<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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.)
3 Regency Plaza, Providence, Rhode Island 02903
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(Address of principal executive offices) (Zip Code)
(401) 453-6100
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(Registrant's telephone number, including area code)
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
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $3,341,075
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer as of March 10, 2000 was equal to $118,129,550
based on the average bid and ask price of $14.25.
As of March 10, 2000, a total of 8,289,793 shares of the Registrant's Common
Stock, $.01 par value, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definite Proxy Statement to be used in connection with the
Registrant's 1999 Annual Meeting of Stockholders to be held on May 23, 2000, are
incorporated by reference into Part III of this Annual Report on Form 10-KSB.
<PAGE>
FORM 10-KSB
LOG ON AMERICA, INC.
Table of Contents
<TABLE>
<CAPTION>
PART I Page
<S> <C> <C>
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Signatures
</TABLE>
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-KSB (this "Form 10-KSB"),
including statements under "Item 1. Description of Business," "Item 3 Legal
Proceedings" and "Item 6. Management's Discussion and Analysis or Plan of
Operation," constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995 (collectively, the "Reform Act").
Certain, but not necessarily all, of such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of Log On America, Inc. (the
"Company", `we" or "us") to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, but are not limited to, the following: general
economic and business conditions; competition in the telecommunications
industry; industry capacity; success of acquisitions and operating initiatives;
management of growth; dependence on senior management; brand awareness; general
risks of the telecommunications industries; development risk; risk relating to
the availability of qualified personnel; labor and employee benefit costs;
changes in, or failure to comply with, government regulations; construction
schedules; the costs and other effects of legal and administrative proceedings;
changes in methods of marketing and technology; changes in political, social and
economic conditions and other factors referenced in this Form 10-KSB. The
Company will not undertake and specifically declines any obligation to publicly
release the results of any revisions which may be made to any forward-looking
statement to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
Overview
We are a Northeast Regional Data Competitive Local Exchange Carrier ("D-CLEC+")
providing local dial tone, in-state toll, long distance, and high-speed Internet
access and cable programming solutions over traditional copper wire using xDSL
technology to residential and commercial clients throughout the Northeast. The
Company completed the first phase of our growth plan in 1999, the acquisition
phase, which established a critical mass of customers throughout the New England
states. Concurrently, through a series of selectively targeted transactions, the
Company established partnerships with the best of breed in the communications
industry and secured the funding needed to implement the second phase of the
Company's business strategy, the deployment of an advanced communications
network. This included Nortel Networks, Inc. ("Nortel") taking a 3.1% stake in
the Company, representing one of only three such direct equity investments in a
service provider ever made by Nortel.
Under the next phase of the Company's business strategy it plans to
systematically build-out a high-speed network, which will ultimately give the
Company one of the most powerful networks in the Northeast, connecting the
under-served, near urban markets. When complete, Log On America will own the
customers, it will own the network and it will own the services provided on the
network, enabling it to further accelerate its revenue growth by expanding the
DSL and other bundled broadband services offered.
We offer CLEC (voice telephony services), D-CLEC+, (high-speed data services),
and ISP (Internet access services) bundled services to residential and
commercial subscribers. We intend to target broad market segments with diverse
requirements by providing easy-to-use services at a very competitive cost. The
potential markets for these services include both residential consumers and
small- and medium-sized businesses - a market that is expected to exceed $35
billion nationwide in the year 2001.
The market for our offering is expanding rapidly. Across the industry,
installation of Digital Subscriber Lines (DSLs) grew 300 percent in the United
States for the first half of 1999, surging well beyond industry analysts'
projections. Due to our IISP and D-CLEC activities, we are poised to enter the
local voice market of approximately
<PAGE>
$5.5 billion in New England by the end of 2000, and enter the local voice market
of approximately $23.4 billion in the Northeast.
We believe we are the first and only full-service integrated communications
provider (ICP) targeting the Northeastern United States. We are a
facilities-based company that owns its own switch. The Company's infrastructure
is based on the latest developments in network operations, engineered to provide
businesses with cutting-edge products and truly exceptional customer service.
