<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2000
Commission File Number: 0-25761
LOG ON AMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 05-0496586
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Cookson Place, 6th Floor, Providence, Rhode Island 02903
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(Address of principal executive offices) (Zip Code)
(401) 459-6550
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check mark whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
/X/ Yes / / No
As of October 26, 2000, a total of 8,796,801 shares of the Registrants Common
Stock, $.01 par value, were issued and outstanding.
<PAGE>
LOG ON AMERICA, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Balance Sheets as of September 30, 2000 and December 31, 1999........................... 3
Statements of Operations for the Three Months and Nine Months
Ended September 30, 2000 and 1999....................................................... 4
Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999......... 5
Notes to Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis....................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 13
Item 2. Changes in Securities and Use of Proceeds............................................... 13
Item 3. Defaults in Senior Securities........................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..................................... 13
Item 5. Other Information....................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................ 14
Signatures............................................................................................ 15
</TABLE>
2
<PAGE>
LOG ON AMERICA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, December 31,
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents..................................................................... $ 7,513,706 $ 7,844,860
Available-for-sale securities ................................................................ 5,249,532 11,203,853
Accounts receivable, net of allowance of $270,000 and $66,448, respectively .................. 1,610,178 319,915
Notes receivable from officers and related parties ........................................... 2,074,080 1,562,757
Other current assets ......................................................................... 1,444,769 558,514
------------ ------------
TOTAL CURRENT ASSETS ....................................................................... 17,892,265 21,489,899
------------ ------------
PROPERTY & EQUIPMENT, net ....................................................................... 20,659,144 4,967,968
OTHER ASSETS
Goodwill and other intangible assets, net .................................................... 10,900,740 10,708,990
Financing costs, net ......................................................................... 666,950 --
Other assets ................................................................................. 127,926 11,558
------------ ------------
TOTAL OTHER ASSETS ........................................................................ 11,695,616 10,720,548
------------ ------------
TOTAL ASSETS .................................................................................... $ 50,247,025 $ 37,178,415
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations .................................................. $ 565,054 $ 454,954
Accounts payable and accrued expenses ......................................................... 7,493,284 2,356,965
Deferred revenue .............................................................................. 1,301,154 1,135,651
------------ ------------
TOTAL CURRENT LIABILITIES .................................................................... 9,359,492 3,947,570
------------ ------------
LONG-TERM LIABILITIES
Borrowings under line of credit ............................................................... 875,000 725,000
Advances under multiple term loan agreement ................................................... 9,211,640 1,439,582
Capital lease obligations ..................................................................... 418,933 640,179
------------ ------------
TOTAL LONG-TERM LIABILITIES .................................................................. 10,505,573 2,804,761
------------ ------------
TOTAL LIABILITIES ............................................................................... 19,865,065 6,752,331
------------ ------------
Redeemable convertible preferred stock, $.01 par value; authorized 15,000,000 shares,
Series A 15,000 shares issued and outstanding at September 30, 2000 .......................... 9,013,699 --
Commitments and contingencies ................................................................... -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 125,000,000 shares, 8,796,801 and
8,289,793 issued and outstanding at September 30, 2000 and
December 31, 1999, respectively ............................................................. 87,968 82,898
Additional paid-in capital .................................................................... 42,165,852 36,095,697
Accumulated other comprehensive (income) loss ................................................. 52,289 (38,676)
Accumulated deficit ........................................................................... (20,937,848) (5,713,835)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................................................................... 21,368,261 30,426,084
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................................... $ 50,247,025 $ 37,178,415
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 3,745,651 $ 1,198,446 $ 9,184,949 $ 1,682,357
OPERATING EXPENSES
Costs of revenue............................................ 3,036,638 477,754 5,805,196 720,979
Selling, general and administrative......................... 6,175,877 1,826,960 15,782,872 2,817,373
