ii)
improper storage; (iii) failure to comply with all specified applicable
environmental requirements for the Products; (iv) improper installation,
maintenance, operation or other service in connection with the Products not
performed by Nortel Networks; (v) use in conjunction with an incompatible
product or a product not purchased from Nortel Networks; (vi) any error, act or
omission by anyone other than Nortel Networks; or (vii) where written notice of
the defect has not been given to Nortel Networks within the applicable Warranty
Period.
e) The warranties set forth herein shall not apply to any (i) hardware not of
Nortel Networks manufacture, software not owned by Nortel Networks or
Applications created by Company; and (ii) any Non-Licensed Software activated
without Nortel Networks' consent. Nortel Networks shall pass through to Company
any warranty rights granted to Nortel Networks by the vendor of any third party
hardware or software. In addition, the foregoing warranties shall not apply to
items normally consumed during Product operation such as but not limited to
lamps and fuses.
f) THE WARRANTIES AND REMEDIES SET FORTH HEREIN CONSTITUTE THE ONLY WARRANTIES,
OBLIGATIONS OR CONDITIONS OF NORTEL NETWORKS WITH RESPECT TO THE PRODUCTS AND
SERVICES AND ARE COMPANY'S SOLE AND EXCLUSIVE REMEDIES IN THE EVENT THAT SUCH
WARRANTIES ARE BREACHED. THEY ARE IN LIEU OF ALL OTHER WARRANTIES OR CONDITIONS,
WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
NORTEL NETWORKS SHALL NOT BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL,
PUNITIVE OR CONSEQUENTIAL DAMAGES, INCLUDING LOST REVENUES OR PROFITS OR OTHER
ECONOMIC LOSS, OF ANY NATURE WHATSOEVER ARISING OUT OF NORTEL NETWORKS' BREACH
OF WARRANTY OR CONDITION. NORTEL NETWORKS SHALL NOT BE RESPONSIBLE FOR ANY
WARRANTY OFFERED BY COMPANY TO ANY CUSTOMER(S) OF COMPANY.
10. CONFIDENTIAL INFORMATION
a) For the purposes hereof, "Information" shall mean all confidential or
proprietary information, including but not limited to, specifications, trade
secrets, drawings, documentation, know-how and pricing information, of every
kind or description which may be disclosed by one party to the other party in
connection with this Agreement; provided that, the disclosing party shall
clearly mark all such information disclosed in writing as such and, in the case
of oral disclosure, the disclosing party shall identify the confidential or
proprietary nature of any such information at the time of such oral disclosure
and shall provide a written summary of such information to the recipient within
fifteen (15) business days following such disclosure.
b) Each party which receives the other party's Information shall use reasonable
care to hold such Information in confidence and not disclose such Information to
anyone except its employees and employees of a Nortel Networks affiliate with a
need to know. The receiving party shall not reproduce Information, except to the
extent reasonably required for the performance of its obligations pursuant to
this Agreement and in connection with any permitted use of such Information.
Company shall take reasonable care to use Nortel Networks' Information only for
study, operating, or maintenance purposes in connection with Company's use of
Products furnished by Nortel Networks pursuant to this Agreement. Company will
comply with any limitations on use contained in documentation provided
hereunder.
c) The obligations of either party pursuant to this Article shall not extend to
any Information which (i) a recipient can demonstrate through written
documentation was already known to the recipient prior to its disclosure to the
recipient; (ii) becomes known or generally available to the public (other than
by act of the recipient) subsequent to its disclosure to the recipient; (iii) is
disclosed or made available in writing to the recipient by a third party having
a bona fide right to do so and without similar confidentiality obligations; (iv)
is independently developed by recipient as demonstrated by the business records
of the recipient; or (v) is required to be disclosed by subpoena or other
process of law, provided that the recipient shall notify the disclosing party
promptly of any such subpoena or other process of law requiring disclosure.
II. EXCUSABLE DELAYS
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<PAGE>
Except as otherwise provided herein, neither party shall be liable for any
delay, loss or damage resulting from any cause beyond its reasonable control,
such as, but not limited to, compliance with any law, order, regulation, or
ordinance; fire, explosion, or act of nature; labor difficulties, unavailability
of supplies of energy or power; or acts of third parties.
12. PATENTS, TRADEMARKS AND COPYRIGHT
a) Nortel Networks shall, at its own expense, defend Company in any legal action
in the United States, alleging that any Product or any portion thereof, other
than a third party product not incorporated during Nortel Networks'
manufacturing process, directly infringes any United States patent, trademark or
copyright, whether the infringement pertains to the manufacture, purchase, sale
or use of the Product or any portion thereof (an "Infringement Claim"). Such
defense is subject to the Product not having been modified by Company and having
been utilized in the manner specified by Nortel Networks. In any such legal
action Nortel Networks will satisfy any final award for infringement. As a
condition of such defense by Nortel Networks, Company shall notify Nortel
Networks promptly in writing upon becoming aware of any pending legal action and
shall cooperate fully with Nortel Networks in the defense or settlement of same.
Nortel Networks shall have sole control over the selection of counsel and the
defense and settlement of such legal action. Upon notification by Nortel
Networks of an actual or potential Infringement Claim which Nortel Networks
deems significant, Company shall return to Nortel Networks the affected
Product(s) in return for a refund of the depreciated value, as carried on
Company's books, of the Product(s) so returned.
b) If by reason of any such legal action Company shall be prevented from using
any Product, Nortel Networks shall at its option and expense:
(1) procure for Company the right to continue using the alleged
infringing Product(s);
(2) replace or modify the same an equivalent Product(s) so that
Company's use is non-infringing; or
(3) accept return of the affected portion of the Product(s) and refund
to Company the depreciated value (as carried on the Company's books)
of such Product(s).
c) Nortel Networks shall have no liability in respect of any Infringement Claim
based on the use of a Product in the event that such Product: (i) is
manufactured, designed or supplied by Nortel Networks in accordance with any
design or special instruction furnished by Company; (ii) is used by Company in a
manner or purpose not contemplated or allowed by this Agreement; (iii) is used
by Company in combination with other products not provided by Nortel Networks,
including any software developed by Company through the permitted use of
Products furnished hereunder, provided that the Infringement Claim arises from
such combination or the use thereof; or (iv) is modified by Company without
Nortel Networks' authorization or, in the case of Modifiable Software, any
Company created Applications. In such cases, Company shall indemnify and hold
Nortel Networks harmless against any loss, cost, expense, damage, settlement or
other liability, including but not limited to, attorneys' fees, which may be
incurred by Nortel Networks with respect to any Infringement Claim. Nortel
Networks shall not be liable for, and Company shall indemnify Nortel Networks
for, any Infringement Claim of which Nortel Networks has notified the Company,
and Company continues use of the affected Product.
d) Nortel Networks' cumulative liability to Company shall not exceed one hundred
percent (100%) of the purchase price of the Product giving rise to the
Infringement Claim(s).
e) THE PROVISIONS OF THIS ARTICLE SHALL CONSTITUTE THE EXCLUSIVE RECOURSE OF
EACH PARTY AND THE ENTIRE LIABILITY OF EACH PARTY WITH RESPECT TO ANY ACTUAL OR
ALLEGED INFRINGEMENT OF ANY PATENT, COPYRIGHT OR TRADEMARK RIGHTS.
13. LIABILITY
Each party hereto shall indemnify and hold the other harmless from any
liabilities, claims or demands, including the costs, expenses and reasonable
attorney's fees on account thereof, that may be made by anyone for bodily
injuries, including death, or damage to tangible property, resulting from the
infringement of property rights or others, negligence and/or willful misconduct
of that party, its employees or agents in the performance of this Agreement.
Each party shall defend the other at the other's request against any such
liability, claim or demand. Each party shall notify the other promptly of
written claims or demands against such party of which the other party is
responsible hereunder. If the damage is so determined to be from the negligence
or willful misconduct of both parties, then any such damages or costs, including
reasonable attorneys' fees, shall be allocated between the parties in accordance
with the respective percentages of fault.