Our objective is to become the leading single-source provider of voice, data,
and video services to residential and small to medium sized business customers
in each of our markets. We will achieve this goal by offering individual or
bundled service options, superior customer service and competitive prices over
our own enhanced telecommunications network.
We believe that we enjoy significant competitive advantages due to our ability
to:
o deliver bundled services (voice, high-speed Internet access, and video
programming) to any given customer on our own network;
o provide superior customer service;
o deliver reliable, secure and high-speed services to our customer base; and
o offer customers highly competitive price packages based on the bundling of
services.
In summary, we will utilize enhanced technology to provide differentiated,
bundled service offerings to growing segments of the voice, high-speed data, and
Internet and video communications market. Among our many unique capabilities and
plans is our ability to sell direct to residential subscribers - which in turn
will have pull through to commercial sales, to emphasize customer service by
concentrating on customer care and billing, and to target under-served areas.
Our current cash position, special vendor arrangements, strong banking and
credit relationships, publicly traded stock, and a highly specialized
acquisition and transition team are some of the financial and manpower
components that exhibit our commitment to a well-managed operation. Finally, our
ISP rollup campaign will provide a solid foundation for our position as a strong
technical player in an increasingly competitive market.
Corporate History
Log On America, Inc., a Rhode Island corporation, was formed in 1992 to provide
online Internet and related services. This company is our predecessor. In 1997,
the Rhode Island corporation sold 100% of its assets to System 4, Inc., a
Delaware corporation and a wholly owned subsidiary of Global Telemedia
International, Inc., a Delaware corporation, and agreed to change its name to
Tekcom.Inc. Tekcom remained a Rhode Island corporation with no operations. At
the time of the acquisition, Global Telemedia was engaged in the marketing of
telecommunications services. In consideration of the sale, Global Telemedia
agreed to assume all of Rhode Island corporation's outstanding liabilities and
to pay the Rhode Island corporation's shareholders, on the third anniversary
date of the purchase, 20% of the value of all of the Rhode Island corporation's
business as of that date. After the transfer of assets and liabilities to System
4, Inc., System 4 changed its name to Log On America, Inc.
Wan Secure, Inc. was organized in Delaware in January 1998 to purchase 100% of
the successor to System 4's outstanding capital from Global Telemedia. As a
result, we became a wholly owned subsidiary of Wan Secure. In September 1998,
Wan Secure merged with LOA, the successor to System 4. As a result of this
merger, Wan Secure was the survivor. Simultaneously with the merger, Wan Secure,
a Delaware corporation, changed its name to Log On America, Inc.
In and around February 1998, 100% of the shareholders of Tekcom. Inc., formerly
the Rhode Island corporation, agreed to surrender and release their rights and
claims to 20% of the value of the Delaware Log On America's business as of the
third anniversary date of the Global Telemedia's purchase. As consideration for
this surrender and release. Tekcom shareholders received an aggregate of 795,130
shares of the Delaware Log On America's common stock.
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Strategic Agreements
On May 18, 1999, the Company entered into an agreement with Nortel Networks,
Inc. ("Nortel") which committed the Company to purchase $8,000,000 of equipment
and services. The agreement was amended on November 22, 1999 to increase the
amount to $47,000,000. The agreement expires on December 31, 2001. Nortel agreed
to finance the purchases under this agreement with a multiple advance term loan
credit facility.
On August 3, 1999, the Company acquired all of the common stock of cyberTours,
Inc. in exchange for 506,667 shares of common stock of the Company, plus the
assumption of $2,764,247 in debt. The transaction was accounted for using the
purchase method. The purchase price including related acquisition costs and the
grant of 50,667 warrants to purchase the Company's common stock to consultants
was estimated to be approximately $11,328,580 based on the value of the
Company's common stock on the purchase date, and the assumed liabilities. The
fair value of the net tangible assets acquired approximated $1,484,191, which
consisted primarily of accounts receivables and computer, network and
communications equipment.
On August 4, 1999, we secured a line of credit for $4,000,000 with Fleet
National Bank, which line of credit is secured with various marketable
securities held in our name.