Depreciation and amortization............................... 1,561,852 453,060 3,482,671 496,024
------------- ------------- ------------ -------------
Total operating expenses................................... 10,774,367 2,757,774 25,070,739 4,034,376
------------- ------------- ------------ -------------
LOSS FROM OPERATIONS.......................................... (7,028,716) (1,559,328) (15,885,790) (2,352,019)
------------- ------------- ------------ -------------
OTHER INCOME (EXPENSE)
Interest expense........................................... (166,277) (43,501) (314,741) (44,378)
Interest income............................................ 275,845 255,765 999,713 402,370
Other income (expense)..................................... 1,299 8,170 (23,195) 8,170
------------- ------------- ------------ -------------
Net other income (expense)................................. 110,867 220,434 661,777 366,162
------------- ------------- ------------ -------------
NET LOSS..................................................... (6,917,849) (1,338,894) (15,224,013) (1,985,857)
Preferred stock dividends (302,465) - (726,575) -
Preferred stock accretion (630,137) - (1,513,699) -
------------- ------------- ------------ -------------
Net income/(loss) applicable to common stockholders $ (7,850,451) $ (1,338,894) $ (17,464,287) $ (1,985,857)
============= ============= ============ =============
WEIGHTED AVERAGE COMMON SHARES USED IN
COMPUTING BASIC AND DILUTED LOSS PER
SHARES...................................................... 8,796,801 7,467,557 8,607,617 6,222,179
============= ============= ============ =============
BASIC AND DILUTED GAIN/(LOSS) PER COMMON
SHARE....................................................... (0.89) (0.18) (2.03) (0.32)
============= ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss (15,224,013) (1,985,857)
Adjustments to reconcile net loss to net cash used in operating activities:
Notes receivable officers forgiven.......................................... - 23,534
Depreciation and amortization............................................... 3,482,672 496,024
Bad debt provision.......................................................... 203,552 (1,030)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable....................................................... (1,493,815) (220,576)
Other current assets...................................................... (827,072) (236,186)
Other assets.............................................................. (116,368) 2,121
Accounts payable and accrued expenses..................................... 1,939,297 (132,816)
Deferred revenue.......................................................... 165,503 274,342
--------------- --------------
Total adjustments....................................................... 3,353,769 205,413
--------------- --------------
NET CASH USED IN OPERATING ACTIVITIES........................................... (11,870,244) (1,780,444)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment......................................... (13,879,204) (1,524,386)
Issuance of notes receivable.................................................. (511,323) -
Sales of available-for-sale securities........................................ 6,045,286 -
Acquisitions.................................................................. (1,614,501) (210,210)
--------------- --------------
NET CASH USED IN INVESTING ACTIVITIES........................................... (9,959,742) (1,734,596)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock............................................ - 25,300,000
Proceeds from issuance of redeemable convertible preferred
stock and stock warrants................................................... 15,000,000 -
Issuance costs on common stock................................................ - (3,465,186)
Issuance costs on preferred stock............................................. (40,000) -
Issuance costs on long term debt.............................................. (580,025) -
Borrowings under line of credit............................................... 150,000 725,000
Borrowings under multiple term loan agreement................................. 7,080,003 -
Payments on notes payable..................................................... - (16,541)
Principal payments on capital lease obligations............................... (111,146) (63,983)
Payments on long term debt.................................................... - (703,732)
--------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................................... 21,498,832 21,775,558
--------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... (331,154) 18,260,518
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD................................... 7,844,860 630,131
--------------- --------------
CASH AND CASH EQUIVALENTS END OF PERIOD......................................... 7,513,706 $ 18,890,649
=============== ==============
SUPPLEMENTAL SCHEDULES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest...................................................................... $ 228,767 $ 44,3788,767
=============== ==============
Income taxes.................................................................. $ - $ -
=============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Details of acquisitions
Fair value of assets acquired................................................. $ 208,414 $ 1,499,191
=============== ==============
Intangibles established....................................................... 2,261,586 10,227,056
=============== ==============
Common stock issued........................................................... 855,500 7,600,000
=============== ==============
Details of financing activities
Equipment acquired under Nortel financing agreement........................... $ 692,055 $ -
=============== ==============
Capital equipment accrued..................................................... 2,306,368 -