14. DEFAULT
a) In the event of any material breach of this Agreement, including but not
limited to, any nonpayment of any amount due Nortel Networks hereunder or
default of Company under the Financing Agreement where such default has not been
cured within the applicable cure period provided therein, by either party which
shall continue for thirty (30) or more days after written notice of such breach,
including a reasonably detailed statement of the nature of such breach, shall
have been given to the breaching party by the aggrieved party, the aggrieved
party shall be
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<PAGE>
entitled, subject to any limitations contained in this Agreement, to avail
itself of any and all remedies available at law or equity, and if the aggrieved
party is Nortel Networks, to suspend performance of all of its obligations
hereunder for so long as the breach continues uncorrected.
b) Nortel Networks may suspend its performance by written notice to Company and
forthwith remove and take possession of any portion of any Product to which
Nortel Networks holds title, or a perfected security interest, if Company, prior
to payment to Nortel Networks of the total purchase price and all additional
monies due, becomes insolvent or bankrupt, makes a general assignment for the
benefit of, or enters into any arrangement with, creditors, files a voluntary
petition under any bankruptcy, insolvency, or similar law, or has proceedings
under any such laws or proceedings seeking appointment of a receiver, trustee or
liquidator instituted against it which are not terminated within thirty (30)
days of such commencement.
c) IN NO EVENT SHALL NORTEL NETWORKS BE LIABLE FOR ANY INDIRECT, INCIDENTAL,
SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES OF ANY NATURE WHATSOEVER FOR ANY
BREACH OF THIS AGREEMENT OR OTHERWISE. THIS LIMITATION SHALL SURVIVE ANY
TERMINATION OF THIS AGREEMENT.
d) Except for actions to enforce payment of any amounts due hereunder, any
action for breach of this Agreement or to enforce any right hereunder shall be
commenced within three (3) years after the cause of action accrues or it shall
be deemed waived and barred.
15. ASSIGNMENT
Neither Company nor Nortel Networks may assign or transfer this Agreement or any
rights hereunder without the prior written consent of the other, such consent
not to be unreasonably withheld. Notwithstanding the foregoing, Nortel Networks
may assign or subcontract this Agreement or any of its obligations hereunder to
its parent or any affiliated company. Company hereby consents, without
qualification, to the sale of receivables by Nortel Networks without the
necessity of further notice thereof and Nortel Networks may disclose the
provisions of this Agreement to prospective purchasers of such receivables
thereof, and their agents.
16. GOVERNING LAW
The construction, interpretation and performance of this Agreement shall be
governed by the laws of the State of Delaware, except for its rules with respect
to the conflict of laws.
17. NOTICE
All notices given hereunder shall be in writing and are deemed given when
delivered by (i) hand; (ii) facsimile transmission (confirming the same by
mail); (iii) certified mail; or (iv) overnight delivery service addressed as
follows:
If to Company:
Log On America, Inc.
3 Regency Plaza
Providence, Rhode Island 02903
Attention: David R. Paolo
Facsimile: (401) 459-6222
If to Nortel Networks:
Nortel Networks Inc.
4001 East Chapel Hill -- Nelson Hwy.
Research Triangle Park, N. Carolina 27709
Attention: VP, Marketing - Contracts
Facsimile: (919) 997-4495
Either party hereto may change its address by a notice given to the other party
hereto in the manner set forth above.
18. ADDITIONAL TERMS
a) Company shall not export, nor cause or allow to be exported by Company's
actions or inactions, Products or technical information received hereunder to
any country or foreign nationals of any country except in compliance with United
States laws and regulations concerning export and with the prior written
permission of Nortel Networks. Company shall obtain all required government
authorizations prior to undertaking export of Products or technical information.
b) Any terms of this Agreement which by their nature are intended to survive
shall survive the termination of this Agreement.
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<PAGE>
c) Notwithstanding the provisions of Article 4, in the event of any change in
the Specifications, manufacturing or delivery processes as a result of
imposition of governmental requirements, Nortel Networks may, upon prior notice
to Company, increase its prices, charges and fees to cover Nortel Networks'
direct and indirect costs resulting from such change.
d) If any provision hereof is determined to be legally unenforceable or invalid,
the remaining provisions shall continue in full force and effect and the parties
shall substitute a provision which most closely approximates the economic effect
and intent of the invalid provision. This Agreement may not be altered or
amended except in writing expressly intending such alteration or amendment and
signed by authorized representatives of each party hereto. Company acknowledges
that it has not relied on any representations or warranties other than those
expressly set forth in this Agreement.
e) A party shall not release any advertising or other publicity relating to this
Agreement or the contents hereof without the prior written approval of the other
party. Each party shall take reasonable precautions to keep the existence and
the contents of this Agreement confidential so long as this Agreement remains in
effect and for five (5) years thereafter, except as may be otherwise expressly
provided in this Agreement or as may be reasonably required to enforce this
Agreement by law.
f) The failure by either party hereto at any time to require performance by the
other party or to claim a breach of this Agreement shall not be construed as
affecting any subsequent breach or the right to require the performance with
respect thereto.
g) This Agreement, applicable Supplemental Terms Annex(es) and Exhibits B and C
which are incorporated herein, comprise all the terms, conditions and agreements
of the parties hereto with respect to the subject matter hereof and supersedes
all previous negotiations, proposals, commitments, writings, publications and
understandings of any nature whatsoever.
IN WITNESS WHEREOF, the parties by their duly authorized representatives have
executed this Agreement.
NORTEL NETWORKS INC
By: ______________________________
Title: ___________________________
Date: ____________________________
LOG ON AMERICA, INC.
By: ______________________________
Title: ___________________________
Date: ____________________________
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[LOGO] Fleet Exhibit 10.9
PLEDGE AGREEMENT
LOG ON AMERICA, INC., a corporation duly organized and existing by and under the
laws of the State of Delaware, having an office located at Three Regency Plaza,
Providence, Rhode Island 02903, (hereinafter jointly and severally if more than
one, referred to herein as the "Pledgor"), and FLEET NATIONAL BANK, a banking
institution duly organized and existing by and under the laws of the United
States of America, having an office located at 111 Westminster Street,
Providence, Rhode Island 02903, (hereinafter referred to as the "Bank"), hereby
agree as follows:
1. Definitions. The following definitions apply:
Borrower: shall mean LOG ON AMERICA, INC. (hereinafter jointly and severally if
more than one, referred to herein as "Borrower").
Liabilities: All obligations, indebtedness and liability of any type of the
Borrower and the Pledgor to the Bank, which arise out of or in connection with
or which in any way relates to that certain Promissory Note from the Borrower to
the Bank in the original principal amount of Four Million ($4,000,000.00)
Dollars, (hereinafter referred to herein as the "Loan") executed in connection
herewith, whether now existing or hereafter incurred, whether direct, indirect,
absolute or contingent, whether otherwise guaranteed or secured, and howsoever
evidenced or acquired, and expenses or costs incurred by the Bank in the
administration of this Pledge Agreement and the enforcement of any of its rights
with respect thereto.
For and in consideration of the sum of TEN ($10.00) DOLLARS, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and for and in consideration of inducing the Bank to lend to the
Borrower the principal sum referred to hereinabove, the Pledgor hereby pledges
to the Bank as collateral security for said loan, the following pledged
collateral:
Pledged Collateral: (i) The property delivered or otherwise transferred by the
Pledgor to the Bank and consisting, as of the date of this Agreement, of the
property described on affixed Exhibit A attached hereto and made a part hereof;
and/or any and all substitutions, additions and accessions thereto upon which
the Pledgor hereby grants and pledges to the Bank and upon which the Bank shall
have absolute control over the pledged collateral which shall include, but not
be limited to, investment property, securities, security entitlements and any
and all financial assets credited to said pledged collateral; (ii) any and all
securities (both certificated and uncertificated), closely held capital stock,
notes, mortgages, instruments, documents, letters of credit, certificates of
deposit, deposit accounts, bank accounts, balances in any account of the Pledgor
with the Bank, and all other property interests which may subsequently be
delivered or transferred by the Pledgor to the Bank; (iii) any of the foregoing
when put in transit to the Bank; (iv) in the case of securities and closely held
capital stock, Pledged Collateral shall include, without limitation, all shares
of any class of the capital stock of the issuer which shall be issued or
distributed (by way of stock dividends or otherwise) or sold by the issuer to
the Pledgor at any time or times after the date of this Agreement or which shall
be purchased or otherwise acquired by or on behalf of the Pledgor from the
issuer or from any other person or persons at any time or times after the date
of this Agreement; all dividends of every kind which shall become and be due and
payable or distributable on or in respect of all or any of the securities and
closely held capital stock; all payments of every kind whatever which shall
become and be due and payable or distributable on account of the purchase,
redemption, repurchase or other retirement of all or any of the securities and
closely held capital stock; all other distributions of every kind (including,
without limitation, all capital distributions) which shall become and be due and
payable or distributable on or in respect of the securities and closely held
capital stock; and (v) all proceeds of the foregoing, including, without
limitation, the roll-over or reinvested proceeds of the foregoing. Any delivery
or transfer of any of the Pledged Collateral to an agent or custodian designated
by the Bank shall be deemed a delivery or transfer to the Bank.