On November 29, 1999, we agreed to loan, pursuant to a promissory note,
$1,500,000 plus interest to certain holders of an aggregate of 421,333 of the
shares issued in connection with the cyberTours, Inc. acquisition by us. The
Notes are due and payable on the earlier of: (i) an effective registration
statement registering the shares with the Securities Exchange Commission; or
(ii) September 14, 2000. The 421,333 shares secure the Notes. In consideration
of the foregoing, the holders of the 421,333 shares have agreed to waive certain
demand rights they have relating to the shares until the Notes are due and
payable.
On December 10, 1999, the Company completed the sale of $5,000,000 in common
stock to Nortel at a price of $19.50 per share ("Shares"). The sale was made in
accordance with the terms of a commitment from Nortel to purchase the Shares and
in addition to provide the Company with up to a $45,000,000 multiple advance
term loan facility. The Shares are subject to certain registration rights.
During 1999, the Company acquired certain assets of three Internet service
provider businesses for approximately $1,672,000, including related acquisition
costs. The total purchase price included cash and 16,000 shares of the Company's
common stock valued at the price of the Company's common stock on the purchase
date. The fair value of the net tangible assets acquired, consisting primarily
of computer, network and communications equipment approximated $86,500.
On February 23, 2000, the Company sold 15,000 shares of the Company's Series A
Convertible Preferred Stock, par value $.01 per share (the "Preferred Shares")
and issued 594,204 common stock purchase warrants (the "Warrants") for an
aggregate consideration of $15,000,000. Subject to certain conditions, the
Company can sell, and may be obligated to sell, up to, an additional 20,000
Preferred Shares and related Warrants for an additional $20,000,000, as more
fully described therein.
Simultaneously, the Company entered into a Senior Secured Credit Agreement (the
"Credit Agreement") with Nortel. Under the Credit Agreement, Nortel has
committed to advance to the Company of up to $30,000,000 and subject to certain
conditions, an additional advance of up to an additional $15,000,000 to finance
the Company's purchases of equipment and services from Nortel. Under the Credit
Agreement, the Company will begin repayment of the facility over a five-year
period upon completion of the purchases from Nortel. The Company has granted a
security interest in substantially all of the Company's assets under the Credit
Agreement. As of December 31, 1999 Nortel has advances $1,439,582 which has been
considered advanced under the Credit Agreement.
<PAGE>
Item 2. DESCRIPTION OF PROPERTIES
The Company's corporate headquarters is currently located in Providence, RI
where the Company leases approximately 8,000 square feet. These leases expire on
May 31, 2004. On January 24, 2000, the Company entered into a ten-year agreement
to lease approximately 17,000 square feet of additional space in Providence, RI.
The executive, sales, marketing, finance and human resource groups will relocate
to the new facilities in early April 2000. In addition, as a result of our
acquisitions completed during the current fiscal year, we assumed additional
facility locations of approximately 11,500 square feet in eight other New
England locations. These leases have various expiration dates beginning March
31, 2000 through August 31, 2003.
Management believes that the above properties and their contents are adequately
covered by insurance and that the square footage is sufficient to meet the
Company's needs.
Item 3. LEGAL PROCEEDINGS
To the knowledge of the Company there are no material pending legal proceedings
(or property subject to a legal proceeding), which is not routine litigation
incidental to the business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 17, 1999, two resolutions were adopted by consent of the majority
shareholders of Log On America, Inc., acting pursuant to Section 228 of the
General Corporation Law of the State of Delaware. Pursuant to the resolutions
the Company:
(i) increased the number of authorized shares of Common Stock, $.01 par value,
from 20,000,000 to 125,000,000 shares; and
(ii) authorized up to 15,000,000 shares of a new class of undesignated Preferred
Stock ("Blank Check Preferred Stock") which would allow the Board of Directors
of the Company to issue, without further shareholder action, one or more series
of Preferred Stock. Pursuant to the second resolution the number of shares
issuable under the Corporation's 1999 Employee Stock Option Plan has been
increased from 1,000,000 to 2,500,000 shares. The board of directors did not
solicit proxies in connection with the adoption of these resolutions and proxies
were not requested from our Stockholders.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock began trading on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system since April 22, 1999,
under the symbol "LOAX." As of December 31, 1999, the Company had 115 holders of
record. The following table sets forth, on a per share basis, for the periods
shown the high and low prices of the Common Stock as reported on NASDAQ.