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
1. Notes to Financial Statements (Unaudited).
September 30, 2000
A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Log On
America, Inc. ("Log On, our, we or us") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to form 10-QSB and article 10 of Regulation S-X. They do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended, September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in our annual report on form 10-KSB for the year
ended, December 31, 1999.
Certain amounts in the prior period's consolidated financial statements have
been reclassified to conform to the current period presentation.
B. Earnings (Loss) Per Common Share
Basic earnings per common share is computed by dividing income or loss
applicable to common stockholders by the weighted average number of common
shares of Log On's common stock after giving consideration to common shares
subject to repurchase that are outstanding during the period.
Diluted earnings per common share is determined in the same manner as basic
earnings per common share except that the number of common shares is increased
assuming exercise of dilutive stock options and warrants using the treasury
stock method. The diluted earnings per common share amount has not been reported
because we have a net loss and the impact of the assumed exercise of our stock
options and warrants is not dilutive.
C. Acquisitions
During the nine months ending, September 30, 2000, we acquired certain assets of
three Internet service provider businesses and one telephone field service
provider for approximately $2,470,000, including related acquisition costs. The
total purchase price included cash and 64,811 shares of our common stock. The
pro forma impact of these acquisitions has not been presented as the impact
would be considered immaterial.
6
<PAGE>
D. Comprehensive Loss
Components of comprehensive loss are as follows:
September 30, September 30,
2000 1999
------------- -----------
Net loss $(15,224,013) $(1,985,857)
Other comprehensive income (loss) - - -
Unrealized gains (losses) on marketable
securities 90,965 -
------------- -----------
Comprehensive loss $(15,133,048) $(1,985,857)
============= ===========
Accumulated other comprehensive income (loss) at September 30, 2000 and December
31, 1999 is composed of unrealized gains (losses) on marketable securities
amounting to $52,289 and $(38,676), respectively.
E. Financing
On February 23, 2000 we sold 15,000 shares of Series A Redeemable Convertible
Preferred Stock (The "Preferred Shares") and issued 594,204 common stock
purchase warrants (the "Warrants") for an aggregate consideration of $15,000,000
The proceeds of the Preferred Shares have been allocated between the Warrants
($7,500,000 in Additional Paid-in Capital) and the Preferred Shares based on the
estimate of the fair value of these instruments at the time of the transaction.
The Preferred Shares have a maturity date of February 23, 2003, at a conversion
price of $1,000 per share plus accumulated and unpaid additional amounts, which
accrue at a rate of 8% per annum and are treated as dividends. Because the fair
value of the Preferred Shares was less than the conversion price at issuance,
periodic accretions from stockholders' equity are made so that the carrying
amount equals the conversion price. Accretions amounted to $1,513,699 as of
September 30, 2000.
Simultaneously, we entered into a Senior Secured Credit Agreement with Nortel
Networks, Inc. Under the Credit Agreement, Nortel has committed to an initial
advance of up to $30,000,000 and a second advance of up to an additional
$15,000,000 to finance the purchase, by December 31, 2001, of up to $47,000,000
of equipment and services from Nortel. Under the Credit Agreement, we will begin
repayment of the facility over a five-year period upon completion of the
purchases from Nortel. We have granted a security interest in substantially all
of our assets under the Credit Agreement. The Credit Agreement has certain
restrictive financial covenants. Such covenants include minimum EBITDA and
annualized EBITDA with respect to financial ratios. At September 30, 2000, we
were substantially not in compliance with such covenants but have obtained the
necessary waivers from Nortel effective September 30, 2000 through March 1,
2001.
