As filed with the Securities and Exchange Commission on February 3, 1999
Registration No. 333-70307
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LOG ON AMERICA, INC.
(Name of Small Business Issuer in its Charter)
7375 05-0496586
Delaware (Primary Standard Industrial (I.R.S. Employer
(State of Incorporation) Classification Code Number) Identification No.)
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3 Regency Plaza
Providence, Rhode Island 02903
(401) 459-6298
(Address and telephone number of principal
executive offices and principal place of business)
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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:
Michael H. Freedman, Esq. Lawrence B. Fisher, Esq.
Silverman, Collura, Chernis & Balzano, 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. [ ]
================================================================================
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, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<S> <C> <C> <C> <C>
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Proposed
Proposed Maximum Maximum
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
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 2,300,000(2) $7.50 $17,250,000 $4,795.50
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Representative's Warrants to purchase
shares of Common Stock 200,000 $.0001 $20 $0(4)
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Common Stock Issuable Upon Exercise of
Representative's Warrants 200,000(3) $9.00 $1,800,000 $500.40
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Common Stock held by Selling
Securityholders 1,896,116 $7.50 $14,220,870 $3,953.40
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Common Stock underlying Warrants held
by Selling Securityholders 1,131,921(3) $7.50 $8,489,407.50 $2,360.06
- ---------------------------------------------------------------------------------------------------------------------------
Total 5,728,038 -- $41,760,305 $11,609.36
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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 300,000 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.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 1999
2,000,000 Shares
LOG ON AMERICA, INC.
Common Stock
This is an initial public offering of shares of Common Stock of Log On
America, Inc. ("LOA") No public market currently exists for our shares. We
anticipate that the initial public offering price will be between $7.00 and
$8.00 per share. We have applied to list the Common Stock on the American Stock
Exchange ("AMEX") under the symbol "LOA." The market price of the securities may
differ after the offering.
Please see the Risk Factors beginning on page 7 to read about certain
factors you should consider before buying shares of 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.............. $ $
Underwriting discount...................... $ $
Proceeds, before expenses, to LOA.......... $ $
This Prospectus also relates to the registration for resale of 1,896,116
shares of Common Stock and 1,131,921 shares of Common Stock underlying warrants
for the purchase of Common Stock held by certain Selling Securityholders
identified in this Prospectus. Such 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. LOA will not receive any proceeds from
the sale of such shares.
The Underwriters may, under certain circumstances, purchase up to an
additional 300,000 shares from LOA at the initial public offering price less the
underwriting discount.
The information in this preliminary prospectus is not complete and may be
changed. The securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the sale is not permitted.
DIRKS & COMPANY, INC.
Prospectus dated _______, 1999
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING PURCHASES OF COMMON STOCK TO COVER SOME OR ALL OF A
SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE REPRESENTATAIVE AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRITPION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
LOA is not currently a reporting company under the Securities and Exchange
Act of 1934, and therefore has not filed any reports with the Securities and
Exchange Commission. Upon completion of this offering, LOA intends to register
under the Exchange Act and furnish its stockholders with annual reports
containing audited financial statements reported on by independent auditors and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
(Picture of man holding phone on the left); The words "Bridging the
Gap Between Voice, Date
and the Internet" on the
right, along the with
Company logo.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with the more detailed information and financial statements and
the notes relating thereto, appearing elsewhere in this Prospectus. Unless
otherwise specified, all information in this Prospectus assumes an initial
public offering price of $7.50 and no exercise of the Underwriter's
over-allotment option. You should read the entire Prospectus carefully,
including the "Risk Factors" section and the financial statements and notes
thereto.
The Company
Log On America, Inc. ("LOA") is a Northeast regional competitive local
exchange carrier ("CLEC") and Information/Internet Service Provider ("IISP")
positioning itself to provide a full range of Internet, voice, data and cable
programming solutions to commercial clients. The majority of our current
operations is providing dedicated access lines for commercial accounts. We
currently maintain a national dial-up Internet service along with commercial
Internet Protocol ("IP") transit throughout the Northeast. We, along with our
predecessor entities, have been providing on-line services, and related
products, to individual and corporate clients since November, 1992. We were
recently approved as a competitive local exchange company in the State of Rhode
Island. We believe our CLEC status will allow us to provide a full range of
local telecommunication services to our customers such as voice, data and the
Internet. Our clients include residential users, Internet Exchange Carriers
("IXC"), Internet Services Provides ("ISP"), wireless carriers and business,
government and institutional end users. We intend to provide to our clients all
of all of our services in selected cities with a population of 200,000 to
1,000,000.
In 1997, Log On America, Inc., a Rhode Island corporation ("LOARI") sold
100% of its assets to Global Telemedia International, Inc. ("GTMI") and agreed
to change its name to Tekcom, Inc. In consideration of the sale of LOARI, 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"). To transfer the assets and liabilities of
LOARI, GTMI formed a wholly owned subsidiary, System 4, Inc. System 4, Inc., a
Delaware corporation, changed its name to Log On America, Inc. in July 1997.
Wan Secure, Inc. ("WS") was organized in Delaware in January 1998 to
purchase 100% of the outstanding capital of LOA from GTMI. Pursuant to such
acquisition, LOA became a wholly owned subsidiary of WS. In consideration for
the purchase, WS executed a note in the amount of $100,000 (the "GTMI Note").
The GTMI Note was personally guaranteed by David R. Paolo, WS's majority
shareholder. 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.
In and around February 1998, 100% of the shareholders of Tekcom, Inc.
(formerly LOARI) agreed to surrender and release all rights and claims to the
Contingent Sum. As
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consideration for such surrender and release, Tekcom shareholders received an
aggregate of 795,130 shares of LOA. In July 1998, GTMI accepted a settlement of
the GTMI Note. In consideration for such settlement, GTMI received $25,000.
As a result of the aforesaid transactions, we are a successor in interest
to WS, System 4, Inc. and LOARI.
We incorporated in Rhode Island ("LOARI") in 1992 and, subsequent to the
aforesaid transactions, 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
website at "www.loa.com." Nothing contained on our website should be construed
as a part of this Prospectus.
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THE OFFERING
Shares of Common Stock
Offered by LOA..........2,000,000 shares of Common Stock (2,300,000 if the
Underwriter's over-allotment option is exercised in
full).
Securities Outstanding
Upon Completion of
this Offering...........6,610,716 shares of Common Stock issued and outstanding
(6,910,716 if the Underwriter's over-allotment option is
exercised in full)(1).
Use of Proceeds.........We intend to use the net proceeds from the sale of the
Common Stock to: (i) finance network expansion and
equipment upgrades, (ii) strategic acquisitions, (iii)
marketing and sales activity, and (iv) working capital
and general corporate purposes.
Risk Factors............The shares of Common Stock offered by us are highly
speculative, involve a high degree of risk and immediate
and substantial dilution and should not be purchased by
an investor who cannot afford the loss of his or her
entire investment.
Proposed American Stock
Stock Exchange Symbol .."LOA"
- ---------------------------
(1) Excludes (i) 1,131,922 shares of Common Stock reserved for issuance upon
the exercise of warrants; and (ii) 200,000 shares of Common Stock reserved
for issuance upon the exercise of the Representative's Warrants.
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Summary Financial Data
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and the financial statements and Notes thereto, included elsewhere in
this Prospectus. The statement of operations data for the years ended December
31, 1997 and 1996, and the balance sheet data for the year ended December 31,
1997 are derived from LOA's audited Financial Statements included elsewhere in
this Prospectus. The statement of operations data for the nine month periods
ended September 30, 1998 and 1997, and the balance sheet data for the nine month
period ended September 30, 1998 have been derived from unaudited financial
statements and include all adjustments (consisting of only normal recurring
adjustments) that LOA considers necessary for a fair statement of the results of
such interim periods. The operating results for the nine months ended September
30, 1998 are not necessarily indicative of the results to be expected for the
full year or for any future period.
<TABLE>
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For the Nine
Months Ended Year Ended
September 30, December 31,
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(unaudited)
1998 1997 1997 1996
---- ---- ---- ----
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Statement of Operations Data:
Revenues $ 551,304 $ 217,038 $ 351,560 $ 186,702
Total Operating Costs
and Expenses $ 727,249 382,395 629,584 323,517
Net loss $ (178,228) $(167,825) $(280,001) $(163,036)
=========== ========= ========= =========
Basic and diluted net loss per share $ (.05) $ (1,661) $ (2,772) $ (1,614)
Shares used in computing basic and
diluted net loss per share 3,708,770 101 101 101
</TABLE>
December 31, 1997 September 30, 1998
----------------- ------------------
(Unaudited)
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Actual Actual As Adjusted(1)
<S> <C> <C> <C>
Balance Sheet Data (end of period):
Cash........................... -- $ 69,911 $13,823,145
Working Capital (Deficit)...... (384,126) $(279,870) $13,551,640
Total Assets................... 362,655 $ 602,204 $16,711,438
Total Debt..................... 22,796 $ 18,486 $ 0
Total Liabilities.............. 463,396 $ 454,908 $ 364,142
Stockholders' Equity
(Deficit).................... (100,741) $ 147,296 $16,347,296
</TABLE>
- ----------
(1) The as adjusted balance sheet data as of September 30, 1998 gives effect
to (i) the completion on December 22, 1998 of a private placement of
369,216 shares of Common Stock at $3.25 per share ("December Placement");
and (ii) the 2,000,000 shares offered hereby at an assumed initial
offering price of $7.50 per share and the application of the net proceeds
therefrom.
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RISK FACTORS
The shares of Common Stock offered hereby are highly speculative in nature
and involve a high degree of risk. Therefore each prospective investor should
consider very carefully certain risks and speculative factors inherent in and
affecting our business prior to the purchase of any of the shares of Common
Stock offered hereby, as well as all of the other matters set forth elsewhere in
this Prospectus.
Limited Operating History - Anticipated Future Losses.
Our historical financial data is not reliable as a basis upon which to
predict our future revenues or operating expenses for a number of reasons,
including our limited operating history, the emerging nature of the Internet
industry, and our growth strategy.
In addition, we have suffered recurring losses from operations since our
inception and have recorded limited revenues to date and expect to operate at a
loss for the foreseeable future. Our business must be considered in light of the
risks, expenses, and problems frequently encountered by companies with a limited
operating history. For example, since 1992, we have incurred substantial
operating losses and as of September 30, 1998, our accumulated deficit was
approximately $178,228. The continuation of our operations is contingent upon
our success in establishing markets for our products and services and achieving
profitable operations. Although we intend to expand our marketing of products
and services, no assurance can be given that we will be able to achieve these
objectives or that, if these objectives are achieved, we will ever be
profitable. Such operations will also require additional financing for us in the
form of debt or equity. There can be no assurance that we will be able to
achieve profitability and, if achieved, sustain such profitability, nor can
there be any assurance as to when such profitability might be achieved. If we
are unsuccessful in addressing any of these risks, it could have a material
adverse effect on our business, results of operations and financial condition.
Planning the development of our business, and accurately predicting our
future revenues and expenses, is difficult because our business and the industry
in which we compete are in the early stages of development. We also expect that,
as in many new industries, there will be intense competition. Our potential
customers and users will be intensely competitive. Our potential customers and
users will experiment with many different products until it becomes apparent
which ones work best. We believe that this will result in a wide range of
pricing models for a variety of difference services and will decrease the
predictability of our revenues.
In addition, at this early state of development, our business and
financial condition could be damaged materially by cancellation or non-renewal
of existing or future client contracts. This could happen if the perceived value
of our services falls below the expectations of our current or prospective
clients, or for many other reasons. Given the possibility of such revenue
fluctuations, we do not believe that quarterly comparisons of the results of our
operations during any fiscal year or from year to year are
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necessarily meaningful or useful to predict future results. Also, the price at
which our securities trade may be subject to substantial volatility because of
fluctuations in our financial results.
Significant Capital Requirements; Dependence on Offering Proceeds; Need for
Additional Financing.
We anticipate, based on our currently proposed plans and assumptions, that
the proceeds of the sale of the shares of Common Stock offered hereby will be
sufficient to satisfy our contemplated cash requirements for at least the 12
month period following the consummation of this Offering. After such time, we
will require additional funding. There is no current arrangements with respect
to sources of additional financing. There can be no assurance that other
additional financing will be available on commercially reasonable terms, or at
all. The inability to obtain additional financing, when needed, would have a
material adverse effect on us, including possibly requiring us to curtail or
cease operations. To the extent that any future financing involves the sale of
our equity securities, our then existing stockholders shares, including
investors shares in this Offering, would be substantially diluted. To the extent
we incur indebtedness or otherwise issues debt securities, we will be subject to
risks associated with indebtedness, including the risk that interest rates may
fluctuate and cash flow may be insufficient to pay principal and interest on
such indebtedness.
Limited Sales Force and Channels of Distribution.
Currently we have a limited number of sales and marketing employees and we
have not established distribution channels for our services and products. There
can be no assurance that we will be able to develop a sufficient sales force and
marketing group. The inability to develop a sufficient sales force and marketing
group would have a material adverse effect on our business, results of
operations and financial condition.
Dependence on Computer Infrastructure; Lack of Insurance.
Substantially all of our communications hardware and certain of our
computer hardware operations are located at our offices in Providence, Rhode
Island. There can be no assurance that a system failure at our present location
would not adversely affect the performance of our services. 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 a any secondary "Off-Site" systems or a formal disaster
recovery plan.
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. The occurrence of any of these risks could
have a material adverse effect on our business, results of operations and
financial condition.
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Liability for Information Retrieved from the Internet.
There is a risk that materials may be downloaded and distributed to others
by the on-line or Internet services operated or facilitated by us or the
Internet access providers with which we have a relationship with. In the event
this were to happen there is the potential that claims may be made against us
for defamation, negligence, copyright or trademark infringement or some other
theory. Such claims or the imposition of liability may have a material adverse
effect on our business, results of operations and financial condition.
Internet Security and E-Commerce Risks.
A significant barrier to e-commerce and communications over the Internet
has been the need for secure transmission of confidential information. Internet
usage could decline if any well-publicized compromise of security occurred. We
may incur significant costs to protect against the threat of security breaches
or to alleviate problems caused by such breaches. If a third person were able to
misappropriate our users' personal information or credit card information, users
could possibly sue us or bring claims against us.