Fiscal Year 1999 - Quarter Ended High Low
Quarter Ended December 31, 1999 28.25 15.13
Quarter Ended September 30, 1999 23.75 13.75
Quarter Ended June 30, 1999 37.00 11.38
<PAGE>
Holders
As of March 10, 2000, there were 114 shareholders, including several holders who
are nominees for an undetermined number of beneficial owners.
Dividends
The Company has not paid any dividends with respect to its common stock and does
not anticipate paying any dividends in the near future. The Company's credit
facility with its lender prohibits the payment of dividends without their
consent.
Sales of Unregistered Securities.
December 1998 Private Placement
In December 1998 we 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. We
sold 369,216 shares of its Common Stock to "accredited investors," as that term
is defined in the Securities Act, and raised gross proceeds of $1,200,000. The
placement agent for the December Placement was Security Capital Trading, Inc.,
which received a commission of 10% of the $1,200,000 raised and a
non-accountable expense allowance of 3% per Unit sold. Security Capital Trading,
Inc. was granted warrants to purchase (a) 13,076 shares of Common Stock reserved
for issuance upon the exercise of outstanding warrants granted on December
3,1998, exercisable during the four year period commencing December 1999 and
expiring December 2003 at $3.90 per share; and (b) 23,845 shares of Common Stock
reserved for issuance upon the exercise of outstanding warrants, granted on
December 23, 1998, exercisable during the four year period commencing December,
1999 and expiring December 2003 at $3.90 per share. The December Placement was
exempt from state and federal registration pursuant to Rule 506 of Regulation D,
and Section 4(2) of the Securities Act.
July 1998 Private Placement
In July 1998 we closed a private placement of shares of Common Stock at a price
of $1.00 per share. We sold 275,000 shares of Common Stock to accredited
investors and received gross proceeds of $275,000. The private placement was
offered by our officers and directors, none of whom received commissions for the
sales. The private placement was exempt from state and federal registration
pursuant to Rule 506 of Regulation D, and Section 4(2) of the Securities Act.
Recent Acquisitions and sales of our securities.
On August 3, 1999, we completed the acquisition of all the outstanding shares of
cyberTours, Inc. in exchange for 506,667 shares of our Common Stock valued at
$7,600,000. Pursuant to the terms of this agreement, dated July 2, 1999,
cyberTours, Inc. has certain demand rights to register the shares.
On September 20, 1999, we acquired certain assets of an Internet Service
Provider in exchange for $256,000 in cash and 16,000 shares of our Common Stock
valued at $256,000, pursuant to an agreement, dated August 24, 1999.
On December 12, 1999, we sold $5,000,000 in common stock to Nortel at a price of
$19.50 per share based on the average closing bid price of the shares, as quoted
on the Nasdaq National Market System over the twenty trading days immediately
preceding the Closing Date of December 2, 1999. The shares are subject to
certain registration rights.
On February 23, 2000, the Company sold 15,000 of Series A Convertible Preferred
Stock (the "Preferred Shares") and issued 594,204 common stock purchase warrants
(the "Warrants") for an aggregate consideration of $15,000,000. Subject to
certain conditions, the Company can sell, and may be obligated to sell, up to an
additional 20,000 Preferred Shares and related Warrants for an additional
$20,000,000.
<PAGE>
Warrants.
On June 17, 1999, the Company granted warrants for the purchase of 50,667 shares
of common stock at an exercise price of $12.25 per share to one entity in
consideration of services rendered. The warrants provide for piggyback
registration rights and are exercisable during the 5 year period commencing June
17, 1999. No information was given to this accredited entity but it was provided
with the opportunity to review our corporate records.
In August 1998, the Company granted warrants for the purchase of 1,000,000
shares of Common Stock at an exercise price of $1.00 per share to four entities,
ICC Consulting, Inc., Scofield Dennison Corp., Northeastern Fibercom and Horizon
Fiber, Inc. in consideration of certain business promotion and sales. The
warrants provide for piggyback registration rights and are exercisable during
the four-year period commencing January 15, 1999. No information about LOA was
given to these entities, but they were provided with the opportunity to review
our corporate records.