2. Security Interest. The Pledgor hereby pledges, hypothecates, and impresses
the Pledged Collateral with a lien in favor of the Bank, and grants to the Bank
a security interest in the Pledged Collateral, to secure the punctual payment
and performance of all Liabilities.
3. Pledgor's Additional Obligations. The Pledgor agrees that: (1) any
distribution in kind received by the Pledgor from any party for or on account of
the Pledged Collateral, including distributions of stock as a dividend or split
of any of the Pledged Collateral, shall be immediately delivered to the Bank in
the form received with any recurred endorsement; (2) additional collateral in
form and kind satisfactory to the Bank will be deposited by the Pledgor with the
Bank if the Bank at any time deems the Pledged Collateral insufficient or
unsatisfactory; (3) any note or other instrument executed and delivered to the
Pledgor by any party to evidence any obligation of such party with respect to
the Pledged Collateral shall be immediately delivered with any required
endorsement to the Bank. All such items shall be held by the Bank in accordance
with the terms of this Pledge Agreement.
The Pledgor agrees to pay to the Bank on demand all reasonable fees, costs and
expenses incurred by the Bank in connection with the administration of this
Pledge Agreement, including, without limitation, overnight courier fees, lien
search fees, and filing and recording fees.
<PAGE>
The Pledgor agrees to execute and deliver to the Bank and/or third parties
designated by the Bank such additional documents, notices, requests and other
instruments as the Bank deems necessary or advisable to protect the Bank's
rights under this Pledge Agreement.
4. Certain Rights and Duties of Bank. The Pledgor acknowledges that: the Bank
has no duty of any type with respect to the Pledged Collateral except for the
use of due care in safekeeping any of the Pledged Collateral actually in the
physical custody of the Bank; prior to the occurrence of any event of default
described in the succeeding paragraph the Bank's rights with respect to the
Pledged Collateral shall be limited to the Bank's rights as a secured party and
pledgee and the right to perfect its security interest, preserve, enforce and
protect the lien granted hereunder and its interest in the Pledged Collateral;
and the Bank may sell, assign or grant participations in any of the Liabilities
and any of the Pledged Collateral and that the Bank's purchaser, assignee or
participant shall have the same rights and privileges with respect to such
Liabilities and Pledged Collateral as the Pledgor grants to the Bank under this
Pledge Agreement. With respect to any Pledged Collateral with a stated maturity
date (including, without limitation, certificates of deposit and other term
accounts), the Bank is authorized and directed, upon maturity, to roll-over and
reinvest such Pledged Collateral in a similar investment, with such tenor and
interest rate or yield as the Bank, in its discretion, deems to be reflective of
prevailing market conditions. Prior to the occurrence of any event of default
described in the succeeding paragraph, the Bank agrees that it will not vote any
Pledged Collateral constitution securities or closely held capital stock.
5. Events of Default; Remedies. Upon occurrence of any event of default under
any instrument evidencing any of the Liabilities or of any of the following
events: (1) default in the payment or performance of any other of the
obligations or liabilities of the Pledgor under any agreement between the Bank
and Pledgor; (2) the Pledgor, if a business entity, discontinues business
operations at any of the Pledgor's locations; (3) the Pledgor is generally
unable to pay debts as they become due or the Bank deems itself insecure; (4)
the Pledgor makes a general assignment for the benefit of creditors; (5) the
entry of a decree, order or order for relief by a court having jurisdiction of a
case initiated by or against the Pledgor under the federal bankruptcy code or
any other federal or state laws pursuant to which a receiver, liquidator,
assignee, custodian, trustee, sequestrator, debtor in possession, examiner or
other similar official, is appointed for the Pledgor or any of the Pledgor's
property with or without consent, for any purpose whatsoever; (6) a substantial
part of the property of the Pledgor is taken by attachment, execution or any
other form of legal process; (7) the assertion of any levy, seizure or
attachment on the Pledged Collateral; or (8) death of an individual Pledgor or
dissolution or termination of legal existence of a corporate, limited liability
company, partnership or trust Pledgor, then the Bank, with or without notice to
the Pledgor and without demand for additional collateral, may (a) transfer the
Pledged Collateral into the name of the Bank or its nominee and vote any Pledged
Collateral constituting securities or closely held capital stock, (b) sell at
public or private sale any or all of the Pledged Collateral, which the Bank may
purchase free from any right of [ILLEGIBLE]mption; or (c) at its discretion in
its own name or in the name of Pledgor take any action for the collection of
the Pledged Collateral, including the filing of a proof of claim in insolvency
proceedings, and may receive the proceeds thereof and execute releases therefor.
After deducting its expenses, including reasonable attorney's fees (which may
include costs allocated by the Bank's internal legal department), incurred in
the sale or collection of the Pledged Collateral, the Bank shall apply the
proceeds to the Liabilities and shall account to the Pledgor for any surplus.
The Pledgor agrees that the Bank has no obligation to sell or otherwise
liquidate the Pledged Collateral in any particular order or to apply the
proceeds thereof to any particular portion of the Liabilities. The Pledgor
further agrees that after the occurrence of an event of default, the Bank shall
have no obligation to vote any Pledged Collateral constituting securities or
closely held capital stock.
In connection with an secured party's sale, the Bank is authorized, if it deems
it advisable to do so, in order to comply with any applicable securities laws,
to restrict the prospective bidders or purchasers to persons who will represent
and agree that they are purchasing the Pledged Collateral for their own account
for investment, and not with a view to the distribution or re-sale thereof.
Sales made subject to such restriction shall be deemed to have been made in a
commercially reasonable manner.
6. Power of Attorney, Etc. The Pledgor hereby irrevocably constitutes and
appoints the Bank the true and lawful attorney-in-fact for and on behalf of the
Pledgor with full power of substitution and revocation in its own name or in the
name of the Pledgor to make, execute, deliver and record any and all financing
statements, continuation statements, assignments, proofs of claim, powers of
attorney, leases, discharges or other instruments or agreements which the Bank
in its sole discretion may deem necessary or advisable to perfect, preserve,
enforce or protect the lien granted hereunder and its interest in the Pledged
Collateral and to carry out the purposes of this Pledge Agreement, including but
without limiting the generality of the foregoing, any and all proofs of claim in
bankruptcy or other insolvency proceedings of the Borrower, with the right to
collect and apply to the Liabilities all distributions and dividends made on
account of the Pledged Collateral. The rights and powers conferred on the Bank
by the Pledgor are expressly declared to be coupled with an interest and shall
be irrevocable until all the Liabilities are paid and performed in full. A
carbon, photographic, or other reproduction of a security agreement (including
this Pledge Agreement) or a financing statement is sufficient as a financing
statement.
7. Miscellaneous. This Pledge Agreement and the Pledged Collateral shall not be
in any way be affected by the extension of time or renewal of any of the
Liabilities, the modification in any manner or the taking or release in whole or
in part of any security therefor or the obligations of any endorsers, sureties,
guarantors or other parties or the granting of any other indulgences to the
Borrower or to the Pledgor. No termination of this Pledge Agreement shall be
effective in an event until the Bank in its discretion determines that the
Liabilities of the Borrower covered by this Pledge Agreement have been satisfied
in full.
8 Notices. Except as otherwise specifically provided for herein, any notice,
demand or communication hereunder shall be given in writing (including facsimile
transmission or telex) and mailed or
<PAGE>
delivered to each party at its address set forth below, or, as to each party, at
such other address as shall be designated by such party by a prior notice to the
other party in accordance with the terms of this provision.