On November 20, 2000,we entered into an additional agreement with Nortel to
settle various claims arising out of certain professional services rendered by
Nortel. This agreement provides for a one-time cash payment of $3,500,000 by
Nortel to us. The agreement also provides for a $1,200,000 credit for products
and services which will assist in getting our existing network fully
operational. In addition, Nortel will provide a one-time reduction of $5,000,000
against the current amount drawn against the Credit Agreement.
As of September 30, 2000 Nortel has advanced $9,211,640.
7
<PAGE>
On September 29, 2000 we entered into a Lease Agreement with Cisco Systems.
Under the Lease Agreement, Cisco has committed to an advance of up to $5,000,000
for equipment and services. As of September 30, 2000, we have not ordered any
equipment or services under this Lease Agreement.
F. Notes Receivable From Officers and Related Parties
Notes receivable consists of secured amounts loaned to the President and CEO of
the Company and secured amounts loaned to the former stockholders of cyberTours,
Inc.
The notes receivable of $1,500,000 maturing on September 14, 2000 were extended
for a period of one year maturing on September 14, 2001. These notes are secured
by 421,333 shares of stock held by us as of June 1, 2000, and are interest free.
Also, in September 2000, our President and CEO executed a promissory note to us
in the amount of $500,000. The note is secured with 500,000 shares of stock
registered in the name of our President and CEO . The note is payable upon
demand and bears an annual interest rate of 9.5%
G. Commitments and Contingencies
On August 18, 2000, we commenced an action against Promethean Asset Management
LLC, HFTP Investment LLC, Fisher Capital LTD, Wingate Capital, LTD, Citadel
Limited Partnership and Marshall Capital Management, Inc. ("Defendants"), in the
United States District Court for the Southern District of New York. (CA NO.
00CIV 6218 (RMB) (MHD), alleging: (i) violations of federal securities laws,
including, but not limited to, insider trading and stock manipulation through
cross sales and short sales of our common stock, (ii) breach of contract, (iii)
fraud, and (iv) breach of the covenant of good faith and fair dealing. The
complaint seeks declaratory relief, injunctive relief, compensatory damages and
punitive damages in an amount to be determined at trial.
After the complaint was filed, Defendants sent conversion and redemption notices
to Log On.. Log On has not honored these notices based on the allegations
contained in our complaint. As a result, we have not converted or redeemed any
shares of our outstanding preferred stock held by any of the Defendants.
On September 19, 2000, Belenos, Inc., a Delaware corporation, filed suit against
us alleging that certain sums are due it for work performed and equipment
provided to us. The suit was filed in the Superior Court of Suffolk County,
Commonwealth of Massachusetts. ( CA 00-4177 (F).
This controversy arises from certain work performed or to be performed, and
equipment provided or to be provided in the build-out of our network. Belenos,
has been either unwilling or unable to provide detailed invoices for the work
performed and has failed to satisfactorily address our concerns as to the
quality of work performed. We refused to make payment as invoiced by Belenos,
until our concerns have been satisfactorily addressed. Belenos filed a suit
against us seeking payment on the above-mentioned invoices in the approximate
amount of $1,200,000, and unspecified money damages in connection with our
alleged breach of contract with Belenos.
H. Going Concern
We plan to reduce our overall EBITDA loss by implementing various cost reduction
programs which include a reduction of staff headcount, a consolidation of
certain redundant offices, and a consolidation of certain network
infrastructure. These programs will be completed in the fourth quarter of this
year.
8
<PAGE>
With the implementation and completion of our various cost reduction programs,
we believe that the existing capital resources will be sufficient to fund our
expansion and operating deficits through 2001. If we are unsuccessful in
implementing these cost reductions or additional unanticipated costs are
incurred, we may not have sufficient funds to continue as a going concern
through December 31, 2001, unless we raise additional capital through an equity
or debt financing, which may or not be available to us or at acceptable terms.