December 1998, the Company granted warrants for the purchase of 50,000 shares of
Common Stock to Silverman, Collura & Chernis, P.C. ("SCCB"), LOA's legal
counsel, for services rendered. The warrants provide for cashless exercise and
piggy-back registration rights. The warrants are exercisable during the five
year period commencing December 31, 1998 at an exercise price of $3.50 per
share. LOA had a pre-existing relationship with SCCB prior to the warrant
issuance. SCCB was provided with complete due diligence documents relating to
LOA prior to the issuance of the warrants. We also granted warrants for the
purchase of 45,000 shares of Common Stock to Kenneth M. Cornell, our 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.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Overview
Log On America, Inc. (the "Company") is a Northeast Regional Data Competitive
Local Exchange Carrier ("D-CLEC+") providing local dial tone, in-state toll,
long distance, and high-speed Internet access and cable programming solutions
over traditional copper wire using xDSL technology to residential and commercial
clients throughout the Northeast. The Company completed the first phase of its
growth plan in 1999, the acquisition phase, which established a critical mass of
customers throughout the New England states. Concurrently, through a series of
selectively targeted transactions, the Company established partnerships with the
best of breed in the communications industry and secured the funding needed to
implement the second phase of the Company's business strategy, the deployment of
an advanced communications network. This included Nortel Networks, Inc.
("Nortel") taking a 3.1% stake in the Company, representing one of only three
such direct equity investments ever made by Nortel.
Under the next phase of the Company's business strategy it plans to
systematically build-out a high-speed network, which will ultimately give the
Company one of the most powerful networks in the Northeast, connecting the
under-served, near urban markets. When complete, Log On America will own the
customers, it will own the network and it will own the services provided on the
network, enabling it to further accelerate its revenue growth by expanding the
DSL and other bundled broadband services offered.
Results of Operations
Pro Forma for Year Ended December 31, 1999
versus year Ended December 31, 1998
On August 3, 1999, the Company acquired all of the common stock of cyberTours,
Inc. in exchange for 506,667 shares of common stock of the Company, plus the
assumption of $2,764,247 in debt. This transaction was accounted for using the
purchase method. The purchase price was estimated to be approximately
$11,328,580. In addition, during 1999, the Company acquired certain assets of
three Internet service provider businesses for approximately $1,672,000. The
total purchase price for these acquisitions included cash and 16,000 shares of
the
<PAGE>
Company's common stock. The fair value of the net tangible assets acquired
approximated $1,570,691, which consisted primarily of accounts receivables and
computer, network and communications equipment. The remaining purchase price was
allocated to the acquired customer base, non-compete agreements, and goodwill,
which are each being amortized over two to five years.
The unaudited pro forma results of operations for 1999 and 1998 assume that the
operations of the Company were combined with the acquired companies as if the
acquisitions occurred on January 1, 1998. The unaudited pro forma results of
operations are presented after giving effect to certain adjustments for
depreciation and amortization of intangibles. The unaudited pro forma results of
operations are based upon currently available information and upon certain
assumptions that the Company believes were reasonable. The unaudited pro forma
results do not purport to represent what the Company's results of operations
would actually have been if the transaction in fact had occurred on such date or
at the beginning of the period indicated or to project the Company's results of
operations at any future date or for any future period.
The following table sets forth the unaudited pro forma results of operations of
the Company for the years ended December 31, 1999 and 1998.
Unaudited
1999 1998
-------------- ----------------
Revenues $ 7,203,410 $ 4,950,828
Operating expenses
Costs of revenue 3,250,938 2,384,611
Selling, general and administrative 8,592,594 3,147,024
Depreciation and amortization 2,993,644 2,699,144
-------------- ----------------
Total operating expenses 14,837,176 8,230,779
-------------- ----------------
Loss from operations (7,633,766) (3,279,951)
Other income (expense) 520,159 (85,583)
-------------- ----------------
Net loss $(7,113,607) $ (3,365,534)
============== ================
Net loss per share, basic and diluted $ (1.02) $ (.77)
============== ================
Weighted average number of shares
outstanding, basic and diluted 6,964,376 4,375,932
============== ================
Revenues
Pro forma revenues increased by $2,252,582 or 46% to $7,203,410 for the year
ended December 31, 1999 as compared to $4,950,828 for the comparable period in
1998. The increase in pro forma revenues is due primarily to increased direct
sales efforts, increased services offerings, and an aggressive marketing
campaign in both Rhode Island and Maine.