Any notice to the Bank shall be sent as follows:
FLEET NATIONAL BANK
111 Westminster Street
Providence, Rhode Island 02903
Attention: Paul Nunes, Senior Vice President
Any notice to the Pledgor shall be sent as follows:
LOG ON AMERICA, INC.
Three Regency Plaza
Providence, Rhode Island 02903
Attention: David Paolo, President
All notices hereunder shall be effective (i) five (5) business days after such
notice is mailed, by registered or certified mail, postage prepaid (return
receipt requested), (ii) upon delivery by hand, (iii) upon delivery if delivered
by overnight courier (such delivery to be evidenced by the courier's records),
and (iv) in the case of any notice or communication by telex or telecopy, on the
date when sent.
9. Joint and Several Obligations; Construction. If more than one Pledgor has
signed this Pledge Agreement, the obligations of the Pledgor are joint and
several. The term "Pledgor" and all pronouns referring thereto as used herein
shall be construed in the masculine, feminine, neuter or singular or plural as
the context may require.
10. Successors and Assigns. This Pledge Agreement shall inure to the benefit of
the Bank and its successors and assigns and shall bind the Pledgor and the
successors, representatives, legal representatives and/or heirs and assigns of
the Pledgor.
This Pledge Agreement has been executed by the Pledgor and the Bank as of the
day and date written hereinbelow.
PLEDGOR:
LOG ON AMERICA, INC.
/s/ David Paolo
- -------------------------------------------
By: David Paolo, duly authorized and in his
capacity as President
Date: 8/10/99
-------------------------------------
EXECUTED IN THE PRESENCE OF:
/s/ [ILLEGIBLE]
- -------------------------------------------
Witness as to Pledgor
BANK:
FLEET NATIONAL BANK
By: /s/ [ILLEGIBLE]
---------------------------------------
Title: Senior Vice President
-------------------------------------
Date: 8/10/99
-------------------------------------
EXECUTED IN THE PRESENCE OF:
/s/ [ILLEGIBLE]
- -------------------------------------------
Witness as to Bank
SEE EXHIBIT "A" ATTACHED HERETO, MADE A PART HEREOF AND INCORPORATED HEREIN BY
REFERENCE.
<PAGE>
EXHIBIT A
(Description of Pledged Collateral)
- --------------------------------------------------------------------------------
I. Securities and Closely Held Capital Stock (Corporate)
Issuer No. of Shares Certificate No. Cusip No.
- ------ ------------- --------------- ---------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
II. Securities (U.S. Government & Federal Agency Securities)
Par Issue Interest Maturity
Description Value Cusip No. Date Rate Date
- ----------- ----- --------- ---- ---- ----
US GOVT & AGENCY OBLIGATIONS, Market Value: $5,000,000.00*
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
III. Certificates of Deposit
Issuer Par Value Interest Rate Maturity Date
- ------ --------- ------------- -------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IV. OTHER
THE COLLATERAL PLEDGED HEREIN SHALL BE HELD IN FLEET INVESTMENT MANAGEMENT
ACCOUNT NUMBER: ___________________________ (IN ITS ENTIRETY)*
- --------------------------------------------------------------------------------
*OR ANY AND ALL SUBSTITUTIONS AND/OR ADDITIONS ACCEPTABLE TO THE BANK ON THE
BANK'S SOLE AND ABSOLUTE DISCRETION
THE COLLATERAL PLEDGED HEREIN IN THE SOLE NAME OF THE PLEDGOR, LOG ON AMERICA,
INC. SHALL BE HELD IN ITS ENTIRETY, IN FLEET INVESTMENT MANAGEMENT ACCOUNT
NUMBER: ________________
Pledgor's Initials:
Log On America, Inc.
/s/ [ILLEGIBLE]
- -----------------
By: DP, President
Date: 8/11/99
-----------
<PAGE>
Joint Venture Agreements
1. See acquisition closing books
<PAGE>
[LETTERHEAD OF FLEET]
August 4, 1999
Log On America, Inc.
Three Regency Plaza
Providence, Rhode Island 02903
Attention: David Paolo, President
RE: $4,000,000.00 SECURED LINE OF CREDIT
Dear Mr. Paolo
Fleet National Bank, (the Bank) is pleased to offer its commitment to finance a
Secured Line of Credit pursuant to the terms and conditions detailed below:
BORROWER: Log On America, Inc. (a Delaware Corporation)
PLEDGOR: Log On America, Inc.
PRINCIPAL
AMOUNT: Four Million ($4,000,000.00) Dollars.
PURPOSE: Proceeds shall be used by the Borrower for working capital purposes
PRICING: A Fixed Rate of Interest equal to One (1) Month, Two (2) Month, Three
(3) Month or One (1) Year LIBOR plus One Hundred Fifty (150) Basis Points or,
the Bank's Floating Prime Rate of Interest.
MATURITY: Due and payable in full on August 15, 2001 (the "Maturity Date").
FEES: Waived.
REPAYMENT: Borrower shall be obligated to make and pay to the Bank interest
payments only, on a consecutive monthly basis. The entire principal balance plus
any and all accrued interest thereon and/or any and [ILLEGIBLE] other sums due
and payable pursuant to the terms and conditions contained in the promissory
note evidencing this loan shall be due and payable in full on the Maturity Date.
<PAGE>
COLLATERAL: This loan shall be fully secured by various marketable securities
held in the sole name of the Pledgor, Log On America, Inc. Said marketable
securities are more particularly described and designated in that certain Pledge
Agreement executed in connection herewith, which marketable securities shall be
held in Fleet Investment Management Account Number: __________________________.
The collateral pledged herein shall remain in the Bank's possession at all
times.
OTHER TERMS AND CONDITIONS:
1. This commitment letter is subject to any specific due diligence and necessary
internal review by the Bank of pending items. Borrower/Pledgor shall execute any
and all documents as may be reasonably required by the Bank and/or its counsel
from time to time (including documentation required subsequent to closing) in
order to close and manage the within facility in order to fully protect the
Bank's interest hereunder.
2. All closing documents shall be in form and substance satisfactory to the Bank
and/or its counsel with such provisions as the Bank may reasonably require to
protect its interest.
If you wish to accept the terms and conditions of the facility detailed above,
please sign below and return the same to me within 30 days of the date of this
letter. This commitment is not assignable and will expire if it is not accepted
during the aforementioned time period. Additionally, this commitment is subject
to the Borrower's/Pledgor's execution of all required loan documentation
(including this letter) containing terms and conditions acceptable to the Bank
and/or its counsel. Please note that the closing must take place within 60 days
from the date of this letter. If you have any questions prior to the loan
closing, please feel free to call me at 401-278-5075. Thank you for choosing
Fleet National Bank.
Sincerely,
/s/ Paul Nunes
Paul Nunes, Senior Vice President
Agreed to and accepted by
BORROWER/PLEDGOR:
LOG ON AMERICA, INC.
/s/ David Paolo
- -------------------------------------------
By: David Paolo, duly authorized and in his
capacity as President
Date: 8/10/99
--------
<PAGE>
PROMISSORY NOTE
MAXIMUM PRINCIPAL AMOUNT
$4,000,000.00
1. BORROWER: LOG ON AMERICA, INC.
2. BORROWER'S ADDRESS: Three Regency Plaza, Providence, Rhode Island 02903.
3. BANK: FLEET NATIONAL BANK
4. BANK'S ADDRESS: 111 Westminster Street, Providence, Rhode Island 02903.
5. INTEREST RATE: Shall mean One (1) Month, Two (2) Month, Three (3) Month or
One (1) Year LIBOR (as defined herein) plus One Hundred Fifty (150) Basis Points
or the Bank's Floating Prime Rate of Interest (as defined herein) to be elected
by the Borrower at the time each advance is made. With respect to each LIBOR
advance, no Interest Period applicable thereto shall extend beyond the Maturity
Date provided for herein and provided, further, that if prior to the end of any
such Interest Period (and within the time set forth herein) the Borrower and the
Bank fail to agree upon a new Interest Period therefor so as to maintain such
advance as a LIBOR advance, such LIBOR advance shall automatically be converted
to the Bank's Floating Prime Rate of Interest plus Zero Percent at the end of
such interest period and shall be maintained as such until a new LIBOR rate and
a new interest period therefor is agreed upon.