Item 2. Management's Discussion and Analysis
Overview
Log On America, Inc. has established a new model of service delivery for
broadband value-added services effectively functioning as a Solutions LEC
(SLEC). We have determined that the traditional CLEC/DLEC service delivery
models do not adequately serve a large portion of the growing communications
marketplace. We also recognize that traditional communications products do not
fulfill the competitive business requirements of many of the fastest growing
business segments. Some of these segments have not been addressed nor identified
by the existing service providers. Two of themarket segments which will be
addressed by our highly leveraged, fully integrated end-to-end solutions based
business and management model are our small office/home office market and the
business solutions market.
We will address these two underserved markets with the existing switch-based
co-location broadband infrastructure, delivering high-speed & direct service
line services. By expanding into the Business Solutions Market with additional
core broadband infrastructure we will extend our reach into markets outside the
limitations of the co-location facilities. This will allow us to provide
broadband access to the desktop at speeds of 10 mbps with native IP access. This
will also allow us to utilize multiple access technologies to aggregate customer
access from office buildings and multiple dwelling units, over long distances.
We will leverage partnerships with content and Application Service Providers to
enhance the package of services, which can be delivered as bundled solutions to
both the small office\home office and Business Solutions Markets.
Using this new model, we will begin to reduce our high EBITDA losses at an
accelerated pace, establish incumbency in the Commercial/Business Solutions &
small office\home office markets, precisely build-out our infrastructure,
strategically utilize capital and operations funding, and position ourselves as
the smart solutions-based delivery provider.
As a facilities-based communications solutions provider, we have competitive
local exchange carrier certification in Rhode Island, Massachusetts, Maine,
Connecticut, Vermont, New Hampshire and New York. We have completed the build
out of 19 central offices and Nortel has agreed to provide certain equipment and
services to make our offices fully operational. Once fully operational, we will
begin to move our existing customer traffic over to our own switch, which will
lead to increased control over service quality, the ability to offer enhanced
high-speed offerings and greater per line profitability. We plan to continue
building additional aggregation centers utilizing our smart build model
strategy. This build out strategy will give us the ability to offer expanded
bundled services to our existing customer base, broaden the geographic reach of
our Nortel-powered Integrated Communications Network, enhance our product
portfolio and substantially boost bandwidth availability for our customers.
Results of Operations
Nine Months Ended September 30, 2000
Versus Nine Months Ended September 30, 1999
Three Months Ended September 30, 2000
Versus Three Months Ended September 30, 1999
9
<PAGE>
Revenues
Our Data and Telecom services revenue is comprised of monthly recurring charges,
additional features on those lines, usage charges and initial, non-recurring
charges typically derived from installing new lines and services.
Revenues increased by $2,547,205 or 213% to $3,745,651 for the three months
ended, September 30, 2000 as compared to $1,198,446 for the comparable period in
1999. Revenues increased by $7,502,592 or 446% to $9,184,949 for the nine months
ended, September 30, 2000 as compared to $1,682,357 for the comparable period in
1999. The increase in revenue is due primarily to acquisitions, increased direct
sales efforts, increased services offerings, and an aggressive marketing
campaign in both Rhode Island and Maine.
Costs of revenue
Costs of revenues are data and telecommunications expenses comprised primarily
of leased transport charges for facilities connecting our customers to our
network, our network to the Internet, our switch and physical co-locations.
Expenses are being incurred to the incumbent local exchange carrier for customer
lines, features on lines and usage. As part of our strategy to seamlessly move
our customers over to our facilities, once our network is fully operational, we
anticipate lowering these costs of providing services resulting in significant
margin savings and allowing us to offer additional value added bundled
applications from our network.