Need to Manage Growth Effectively
The pursuit of our business strategy will place a significant strain on
our managerial, operational and financial resources. We will need to improve our
financial and management controls, reporting systems and procedures; expand,
train and manage our work force for marketing, sales and support, product
development, site design, and network and equipment repair and maintenance, and
manage multiple relationships with various customers, strategic partners and
other third parties. We will need to continually expand and upgrade our
technology infrastructure and systems and ensure continued 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.
Dependence on the Internet
To achieve our objectives, we may have to acquire technologies or products
or enter into strategic alliances and acquisitions. For those initiatives to
succeed, we must make our existing technology, business, and systems work
effectively with those of our strategic partners and any acquired properties
without under expense, distraction of management from other priorities or other
disruptions to our existing business. Currently, our market is highly dependent
upon the increased use of the Internet by consumers for information,
publication, distribution and commerce. Our future operating results will depend
substantially upon the increased use of the Internet by individuals and
companies 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
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develop, our business, results of operations and financial condition will be
materially adversely affected.
Moreover, the success of our services and products depend, in large part,
upon the 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. There can be no assurance
that the Internet infrastructure will continue to 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 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 such as the services
that we currently offer. 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.
Security Risks.
Although we are not aware of any attempts by programmers or "hackers" to
penetrate our network security, there can be no assurance that such actions will
not occur in the future. A party who is able to penetrate our network security
could misappropriate proprietary information or cause interruptions in the
operation of our Web sites, which could have a material adverse effect on our
business, financial condition and results of operations. We may be required to
expend significant capital and resources to protect against the threat of such
security breaches or to alleviate problems caused by such breaches. 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 materially adversely effected if contractual provisions
attempting to limit our liability in such areas are not successful or
enforceable, or if other parties do not accept such contractual provisions as
part of our agreements.
Possibility of Economic Downturn
Any substantial downturn in economic conditions or any significant
increase in the cost of operations in general could significantly depress
discretionary consumer spending and, therefore, have a material adverse effect
on our sales of products and services. In addition, the future unavailability of
attractive financing rates could adversely affect our business.
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Management's Discretion in Application of Net Proceeds.
Our intention is to allocate a substantial amount of the net proceeds of
from this Offering to the acquisition, development and marketing of our various
business activities. Investors in this Offering will not be able to direct the
use of these funds or have any opportunity to review the development and or
marketing of products. Investors must therefore rely on our management for
directing the expenditure of the Offering proceeds. There can be no assurance
that any such acquisition, development or marketing will prove successful.
Internet Competition.
The Internet connectivity business is highly competitive, and there are no
substantial barriers to entry and it is our belief that competition will
intensify. Currently, our primary competitors include such companies as: (i)
national Internet Service Providers (Netcom On Line Communication Services,
Inc., PSINet, Inc., UUNET Technologies, Inc. and BBN Corp.); (ii) regional
providers; (iii) on-line service provide (America Online, Inc.); and (iv)
regional telephone companies and long distance companies such as 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 us, 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
addressing these markets in the future. 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 Internet related
products and services. There can be no assurance that our competitors will not
develop products or services that are superior to ours or achieve greater market
acceptance than our products and services. Competition could have a material
adverse effect on our ability to consummate arrangements with clients or enter
into strategic business alliances, or on our business, financial condition and
results of operations. Moreover, as a strategic response to changes in the
competitive environment, we may make certain pricing, service or marketing
decisions or enter into acquisitions or new ventures that could have a material
adverse effect on our business, financial condition and results of operations.
Regulation, Rules and Governing Law.
We are currently subject to regulation by the Federal Communications
Commission ("FCC") and related state agencies. Additionally, we may be required
to file related applications with the FCC.
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
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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. In addition, the
adoption of additional laws in the United States and in foreign countries could
adversely affect our business
No Assurance as to Future Acquisitions.
Our business plan calls for the acquisition of certain competitors. Our
ability to achieve our expansion plans depends in large part on our sound
business judgment relative to quality targets and our negotiating strength.
There can be no assurance, however, that our acquisition targets will be
receptive to our proposals or that we will be able to enter into acquisition
agreements on acceptable terms, if at all. Moreover there can be no assurance
that once acquisitions are made they will have a positive effect on our
operations.
Early Stage Products and Technology.
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequently introduced new services,
products and enhancements and changing customer demands. Our products and
technology will depend, in part, upon the ability to develop and manage customer
applications of those products and technologies. Many of our anticipated
products and service applications are in the early stages of development and/or
marketing, and are subject to the risks inherent in the development and
marketing of new products and services. 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 competition from telecommunication
companies, computer software, and technology or service companies, failure of
our products to attain widespread acceptance in the marketplace, and the
development of unforeseen design or engineering problems with our products and
applications. There can be no assurance that these or other risks associated
with new product and service development or introduction will not occur. The
occurrence of one or more of these risks could have a materially adverse effect
on our financial condition and operating results.
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Dependence on 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.. Although this access is available from several
alternative suppliers, there can be no assurance that we can 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 as we
require could materially adversely affect our business, operations, and
financial condition.
Dependence on Key Personnel.
Our ability carry out our proposed activities will be dependent, to a
substantial degree, upon the efforts of our CEO, David Paolo. The loss of the
services of Mr. Paolo, or his incapacity to perform his duties would have a
material adverse effect upon our activities and prospects. We do not have key
man life insurance coverage on the life of Mr. Paolo. Our success is also
dependent on our ability to recruit and motivate high quality personnel. There
can be no assurance that we will be able to hire and retain such personnel. The
loss of the services of any of our key employees or officers could adversely
affect on our business.
Dilution of Common Stock.
Dilution represents the difference between the offering price and the net
tangible book value per share immediately after the completion of the Offering.
The net tangible value of the presently outstanding shares will, at no
additional cost to the holders thereof, be increased from approximately
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$.03 per share as of September 30, 1998 to $.29 per share as of December 22,
1998 as a result of our $1,200,000 private placement of 369,216 shares of Common
Stock ("December Placement"). The net tangible book value will increase to $2.47
if all of the shares are sold in this Offering ($2.69 if the Underwriter's
over-allotment is exercised in full). The shares of Common Stock acquired by the
public investors at $7.50 per share will have the same net tangible book value
of $2.47 per Share ($2.69 if the Underwriter's over-allotment is exercised).
Investors in this Offering will thus suffer an immediate loss of $5.03 per share
($4.81 if the Underwriter's over-allotment is exercised in full) in the net
tangible book value of each share purchased.
Control by Directors and Executive Officers.
Upon completion of this Offering, our present Stockholders will own
approximately 70% of the then outstanding shares of Common Stock. Therefore, the
majority of outstanding shares will be owned by our existing Stockholders and
these shareholders will poses voting control, giving them the ability to amend
corporate filings, elect all of our board of directors, and otherwise control
all matters requiring approval by our the shareholders, including approval of
significant corporate transactions. The purchasers of the shares of Common Stock
offered hereby would have no effective voice in our management and we would be
controlled by the existing Stockholders.
No Prior Public Market.
Prior to the Offering, there has been no public market for our Common
Stock. Although we intend to apply for listing of the Common Stock offered
hereby on the American Stock Exchange, there can be no assurance that an active
trading market will develop or be maintained. The market prices for securities
of Internet companies have historically been volatile. Factors that could cause
the market price of the Common Stock to fluctuate substantially include but are
not limited to:
o future technological innovations;
o new commercial products;
o changes in regulation;
o period to period fluctuations in financial performance; and
o fluctuations in the securities markets.
Such price changes have often been unrelated to the operating performance
of the affected companies. These broad market fluctuations may adversely affect
the market price of the Common Stock.
Arbitrary Determination of Offering Price
Our initial public offering price for the shares of Common Stock offered
hereby will be determined by negotiations between us and Dirks & Company, Inc.,
the Representative of the several Underwriters, and may bear no relationship to
the price at which the
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<PAGE>
Common Stock may trade after completion of this Offering. Factors which may be
considered in determining the initial public offering price include but are not
limited to:
o the information set forth in this Prospectus and otherwise available to
Dirks & Company, Inc.;
o the history of and the prospects for the industry in which we operate;
o the assessment of our management;
o our past and present operations;
o our prospects for future earnings;
o the present state of our development;
o the general condition of the securities markets at the time of this
Offering; and
o the recent market prices of and the demand for publicly traded common
stock of generally comparable companies.
A decline in the trading price of the Common Stock could also impact
negatively upon our ability to raise additional equity capital in the future.
Impact of Potential AMEX Delisting on Marketability of Securities; Broker\Dealer
Sales of Our Securities.
We intend to list our Common Stock on the American Stock Exchange
("AMEX"). AMEX has rules which establish criteria for the continued listing of
securities on AMEX. Generally, AMEX will consider delisting or suspending a
company based on, among other things, the following criteria: Stockholders'
equity, operating losses, reduced market value of publicly held shares,
substantial disposition of assets, and total number of shareholders.
If we were to continue to incur operating losses, we might be unable to
maintain the standards for continued listing and the listed securities could be
subject to delisting from AMEX. If our securities are delisted, an investor
would find it more difficult to dispose of our securities or to obtain accurate
quotations as to the price of our securities. Any news coverage concerning our
delisting may also adversely affect an investor's ability to dispose of our
securities. In addition, if our securities were delisted, they would likely be
subject to a rule that imposes additional sales practice requirements on
broker\dealers who sell such securities to persons other than established
customers and accredited investors (accredited investors are generally persons
having net worth in excess of $1,000,000 or annual income exceeding $200,000, or
$300,000 together with a spouse). For transactions covered by this rule, the
broker\dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale, as well as disclosing certain information concerning the risks of
purchasing low priced securities on the market for such securities.
Consequently, delisting, if it occurred, would adversely affect the ability of
broker\dealers to sell our securities and would make subsequent financing more
difficult.
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Penny Stock Regulation.
If we are unable to meet the AMEX listing or maintenance requirements and
the price per share of our Common Stock were to drop below $5.00 per share, then
our securities would become subject to certain "penny stock" rules promulgated
by the Securities and Exchange Commission. Under such rule, broker\dealers who
recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from this rule if the market price is at
least $5.00 per share.
The Commission has adopted regulations that generally define a "penny
stock" to be an equity security that has a market price of less than $5.00 per
share or an exercise price of less than $5.00 per share subject to certain
exceptions. Such exceptions include equity securities listed on AMEX and equity
securities issued by an issuer that has: (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for more than three
years, or (ii) net tangible assets of at least $5,000,000, if such issuer has
been in continuous operation for less than three years, or (iii) average revenue
of at least $6,000,000 for the preceding three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a risk of disclosure schedule explaining the penny
stock market and the risks associated therewith.
Shares Eligible for Future Sale.
Upon completion of this Offering, we will have 6,610,716 shares of Common
Stock outstanding (6,910,716 shares if the Underwriter's over-allotment option
is exercised in full). The 2,000,000 shares of Common Stock offered hereby
(2,300,000 shares if the Underwriter's over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act, except for any shares purchased by our "affiliates," as such
term is defined in Rule 144 promulgated under the Securities Act. The
outstanding shares of Common Stock prior to the Offering are "restricted
securities" within the meaning of Rule 144. Restricted securities may only be
sold in private transactions or pursuant to Rule 144. In addition, an aggregate
of 1,131,922 shares are issuable upon the exercise of outstanding warrants. All
of such shares will be restricted securities when issued, unless registered.
We along with our Stockholders and our warrant holders have agreed to not
(without the prior written consent of Dirks & Company), directly or indirectly,
offer, sell, pledge, grant any option to purchase, or otherwise sell or dispose
of any shares of LOA's Common Stock or other similar securities for a period of
twelve months after the Offering. Sales of substantial amounts of Common Stock
(including shares issued upon the exercise of outstanding warrants) in the
public market after the Offering or the prospect of such sales could adversely
affect the market price of the Common Stock and may have a material affect on
our ability to raise any necessary capital to fund its future operations.
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No Dividends.
We have never paid dividends on our Common Stock and do not contemplate
paying dividends in the foreseeable future. It is Management's present intention
to retain future earnings, if any, for use in our business.
Possible Anti-Takeover Effects of Delaware Law
We are subject to the provisions of Section 203 of the General Corporation
Law of the State of Delaware. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner or unless the interested
stockholder acquires at least 85% of the corporation's voting stock (excluding
shares held by certain designated stockholders) in the transaction in which it
becomes an interested stockholder. A "business combination" includes mergers,
asset sales and other transactions resulting in financial benefit to the
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the previous three years did own, 15% or more of the corporation's voting
stock. This provision of the Delaware law could delay and make more difficult a
business combination even if the business combination would be beneficial, in
the short term, to the interests of our stockholders and also could limit the
price certain investors might be willing to pay in the future for shares of our
Common Stock.
Limitation of Liability and Indemnification.
Our certificate of incorporation limits, to the maximum extent permitted
by the Delaware General Corporation Law, the personal liability of directors for
monetary damages for breach of their fiduciary duties as directors, and provides
that we shall indemnify its officers and directors and may indemnify its
employees and other agents to the fullest extent permitted by law. Section 145
of the Delaware law provides that a corporation may indemnify a director,
officer, employee or agent made or threatened to be made a party to an action by
reason of the fact that he was a director, officer, employee or agent of the
corporation or was serving at the request of the corporation against expenses
actually and reasonably incurred in connection with such action if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
interests of the corporation, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was unlawful.
Delaware law does not permit a corporation to eliminate a director's duty of
care, and the provisions of our certificate of incorporation have no effect on
the availability of equitable remedies, such as injunction or rescission, for a
director's breach of the duty of care.
We may enter into indemnification agreements with its directors and
officers which may require it, among other things, to indemnify such directors
and officers against liabilities that may arise by reason of their status or
service as directors or officers (other than liabilities arising from
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willful misconduct of a culpable nature), to advance their expenses incurred as
a result of any proceeding against them as to which they could be indemnified,
and to obtain directors' and officers' insurance, if available on reasonable
terms.
Year 2000.