Loan Requests: Requests for LIBOR loans and for interest period subsequent to
the initial interest period therefor shall be made not less than two (2)
business days prior to the first day of each interest period applicable thereto.
Requests for Prime Rate loans may be made up until 1:00 p.m. on the date the
loan is to be made. Any request for a loan may be written or oral, but if oral,
written confirmation thereof must be received by the Bank within three (3)
business days thereafter.
6. PAYMENT SCHEDULE:
Interest: Commencing on the 10 day of September, 1999 and continuing on the same
date of each and every consecutive month thereafter, and until payment in full
of this Note, monthly payments of Interest only in arrears shall be due and
payable.
Principal: The entire principal balance shall be due and payable in full on the
Maturity Date (as defined herein). The final payment shall consist of the entire
balance of the funds due to the Bank whether for principal, interest, and/or any
and all other sums due and payable pursuant to the terms and conditions
contained herein.
7. MATURITY DATE: Each reference in this Note to the "Maturity Date" shall mean
AUGUST 15, 2001.
8. CHOICE OF LAW/BINDING EFFECT: This Note shall be construed in accordance with
and governed by the local laws including the conflict of laws rules, so-called)
of the State of Rhode Island.
9. SCHEDULE "A": Each reference made to Schedule "A" shall mean Schedule "A"
attached hereto made a part hereof and incorporated herein by reference. This
Note shall be subject to the terms and conditions set forth in said Schedule "A"
attached hereto.
10. LOAN AGREEMENT: That certain Pledge Agreement relating to the indebtedness
of the Borrower as evidenced hereby.
11. PROMISE TO PAY: FOR VALUE RECEIVED, the Borrower absolutely and
unconditionally promises to pay to the Bank, its assigns or order, on or before
the Maturity Date, the Maximum Principal Amount or, if less, the aggregate
unpaid principal amount of advances made by the Bank to the Borrower in
accordance with the terms and conditions contained herein, together with
interest in accordance with the Payment Schedule and at the Interest Rate on the
unpaid principal balance hereof from time to time outstanding. Notwithstanding
the foregoing, from and after demand and/or maturity, (including any accelerated
maturity), after judgment has been rendered on this Note, and/or from and after
any Event of Default (as defined herein), the entire principal balance plus any
and all other amounts outstanding and due and payable under this Note shall
bear interest at the rate of Four Percent (4.00%) per annum greater than the
applicable interest rate due and payable hereunder or up to the Maximum Interest
Rate allowable under applicable law until paid in full or until any event of
default has been fully cured in the sole and absolute discretion of the Bank. In
addition, Borrower's right to select pricing options as provided for hereunder
shall immediately cease. All interest payable hereunder shall be computed on the
basis of the actual number of days elapsed using a three hundred sixty (360) day
year.
12. MAXIMUM RATE OF INTEREST: All provisions of this Note are expressly subject
to the condition that in no event shall the amount paid or agreed to be paid to
the Bank hereunder and deemed interest under applicable law exceed the maximum
rate of interest on the unpaid principal balance of this Note allowed by
applicable law (the "Maximum Allowable Rate"), which shall mean the law in
effect as of the date of the execution of this Note, except that if there is a
change in such law which results in a higher Maximum Allowable Rate being
applicable to this Note, then this Note shall be governed by such amended law
from and after its effective date. In the event that fulfillment of any
provision of this Note results in the interest rate hereunder being in excess of
the Maximum Allowable Rate, the obligation to be fulfilled shall automatically
be reduced to eliminate such excess. If, notwithstanding the foregoing, the Bank
receives an amount which under applicable law would cause the interest rate set
<PAGE>
forth in this Note to exceed the Maximum Allowable Rate, the portion thereof
which would be excessive shall automatically be applied to and deemed a
prepayment of the unpaid principal balance of the Note and not a payment of
interest.
13. ADVANCES: So long as the Borrower is not in default pursuant to the terms
and conditions of this Note and/or any and all other documents or security
instruments which may in any way evidence, govern and/or secure this Note, the
Bank agrees to make advances to the Borrower until the maturity date provided
for herein or until the Bank's decision to collect the balance due hereunder,
whether upon demand, maturity, or availability of the Bank's commitment or upon
the occurrence of any Event of Default (as defined herein), provided, however,
that the aggregate principal amount of this Note does not exceed the maximum
permissible amount hereunder (as indicated on page one). If any advance is made,
the Bank may, at its option, record on the books and records of the Bank and
make an appropriate notation evidencing any such advance, each repayment on
account of the principal thereof, and the amount of interest paid. The Borrower
authorizes the Bank to maintain such records or make such notations and agrees
that the amount indicated on the books and records of the Bank as outstanding
from time to time shall constitute the amount owing to the Bank pursuant to this
Note. In the event of any conflict with the amount due and payable hereunder
pursuant to the books and records of the Bank, the books and records of the Bank
shall control any such disposition of the conflict absent manifest error. If for
any reason the outstanding principal balance of this Note should at any time
exceed the maximum permissible amount allowable hereunder, then in said event,
the Borrower shall, forthwith, and without demand [ILLEGIBLE]ny type,
immediately pay to the Bank an amount sufficient to reduce the outstanding
principal balance of this Note to the maximum amount permissible hereunder.
Failure to reduce the amount shall constitute an immediate event of default
hereunder.
Within the maximum permissible amount allowable hereunder and until demand
and/or maturity, the Borrower may borrow, repay and reborrow in accordance with
the terms and conditions contained herein. The Borrower shall access this line
of credit by a telephonic request for an advance, which will be disbursed to the
Borrower's demand deposit checking account with the Bank. LIBOR Advances
hereunder shall be in the minimum amount of Twenty Five Thousand ($25,000.00)
Dollars. Prime Rate advances hereunder shall be in the minimum amount of Ten
Thousand ($10,000.00) Dollars The Borrower accepts all risks inherent in such
requests for advances. The Borrower hereby absolves and indemnifies the Bank
from and against any and all damages, loss and liabilities of any nature
whatsoever which may result from an unauthorized telephonic request, a defective
transmission, or a telephonic request which is misunderstood by any Bank
employee. The Bank nor any of its directors, officers or employees shall be
under any duty to pass upon the validity, accuracy, authorization, effectiveness
or genuineness of any telephone request, and the Bank and its directors,
officers and employees shall be entitled to assume that any such telephonic
instructions are valid, effective, accurate, genuine and authorized. The
Borrower consents to the Bank's taping and recording of all telephonic
conversations relating to any such advances. Advances hereunder will be made
only if in the sole and absolute discretion and [ILLEGIBLE]on of the Bank there
has been no material adverse change in the financial condition or circumstances
of the Borrower.
14. PAYMENT PROVISIONS: All sums payable hereunder shall be payable in lawful
money of the United States of America and in immediately available funds at the
Bank's Address or at such other place or places as the Bank, its successors
and/or assigns (collectively the "Holder") may designate in writing. If this
Note or any payment hereunder becomes due on a Saturday, Sunday or other holiday
on which the Bank is authorized to close, the due date of this Note or payment
shall be extended to the next succeeding business day, but any interest or fees
shall be calculated based upon the actual time of payment. Each Note payment
(other than final payment in full of the Note) made by check drawn on a bank
other than the Bank shall be credited to the Note on the business day that funds
are deemed to be available under applicable federal law.