Costs of revenue increased by $2,558,884 or 536%, to $3,036,638 for the three
months ended, September 30, 2000 as compared to $477,754 for the comparable
period in 1999. Costs of revenue increased by $5,084,217 or 705%, to $5,805,196
for the nine months ended, September 30, 2000 as compared to $720,979 for the
comparable period in 1999. This increase is reflective of the costs associated
with the significant customer base growth achieved year-to-date and the costs
associated with high speed data and telecom network expansion. The Nortel DMS
500 switch and 10 co-locations in Rhode Island were put into service during the
second quarter of 2000. This will now allow the conversion of our customers to
our facilities based service and allow us to offer enhanced high-speed products.
Selling, general and administrative expense
Selling, general and administrative expenses increased by $4,348,917 to
$6,175,877 for the three months ended, September 30, 2000 as compared to
$1,826,960 for the comparable period in 1999. Selling, general and
administrative expenses increased by $12,965,499 to $15,782,872 for the nine
months ended, September 30, 2000 as compared to $2,817,373 for the comparable
period in 1999. This increase is due primarily to the salaries and related
expenses for the development of our business, the establishment of our
management team and the development of corporate identification, promotional and
advertising materials. This also includes the corporate activities related to
finance, regulatory, legal, executive, billing, marketing, and other
administrative functions.
Depreciation and amortization
Depreciation and amortization increased by $1,108,792 to $1,561,852 for the
three months ended, September 30, 2000 as compared to $453,060 for the
comparable period in 1999. Depreciation and amortization increased by $2,986,647
to $3,482,671 for the nine months ended, September 30, 2000 as compared to
$496,024 for the comparable period in 1999. This increase is due primarily to
the amortization expense related to the intangible assets associated with the
acquisitions and the depreciation on the equipment costs associated with the
buildout of our Internet Service Provider network backbone, switch and
collocation buildouts and the internal infrastructure to accommodate the
increased usage of our external and internal network. It is also reflective of
the deployment of $17,040,936 in network equipment, central office switching
equipment and collocate equipment during the current nine month period.
Other Income
Other income decreased by $109,567 to $110,867 for the three months ended,
September 30, 2000 as compared to $220,434 for the comparable period in 1999.
This decrease is due to the interest expense related to the Nortel line of
credit. Other income increased by $295,615 to $661,777 for the nine months
ended, September 30, 2000 as compared to $366,162 for the comparable period in
1999. This increase is due primarily to the interest gained on our investments.
10
<PAGE>
Liquidity and Capital Resources
The development and expansion of our business requires substantial capital
investment for the procurement, design and construction of our 19 completed
central offices, additional customer aggregation centers and collocation space
improvements and cages, the purchase of telecommunications equipment, the design
and development of our networks, and the implementation of an in-house scaleable
customer care and billing platform. Capital expenditures were approximately
$17,040,936 for the nine months ended, September 30, 2000. We expect to decrease
capital expenditures over the next two quarters as the company moves to getting
its existing network fully operational.
Our capital requirements may vary based upon the timing and success of our
rollout and as a result of regulatory, technological, and competitive
developments, or if;
o demand for our services or our anticipated cash flow from operations
is less or more
o than expected; development plans or projections change or prove to
be inaccurate;
o we engage in any acquisitions; or
o we accelerate deployment of our network services or otherwise alters
the schedule or targets of our rollout plan.
During the nine months ended, September 30, 2000, we had a loss from operations
of $15,885,790. Net cash used in operating activities was $11,870,244 and
$1,780,444 for the nine months ended, September 30, 2000 and 1999, respectively.
The net cash used in operations was primarily due to higher network costs due to
the cost associated with implementing an in house customer care and billing
organization. This was partially offset by increases in accounts payable and
accrued expenses and deferred revenue for the nine months ended, September 30,
2000. The net cash used in investing activities was $9,959,742 for the nine
months ended, September 30, 2000, related primarily to the acquisitions and
purchases of property and equipment correlating to network buildout, switch
installation, the implementation of the customer care and billing
infrastructure, and the acquisition of three internet service providers. The net
cash used in investing activities was $1,734,596 for the nine months ended,
September 30, 1999, related primarily to purchases of property and equipment.