Like many other entities, we are currently assessing our computer software
and database with respect to its functionality beyond the turn of the century.
The extent and estimated cost of the modifications which will be required cannot
yet be determined, although it is expected that such expenditures will not have
a material effect on the financial condition and results of our operations.
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 December 15, 1998, we spent $1,500 on our Year 2000 compliant efforts. This
figure includes all labor and expenses.
Lack of Experience of the Representative.
Dirks & Company, Inc., the representative of the several Underwriters,
commenced operations in July 1997. Dirks & Company has co-managed only two
previous public offerings of securities and participated as an underwriter in
only three previous public offerings of securities. No assurances can be given
that the representative will be able to participate as a market maker of the
common stock or that any broker-dealer will become a market maker for the common
stock.
Risks Associated with Forward Looking Statements.
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 similar statements. The statements in
"Risk Factors" are cautionary statements. They identify important factors, with
respect to forward-looking statements, that could cause actual results to differ
materially from those forecasted in such statements. All forward-looking
statements in this Prospectus are expressly qualified in their entirety by the
cautionary statements in this paragraph.
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USE OF PROCEEDS
The net proceeds to LOA from the sale of the 2,000,000 shares of Common
Stock offered hereby are estimated to be approximately $12,725,000, and
$14,682,500 if the Underwriter's over-allotment option is exercised in full,
(assuming an initial offering price of $7.50 per share), after deducting
underwriting discounts and commissions, and other estimated expenses of
approximately $325,000 payable by LOA.
LOA anticipates using the net proceeds from the Offering as follows::
Amount($): Percent(%)(1)
----------- -------------
Network expansion and
equipment upgrades(2) $4,700,000 36.9%
Strategic acquisitions(3) $4,100,000 32.2%
Marketing and sales(4) $2,000,000 15.7%
Working capital and
general corporate purposes(5) $1,925,000 15.1%
- --------------------------
(1) Assumes no exercise of the Underwriter's over-allotment option.
(2) LOA intends to purchase routing and switching equipment to continue its
network buildup of the specific products and services which is currently
offered.
(3) LOA does not currently have any plans or agreements regarding
acquisitions.
(4) LOA intends 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. Proceeds from the sale of the
over-allotment option, if any, will be used for working capital and
general corporate purposes.
The foregoing represents LOA's best estimate of its allocation of the net
proceeds from the sale of shares of Common Stock offered hereby based on the
current state of LOA's business operations, LOA's current plans and current
economic and industry conditions and is subject to reallocation among the
categories listed above or for additional purposes. Accordingly, LOA will have
broad discretion as to the application of the net proceeds.
LOA believes that the net proceeds of this Offering will be sufficient to
meet its projected needs for working capital and capital requirements through at
least the 12 months following
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completion of this Offering. Pending such uses, LOA intends to invest the net
proceeds from this Offering in interest bearing accounts, certificates of
deposit, money market funds or other short term investments.
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CAPITALIZATION
The following table sets forth the capitalization of LOA: (i) as of
September 30, 1998; and (ii) as adjusted to give effect to (a) the completion of
the December Placement of 369,216 shares of Common Stock at $3.25 per share and
the application of the estimated net proceeds therefrom; and (b) the
consummation of the Offering at an assumed initial public offering price of
$7.50 per share and the application of the estimated net proceeds therefrom
which include the repayment of all outstanding debt. The table should be read in
conjunction with the Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus.
September 30, 1998
------------------
Actual As Adjusted(1)
------ --------------
Long Term Note Payable: ................. $ 12,490 --
Stockholders' Equity (deficit):
Common Stock, $.01 par value;
20,000,000 shares authorized,
4,241,500 issued and outstanding
as of September 30, 1998; and
6,610,716 issued and outstanding,
as adjusted ............................ $ 18,070 $ 41,762
Additional paid-in capital(2) ........... $ 307,454 $ 16,483,762
--------- ------------
Accumulated deficit ..................... $(178,228) $ (178,228)
--------- ------------
Total Stockholders' equity ......... $ 147,296 $ 16,347,248
--------- ------------
Total capitalization ............... $ 147,296 $ 16,347,248
========= ============
- ----------
(1) Does not include: (i) 1,000,000 shares of 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; (ii) 13,076 shares of Common Stock reserved for issuance upon
the exercise of outstanding warrants granted on December 3, 1998, which
warrants are exercisable during the four year period commencing December
3, 1999 and expiring December 3, 2003 at $3.90 per share; 23,845 shares of
Common Stock reserved for issuance upon the exercise of outstanding
warrants, granted on December 23, 1998, which warrants are exercisable
during the four year period commencing December 23, 1999 and expiring
December 23, 2003 at $3.90 per share; (iii) 50,000 shares of Common Stock
reserved for issuance upon the exercise of outstanding warrants
exercisable during the five year period commencing December 31, 1998 at
$3.50 per share; (iv) 45,000 shares of Common Stock reserved for issuance
upon the exercise of outstanding warrants exercisable during the four year
period commencing December 31, 1998 at $3.25 per share; (v) 300,000 shares
of Common Stock issuable upon exercise of the Underwriter's over-allotment
option; and (vi) 200,000 shares of Common Stock reserved for issuance upon
the exercise of the Representative's Warrants exercisable during the four
year period
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commencing one year from the date of this Prospectus at an exercise price
of 120% of the public offering price.
(2) In January, 1998 the board of directors of LOA approved a change in
authorized common stock from 1,000 shares at no par value to 5,000,000
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.
DIVIDEND POLICY
LOA has never paid any dividends on its Common Stock. LOA does not intend
to declare or pay dividends on the Common Stock, but to retain earnings, if any,
for the operation and expansion of LOA's business. Dividends will be subject to
the discretion of the Board of Directors and will be contingent on future
earnings, if any, LOA's financial condition, capital requirements, general
business conditions and such other factors as the Board of Directors deems
relevant.
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DILUTION
Purchasers of the shares of Common Stock offered hereby will experience an
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 (total tangible assets less total liabilities) by the
number of outstanding shares of Common Stock. As of September 30, 1998, LOA had
a net tangible book value of $147,296, approximately $.03 per share of Common
Stock. After considering LOA's December Placement of 369,216 shares at $3.25 per
share, the net tangible book value per share at December 22, 1998 is $.29 per
share. Without taking into account any other changes in such net tangible book
value of LOA after December 22, 1998, other than to give effect to the sale of
all of the shares of Common Stock offered hereby at an assumed initial public
offering price of $7.50 per share, the net tangible book value on December 22,
1998, would have been $16,347,296 or $2.47 per share, which represents an
immediate increase in the net tangible book value of approximately $2.18 or an
increase of 752% per share to existing Stockholders and an immediate dilution of
$5.03 per share or 67% to new investors. The following table illustrates this
per share dilution:
Assumed initial public offering
price per share ............................... $7.50
Net tangible book value
per share as of September 30, 1998............. $ .03
Increase per share attributable
to December Placement.......................... $0.26
Increase per share attributable
to this Offering............................... $2.18
Net tangible book value per share
after this Offering............................ $2.47
Dilution per share to new investors
post December Placement........................ $5.03
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The following table summarizes, as of December 31, 1998, the number of
shares of Common Stock purchased from LOA, the total consideration paid to LOA
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 70% $1,525,524 9% $ .33
New Investors........... 2,000,000 30% $15,000,000 91% $7.50
--------- --- ----------- --- ----
Total............. 6,610,716 100% $16,525,524 100%
--------- ---- ---------- ----
(1) Does not include (i) 1,000,000 shares of 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; (ii) 36,921 shares of Common Stock reserved for issuance upon
the exercise of outstanding warrants exercisable during the four year
period commencing December, 1999 at $3.90 per share; (iii) 50,000 shares
of Common Stock reserved for issuance upon the exercise of outstanding
warrants exercisable during the four year period commencing December 31,
1998 at $3.50 per share; and (iv) 45,000 shares of Common Stock reserved
for issuance upon the exercise of outstanding warrants exercisable during
the four year period commencing December 31, 1998 at $3.25 per share; (v)
300,000 shares of Common Stock issuable upon the exercise of the
Underwriter's over-allotment option; and (vi) 200,000 shares of Common
Stock reserved for issuance upon there 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 120% of the initial
public offering price. Should the Underwriter's over-allotment option be
exercised, the new investors will hold 2,300,000 shares of Common Stock
representing 33.3% of the outstanding shares of Common Stock after the
Offering. The proceeds of $17,250,000 would represent approximately 92% of
the total consideration paid by investors.
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SELECTED FINANCIAL DATA
The following table sets forth selected financial information with respect
to LOA as of and for the periods indicated. The statement of operations data for
the years ended December 31, 1997 and 1996, and the balance sheet data for the
year ended December 31, 1997 are derived from LOA's audited Financial Statements
included elsewhere in this Prospectus. The statement of operations data for the
nine month periods ended September 30, 1998 and 1997, and the balance sheet data
for the nine month period ended September 30, 1998 have been derived from
unaudited financial statements and include all adjustments (consisting of only
normal recurring adjustments) that LOA considers necessary for a fair statement
of the results of such interim periods. Results for the nine months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year or for any future period. The selected financial information
should be read in conjunction with the financial statements and notes thereto
and the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
For the Nine
Months Ended Year Ended
September 30, December 31,
------------- ------------
(unaudited)
1998 1997 1997 1996
---- ---- ---- ----
Statement of Operations Data:
Revenues .................. $ 551,304 $ 217,038 $ 351,560 $ 186,702
Total Operating Costs
and Expenses ............. $ 727,249 382,395 629,584 323,517
Net loss .................. $ (178,228) $(167,825) $(280,001) $(163,036)
=========== ========= ========= =========
Basic and diluted
net loss per share ....... $ (.05) $ (1,661) $ (2,772) $ (1,614)
Shares used in computing
basic and diluted
net loss per share ........ 3,708,770 101 101 101
December 31, 1997 September 30, 1998
----------------- ------------------
(Unaudited)
Actual Actual As Adjusted(1)
------ ------ --------------
Balance Sheet Data
(end of period):
Cash -- $ 69,911 $13,823,145
Working Capital
(Deficit) (384,126) $(279,870) $13,551,640
Total Assets 362,655 $ 602,204 $16,711,438
Total Debt 22,796 $ 18,486 $ 0
Total Liabilities 463,396 $ 454,908 $ 364,142
Stockholders' Equity
(Deficit) (100,741) $ 147,296 $16,347,296
(1) The as adjusted balance sheet data as of September 30, 1998 gives effect
to (i) the completion on December 22, 1998 of a private placement of
369,216 shares of Common Stock at $3.25 per share ("December Placement");
and (ii) the 2,000,000 shares offered hereby at an assumed initial
offering price of $7.50 per share and the application of the net proceeds
therefrom.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information contained in this Registration Statement, including in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain forward-looking statements. The forward-looking statements
contained herein are based on current expectations that involve a number of
risks and uncertainties. Such forward-looking statements are based on
assumptions which include, but are not limited to, the ability of LOA to obtain
additional financing, the ability of LOA to implement its acquisition strategy
and the success of that strategy, that LOA will continue to design, market and
provide successful new services, that competitive conditions will not change
materially, that demand for LOA's services will continue to grow, that LOA will
retain and add qualified personnel, that LOA's forecasts will accurately
anticipate revenue growth and the costs of producing that growth, and that there
will be no material adverse change in LOA's business. In light of the
significant uncertainties inherent in the forward-looking information included
in this Registration Statement, actual results could differ materially from the
forward-looking information contained in this Registration Statement. The
following discussion and analysis should be read in conjunction with the
Selected Financial Data and the Financial Statements and Notes thereto included
elsewhere herein
Overview
LOA is a Northeast regional competitive local exchange carrier ("CLEC")
and Information/Internet Service Provider ("IISP") positioning itself to provide
a full range of Internet, voice, data and cable programming solutions to
commercial clients.
LOA currently provides a variety of Internet-related services to business
organizations, including leased lines, web page hosting, web page design,
Internet set-up and sales of DEC Alpha web servers to customers in the State of
Rhode Island. LOA has developed a base of corporate and institutional customers
for its Internet services and has built the necessary network infrastructure for
an Internet service network. The majority of LOA's current operations is
providing dedicated access lines for commercial accounts. LOA maintains a
national dial-up Internet service along with commercial Internet Protocol ("IP")
transit throughout the Northeast. LOA, and its predecessor entities, has been
providing on-line services including web page hosting and design, and other
related products, to individual and corporate clients since November 1992.
LOA has been approved as a competitive local exchange company. LOA
believes its CLEC status allows it to provide a range of local telecommunication
services to its customers including voice, data, and Internet services. Such
customers may include residential users, Internet Exchange Carriers ("IXC"),
Internet Service Providers ("ISP"), wireless carriers and business, government
and institutional end users. LOA believes it will be able to provide typical
phone service such as dial tone, toll calls (in-state long distance), long
distance, as well as high-speed Internet access, through the use of home cable
into a residence.
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Currently, LOA is a retail customer of Bell Atlantic. LOA intends to market
certain new communication link services to existing customers while attempting
to gain additional market share from the ILECs. These new services include,
POP-to-Pop Special Access, End-User/IXC Special Access and Private Line.
Results of Operations
Comparison of Nine Months Ended September 30, 1998
to Nine Months Ended September 30, 1997
Revenues
LOA's revenues are primarily comprised of dial-up, dedicated access
service and web services. Revenues grew 154% from $217,038 to $551,304 for the
nine months ended September 30, 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 LOA's local
market, Rhode Island.
Dial-up
During 1998, LOA expended significant marketing efforts in Rhode Island to
expand its Internet dial-up customer base through billboard advertising, radio
media, and target marketing campaigns. As a result, dial-up revenue grew from
$58,793 to $177,111 from the nine months ended September 30, 1997 as compared to
the comparable period in 1998 for an increase of 200%.
Dedicated Access Service
During the fourth quarter of 1997, LOA increased its sales efforts for
dedicated Internet access service which resulted in higher revenue growth during
1998. As a result, dedicated Internet access service business grew based
principally on ISDN, T-1 and High Speed circuit growth. Revenues grew from
$115,456 to $314,272 from the nine months ended September 30, 1997 as compared
to the comparable period in 1998 for an increase of 172%.