15. LIBOR: Each reference in this Note to LIBOR shall mean, as applicable to any
LIBOR Advance, the rate per annum (rounded upward, if necessary, to the nearest
1/32 of one percent) as determined on the basis of the offered rates for
deposits in U.S. dollars for a period of time comparable to such LIBOR Advance
which appears on the Telerate page 3750 as of 11:00 a.m. London time on the day
that is two (2) London Banking Days preceding the first day of such LIBOR
Advance; provided, however, if the rate described above does not appear on the
Telerate System on any applicable interest determination date, the LIBOR rate
shall be the rate (rounded upwards as described above, if necessary) for
deposits in dollars for a period substantially equal to the interest period on
the Reuters Page "LIBO" (or such other page as may replace the LIBO Page on that
service for the purpose of displaying such rates), as of 11:00 a.m. (London
Time), on the day that is two (2) London Business Days prior to the beginning of
such interest period. "Banking Day" shall mean in respect to any city any date
on which commercial banks are open for business in that city. If both the
Telerate and Reuters system are unavailable, then the rate for that date will be
determined on the basis of the offered rates for deposits in U.S. dollars for a
period of time comparable to such LIBOR Advance which are offered by four major
banks in the London interbank market at approximately 11:00 a.m. London time, on
the day that is two (2) London Banking Days preceding the first day of such
LIBOR advance as selected by the Calculation Agent. The principal London office
of each of the four major London banks will be requested to provide a quotation
of its U.S. dollar deposit offered rate. If at least two such quotations are
provided, the rate for that date will be the arithmetic mean of the quotations.
If fewer than two quotations are provided as requested, the rate for that date
will be determined on the basis of the rates quoted for loans in U.S. dollars to
leading European banks for a period of time comparable to such LIBOR Advance
offered by major banks in New York City at approximately 11:00 a.m. New York
City time, on the day that is two (2) London Banking Days preceding the first
day of such LIBOR Advance. In the event that the Bank is unable to obtain any
such quotation as provided above, it will be deemed that LIBOR pursuant to a
LIBOR Advance cannot be determined. In the event that the Board of Governors of
the Federal Reserve System shall impose a Reserve Percentage with respect to
LIBOR deposits of the Bank, then for any period during which such Reserve
Percentage shall apply LIBOR shall be equal to the amount determined above
divided by an amount equal to one minus the Reserve Percentage. The "Interest
Period" referred to herein shall mean that the period selected by the Borrower,
within the limitations contained in this Note, during which a LIBOR Advance may
bear interest at the LIBOR Rate plus the margin referred to herein.
<PAGE>
Prepayment of LIBOR Loans: The Borrower hereby indemnifies [ILLEGIBLE]e Bank
from and against any and all losses or expenses which the Bank may sustain or
incur as a consequence of the following: (a) the receipt or recovery by the
Bank, whether by acceleration or otherwise, of all or any part of a LIBOR
advance prior to the last day of an interest period applicable thereto; or; (b)
the conversion, prior to the last day of an applicable Interest Period into a
Prime Rate loan; or (c) the failure of the Borrower to borrow any LIBOR advance
after agreement shall have been reached with respect to the amount, interest
rate thereon and the Interest Period therefor. Without limiting the effect of
the foregoing, the amount to be paid by the Borrower to the Bank in order to so
indemnify the Bank for any loss occasioned by any of the events described
herein, and as liquidated damages therefor, shall be equal to the excess,
discounted to its present value as of the date paid to the Bank, of (i) the
amount of interest which otherwise would have accrued on the principal amount so
received, recovered, converted or not borrowed during the period (the "Indemnity
Period") commencing with the date of such receipt, recovery, conversion or
failure to borrow to the last day of the then applicable Interest Period for
such LIBOR advance at the rate of interest applicable to such Advance (or the
rate of interest agreed to in the case of a failure to borrow) provided for
herein (prior to default) over (ii) the amount of interest which would be earned
by the Bank during the Indemnify Period if it invested the principal amount so
received, recovered, converted or not borrowed at a rate per annum determined by
the Bank as the rate it would bid in the London interbank market for a deposit
of eurodollars in an amount approximately equal to such principal amount for a
period of time comparable to the Indemnity Period. For the purposes of this
Section, [ILLEGIBLE] determination by the Bank of such losses and reasonable
expenses shall be conclusive if made reasonably and in good faith. A certificate
as to any additional amounts payable pursuant to this section setting for the
basis and method of determining such amounts shall be conclusive, absent
manifest error, as to the determination by the Bank set forth therein if made
reasonably and in good faith. The Borrower shall pay any and all amounts so
certified to it by the Bank within ten (10) days of receipt of any such
certificate. The indemnities set forth herein shall survive payment in full of
all LIBOR loans and all other loans made pursuant to this Note.
Increased Costs: If the Bank determines that the effect of any applicable law or
government regulation, guideline or order or the interpretation thereof by any
governmental authority charged with the administration thereof (such as, for
example, a change in official reserve requirements which the Bank is required to
maintain in respect of loans or deposits or other funds procured for funding
such loans) is to increase the cost to the Bank of making or continuing LIBOR
advances hereunder or to reduce the amount of any payment of principal or
interest receivable by the Bank thereon, then the Borrower shall pay to the Bank
on demand such additional amounts as the Bank may determine in its sole and
absolute discretion, to be required to compensate the Bank for such additional
costs or reduction. Any additional payment under this section will be computed
from the effective date at which such additional costs have to be borne by the
Bank. A certificate as to any additional amounts payable pursuant to this
section setting forth the basis and method of determining such amounts shall be
conclusive, absent manifest error, as to the determination by the Bank set forth
therein if made [ILLEGIBLE]ablv and in good faith. The Borrower shall pay any
and all amounts so certified to it by the Bank within ten (10) days of receipt
of such certificate.
Alternate Rate of Interest: In the event, and on each occasion, that on the day
two (2) Business Days prior to the commencement of any Interest Period for a
LIBOR advance, the Bank shall have determined (i) that dollar deposits in the
amount of the requested principal amount of such LIBOR advance are not generally
available in the London interbank market, (ii) that the rate at which such
dollar deposits are being offered will not adequately and fairly reflect the
cost to the Bank of making or maintaining such LIBOR advance during such
Interest Period, or (iii) that reasonable means do not exist for ascertaining
the LIBOR Rate, the Bank shall, as soon as practicable thereafter, give written
notice or telex notice of such determination to the Borrower. In the event of
any such determination, until the circumstances giving rise to such notice no
longer exist, no LIBOR advances will be made hereunder. Each determination by
the Bank hereunder shall be conclusive absent manifest error.
Change in Legality: Notwithstanding anything to the contrary contained herein,
if any change in any law or regulation or with the administration or
interpretation thereof shall make it unlawful for the Bank to make or maintain
any LIBOR advance, then, by written notice to the Borrower, the Bank may: (i)
declare that LIBOR advances will not thereafter be made by the Bank hereunder,
whereupon the Borrower shall be prohibited from requesting LIBOR advances from
the Bank hereunder unless such declaration is subsequently withdrawn; and (ii)
require that all outstanding LIBOR advances made by it be converted to Prime
Rate loans, in which event (x) all such LIBOR advances shall be automatically
converted into Prime Rate loans as of the effective date of such notice as
provided for herein and (y) all payments and prepayments of principal which
would otherwise be applied to repay the converted LIBOR advances shall instead
be applied to repay the Prime Rate loans resulting from the conversion of such
LIBOR advances. For purposes of this section, a notice to the Borrower by the
Bank shall be effective on the day of receipt by the Borrower.
16. PRIME RATE: Each reference in this Note to the "Prime Rate" shall mean the
prime rate of interest designated from time to time by the Bank as being its
"prime rate" of interest, such interest rate to change on the effective date of
each change in the Prime Rate.