Net cash provided by financing activities was $21,498,832 for the nine months
ended, September 30, 2000 and was primarily due to net proceeds from the
issuance of our preferred stock and common stock warrants and our borrowings
under the credit agreement with Nortel, less related issuance costs. Net cash
provided by financing activities was $21,775,558 for the nine months ended,
September 30, 1999 and was primarily related to proceeds from the issuance of
common stock at the initial public offering on April 22, 1999, less related
issuance costs.
On November 20, 2000, we entered into an additional agreement with Nortel to
settle various claims arising out of certain professional services rendered by
Nortel. This agreement provides for a one-time cash payment of $3,500,000 by
Nortel to us. The agreement also provides for a $1,200,000 credit for products
and services which will assist in getting our existing network fully
operational. In additon, Nortel will provide a one-time reduction of $5,000,000
against the current amount drawn against the Credit Agreement.
We plan to realign our business plan to effectively meet the increasingly
challenging competitive local exchange carrier environment. We plan to optimize
the assets that we have deployed and limit future capital expenditures to a
success based smart build strategy. This will lower our overall capital
expenditure requirements and allow us to direct resources to high EBITDA
opportunities. In addition, we plan to reduce our overall EBITDA loss by
implementing various cost reduction programs which include a reduction of staff
headcount, a consolidation of certain redundant offices, and a consolidation of
certain network infrastructure. These programs will be completed in the fourth
quarter of this year.
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With the implementation and completion of our various cost reduction programs,
we believe that the existing capital resources will be sufficient to fund our
expansion and operating deficits through 2001. If we are unsuccessful in
implementing these cost reductions or additional unanticipated costs are
incurred, we may not have sufficient funds to continue as a going concern
through December 31, 2001. As a result, we may decide to seek additional capital
earlier than the end of 2001, the timing of which will depend upon, among other
things, market conditions and terms which are acceptable to us. The actual
amount and timing of our future capital requirements may differ materially from
our estimates as a result of, among other things, the demand for our services
and regulatory, technological and competitive developments, including additional
market developments and new opportunities, in our industry. We may also need
additional financing if:
o We alter the schedule, targets or scope of the network rollout plan;
o Our plans or projections change or prove to be inaccurate; or
o We acquire other companies or businesses. We may obtain additional
financing through commercial bank borrowings, equipment financing or
the private or public sale of equity or debt securities. We may be
unsuccessful in raising sufficient additional capital. In
particular, we may be unable to raise additional capital on terms
that we consider acceptable, that are within the limitations
contained in our financing agreements and that will not impair our
ability to develop its business. If we fail to raise sufficient
funds, we may need to modify, delay or abandon some of the planned
future expansion or expenditures, which could have a material
adverse effect on the business, prospects, financial condition and
results of operations.
We have not paid any cash dividends to our shareholders and do not intend to pay
cash dividends in the foreseeable future.