Web Services
During 1998, Web site hosting and consulting became more important to
LOA's new and existing customers as the popularity of the web increased as a
business tool. Accordingly, to respond to this increase in demand, LOA increased
its sales efforts and increased server capacities and speed. As a result, web
services revenue relating to Dial-up access, Point to Point, 384k & 56k Frame
Relay, xDSL, Domain Names and Web Page Design & Hosting grew from $32,975 to
$51,343 from the nine months ended September 30, 1997 as compared to the
comparable period in 1998 for an increase of 56%.
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Gross Profit
Gross profit consists of total revenue less the cost of delivering
services and equipment. Gross profit increased from $126,572 to $322,254 for an
increase of 58% for the nine months ended September 30, 1997 and 1998,
respectively.
Selling General, and Administrative Expenses
Selling general, and administrative expenses ("SG&A") increased from
$291,929 in the nine months ended September 30, 1997 to $495,375 in the nine
months ended September 30, 1998 for an increase of 70%. These increases were
primarily attributed to six additional personnel and overhead costs associated
with LOA's expansion efforts, including additional telecommunication costs of
approximately $106,000 relating to building out LOA's network backbone.
Advertising
Advertising expenses were $4,600 for the nine months ended September 30,
1997, and $64,820 for the nine months ended September 30, 1998 for an increase
of 1,039%.
Legal and Accounting
Legal and accounting expenses increased from $19,206 in the nine months
ended September 30, 1997 to $28,524 in the nine months ended September 30, 1998
for an increase of 50%. This increase resulted from legal and accounting work
required in preparation of LOA's September and December private placements.
Other Expenses
Other expenses represent interest on LOA small business loans and
penalties in connection with LOA's payroll tax delinquency. Other expenses were
$2,468 and $2,283 for the nine months ended September 30, 1997, and 1998,
respectively.
Net Loss
As a result of the foregoing, net loss grew from $167,825 to $178,228 for
the nine months ended September 30, 1997, and 1998, respectively, for an
increase of 6.2%.
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Comparison of Fiscal Year Ended December 31, 1997
to Fiscal Year Ended December 31, 1996
Revenues
LOA's revenue grew 88% from $186,702 to $351,560 for the year ended
December 31, 1998, as compared to the comparable period in 1997. Revenue growth
performance is attributable to increasing sales efforts, services offered, and
an aggressive marketing campaign in LOA's local market, Rhode Island.
Dial-up
During 1997, LOA expended significant marketing efforts to expand its
others services dedicated to access and web services. This resulted in a
decrease in LOA's dial-up customer base. As a result, dial-up revenue decreased
from $168,119 to $123,680 from 1996 to 1997 for a decrease of 26%.
Dedicated Access Service
During the fourth quarter of 1997, LOA increased its sales efforts for
dedicated access service which resulted in higher revenue growth during fiscal
year 1998. As a result, dedicated access service business grew based principally
on ISDN, T-1 and High Speed circuit growth. Revenues grew from $14,153 to
$172,734 from fiscal year 1996 to fiscal year 1997, for an increase of 1,120%.
Web Services
During 1997, Web site hosting and consulting became more important to
LOA's new and existing customers as the popularity of the web increased as a
business tool. As a result, web services revenue grew from $4,430 to $41,895
from fiscal year 1996 to fiscal year 1997 for an increase of 846%.
Gross Profit
Gross profit consists of total revenue less the cost of delivering
services and equipment. Gross profit increased from $134,666 to $213,036 from
1996 to 1997 for an increase of 55%. This increase was a direct result of the
increase in revenues.
Selling General, and Administrative Expenses
Selling general, and administrative expenses ("SG&A") increased from
$271,481 in fiscal year 1996 to $491,060 in fiscal year 1997, for an increase of
81%. The increases was primarily attributed to three additional personnel and
overhead costs associated with LOA's
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expansion efforts. Included in overhead costs were additional telecommunication
costs of $140,364 related to building out LOA's network.
Advertising expenses were $64,820 and $8,089 for the years ended December
31, 1997, and 1996, respectively.
Other Expenses
Other expenses represent interest on a small business loan and tax
penalties in connection with certain payroll taxes owed to Internal Revenue
Service ("IRS"). LOA settled with the IRS in the amount of $41,559 and received
a final release to that effect, dated December 28, 1998. Other expenses were
$26,221 and $1,977 in fiscal year 1996 and fiscal year 1997, respectively. This
decrease was primarily attributed to the decrease in penalties during 1997.
Net Loss
As a result of the foregoing, net loss grew from $163,036 to $280,001 in
1996 and 1997 for an increase of 72%.
Liquidity and Capital Resources
LOA has historically financed our operations primarily through the sale of
equity and debt securities and through funds provided by LOA's predecessor's
parent company.
During 1997, LOA received $179,260 from its parent company, GTMI. These
funds were utilized to fund operations, expand marketing efforts and expand
LOA's customer base. During the third quarter of 1998, LOA sold 275,000 shares
of Common Stock in a private placement, dated August 18, 1998, resulting in
gross proceeds of $275,000 for use in operational activities. Subsequent to
September 30, 1998, LOA sold an additional 369,216 shares of Common Stock in the
December Placement resulting in gross proceeds of approximately $1,200,000, and
net proceeds of approximately $1,044,000.
As of September 30, 1998, LOA had notes payable totaling $18,486, and
accrued but unpaid expenses totaling $72,280, current accounts payable totaling
$338,433, and a current working capital deficiency of $279,870. This working
capital deficiency has been eliminated as a result of the December Placement.
Certain payroll taxes were owed to the IRS. LOA settled with the IRS in
full in the amount of $41,559 and received a final release to that effect, dated
December 28, 1998.
In August 1998, certain consultants were issued 1,000,000 warrants. 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 certain piggyback
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registration rights.
In December 1998, LOA issued 131,921 warrants to consultants and a
placement agent in connection with the December Placement. 50,000 and 45,000 of
the warrants are exercisable at $3.50 and $3.25 per share, respectively. The
warrants are exercisable during the four-year period commencing December 31,
1998. Also issued in December 1998, were 36,921 warrants exercisable at $3.90,
which are exercisable during the four year period commencing December 15, 1999.
For the period ended September 30, 1998, LOA's negative cash flow from
operations was $146,123, down from $159,628 for the same period in the prior
year due to an increase in revenue growth.
LOA anticipates based upon its currently prepared plans and assumptions
relating to operations that the net proceeds from the sale of the securities
offered herein and the projected cash flow from operations that the cash
available will be sufficient to satisfy our contemplated cash requirements for
at least the 12 months following completion of this Offering.
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, such systems may be unable to accurately process certain
date-based information.
LOA has implemented a Year 2000 program to ensure that LOA's computer
systems and applications will function properly beyond 1999. LOA has identified
vendor and business partner software with which it electronically interacts, or
from which it purchases supplies, and has requested Year 2000 compliance
certifications. LOA has received verbal assurances from those vendors and
business partners that they and their respective suppliers are Year 2000
compliant. Although the LOA believes all of its systems are and will be Year
2000 compliant, there can be no assurances that all of LOA's vendors' and
business partners' systems will be Year 2000 compliant. LOA's cost to comply
with the Year 2000 initiative is not expected to be material.
In addition, LOA is communicating with its external service providers to
ensure that such service providers are taking appropriate action to address Year
2000 issues. However, there can be no assurance that the systems of third
parties on which LOA's systems rely will connect, or that a conversion is
compatible with LOA's systems and accordingly would not have an adverse effect
on LOA's systems.
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
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Obtained for Internal Use" ("SOP 98-1"). 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. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998, with earlier application
permitted. LOA has not determined the impact of the adoption of SOP 98-1 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 of Position 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. The SOP is effective
for financial statements for fiscal years beginning after December 15, 1998. LOA
does not expect adoption of this SOP to have a material impact on its financial
statements.
LOA will be required to adopt Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Statement 131 superseded SFAS 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 LOA's 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 ("FASB") issued
SFAS 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. SFAS
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. LOA does not anticipate that the adoption of SFAS 133 will have a
material impact on its financial position or results of operations.
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BUSINESS
Overview
LOA was incorporated in Rhode Island ("LOARI") in 1992 for the purpose of
providing online and Internet related services. LOA is a Rhode Island regional
competitive local exchange carrier ("CLEC") and information/Internet Service
Provider ("IISP"). LOA currently provides a variety of internet solutions to
both commercial and residential customers and we plan to include 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.
LOA believes that the Northeast region provides access to attractive Tier
1 (cities with populations over 2,000,000), Tier 2 and 3 (cities with
populations between 250,000 and 2,000,000) demographic markets within close
proximity of planned network expansions resulting in efficient utilization of
network capacity. Our plan is to initiate an acquisition campaign targeting
ISPs, CLECs and resellers of telecommunication services to gain market share,
name recognition and valuable industry talent. In parallel with the acquisition
program, LOA intends to initiate an internal growth strategy that will pursue
market share through an increased direct sales force offering an expanded
product line to both commercial and residential customers. Anticipated 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.
In January of 1997, LOARI sold 100% of its assets to Global Telemedia
International, Inc. ("GTMI") and agreed to change its name to Tekcom, Inc. 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"). At
this time GTMI formed System 4, Inc., a wholly owned Delaware subsidiary, in
which to transfer the LOARI assets and liabilities. In July 1997, System 4, Inc.
changed its name to Log On America, Inc.
Wan Secure, Inc. ("WS") was organized in Delaware in January 1998, 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 consideration
for the purchase, WS executed a note in the amount of $100,000 ("GTMI Note").
The GTMI Note was personally guaranteed by David R. Paolo, WS's majority
shareholder. 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.
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In and around February 1998, 100% of the shareholders of Tekcom, Inc.
(formerly LOARI) agreed to surrender and release all rights and claims to the
Contingent Sum. As consideration for such surrender and release, Tekcom
shareholders received an aggregate of 795,130 shares of LOA. In July 1998, GTMI
accepted a settlement of the GTMI Note. In consideration for such settlement,
GTMI accepted $25,000. As a result of the aforesaid transactions, LOA is a
successor in interest to WS, System 4 and LOARI.
Business
LOA is an Internet Service Provider ("ISP") which provides its customers
with access to the Internet. The majority of LOA's current operations is
providing dedicated access lines for commercial accounts. LOA maintains a
national dial-up Internet service along with commercial Internet Protocol ("IP")
transit throughout the Northeast. LOA, and its predecessor entities, has been
providing on-line services, and related products, to individual and corporate
clients since November 1992. LOA has also recently been approved as a
competitive local exchange company ("CLEC") in Rhode Island. LOA believes its
CLEC status allows it to provide a full range of local telecommunication
services to its customers including voice, data, and Internet services. Such
customers include residential users, Internet Exchange Carriers ("IXC"),
Internet Service Providers ("ISP"), wireless carriers and business, government
and institutional end users. LOA believes that its prices will be competitive
with those charged by independent local exchange carriers ("ILECs"). LOA intends
to provide typical phone service such as dial tone, toll calls (in-state long
distance), long distance, as well as high-speed Internet access, through the use
of one cable into the home of a user in the second quarter of 1999 in Rhode
Island. LOA believes its commercial customers will benefit from LOA's CLEC
status by LOA's ability to resell local phone services from the area's local
provider (Bell Atlantic) at a discount to certain of its competitors. Currently,
LOA is a retail customer of Bell Atlantic.
LOA is also positioned to address local and wide area network ("LAN/WAN")
security issues and provide secure virtual private networks, encrypted DS0 to
DS3 IP transit, LAN/WAN design, Intranets, secure commerce, secure server
applications, and firewall sales and support.
Marketing and Business Strategy.
LOA's goal is to be a leading provider of a wide range of Internet, voice,
data, video, and cable programming solutions in the Northeast. To effectuate
such goal LOA intends to develop, utilize and package its services for the
marketplace at competitive prices. LOA has focused its efforts on high revenue,
high margin commercial clients which enter into term contracts for service,
generally 12 months in duration. LOA believes this approach differentiates it
from its competitors who generally seek bulk quantities of Internet dial-up
customers for a monthly fee without contractual commitment. Although LOA also
markets to customers on a monthly fee basis without contractual commitment, LOA
relies on service and performance to attract and to keep its clients. LOA also
provides equipment and security products to its clients which provides enhanced
customer service and helps LOA meet the demands of its customers.
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LOA employs the following marketing strategies: targeted direct marketing,
development of brochures, trade show participation and print media. Upon
consummation of this Offering, LOA plans to expand its direct marketing sales
team, and to employ more sales staff in the Northeast.
LOA currently offers a comprehensive range of Internet access options, Web
production services and Web hosting services designed to meet the needs of
businesses and individual subscribers. LOA's strategy is to focus on cities that
have not become the primary target markets for national ISPs such as Netcom On
Line Communication Services, Inc. and America Online, Inc. or long distance
carriers, and have a population base sufficient to provide a return on
investment to justify our initiatives. It is the objective of LOA to provide a
"one-stop-shop" to its customers. 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. LOA plans to leverage its local presence in the form of
customized service, and direct field sales force and customer service
organizations to provide on-site sales and support. LOA also plans to remain
competitive in the individual internet market with reasonably priced services.
LOA believes its recent approval as a CLEC from the Rhode Island Public
Utilities Commission provides LOA with the ability to become a full service
provider of local telecommunications services to IXCs, ISPs, wireless carriers
and business, government and institutional end users in selected cities by
offering products and customer service at prices competitive with those charged
by the ILECs.
Internet Business
Our strategy is to continue to focus on our 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. LOA intends to continue to
expand its subscriber base by providing high quality services coupled with the
expertise to assist its customers with solutions to their internet and
telecommunication needs. LOA intends to achieve its strategy by focusing on the
following key elements:
1. Focus On Business Customers. LOA believes 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. LOA believes 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. LOA believes 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. LOA believes that by offering its business customers a
service oriented
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relationship, it can position itself as a value added supplier and thus gain a
competitive advantage over certain of its larger competitors which may be
unwilling or unable to provide the kind of customized service that LOA intends
to provide. In order to implement this strategy, LOA instituted a technical
personnel sales staff, currently comprised of 2 individuals.