17. REPRESENTATIONS, WARRANTIES & COVENANTS: (a) if the Borrower is a
corporation, limited liability company, partnership, limited liability
partnership, trust or any other legal entity recognized under applicable law, it
is duly organized and validly existing; if a corporation, the Borrower is in
good standing under the laws of its jurisdiction or organization; if a
partnership, trust or other legal entity, the Borrower has filed in all
locations required under the laws of each state in which it does business; (b)
the Borrower is qualified to do business in every state in which the nature of
its business conducted or the character of its property owned in such state
would require such qualification; (c) the Borrower has the power to execute,
deliver and perform this Note and to borrow from the Bank; (d) the execution,
delivery and performance of this Note and/or any other agreements, security
instruments or documents which may in any way evidence, govern and/or secure
this Note have been duly authorized and will not violate the articles of
organization, certificate of incorporation, partnership agreement, bylaws,
operating agreement, declaration of trust or other similar organization
documents or any law, regulation or court order and will not result in a default
under any agreement or indenture to which the Borrower is or hereafter made a
part of or bound by in any manner whatsoever, (e) there is no suit or
<PAGE>
proceeding at law or in equity affecting the Borrower or any of its properties
or assets which, if adversely determined, would materially impair the assets,
liabilities, financial condition or business of the Borrower; (f) the Borrower
has filed all federal, state and local tax returns and any other reports it is
required to file by law and has paid all taxes and other charges and assessments
that are due and payable; (g) The Borrower has furnished to the Bank such tax
returns, financial statements and other information about the Borrower's
financial condition as the Bank shall have requested, which tax returns,
financial statements and other information fairly and accurately represent the
financial condition of the Borrower, and since the date of the last financial
statements delivered to the Bank, there has been no material adverse change in
the assets, liabilities, financial condition or business of the Borrower; (h) no
Event of Default (as determined herein) has occurred and no event has occurred
or is continuing which, with the giving of notice or lapse of time or both,
would constitute an Event of Default; (i) all of the information, documents and
instruments furnished by the Borrower to the Bank and upon which the commitment
for this loan is based, including without limitation, financial statements, are
true, accurate, complete and without any material omissions of any nature
whatsoever and (j) the Borrower is now and shall continue to be in full and
complete compliance with any and all laws of the federal, state, county and
municipal laws, rules ordinances and regulations applicable to it, its business
and/or its properties or assets, including without limitation, any and all laws,
rules and regulations pertaining to or concerning the employment of labor,
employee benefits, public health, safety and any and all environmental laws of
any nature whatsoever whether now or hereafter in effect; (k) the Borrower shall
be obligated to keep all property of the Borrower, including without limitation,
all collateral securing the obligations of the Borrower to the Bank, insured
against risks of loss or damage by fire (including so-called extended coverage),
theft and such other casualties as the Bank may require, all in such amounts,
under such forms of policies and under such terms, for such periods and written
by such companies or underwriters as the Bank may approve with such insurance to
name the Bank, its successors and/or assigns as first loss payee and/or
mortgagee thereon; and (l) the Borrower shall maintain at all times a
satisfactory payment record with the Bank and with all other creditors of the
Borrower.
18. EVENTS OF DEFAULT/ACCELERATION: The Bank may, in its sole and absolute
discretion, accelerate the maturity hereof upon the occurrence of any Event of
Default hereunder, and/or any events of default described in any and all other
documents or security instruments which may in any way evidence, govern and/or
secure this Promissory Note. By way of example and not limitation, an Event of
Default hereunder shall include, but not be limited to any of the following
events: (a) any representation or warranty made herein or in any report,
certificate, financial statement or any other instrument furnished in connection
with the loan made hereby shall prove to be false or misleading in any material
respect; (b) failure to pay the principal or any interest due and payable
pursuant to this Note or any other indebtedness of the Borrower or any Guarantor
to the Bank within ten (10) days from the date the same or any installment
thereof shall become due and payable, whether at the due date thereof or at a
date fixed for prepayment or by acceleration or otherwise; (c) involvement in
financial difficulties as evidenced by: (i) the appointment or authorization of
a custodian as defined in the Bankruptcy Code, provided, however, that in the
case of the appointment of a receiver in an involuntary proceeding and such
appointment continues in effect and undischarged for a period of thirty (30)
days; or (ii) the filing of an involuntary petition under any chapter of the
Bankruptcy Code or any Receivership Proceeding, which proceeding or petition
remains undismissed for a period of thirty (30) days; (d) any levy, seizure,
attachment, execution or similar process shall be issued or levied on or against
any of the Borrower's or Guarantor's properties or assets; (e) the Bank believes
that any material adverse change in the assets, liabilities, financial condition
or business of the Borrower or any Guarantor has occurred since the date of any
financial statements delivered to the Bank before or after the date of the
execution of this Note; (f) call upon the Borrower for payment of any contingent
debt which would materially affect the Bank's position with regard to the
collateral pledged for this loan; (g) sale or other disposition of or
encumbrance on any property of the Borrower or any Guarantor, except as
permitted hereby or by any agreement, document or instrument which may in any
way evidence, govern and/or secure this Note; (h) assignment for the benefit of
creditors by, or the commencement of any case or any other proceeding (whether
for the purpose of liquidation or rehabilitation or otherwise) under any
bankruptcy or insolvency laws or the death of, by or against Borrower or of, by
or against any Guarantor; (i) the Bank in good faith believes that the prospect
of payment or performance is impaired; (j) participation in any illegal activity
or in any activity, whether or not related to the business of the Borrower or
any Guarantor that may subject the assets of the Borrower or Guarantor to a
restraining order or any form of injunction issued by any federal or state court
or any seizure, forfeiture or confiscation by any federal or state governmental
instrumentality; and (k) failure to comply with any and all terms and conditions
contained in any other document or security instrument which may in any way
evidence, govern and/or secure this Note. Upon the occurrence of any Event of
Default, the availability of advances hereunder shall, at the option of the
Bank, be deemed to be automatically terminated and the Bank, at its sole and
absolute discretion, may declare all advances outstanding hereunder, together
with any and all accrued interest thereon and all applicable late charges and
all other liabilities or obligations of the Borrower and/or any Guarantor to the
Bank to be forthwith due and payable without presentment or demand for payment,
notice of non-payment, protest or any other notice or demand of any type or
kind, all of which are hereby expressly waived by the Borrower and/or any
Guarantor.
19. LATE FEES: If the entire amount of any required principal and/or interest is
not paid in full within ten (10) days after the same is due, the Borrower shall
pay to the Bank a late fee equal to five percent (5%) of the required payment.
If this Note is governed in accordance with the laws of the Commonwealth of
Massachusetts, such late fee shall be reduced to three (3%) percent of any
required principal and interest payment that is not paid within fifteen (15)
days of the date it is due if this Note is secured by a mortgage on an
owner-occupied residence, one to four (1-4) units. If this Note is governed in
accordance with the laws of New York, such late fee shall be reduced to two (2%)
percent of any required principal and interest payment that is not paid within
fifteen (15) days of the date it is due if this Note is secured by a mortgage on
an owner-occupied residence, one to six (1-6) units.
20. FEES AND EXPENSES: The Borrower shall be obligated to pay any and all
expenses, fees and/or costs incurred by the Bank in connection with the
preparation of the loan documents, the making of the loan evidenced by this
Note, and the enforcement of the rights of the Bank in connection with this Note
and the loan documents and
<PAGE>
security instruments including, but not limited to, all reasonable fees
[ILLEGIBLE] its counsel (which may include costs allocated by the Bank's
internal legal department) plus the disbursements of said counsel. The Borrower
shall be further obligated to pay to the Bank on demand all reasonable fees,
costs and expenses incurred by the Bank in connection with the collection,
enforcement and/or administration of the loan evidenced hereby which shall
include, without limitation, any and all overnight courier fees, lien search
fees, and filing and recording fees.
21. LIEN AND SET OFF: The Borrower and/or any Guarantor hereby grant the Bank a
lien, security interest and right of setoff for all liabilities and obligations
to the Bank, whether now existing or hereafter arising, upon and against all
deposits, credits, collateral and property now or hereafter in the possession,
custody, safekeeping or control of the Bank or any entity under the control of
Fleet Financial Group, Inc. or in transit to any of them. At any time after an
event of default, without demand or notice, Bank may set off the same or any
part thereof and apply the same to any liability or obligation of the Borrower
and any Guarantor even though unmatured and regardless of the adequacy of any
other collateral securing this Note. Any and all rights to require the Bank to
exercise its rights or remedies with respect to any other collateral which
secures this Note, prior to exercising its right of set off with respect to such
deposits, credits or other property of the Borrower or any Guarantor are hereby
knowingly, voluntarily and irrevocably waived.