Special Note Regarding Forward-Looking Statements
Any statements in this Quarterly Report on Form 10-QSB about our expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and are forward-looking statements. These statements are often,
but not always, made through the use of words or phrases such as "will," "will
likely result," "expect," "will continue," "anticipate," "estimate," "intend,"
"plan," "projection," "would," "should" and "outlook." Accordingly, these
statements involve estimates, assumptions and uncertainties which could cause
actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout this Report and our Annual Report on Form 10-KSB,
as amended, for the year ended December 31, 1999. The following cautionary
statements identify important factors that could cause our actual results to
differ materially from those projected in the forward-looking statements made in
this prospectus. Among the key factors that have a direct bearing on our results
of operations are:
o general economic and business conditions; the existence or absence
of adverse publicity; changes in, or failure to comply with,
government regulations; changes in marketing and technology; change
in political, social and economic conditions;
o increased competition in the Internet ; Internet capacity; general
risks of the Internet;
o success of acquisitions and operating initiatives; changes in
business strategy or development plans; management of growth;
o availability, terms and deployment of capital;
o construction schedules; costs and other effects of legal and
administrative proceedings;
o dependence on senior management; business abilities and judgment of
personnel; availability of qualified personnel; labor and employee
benefit costs;
o development risks; risks relating to the availability of financing;
and
o other factors referenced in this Report and the Form 10-KSB, as
amended.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
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PART II
OTHER INFORMATION
Item 1: Legal Proceedings
On August 18, 2000, we commenced an action against Promethean Asset Management
LLC, HFTP Investment LLC, Fisher Capital LTD, Wingate Capital, LTD, Citadel
Limited Partnership and Marshall Capital Management, Inc. ("Defendants"), in the
United States District Court for the Southern District of New York, Case No. 00
Civ. 6218 (RMB) (MHD). In the action, we allege that the holders of our Series A
Convertible Preferred Stock and certain of their affiliates engaged in a scheme
to manipulate and intentionally drive down the trading price of our common
stock.
Our complaint asserts that the Defendants actions constitute (i) violation of
federal securities laws, including, but not limited to, insider trading, stock
manipulation through cross sales and massive short sales of our common stock and
short swing profits, (ii) breach of contract, (iii) fraud, and (iv) breach of
the covenant of good faith and fair dealing. Our complaint seeks injunctive
relief, rescission, compensatory damages and punitive damages. We are also
seeking a declaration that we are relieved of our obligations to the holders of
our preferred stock by reason of fraud, illegality and manipulative conduct. The
Defendants have filed a motion to dismiss our complaint, which is presently
pending before the court.
On September 19, 2000, Belenos, Inc., a Delaware corporation, filed suit against
us alleging that certain sums are due to it for work performed and equipment
provided to us. The suit was filed in the Superior Court of Suffolk County,
Commonwealth of Massachusetts (Ca 00-4177 (F).
This controversy arises from certain work performed or to be performed, and
equipment provided or to be provided in the build-out of our network. Belenos
has been either unwilling or unable to provide detailed invoices for the work
performed and has failed to satisfactorily address our concerns as to the
quality of work performed. We refused to make payment as invoiced by Belenos
until our concerns have been satisfactorily addressed. Belenos filed a suit
against us seeking payment on the above-mentioned invoices in the approximate
amount of $1,200,000, and unspecified money damages in connection with an
alleged breach of contract by us with Belenos.
Item 2: Changes in Securities and Use of Proceeds
None
Item 3: Defaults in Senior Securities Following the commencement of the action
against the holders of our Series A Convertible Preferred Stock and the
announcement that we will not honor requests for conversions, the holders of the
preferred stock requested redemption of the preferred stock. The holders have
asserted that they are entitled to redemption of their preferred shares under
our Certificate of Designations, Preferences and Rights of Series A Preferred
Stock by reason of the our announcement that we will not honor conversion
requests and of the alleged failure by us to have the shares of common stock
underlying the preferred shares and their related warrants registered under
Securities Act of 1933. We have refused to honor the redemption requests upon
the basis set forth in its action against the preferred holders. Holders of
fifty percent of the preferred stock have requested an aggregate redemption
amount of $10.8 million. The holder of the other fifty percent has not specified
a redemption amount.
Item 4: Submission of Matters to a Vote of Security Holders
None
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Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8K
(1) Exhibits:
27 Financial Data Schedule
(2) Form 8K filed on August 21, 2000, in connection with the
registrant's commencement of legal proceedings against the holders of its series
A convertible preferred stock and certain of the holders' affiliates.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LOG ON AMERICA, INC.
By: /s/ Kenneth M. Cornell
----------------------------------------
Date: November 20, 2000 Kenneth M. Cornell,
Chief Financial Officer, Principal
Financial and Accounting Officer
(duly authorized to sign on behalf
of registrant)