2. Provide High-Bandwidth, Reliable Infrastructure Services. LOA has
contracted with Bell Atlantic to deploy LOA's first 155Mbs OC/3 Sonnet ring
("Sonnet") around the city of Providence, Rhode Island. Sonnet will allow LOA to
deliver high speed Internet access throughout all major points of Providence,
Road Island.
3. Provide Value-Added Services. LOA offers 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, network consulting, security consulting, data services, commercial
transaction and payment processing services, Intranet applications, and e-mail
to fax services.
4. Pricing Strategy. LOA believes that price competition will intensify as
the Internet market grows and matures. LOA intends to remain competitive by
pricing its services to reflect market conditions. Accordingly, LOA believes
that management of its costs will be critical to remaining competitive. LOA has
made and plans to continue to make investments in its hardware and network
infrastructure which are designed to increase efficiency and reduce the cost of
delivering its services. LOA intends to price all of its services in order to
remain competitive with demand, competition and market trends.
Internet Products and Services.
LOA is a Northeast CLEC and IISP providing Internet and wide area network
("WAN") access, Web Hosting and Web Development. Its current clients include
educational facilities such as Providence College, international corporations
such as Cookson America, Inc., and Toray Plastics, Inc., organizations such as
Butler Hospital and the Bell Atlantic Telecommunications Center, and
governmental agencies such as the Rhode Island Supreme Court, the Office of the
Rhode Island Attorney General and the Rhode Island Public Utilities Commission.
LOA provides its clients with a variety of services for Internet access
such as: e-mail, web sites, and dedicated circuits with wide bandwidth to
enhance data transmission. LOA's services are used by clients to receive and/or
send data or display products and services on the Internet using text,
high-resolution color photographs, video and/or audio.
LOA is the Domain Name registration provider for Wenzhou Emy Network
Information Company, a Chinese entity which markets access to the World Wide Web
to institutions and corporations within the Zhejiang Province of the People's
Republic of China.
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The following list summarizes and defines the specific products and
services which LOA currently offers:
Dial-up access: Retail access for home users with personal computers.
Point to Point, 384k & 56k Frame Relay: Dedicated access for higher bandwidth
solutions for corporate needs.
xDSL: High bandwidth solutions for residential and corporate needs.
Domain Names: The name used as a means of identity for use on the Internet in
the People's Republic of China.
Web Page Design & Hosting: Building, designing and construction of a web sites,
including corporate web sites that reside and are served from the ISP's web
server.
Equipment sales: The sale of hardware associated with the deployment of Internet
services. DEC Alpha servers, Cisco Routers, CSU/DSU and cables.
Banner Advertisements: Display ads and links listed on LOA's web site.
Secure Virtual Private Networks: Provides long haul connectivity between remote
sites.
Encrypted DS0 to DS3 IP transit: Secure IP Tunneling with T1 to T3 local loops
back-hauled through LOA's backbone.
Secure LAN and WAN design: LOA's technical team can design Local Area or Wide
Area Networks for small to large corporations seeking security protection and
flexibility in communications.
Intranet, Extranet, Secure Commerce: LOA's technical personnel can design custom
Intranet, Extranet or Secure Commerce Server to meet various business needs.
Security Breach Investigations: LOA investigates compromised networks and
attempts to identify perpetrators of security breaches.
Data Loss Insurance: LOA also offers its customers a "Data Loss Insurance
Policy" that insures a network from the threat of security breaches.
Continue To Increase The Number Of Cities Served. During 1996, LOA
achieved its goal of having dial-up services in a total of 230 area codes, and
LOA plans to have its 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 LOA will meet such goals. LOA's
expansion into additional cities is expected to be accomplished by the
acquisition of existing networks as well as the development of new
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networks. By adding networks, LOA believes it can increase revenues and obtain
economies of scale in its operating costs.
Planned CLEC Business.
On October 6, 1998, LOA's application for CLEC status with the Rhode
Island Public Utilities Commission was approved. LOA intends to become a full
service provider of local telecommunications services to IXCs, ISPs, wireless
carriers and business, government and institutional end users in selected cities
in the Northeast by offering products with customer service at competitive
prices with those charged by the ILECs. LOA plans on preparing other
applications for CLEC status in the Northeast.
The principal elements of LOA's CLEC strategy include:
Targeting Second and Third Tier Markets. As an early entrant in selected
second and third tier cities (cities with a population of between 250,000 to
2,000,000), as well as through its acquisition strategy, LOA believes it can
attain a competitive position by securing franchises and rights-of-way,
installing CLEC networks and facilities and establishing customer relationships
with IXCs, ISPs, wireless carriers and business, government and institutional
end users that will enable it to take advantage of the potential growth rates
for local exchange service revenues in those markets. Currently, LOA has not
secured, and has no agreements to secure, any franchises, rights-of-way,
installed CLEC networks, facilities, established customer relationships with
IXCs, ISPs, wireless carriers, business, or government and institutional end
users.
LOA also intends to pursue opportunities in selected first tier markets
defined as those cities in the Northeast with over two million people. LOA
intends to utilize its existing operational capabilities in conjunction with
proposed operating agreements with IXC customers. LOA's intends to design its
networks to access at least 70% to 80% of the identified business, government
and institutional end user revenue base and the IXC facilities ("Points of
Presence" or "POPs") and substantially all of the central offices of the ILECs
within the defined markets.
Expand and Enhance Service Offerings.
LOA intends to expand its capability to provide enhanced services to
complement its planned switch-based services. LOA intends that its enhanced
services will include, among other things, high speed video conferencing, frame
relay and ATM-based packet transport services
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along with its currently existing Internet access products. LOA plans to upgrade
and add to its systems and services as technology and regulations permit.
Planned CLEC Products And Services.
LOA plans to provide several types of switched access and private line
services to IXC and end-user customers. Historically, competitive access
providers ("CAPs") were able to offer only non-switched special access and
private line services which involved the installation of dedicated lines to
provide the following types of communications links:
POP-to-POP Special Access. Telecommunications lines linking the POPs of
one IXC or the POPs of different IXCs in a market, allowing these POPs to
exchange transmissions for transport to their final destinations.
End-User/IXC Special Access. Telecommunications lines between an end user,
such as a business, and the local POP of its selected IXC.
Private Line. Telecommunications 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 IXC POP, through the ILEC's central office to the end
users.
Collocated POP-to-ILEC Switched Access Transport: A dedicated line
carrying switched transmissions from the ILEC's central office to an IXC's POP.
In order to provide these services, LOA intends to offer various types of
dedicated fiber optic lines that operate at different speeds and handle varying
amounts of traffic to provide tailor-made solutions to its customers' needs,
including:
DS-0: A dedicated line service that meets the requirements of business
communications, with transmission capacity of up to 64 kilobits of bandwidth per
second (a voice grade equivalent circuit). 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 IXCs or other customer locations. Used for voice transmissions as
well as the interconnection of Local Area Networks ("LANs"), DS-1 service
accommodates transmission speeds of up to 1.544 megabits per second, the
equivalent of 24 voice-grade equivalent circuits. LOA offers 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, which is equivalent to 28 DS-1
circuits or 672 voice grade
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equivalent circuits. This is a digital service used by IXCs for central office
connections and by some large commercial users to link multiple sites.
LOA intends to add capabilities to provide local dial tone and switched
access termination and origination services to its networks.
It is intended that the business customers served by LOA can acquire
centrex and long-distance services from LOA as a reseller. In order to provide
these services, LOA intends to purchase these services in bulk from the ILEC and
the IXC and provide its retail customers with a single source of integrated
local and long distance telecommunications services and facilities management at
a discount from the published retail ILEC tariff rates. By using centrex service
instead of a private branch exchange ("PBX") to direct their telecommunications
traffic, customers can avoid the large investment in equipment required and the
fixed costs associated with maintaining a PBX network infrastructure. LOA's
centrex service, as envisioned, will allow medium to small business customers
who lack the size or resources to support their own PBX to benefit from a
telecommunications system.
LOA intends 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
the United States.
Competition
The Internet connectivity and telecommunications business is highly
competitive, and there are no substantial barriers to entry. LOA believes that
competition will intensify and its ability to successfully compete depends on a
number of factors including market presence, the capacity, reliability, and the
security of its network infrastructure, its pricing of services compared to its
competitors, the timing of new products and services by LOA and its competitors,
LOA's ability to react to changes in the market, and industry and economic
trends. LOA's competitors consist of (1) regional Internet access providers, (2)
national Internet service providers, (3) on-line service companies, (4) regional
telephone companies and national long distance carriers, and (5)
hardware/software companies and cable operators, as discussed below:
1. Regional Internet Access Providers. LOA's competitors include
numerous regional Internet access providers.
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. ("Netcom"),
PSINet, Inc. ("PSI"), UUNET Technologies, Inc. ("UUNET"), and BBN
Corp., a division of GTE Corp. ("BBN"). 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
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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
LOA. 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., 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 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
AT&T Corp., MCI Worldcom, Inc., and Sprint Corp. have recently
announced Internet access services.
5. Hardware / Software Companies and Cable Operators. In 1995,
Microsoft Corporation announced its entry 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. It can reasonably be expected that other
significant software and/ or hardware companies will follow suit.
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 handle the Internet. Each of LOA's primary markets
is highly competitive. Many of LOA's competitors are much larger
than LOA and have substantially greater resources.
6. CLEC - Regional CLEC competitors include Teleport, Inc., MCI
Worldcom, Inc., and TCG, Inc. Most of these competitors have
substantially greater resources than LOA.
Government Regulation.
LOA is currently subject to regulation by the Federal Communications
Commission ("FCC") 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
41
<PAGE>
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
such as those offered by LOA. 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.
LOA regards its technology as proprietary and attempts to protect it with
copyrights, trademarks, trade secret laws, restrictions on disclosure and
transferring title and other methods. We have registered the Internet domain
name www.loa.com. There can be no assurance that potential users and advertisers
will not confuse our domain name with other similar domain names. If such
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 such
users erroneously associate with us.
Employees.
As of December 31, 1998, LOA had 12 employees. Of these 12 employees, 4
were engaged in technical support, 2 in information processing services, 1 in
customer support functions, 2 were engaged in sales and marketing, and 3 in
administration and finance functions. LOA has no collective bargaining agreement
in place and believes that its relationship with its employees is good.
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<PAGE>
Facilities.
LOA entered into a lease agreement between LOA and Regency Plaza
Associates dated May 1, 1996, for the premises located at 3 Regency Plaza,
Providence, Rhode Island 02903. Said lease was amended on August 6, 1997, to
provide for rental increases, additional space, and extension of its term. The
lease currently provides for a term expiring on May 31, 1999. Monthly rent is
currently $2,568. The facilities currently comprise approximately 3,000 square
feet.
The Company also maintains office space comprising less than 500 square
feet in Massachusetts through a verbal arrangement with a customer. The Company
discounts services to the customer in consideration for such space. The Company
uses this space to service its Massachusetts clients and customers. Upon
completion of this Offering, the Company intends to enter into a lease
arrangement for an office in Massachusetts.
Legal Proceedings.
There is currently no pending or threatened litigation against LOA.
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<PAGE>
MANAGEMENT
Directors and Officers
The following table sets forth certain information concerning each of the
directors and officers of LOA:
Name Age Position
- ---- --- --------
David R. Paolo 30 President, CEO and Chairman
Donald J. Schattle II 33 V.P. of Operations and Technology
and Director
Kenneth M. Cornell 30 CFO
Raymond Paolo 53 V.P. of Administration, Secretary
Treasurer and Director
Paul Phillips 55 Director
Deborah Stevenson 33 Director
David R. Paolo is the President, Chief Executive Officer, Chairman and founder
of LOA. He has served in this position since the formation of LOA's precursor,
LOARI. In 1994, Mr. Paolo was appointed as Ambassador for the Greater Providence
Chamber of Commerce, which he still retains, and in 1996, he was voted chairman
of the NYNEX Advisory Board. Mr. Paolo attended Roger Williams University from
1986 to 1990.
Donald J. Schattle II has served as Vice President of Operations and Technology
since 1998. From 1997 to 1998, he served as Senior Systems Administrator,
Director of Operations for LOA's predecessor, LOARI. Prior thereto, 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 B.A. degree.
Kenneth M. Cornell has served as 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 B.S. from the
University Fisher School of Accounting in May 1990. In 1991, he graduated from
said university with a Masters in Accounting.
Raymond Paolo has served as V.P. of Administration, Secretary, Treasurer and
director of LOA since October 1998. Prior thereto, he was Chief Financial
Officer of LOARI since its inception in 1992. Mr. Paolo has 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. Mr. Paolo graduated from the University of
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<PAGE>
Rhode Island in 1968 with a B.S. in Business Administration. In 1980, he
graduated from the Williams School of Banking with a M.A. in Business
Administration.
Paul Phillips has served as a director of LOA since May 1998. From 1967 to the
present, Mr. Phillips has served as manager of computer operations with Blue
Cross/Blue Shield of Rhode Island. Mr. Phillips manages day to day operations at
Blue Cross/Blue Shield's mainframe and network systems. Mr. Philliips attended
Johnson and Wales University in Rhode Island from 1970 to 1972.
Deborah Stevenson has served as a director of LOA since May 1998. Ms. Stevenson
has over 10 years of experience in the data processing field in the
manufacturing and financial areas working for Hasbro, where she worked from
1988-1994, and currently as Systems Project Manager at Fleet Technology
Solutions, a division of Fleet Bank. Ms. Stevenson graduated in 1989 from
Community College of Rhode Island with an A.S. in computer science.
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
The Board of Directors intends to have a standing Audit Committee as of
the closing of the Offering. The Audit Committee will be comprised of the
following directors: Paul Phillips, Deborah Stevenson and David Paolo. The Audit
Committee will assist the 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. The Audit Committee intends to 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,
LOA's President, was compensated and/or received advances in the amount of
$60,000, $77,617 and $105,700, respectively. In 1998, Mr. Paolo executed a
promissory note to LOA in the amount of $77,617 ("Paolo Note"). Pursuant to the
terms of the Paolo Note, LOA agrees 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.