22. WAIVERS: THE BORROWER AND/OR ANY GUARANTOR EXPRESSLY WAIVES PRESENTMENT,
DEMAND, NOTICE OF DISHONOR, PROTEST AND NOTICE OF NON-PAYMENT. WITH RESPECT TO
ANY PREJUDGMENT REMEDY WAIVER, THE BORROWER AND EACH GUARANTOR HEREBY
ACKNOWLEDGE THAT TO THE EXTENT THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART
OF A COMMERCIAL TRANSACTION AND, TO THE EXTENT PERMITTED BY ANY STATE OR FEDERAL
LAW, BORROWER AND EACH GUARANTOR HEREBY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO
PRIOR NOTICE OF AND A HEARING ON THE RIGHT OF THE BANK TO ANY REMEDY OR
COMBINATION OF REMEDIES THAT ENABLES SAID BANK, BY WAY OF ATTACHMENT, FOREIGN
ATTACHMENT, GARNISHMENT OR REPLEVIN, TO DEPRIVE BORROWER OR ANY GUARANTOR OF, OR
AFFECT THE USE, POSSESSION OR ENJOYMENT BY BORROWER OR ANY GUARANTOR OF ANY OF
THEIR PROPERTY, AT ANY TIME PRIOR TO JUDGMENT IN ANY LITIGATION OR ARBITRATION
INSTITUTED IN CONNECTION WITH THIS NOTE OR THE TRANSACTION OF WHICH THIS NOTE IS
A PART. IN ADDITION HERETO, THE BANK BORROWER AND EACH GUARANTOR MUTUALLY
HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY
JURY IN RESPECT TO ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS NOTE OR ANY OTHER LOAN DOCUMENTS OR SECURITY INSTRUMENTS
CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT,
COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY
PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANK TO ACCEPT THIS
NOTE AND MAKE THE LOAN.
23. JOINT AND SEVERAL OBLIGATIONS /UNENFORCEABILITY: If this Note is executed by
more than one Borrower, then in said event, the obligations created herein shall
be the joint and several obligations and liability of each Borrower and each
Guarantor and each provision of this Note shall apply to each and all jointly
and severally and to the property and liabilities of each and all, each of whom
hereby waive presentment for the payment, protest and notice of dishonor, and
who hereby agree to any extension or delay in the time for payment or
enforcement, to renewal of this Note and to any substitution or release of any
collateral, all without notice and without any effect on their liabilities. Any
delay on the part of the Bank hereof in exercising any right hereunder or under
any other document or security instrument of any nature whatsoever which may
evidence, govern and/or secure this Note shall not operate as a waiver and any
waiver for one occasion shall not operate as a waiver in the event of any
subsequent default. The rights and remedies of the Bank hereof shall be
cumulative and not in the alternative and shall include all rights and remedies
granted herein or in any other document or security instrument which may in any
way evidence, govern and/or secure this Note under applicable law. In the event
that any term or provision of this Note or the application thereof to any person
or circumstance shall, to any extent, be held invalid or unenforceable, the
remainder of this Note or the application of such term or provision to persons
or circumstances other than those to which it is held invalid or unenforceable,
shall be valid and enforceable to the fullest extent permitted by law.
24. MISCELLANEOUS PROVISIONS: (a) Pledge to the Federal Reserve: the Bank may at
any time pledge all or any portion of its rights under the loan documents
including any portion of this Note to any of the twelve (12) Federal Reserve
Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section
341. No such pledge or enforcement thereof shall release Bank from its
obligations under any of the loan documents. The Bank shall have the
unrestricted right at any time and from time to time, and without the consent of
or notice to Borrower or any Guarantor to grant to one or more banks or other
financial institutions (each, a "Participant") participating interests in the
Bank's obligation to lend hereunder and/or any or all of the loans held by the
Bank hereunder. In the event of any such grant by the Bank of a participating
interest to a Participant, whether or not upon notice to the Borrower or any
Guarantor, the Bank will remain responsible for the performance of its
obligations hereunder and Borrower and any Guarantor shall continue to deal
solely and directly with the Bank in connection with the Bank's rights and
obligations hereunder. The Borrower shall not be permitted to assign any of the
obligations contained in this Note. The Bank may furnish any information
concerning Borrower or any Guarantor in its possession from time to time to
prospective Assignees and Participants, provided that the Bank shall require any
such prospective Assignee or Participant to agree in writing to maintain the
confidentiality of such information; (b) Replacement Note: upon receipt of an
affidavit of an officer of the Bank as to the loss, theft, destruction or
mutilation of this Note or any other document or security instrument which is
not of public record, and in the case of any such loss, theft, destruction or
mutilation, upon surrender and cancellation of such Note or other document or
security instrument, the Borrower and/or any Guarantor or Obligor as the case
may be, shall be obligated to issue, in lieu thereof, a replacement Note or
other
<PAGE>
document or security instrument in the same principal amount thereof and
otherwise of like tenor, (c) References: each reference herein to the Bank shall
be deemed to include its successors and/or assigns and each reference to the
Borrower and/or any Guarantor and any pronouns referring thereto as used herein
shall be construed in the masculine, feminine, neuter, singular or plural as the
context may require and shall be deemed to include the heirs, executors,
administrators, legal representatives, successors and/or assigns of the Borrower
and/or any Guarantor, all of whom shall be bound by each of the provisions
contained in this Note.
IN WITNESS WHEREOF, the undersigned Borrower, duly authorized, has executed,
sealed and delivered this instrument as a sealed instrument as of the day and
date written hereinbelow.
BORROWER:
LOG ON AMERICA, INC.
/s/ David Paolo
- ---------------------------------------
By: David Paolo, duly authorized and in
his capacity as President
Date: 8/10/99
-------
EXECUTED IN THE PRESENCE OF:
/s/ [ILLEGIBLE]
- ---------------------------------------
Witness as to Borrower
<PAGE>
[LOGO] FLEET
SCHEDULE "A"
This Schedule "A" is attached to the Promissory Note dated ________________
(specify date of execution of the Note) and constitutes an integral part of said
Promissory Note and is incorporated herein by reference, as if all terms and
conditions set forth herein were fully and completely set forth at length in
said Promissory Note. The terms and conditions contained in this Schedule "A"
and all covenants, agreements, representations and/or warranties made herein
shall survive the closing of this loan. The execution and delivery of any and
all loan documents or security instruments which may in any way evidence, govern
and/or secure this Note shall continue to remain in full force and effect until
any and all obligations created herein have been fully and completely satisfied
in the sole and absolute discretion of the Bank. Any modifications to this Note
and/or any modifications to any of the loan documents and/or security
instruments which may in any way evidence, govern and/or secure this Note shall
be reduced to writing and executed in form and substance acceptable to the Bank.
In addition, whenever the context so requires, any reference in this Schedule
"A" to the neuter gender shall include the masculine and/or feminine gender, and
the singular number shall include the plural and in each case, vice versa. If
this Schedule "A" is executed, initialed and/or dated by more than one Borrower,
then in said event, the obligations created herein shall be the joint and
several obligations and liability of each of the parties executing, and/or
initialing this Schedule "A".
This loan shall be fully secured by various marketable securities more
particularly described and designated in that certain Pledge Agreement executed
in connection herewith. The collateral pledged herein is held in the sole name
of the Pledgor for this loan, Log On America, Inc. and shall be held in Fleet
Investment Management Account Number: _____________________. The collateral
pledged herein shall remain in the Bank's possession at all times. The advance
rate shall not exceed 70% of NYSE and AMEX listed stocks and bonds, 70% of
stocks traded on other major exchanges acceptable to the Bank, 80% of the value
of investment grade municipal bonds, and 90% of the value of U.S. Treasury
obligations. Stocks traded at less than $10.00 per share as well as Fleet
Financial Group, Inc. stock shall not be considered eligible collateral for this
loan. If at any time the value of the collateral does not meet the
above-mentioned loan to value requirements, then this loan shall be reduced or
additional liquid collateral, acceptable to the Bank, shall be pledged to meet
the requisite loan to value guidelines. Failure to do so within two (2) business
days shall constitute an immediate event of default. Shares that fall below
$10.00 per share and bonds which fall below investment grade will be excluded
from the collateral pool.
BORROWER'S INITIALS:
Log on America ,Inc.
/s/ [ILLEGIBLE]
- -----------------
By: DP, President
Date: 8/10/99
-------
TAUBER & BALSER, P.C.
Certified Public Accountants
3340 Peachtree Road, N.E.
Suite 250
Atlanta, GA 30326
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Post Effective Amendment No. 1 Registration
Statement on Form S-B2 of our report dated December 18, 1998, relating to the
financial statements of Log On America, Inc. We also consent to the reference to
our firm under the caption "Experts" in the Prospectus.
/s/ Tauber & Balser, P.C.
Tauber & Balser, P.C.
Atlanta, Georgia
December 1, 1999