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<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Restricted Securities
Name and Other Annual Stock Underlying All Other
Principal 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- $13,200(1)
1997 $77,617 -0- -0- -0- -0- -0-
1996 $60,000 -0- -0- -0- -0- -0-
</TABLE>
(1) Represents $7,800 for car allowance and $5,400 for club membership.
Employment Agreements
On January 12, 1998, LOA amended an employment agreement with David R.
Paolo dated January 3, 1997, to serve as President and Chief Executive Officer
of LOA (the "David Employment Agreement"). The term of the David Employment
Agreement is for six years commencing on January 12, 1998. Mr. Paolo's base
compensation of $91,500 per year was increased to $124,500 upon the consummation
of a previous private offering, dated August 28, 1998. Pursuant to the terms and
conditions of the David Employment Agreement, Mr. Paolo will receive an annual
increase in base compensation of 10% for the term of the agreement. Mr. Paolo's
base compensation was increased to $136,950, effective January 1, 1999. The
David Employment Agreement contains a provision for performance based bonuses,
including non-qualified stock options upon the effectuation of a Company stock
option plan, car allowance, and club membership. The David Employment Agreement
contains a non-compete clause for a period of two years following the
termination of Mr. Paolo's employment. The David Employment Agreement may be
terminated upon 90 days written notice by either party. In addition, under
certain terms and conditions of the David Employment Agreement, if LOA
terminates the David Employment Agreement; Mr. Paolo may be entitled to receive
the balance of any unpaid salary which would otherwise be payable to Mr. Paolo
(during the remainder of the term of the David Employment Agreement).
On January 12, 1998, LOA entered into an employment agreement with Raymond
Paolo to serve as Chief Financial Officer of LOA (the "Raymond Employment
Agreement"). On January 1, 1999 LOA amended the Raymond Employment Agreement to
reflect his current position as V.P. of Administration, Secretary and Treasurer
of LOA. The Raymond Employment Agreement's term is for six years. Mr. Paolo's
base compensation of $51,500 per year was increased to $69,500 upon the
consummation of a previous private offering, dated August 8, 1998. Pursuant to
the terms and conditions of the Raymond Employment Agreement, Mr. Paolo will
receive an annual increase in base compensation of 10% for the term of the
agreement. Mr. Paolo's base compensation was increased to $76,450, effective
January 1, 1999. The Raymond Employment Agreement contains a provision for
performance based bonuses, including non-qualified stock options upon the
effectuation of a Company stock option
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<PAGE>
plan and car allowance. The Raymond Employment Agreement contains a non-compete
clause for a period of two years following the termination of Mr. Paolo's
employment. The Raymond Employment Agreement may be terminated upon 90 days
written notice by either party. In addition, under certain terms and conditions
of the Raymond Employment Agreement, if LOA terminates the Raymond Employment
Agreement; Mr. Paolo may be entitled to receive the balance of any unpaid salary
which would otherwise be payable to Mr. Paolo (during the remainder of the term
of the Raymond Employment Agreement).
Stock Option Plan.
In January 1998, LOA adopted the 1999 Stock Option Plan ("Plan"). The
purpose of the Plan is to enable LOA to attract, retain and motivate key
employees, directors, and on occasion, 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, as amended, or
non-qualified stock options. LOA has reserved 1,000,000 shares of Common Stock
for issuance under the Plan. As of the date of this Prospectus, no options have
been granted pursuant to the Plan.
The Plan will be administered by the Board of Directors. The Board has the
power to determine the terms of any options granted thereunder, 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 optionee only by
such optionee. 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 stock of LOA
("10% Owners"), 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 under the Plan may not exceed ten years, or five
years in the case of 10% Owners. The specific terms of each option grant are
approved by the Board of Directors and are reflected in a written stock option
agreement.
Right to Designate Director.
The Representative has the right, for a period of five years from the
closing of this Offering, to designate a person for election to LOA's Board of
Directors.
Limitations of Liability and 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
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<PAGE>
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 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
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<PAGE>
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.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of December 31, 1998, and as adjusted
for this Offering, the number and percentage of outstanding shares of Common
Stock beneficially owned by each person who beneficially owns (i) more than 5%
of the outstanding shares of Common Stock; (ii) each of LOA's officers and
directors; and (iii) all of LOA's officers and directors as a group. Except as
otherwise noted, the persons named in this table, based upon information
provided by such persons, have sole voting and investment power with respect to
all shares of Common Stock beneficially owned by them.
Number of
Shares % Beneficially % Beneficially
Name and Address of Beneficially Owned Before Owned After
Beneficial Owner(1) Owned Offering Offering(2)
- ------------------- ------------ -------------- --------------
David R. Paolo ................ 2,434,600 52.8% 35.2%
Raymond Paolo ................. 200,000 4.3% 2.9%
Donald Schattle II ............ 80,000 1.7% 1.2%
Paul Phillips ................. 13,500 ** **
Deborah Stevenson ............. 27,000 ** **
Kenneth Cornell ............... 45,000(3) ** **
Marilyn Henderson ............. 375,000 8.1% 5.4%
ICC Consulting, Inc. .......... 250,000(4) 5.4% 3.6%
25A Sintsink Drive West
Port Washington, NY 11050
Scofield Dennison Corp. ....... 250,000(4) 5.4% 3.6%
130 Shore Rd.
Port Washington, NY 11050
Northeastern Fibercom ......... 250,000(4) 5.4% 3.6%
8 West 38th St.
New York, NY 10018
Horizon Fiber, Inc. ........... 250,000(4) 5.4% 3.6%
22 Cherry Lane
Putnam Valley, NY 10579
All Officers and Directors .... 2,800,100 60.7% 40.5%
as a Group (6 persons)
** Less than 1%
(1) Unless otherwise indicated, the addresses of each beneficial owner is c/o
Log On America, Inc., 3 Regency Plaza, Providence, Rhode Island 02903.
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<PAGE>
(2) Assumes the sale of all of the shares of Common Stock offered hereby and
the exercise of the Underwriter's over-allotment option. Does not reflect
the exercise of the Representative's Warrants.
(3) Represents warrants for the purchase of 45,000 shares of Common Stock
issuable to the securityholder in consideration of accounting and other
related services rendered. Such warrants are exercisable during a four
year period commencing December 31, 1998 at $3.25 per share.
(3) Represents warrants for the purchase of 250,000 shares of Common Stock
during the four 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>
CERTAIN TRANSACTIONS
In 1997, LOA America, Inc., a Rhode Island corporation ("LOARI") sold 100%
of its assets and liabilities to Global Telemedia International, Inc. ("GTMI")
and agreed to change its name to Tekcom, Inc. In consideration for the sale,
GTMI assumed the liabilities of LOARI and agreed to pay LOARI shareholders 20%
of the value of all LOARI business on the third anniversary of the purchase
("Contingent Sum"). At this time GTMI formed System 4, Inc., a wholly owned
Delaware subsidiary, in which to transfer the LOARI assets and liabilities.
System 4, Inc. then changed its name to LOA America, Inc.
In January 1998, Wan Secure, Inc. ("WS") was organized in Delaware to
purchase 100% of the outstanding capital stock of LOA from GTMI. In
consideration for the purchase, WS executed a note in the amount of $100,000
("GTMI Note"). The GTMI Note was personally guaranteed by David R. Paolo, WS's
majority shareholder.
In and around February 1998, 100% of Tekcom, Inc. (formerly LOARI)
shareholders agreed to surrender and release all rights and claims to the
Contingent Sum. As consideration for such surrender and release, Tekcom
shareholders received shares in LOA. In July 1998, the GTMI accepted a
settlement of the GTMI Note. In consideration for such settlement, GTMI accepted
$25,000.
In May 1998, David R. Paolo, LOA's president and CEO, and Raymond Paolo,
an officer and director of LOA, executed promissory notes to LOA in the amounts
of $77,617.80 and $47,859.41, respectively ("Paolo Notes"). Pursuant to the
terms of the Paolo Notes, LOA agrees to forgive 25% of the principal amount for
each note per year. Accordingly, the Paolo Notes will be completely forgiven in
2002.
LOA currently has office space in Massachusetts of less than 500 square
feet under a verbal arrangement with a customer. In consideration of the use of
its customers office LOA provides discounted services to the customer. The
office is used to service its clients located in Massachusetts.
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<PAGE>
DESCRIPTION OF SECURITIES
The following section does not purport to be complete and is qualified in
its entirety by reference to the detailed provisions of LOA's Certificate of
Incorporation and By-laws, copies of which have been filed with LOA's
Registration Statement on Form SB-2, of which this Prospectus forms a part.
The authorized capital stock of LOA consists of 20,000,000 shares of
Common Stock, $.01 par value. As of December 31, 1998, 4,610,716 shares of
Common Stock were issued and outstanding. As of such date, there were 64 record
holders of the Common Stock. LOA is not authorized to issue Preferred Stock.
Common Stock
Shares of 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 thereof
at meetings of the 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 the shares of outstanding Common
Stock can, if they choose to do so, elect all of the directors of LOA. In such
event, the holders of the remaining shares of Common Stock will not be able to
elect any directors.
The holders of Common Stock (i) have equal rights to dividends from funds
legally available therefore, when and if declared by the board of directors of
LOA; (ii) are entitled to share ratably in all of the assets of LOA available
for distribution to holders of Common Stock upon liquidation, dissolution or
winding up of the affairs of LOA; and (iii) do not have preemptive, subscriptive
or conversion rights, or redemption of sinking fund provisions applicable
thereto. The outstanding shares of Common Stock are duly authorized, validly
issued, fully paid and nonassessable.
Warrants
LOA currently has 1,095,000 common stock purchase warrants ("Warrants")
outstanding. 1,000,000 of such Warrants, held in the aggregate by four
beneficial owners, are exercisable during the five year period commencing
January 15, 1999 at an exercise price of $1.00. 50,000 of such Warrants, held by
one beneficial owner, are exercisable during the five year period commencing
December 31, 1998 at an exercise price of $3.50 per share. 45,000 of such
Warrants, held by one beneficial owner, are exercisable during the four year
period commencing December 31, 1998 at $3.25 per share. The 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.
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<PAGE>
Placement Agent Warrants
LOA issued warrants to its placement agent, Security Capital Trading,
Inc., in connection with its private placement between November and December
1998. Such warrants provide for the purchase of: (ii) 13,076 shares of Common
Stock upon the exercise of warrants granted on December 3, 1998, which warrants
are exercisable during the four year period commencing December 3, 1999 and
expiring December 3, 2003 at an exercise price of $3.90 per share; and (ii)
23,845 shares of Common Stock upon the exercise of warrants granted on December
23, 1998, which warrants are exercisable during the four year period commencing
December 23, 1999 and expiring December 23, 2003 at an exercise price of $3.90
per share. These warrants provide for piggy-back and demand registration rights.
Representative's Warrants
LOA has agreed to sell to the Representative, upon closing of this
Offering, warrants for the purchase of 200,000 shares of Common Stock
("Representative's Warrants"). The Representative's Warrants may be purchased
for $20. The Representative's Warrants are exercisable at a price equal to 120%
of the Common Stock offering price. 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 which protect the
holders thereof 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.
Pursuant to the terms of the Representative's Warrants, LOA has agreed
that, for a period of five years commencing on the date of this Prospectus, upon
written demand of the holders of a majority of the Representative's Warrants and
the securities issued pursuant thereto, LOA will, on one occasion, 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 (and the
Warrants and Shares included therein). Any such registration would be at LOA's
expense. LOA has also agreed to include such underlying securities in any
appropriate registration statement which is filed by LOA during the five years
following the date of this Prospectus.
Transfer Agent
LOA intends to appoint Continental Stock Transfer & Trust Company as the
transfer agent and registrar for the shares of Common Stock offered hereby.
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<PAGE>
RESALES BY SELLING SECURITYHOLDERS
The registration statement, of which this Prospectus forms a part, also
relates to the registration by LOA, for the account of the Selling
Securityholders, of an aggregate of 1,896,116 shares of Common Stock and
1,131,921 shares of Common Stock underlying warrants. The Selling
Securityholders' shares are not being underwritten by the Underwriters in
connection with this Offering. The Selling Securityholders have 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.
The sale of the Selling Securityholders' shares by the Selling
Securityholders may be effected from time to time in transactions (which may
include block transactions by or for the account of the Selling Securityholders)
in the over-the-counter market or in negotiated transactions, or through the
writing of options on the Selling Securityholders' shares, a combination of such
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 Securityholders may effect such transactions by selling the
Selling Securityholders' shares directly to purchasers, through broker\dealers
acting as agents for the Selling Securityholders, or to broker\dealers who may
purchase shares as principals and thereafter sell the Selling Securityholders'
shares from time to time in the over-the-counter market, in negotiated
transactions, or otherwise. Such broker\dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders 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 Securityholders and broker-dealers, if any, acting in
connection with such sales, might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit upon the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
Sales of any shares of Common Stock by the Selling Securityholders may
depress the price of the Common Stock in any market that may develop for the
Common Stock.
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to Offering(1) Common Stock After Offering(2)
Names of Selling -------------------- Offered By ------------------
Securityholders Number Beneficial Owner Number Percent
- --------------- ------ ---------------- ------ -------
<S> <C> <C> <C> <C>
Robert A. Schattle 52,500 52,500 0 0
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
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to Offering(1) Common Stock After Offering(2)
Names of Selling -------------------- Offered By ------------------
Securityholders Number Beneficial Owner Number Percent
- --------------- ------ ---------------- ------ -------
<S> <C> <C> <C> <C>
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 Debbie Stephenson 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
Dr. Christoph Ludz 15,384 15,384 0 0
Robert Standaert 7,692 7,692 0 0
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to Offering(1) Common Stock After Offering(2)
Names of Selling -------------------- Offered By ------------------
Securityholders Number Beneficial Owner Number Percent
- --------------- ------ ---------------- ------ -------
<S> <C> <C> <C> <C>
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 15,384 63,384(3) 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
Security Capital Trading, Inc. 36,921 36,921(4) 0 0
ICC Consulting, Inc. 250,000 250,000(5) 0 0
Scofield Dennison Corp. 250,000 250,000(5) 0 0
Northeastern Fibercom 250,000 250,000(5) 0 0
Horizon Fiber, Inc. 250,000 250,000(5) 0 0
Michael H. Freedman 2,000 2,000(6) 0 0
Kenneth M. Cornell 45,000 45,000(7) 0 0
</TABLE>
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has
the right to acquire such shares within 60 days of December 31, 1998. For
purposes of computing the percentage of outstanding shares of Common Stock
held by each person or group of persons named above, any security which
such person or persons has or have the right to acquire within such date
is deemed to be outstanding but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, LOA believes based on information supplied by
such 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 own.
(2) Assumes the sale of all of the shares offered hereby.
57
<PAGE>
(3) Includes 48,000 shares of Common Stock underlying a warrant exercisable
during the five year period commencing December 31, 1998.
(4) Represents shares of Common Stock underlying warrants for the purchase of
36,922 shares of Common Stock exercisable during the four year period
commencing December 1999 at an exercise price of $3.90 per share.
(5) Represents shares of Common Stock underlying 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.
(6) 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.
(7) 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.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for LOA's Common Stock
and no prediction can be made as to the effect, if any, that market sales of
shares of Common Stock or the availability of such shares for sale will have on
the market prices from time to time. The possibility that substantial amounts of
shares of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the shares of Common Stock and/or may impair LOA's
ability to raise equity capital in the future.
Upon completion of this Offering, LOA will have 6,610,716 shares of Common
Stock outstanding (6,910,716 shares if the Underwriter's over-allotment option
is exercised in full). The 2,000,000 shares of Common Stock offered hereby
(2,300,000 shares if the Underwriter's over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act, except for any shares purchased by "affiliates" of LOA, as
such term is defined in pursuant to Rule 144 promulgated under the Securities
Act. The remaining shares of Common Stock were sold by LOA in private
transactions and may only be sold if registered under the Securities Act, sold
in accordance with Rule 144 or Rule 701 thereunder or pursuant to an exemption
from registration. In addition, an aggregate of 1,131,922 shares are issuable
upon the exercise of outstanding warrants. All of such shares will be restricted
securities when issued, unless registered.
LOA and each of its securityholders, as well as holders of warrants to
purchase Common Stock have agreed that they will not, without the prior written
consent of the Representative, directly or indirectly, offer, sell, pledge,
grant any option to purchase, or otherwise sell or dispose of any shares of
Common Stock or other similar securities, which they owned prior to the
Offering, for a period of twelve months after the Offering. Such agreements
provide that the Representative may, in its sole discretion and at any time
without notice, release all or a portion of the shares subject to these lock-up
agreements; however, the Representative has no intention to do so.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate (as that term is defined
under the rules and regulations of the Securities Act), who has beneficially
owned "restricted securities" for at least one year will be entitled to sell
within any three month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock, or (ii) the
average weekly trading volume in the Common Stock on all national securities
exchanges and/or reported through the automated quotation system of registered
securities associations during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Commission. Sales pursuant to
Rule 144 are also subject to certain other requirements regarding the manner of
sale, notice and availability of current public information about LOA. A person
(or persons whose shares are aggregated) who is not deemed to have been an
affiliate of LOA at any time during the three months immediately preceding the
sale is entitled to sell restricted securities pursuant to Rule 144(k) without
regard to the limitations described above, provided that two years have expired
since the later of the date on which such restricted securities were acquired
from the LOA
59
<PAGE>
or the date they were acquired from an affiliate of LOA. Affiliates, including
members of the Board of Directors and certain of the officers of LOA continue to
be subject to such limitations. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with,
such issuer. Under Rule 701, persons who purchase shares upon exercise of
options granted prior to the effective date of this Offering, are entitled to
sell such shares beginning 90 days after the effective date of the Offering in
reliance upon Rule 144 without having to comply with the holding period
requirements set forth under Rule 144.
60
<PAGE>
UNDERWRITING
The Underwriters named below ("Underwriters"), for whom Dirks & Company,
Inc. is acting as Representative, have severally agreed, subject to the terms
and conditions contained in the Underwriting Agreement ("Underwriting
Agreement"), to purchase from LOA, and LOA has 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. ......................................
Total.............................................. 2,000,000
The Underwriters are committed to purchase all the securities offered
hereby, if any of the securities are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to the
conditions precedent specified therein.
The Selling Securityholders' shares are not being underwritten by the
Underwriters in connection with this Offering. The sale of the Selling
Securityholders shares by the Selling Securityholders may be effected from time
to time in transactions, which may include block transactions by or for the
account of the Selling Securityholders, in the over-the-counter market or in
negotiated transactions or through the writing of options on the Selling
Securityholders shares, a combination of such 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.
LOA has been advised by the Representative that the Underwriters initially
propose to offer the shares of 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 $______ per share of Common Stock. Such dealers may
reallow a concession not in excess of $______ per share of Common Stock to
certain other dealers. After the commencement of the Offering, the public
offering price, concessions and reallowances may be changed by the
Representative. The Representative has informed LOA that it does not expect
sales to discretionary accounts by the Representative to exceed five percent of
the shares of Common Stock offered by LOA hereby.
LOA has granted to the Underwriters an over-allotment option, exercisable
during the 45-day period from the date of this Prospectus, to purchase from LOA
up to an additional 300,000 shares of Common Stock at the initial public
offering prices, less underwriting discounts and the non-accountable expense
allowance. Such option may be exercised only for the purpose of covering
over-allotments, if any, incurred in the sale of the shares of Common
61
<PAGE>
Stock offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional shares of Common Stock
proportionate to its initial commitment.
LOA has 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.
LOA has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make. LOA has been advised that, in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
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. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
the 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 LOA, and in such case may
purchase shares of Common Stock in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 300,000 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 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.
LOA's directors and executive officers, and all holders of shares of
Common Stock, warrants or other securities convertible, exercisable or
exchangeable for Common Stock, have, pursuant to certain lock-up agreements
("Lock-up Agreements"), agreed not to 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. An
appropriate legend shall be placed on the certificates representing such
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 LOA
securities.
62
<PAGE>
In connection with this Offering, LOA has agreed to sell to the
Representative, and/or its designees, for nominal consideration,
Representative's Warrants to purchase from LOA up to 200,000 shares of Common
Stock. The Representative's Warrants are initially exercisable at any time
during a period of four (4) years commencing one year from the date of the
Prospectus at a price of 120% of the initial public offering price per share of
Common Stock. 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 thereof 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.
Prior to this Offering, there has been no public market for LOA's Common
Stock. Consequently, the initial public offering price of the Common Stock has
been determined by negotiation between the LOA and the Representative and does
not necessarily bear any relationship to LOA's asset value, net worth or other
established criteria of value. The factors considered in such negotiations, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which LOA competes, an assessment of LOA's management, the
prospects of LOA, its capital structure and such other factors as were deemed
relevant.
LOA 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 the Board of Directors of LOA. LOA's officers,
directors and principal shareholders have agreed to vote their shares in favor
of such designee. The Representative has not yet exercised its right to
designate such a person. If the Representative elects not to exercise this
right, then the Representative may designate one person to attend meetings of
the Board of Directors.
Dirks & Company, Inc. commenced operations in July 1997. Dirks & Company,
Inc. has co-managed only two public offering of securities. Accordingly, the
Representative has only limited experience as an underwriter of the public
offering of securities.
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 such agreement which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock being offered
hereby are being passed upon for LOA by Silverman, Collura, Chernis & Balzano,
P.C. ("SCCB"). Orrick, Herrington & Sutcliffe LLP, New York, New York 10112, is
acting as counsel for the
63
<PAGE>
Representatives in connection with this Offering. Certain designees of SCCB have
been granted warrants for the purchase of an aggregate of 50,000 shares of
Common Stock exercisable during the five year period commencing December 31,
1998 at an exercise price of $3.50 per share.
EXPERTS
The financial statements included in this Registration Statement for the
years ended December 31, 1997 and 1996 have been examined by Tauber & Balser,
PC. ("T&B"), independent certified public accountants, as set forth in its
report appearing elsewhere herein, and are included in reliance upon such report
and upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
With respect to the securities offered hereby, LOA has filed with the
principal office of the Securities and Exchange Commission ("Commission") in
Washington, D.C., a Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended ("Securities Act"). For purposes hereof, the term
"Registration Statement" means the original Registration Statement and any and
all amendments thereto. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, to which
reference hereby is made. For further information with respect to LOA and the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, and the financial statements and notes filed as
a part thereof. Each statement made in this Prospectus concerning a document
filed as an exhibit to the Registration Statement is not necessarily complete
and is qualified in its entirety by reference to such exhibit for a complete
statement of its provisions. Any interested party may inspect the Registration
Statement and its exhibits without charge, or obtain a copy of all or any
portion thereof, at prescribed rates, at the public reference facilities of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. The Registration Statement and exhibits may
also be inspected at the Commission's regional offices at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
at 7 World Trade Center, Suite 1300, New York, New York 10048. Such other
reports and other information may also be inspected without charge at a website
maintained by the Commission. The address of the website is www.sec.gov.
64
<PAGE>
GLOSSARY OF SELECTED TERMS
"Associated Services" means products indirectly related to telecommunications,
including but not limited to Internet access, video conferencing, video on
demand and e-mail.
"Carriers" denotes companies that are licensed by the various states to carry
domestic and/or international long-distance traffic. These companies may have
their own switching facilities or may contract to use the switching platform(s)
of other carriers.
"Internet" means a wide collection of inter-connected networks that all use the
transmission control protocol/Internet protocol (TCP/IP) operating system and
that evolved from the Advanced Research Projects Administration Network which
was developed in the late 1960s. The Internet
"ISP" means a company that provides access service to the Internet. Services may
be provided to businesses or individual customers via simple local dial in
capability or by means of dedicated high-speed transmission devices.
"PTT" is the acronym for the Postal, Telephone and Telegraph agency or ministry
within a country that is responsible for the management and licensing of those
services within and into and out of that country.
"Telecommunications Industry" is intended to include carriers of voice, data
and video traffic, Internet services and associated products, including
transmission by satellite, wired and wireless means. The industry also includes
other marketers and providers of any services.
65
<PAGE>
LOG ON AMERICA, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 and 1997 (Unaudited)
AND
DECEMBER 31, 1997 and 1996
<PAGE>
LOG ON AMERICA, INC.
TABLE OF CONTENTS
Pages
-----
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS F-3-F-4
STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CASH FLOWS F-6-F-7
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) F-8
NOTES TO FINANCIAL STATEMENTS F-9-F-15
F-1
<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, 1997 and the related statements of operations, stockholders' equity
(deficiency) and cash flows for the years ended December 31, 1997 and 1996.
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, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
s/ Tauber & Balser, P.C.
Atlanta, Georgia
December 18, 1998
F-2
<PAGE>
LOG ON AMERICA, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) and
DECEMBER 31, 1997
ASSETS
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash $ 69,911 $ --
Accounts receivable, net of allowance
for doubtful accounts of $4,264 at
September 30, 1998 and $12,723 at
December 31, 1997 87,495 59,602
Other current assets 5,142 1,948
-------- --------
TOTAL CURRENT ASSETS 162,548 61,550
-------- --------
PROPERTY & EQUIPMENT, net of accumulated
depreciation of $159,157 at
September 30, 1998 and
$128,164 at December 31, 1997 62,123 66,727
OTHER ASSETS
Goodwill, net of accumulated
amortization of $58,721
at September 30, 1998
and $25,857 at
December 31, 1997 248,015 155,140
Notes receivable - officer 128,813 78,533
Deposits 705 705
-------- --------
377,533 234,378
-------- --------
TOTAL ASSETS $602,204 $362,655
======== ========
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
CURRENT LIABILITIES
Notes payable - current portion $ 5,996 $ 5,076
Accounts payable 338,433 315,626
Accrued expenses 72,280 83,445
Deferred revenues 25,709 38,262
Notes payable - related party -- 3,267
--------- ---------
TOTAL CURRENT LIABILITIES 442,418 445,676
--------- ---------
LONG-TERM DEBT, net of current portion
Note payable 12,490 17,720
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock, $.01 par value;
authorized 20,000,000 shares and
issued and outstanding 4,241,500
shares as of September 30, 1998
Authorized 1,000 shares and issued
and outstanding 100 shares as
of December 31, 1997, respectively 18,070 179,260
Additional paid-in capital 307,454 --
Accumulated deficit (178,228) (280,001)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 147,296 (100,741)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY) $ 602,204 $ 362,655
========= =========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months
Ended September 30 Year Ended December 31,
------------------ -----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Dial up $ 177,111 $ 58,793 $ 123,680 $ 168,119
Dedicated access service 314,272 115,456 172,734 14,153
Web services 51,343 32,975 41,895 4,430
Other 8,578 9,814 13,251 --
----------- --------- --------- ---------
Total Revenues 551,304 217,038 351,560 186,702
----------- --------- --------- ---------
OPERATING EXPENSES
Communication and internet services 228,950 90,466 138,524 52,036
General and administrative 498,299 291,929 491,060 271,481
----------- --------- --------- ---------
Total Operating Expenses 727,249 382,395 629,584 323,517
----------- --------- --------- ---------
OPERATING LOSS (175,945) (165,357) (278,024) (136,815)
----------- --------- --------- ---------
OTHER EXPENSES
Interest (2,283) (2,468) (1,977) (2,139)
Penalties -- -- -- (24,082)
----------- --------- --------- ---------
(2,283) (2,468) (1,977) (26,221)
----------- --------- --------- ---------
NET LOSS $ (178,228) $(167,825) $(280,001) $(163,036)
=========== ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
USED IN COMPUTING BASIC AND
DILUTED LOSS PER SHARE 3,708,770 101 101 101
----------- --------- --------- ---------
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (.05) $ (1,661) $ (2,772) $ (1,614)
=========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
---------------------- -----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(178,228) $(167,825) $(280,001) $(163,036)
--------- --------- --------- ---------
Adjustments:
Stock issued for services 4,392 -- -- --
Stock issued for settlement of
prior obligations 10,022 -- -- --
Notes receivable forgiven related
to stock subscriptions 36,110 -- -- --
Depreciation and amortization 63,858 37,473 71,296 36,347
Bad debt provision (8,459) (395) 903 11,820
Negative amortization of note payable -- -- -- 1,445
Changes in:
Accounts receivable (19,432) (39,657) (46,808) (10,933)
Prepaid advertising -- -- 20,000 (20,000)
Other current assets (3,194) (549) (1,948) --
Note receivable - officer (50,280) (54,501) (78,533) --
Accounts payable 22,806 24,861 105,820 152,464
Accrued expenses (11,165) 7,998 13,568 61,254
Deferred revenue (12,553) 32,967 38,262 --
--------- --------- --------- ---------
Total Adjustments 32,105 8,197 122,560 232,397
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (146,123) (159,628) (157,441) 69,361
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (26,389) (12,257) (12,257) (92,857)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes payable-related party -- -- -- 6,667
Proceeds from capital contribution from parent
company -- 179,260 179,260
Proceeds from sale of common stock 275,000 -- -- 10,000
Payments on note payable (29,310) (3,292) (6,362) (594)
Payments on notes payable-related party (3,267) (3,200) (3,200) (200)
--------- --------- --------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 242,423 169,501 169,698 15,873
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH 69,911 883 -- (7,623)
CASH BEGINNING OF PERIOD -- -- -- 7,623
--------- --------- --------- ---------
CASH END OF PERIOD $ 69,911 $ 883 $ -- $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
Nine Months Year Ended
Ended September 30, December 31,
------------------- -----------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid for interest $2,952 $554 $3,148 $972
====== ==== ====== ====
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Details of acquisition
Fair value of assets acquired $ 134,311
=========
Goodwill established $ 180,998
=========
Liabilities assumed $ 315,309
=========
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) and
THE YEARS ENDED DECEMBER 31, 1997 and 1996
<TABLE>
<CAPTION>
Total
Common Stock Issued Additional Stockholders'
--------------------- Paid-In Accumulated Equity
Shares Par Value Capital Deficit (Deficiency)
------ --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 100 $ 144,200 $ -- $(172,162) $ (27,962)
Shares issued 2 10,000 -- -- 10,000
Net loss -- -- -- (163,036) (163,036)
---------- --------- -------- --------- ---------
BALANCE DECEMBER 31, 1996 102 154,200 -- (335,198) (180,998)
Acquisition of assets and assumptions of
liabilities of 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 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 275,000 2,750 272,250 -- 275,000
Issuance of common stock to President 2,434,600 -- -- -- --
Issuance of common stock for settlement of
prior obligations 319,150 3,192 6,830 -- 10,022
Net loss -- -- -- (178,228) (178,228)
---------- --------- -------- --------- ---------
BALANCE SEPTEMBER 30, 1998 (unaudited) 4,241,500 $ 18,070 $307,454 $(178,228) $ 147,296
========== ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
THE YEARS ENDED DECEMBER 31, 1997 and 1996
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") and agreed
to change its name to Tekcom, Inc. 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"). At this time, GTMI formed System 4, Inc., a wholly owned
Delaware subsidiary, in which to transfer the LOARI assets and liabilities.
In July 1997, System 4, Inc. changed its name to Log On America, Inc. ("LOA").
Wan Secure, ("WS") was organized in Delaware in January 1998 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 consideration for the purchase,
WS executed a note in the amount of $100,000 ("GTMI Note"). The GTMI Note was
personally guaranteed by David R. Paolo, WS's majority shareholder. 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. (the
"Company").
In and around February 1998, 100% of the shareholders of Tekcom, Inc. (formerly
LOARI) agreed to surrender and release all rights and claims to the Contingent
Sum. As consideration for such surrender and release, Tekcom shareholders
received an aggregate of 795,130 shares; 319,150 shares were issued to the
Contingent Sum holders and 475,980 shares were issued to the founder and
President of the Company. In July 1998, GTMI accepted a settlement of the GTMI
Note. In consideration for such settlement, GTMI accepted $25,000. As a result
of the aforesaid transactions, the Company is a successor in interest to WS,
System 4 and LOARI.
Unaudited Financial Statements
The balance sheet and statement of changes in stockholders' equity as of
September 30, 1998 and the statements of income and cash flows for the nine
months ended September 30, 1998 and 1997 are unaudited, and in the opinion of
management, include all normal and recurring adjustments necessary to present
fairly the Company's financial position, results of operations and cash flows.
The data disclosed in these notes to the financial statements for these periods
is also unaudited. The results of operations for the periods presented are not
necessarily indicative of the operations for the full year.
Fair Value of Financial Instruments
All current assets and liabilities are carried at cost, which approximates fair
value because of the short maturity of those instruments.
F-9
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
THE YEARS ENDED DECEMBER 31, 1997 and 1996
1. Summary of Significant Accounting Policies, continued
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. The carrying amount of the Company's receivables
approximates their fair value.
Property and Equipment
Purchased 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
The excess of liabilities assumed over the fair value of assets acquired when
the Company sold all of its assets and liabilities to Global Telemedia
International, Inc. (GTMI) on January 2, 1997 was $180,998. In January, 1998 WAN
Secure, Inc. purchased all of the liabilities and assets of LOA from GTMI,
resulting in additional excess liabilities over fair value of assets acquired of
$99,882. The resulting goodwill is being amortized by the straight-line method
over a 7 year period. Amortization for the period ended September 30, 1998 was
$32,864 (unaudited), and for the year ended December 31, 1997 was $25,857.
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.
Advertising Expense
The 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 was $4,600 (unaudited) for the period ended
September 30, 1998 and $64,820 and $8,089 for the years ended December 31, 1997
and 1996, respectively.
F-10
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
THE YEARS ENDED DECEMBER 31, 1997 and 1996
1. Summary of Significant Accounting Policies, continued
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.
Stock Based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company accounts for its stock-based compensation arrangements pursuant to APB
No. 25, Accounting for Stock Issued to Employees. In accordance with those
provisions, because the exercise price of the Company's stock options equals the
market price of the underlying stock on the grant date, no compensation expense
is recognized.
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 are 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 9.
2. Notes Receivable - Officers
Notes receivable - officers consisted of amounts loaned to officers of the
Company in the amount of $128,813 at September 30, 1998 (unaudited) and $78,533
at December 31, 1997. 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.
F-11
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
THE YEARS ENDED DECEMBER 31, 1997 and 1996
3. Property and Equipment
Property and equipment consist of the following:
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Computer, telecommunications and office equipment $219,326 $192,937
Leasehold improvements 1,954 1,954
-------- --------
221,280 194,891
Less accumulated depreciation 159,157 128,164
-------- --------
$ 62,123 $ 66,727
======== ========
Depreciation expense for the period ended September 30, 1998 was $30,993
(unaudited), and $45,439 and $36,347 for the years ended December 31, 1997 and
1996, respectively.
4. Accrued Expenses and Deferred Revenues
Accrued expenses and deferred revenues consisted of the following as of:
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Accrued payroll taxes $59,722 $ 66,994
Accrued expenses 12,558 16,451
------- ---------
$72,280 $ 83,445
======= =========
F-12
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
THE YEARS ENDED DECEMBER 31, 1997 and 1996
5. Notes Payable
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Notes payable 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 $18,486 $22,796
Notes payable to related parties at 9.25%,
interest and principal due in lump sum at
various due dates in 1997 and 1998 -- 3,267
------- -------
18,486 26,063
Less current portion 5,996 8,343
------- -------
$12,490 $17,720
======= =======
Maturities of notes payable are as follows for the years ended December 31,
1998 $ 8,343
1999 17,720
-------
$26,063
=======
6. Income Taxes
There are no income tax assets, liabilities or income tax expense included in
the financial statements. The Company has incurred losses since inception for
both book and tax purposes. However, the Company can not utilize any federal or
state loss carryforwards due to changes in ownership of the Company.
7. Lease Commitments
The Company leases office space and equipment under operating leases expiring in
1999. Rental expense for the period ended September 30, 1998 was $46,412
(unaudited), and $50,700 and $18,204 for the years ended December 31, 1997 and
1996, respectively. The following represent minimum rental payments due:
Years ended
December 31, Amount
------------ ------
1998 $54,684
1999 23,961
-------
$78,645
=======
F-13
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
THE YEARS ENDED DECEMBER 31, 1997 and 1996
7. Lease Commitments (continued)
The Company has office space in Massachusetts of less than 500 square feet under
a verbal agreement with a customer. In consideration of the use of its
customer's office, LOA provides discounted services to the customer. The office
is used to service its clients located in Massachusetts.
8. Reverse Merger and Subsequent Events
In October 1998, Log On America, Inc., a Delaware corporation and wholly owned
subsidiary of WAN Secure, Inc. completed a reverse merger with its parent
company. WAN Secure, Inc. then changed its name to Log On America, Inc., and
remained a Delaware corporation.
In a private offering that occurred in November and December 1998, the Company
sold $1,200,000 of unregistered shares at a price of $50,000 per unit which
consists of 15,384 shares of common stock ($3.25 per share). Net proceeds to LOA
were $1,044,000. Securities issued under the private offering were done so in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act and Rule 506 of Regulation D. Accordingly, the transfer of the
units and underlying shares of common stock is subject to substantial
restrictions.
In December 1998, the Company issued 50,000 and 45,000 warrants exercisable at
$3.50 and $3.25, respectively. The warrants are exercisable during the four year
period commencing December 31, 1998.
In December 1998, the Company approved an initial public offering of up to
2,300,000 shares of its common stock.
On December 21, 1998, the Company paid $41,559 to the Internal Revenue Service
for settlement of all past due payroll taxes.
9. Stock Options and Warrants
As of January 4, 1999, the Board of Directors has authorized the granting of
options for up to 1,000,000 shares of Common Stock to officers, directors, and
employees at a strike price at 85% to 90% of market value.
In August 1998, the Company issued 1,000,000 warrants to certain consultants.
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. The value of the warrants
granted of $1,000,000 was determined using the Black-Sholes model.
F-14
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (UNAUDITED) and
THE YEARS ENDED DECEMBER 31, 1997 and 1996
9. Stock Options and Warrants (continued)
In December 1998, the Company issued 131,922 warrants to consultants and
underwriters in conjunction with the private offering and the proposed public
offering. 50,000 and 45,000 of the warrants are exercisable at $3.50 and $3.25
per share, respectively. The warrants are exercisable during the four-year
period commencing December 31, 1998. Also issued in December 1998, were 36,922
warrants exercisable at $3.90, which are exercisable during the four year period
commencing December 15, 1998.The total value of the December, 1998 warrants, as
determined by using the Black-Sholes model, was $465,245.
10. Employment Agreements
The Company has employment agreements through 2004 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 potential minimum obligation under
the agreements was $1,302,828 at September 30, 1998.
11. Common Stock Issued to President
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 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.
F-15
<PAGE>
================================================================================
No dealer, salesman or any other person is authorized to give any
information or to represent anything not contained in this Prospectus. You must
not rely on any unauthorized information or representations. This Prospectus is
an offer to sell the securities offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
Prospectus is current only as of this date
TABLE OF CONTENTS
Page
----
Prospectus Summary.............................................................3
Risk Factors...................................................................7
Use of Proceeds...............................................................19
Capitalization................................................................21
Dividend Policy...............................................................22
Dilution......................................................................23
Selected Financial Data.......................................................25
Management's Discussion and Analysis of
Financial Condition.........................................................26
Business......................................................................33
Management....................................................................44
Principal Shareholders........................................................50
Certain Transactions..........................................................52
Description of Securities.....................................................53
Resales by Selling Securityholders............................................55
Shares Eligible for Future Sale...............................................59
Underwriting..................................................................61
Legal Matters.................................................................63
Experts.......................................................................64
Additional Information........................................................64
Glossary of Selected Terms....................................................65
Index to Financial Statements................................................F-1
--------------------
Until __________, 1999 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to deliver
a Prospectus when acting as Representatives and with respect to their unsold
allotments or subscriptions.
================================================================================
================================================================================
2,000,000 SHARES
LOG ON AMERICA, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
Dirks & Company, Inc.
____________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee $11,609.36
American Stock Exchange Listing Fee $10,000
NASD Filing Fee $ 4,676.03
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 $ 4,000
-----------
TOTAL $325,285*
*Estimated
The Selling Securityholders 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.
II-1
<PAGE>
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 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"
II-2
<PAGE>
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)
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 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 13,076 shares of Common Stock reserved for
issuance upon the exercise of outstanding warrants granted on December 3, 1998,
which warrants are exercisable during the four year period commencing December
3, 1999 and expiring December 3, 2003 at $3.90 per share; and 23,845 shares of
Common Stock reserved for issuance upon the exercise of outstanding warrants,
granted on December 23, 1998, which warrants are exercisable during the four
year period commencing December 23, 1999 and expiring December 23, 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 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.
Warrants
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 piggy-back registration rights and are exercisable during
the four year period commencing January 15, 1999.
In December 1998, LOA granted warrants for the purchase of 50,000 shares of
Common Stock to Silverman, Collura, Chernis & Balzano, P.C., 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,
II-3
<PAGE>
1998 at an exercise price of $3.50 per share.
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.
In November and December 1998, LOA granted warrants to Security Trading
Capital,Inc. for the purchase of 36,921 shares of Common Stock at an exercise
price of $3.90 per share in connection with the December Placement.
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 Representative'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
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
27.1* Financial Data Schedule
- ----------
* previously filed
** to be filed by amendment
II-4
<PAGE>
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 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
II-5
<PAGE>
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 on 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 February 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 Principal Executive Officer
- ------------------------ and Chairman of the Board February 1, 1999
David R. Paolo
* Principal Financial Officer and
- ------------------------ Principal Accounting Officer February 1, 1999
Kenneth M. Cornell
* Vice President of Administration,
- ------------------------ Secretary, Treasurer and Director February 1, 1999
Raymond E. Paolo
Director
- ------------------------
Donald J. Schattle III
* Director February 1, 1999
- -----------------------
Paul Phillips
*
- ------------------------ Director February 1, 1999
Deborah Stevenson
* David Paolo as attorney-in-fact
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<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1.1* Form of Underwriting Agreement
1.2* Form of Representative'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
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
27.1* Financial Data Schedule
- -----------
* previously filed
** to be filed by amendment
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 amended 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
February 3, 1999