Costs of revenue
Pro forma costs of revenue increased by $866,327 or 36%, to $3,250,938 for the
year ended December 31, 1999 as compared to $2,384,611 for the comparable period
in 1998. This increase is due primarily to the variable and fixed network costs
associated with the increase in pro forma revenue.
Selling, general and administrative expense
Pro forma selling, general and administrative expenses increased by $5,445,570
or 173%, to $8,592,594 for the year ended December 31, 1999 as compared to
$3,147,024 for the comparable period in 1998. This increase is due
<PAGE>
primarily to the salaries and related expenses for the development of our
business, network architecture, the establishment of our management team and the
development of corporate identification, promotional and advertising materials.
As the staffing levels and operations of the Company have expanded over the past
year, we have incurred additional expenses to support such growth.
Depreciation and amortization
Pro forma depreciation and amortization increased by $294,500 or 11%, to
$2,993,644 for the year ended December 31, 1999 as compared to $2,699,144 for
the comparable period in 1998. This increase is due primarily to the
depreciation on the equipment costs associated with the buildout of our network
backbone to accommodate increased usage of our network.
Other Income (Expense)
Pro forma other income increased by $605,742or 708%, to $520,159 for the year
ended December 31, 1999 as compared to other expense of $85,583 for the
comparable period in 1998. This increase is due primarily to the investment
income earned on the proceeds from the initial public offering on April 22,
1999.
Year Ended December 31, 1999
versus Year Ended December 31, 1998
Revenues
Revenues increased by $2,581,197 or 340% to $3,341,075 for the year ended
December 31, 1999 as compared to $759,878 for the comparable period in 1998. The
increase in revenue is due primarily to the acquisitions, increased direct sales
efforts, increased services offerings, and an aggressive marketing campaign in
both Rhode Island and Maine.
Costs of revenue
Costs of revenue increased by $1,057,346 or 262%, to $1,460,854 for the year
ended December 31, 1999 as compared to $403,508 for the comparable period in
1998. This increase is due primarily to the variable and fixed network costs
associated with the increase in revenue.
Selling, general and administrative expense
Selling, general and administrative expenses increased by $5,801,041 or 832%, to
$6,497,908 for the year ended December 31, 1999 as compared to $696,867 for the
comparable period in 1998. This increase is due primarily to the salaries and
related expenses for the development of our business, network architecture, the
establishment of our management team and the development of corporate
identification, promotional and advertising materials. As the staffing levels
and operations of the Company have expanded over the past year, so have these
expenses to support such growth.
Depreciation and amortization
Depreciation and amortization increased by $1,195,757 or 1,504%, to $1,275,279
for the year ended December 31, 1999 as compared to $79,522 for the comparable
period in 1998. 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 network
backbone to accommodate increased usage of our network.
<PAGE>
Other Income (Expense)
Other income increased by $603,238, to $601,194 for the year ended December 31,
1999 as compared to other expense of $2,044 for the comparable period in 1998.
This increase is due primarily to the investment income earned on the proceeds
from the initial public offering on April 22, 1999.
Liquidity and Capital Resources
The development and expansion of our business requires substantial capital
investment for the procurement, design and construction of our central office
collocation space improvements and cages, the purchase of telecommunications
equipment and the design and development of our networks. Capital expenditures
were approximately $2,097,176 and $40,821 for the years ended December 31, 1999
and 1998, respectively. The Company expects capital expenditures to be
significantly higher in future periods arising primarily from payments of
collocation fees and the purchase of infrastructure equipment necessary for the
development and expansion of our network.
The Company's capital requirements may vary based upon the timing and success of
our rollout and as a result of regulatory, technological, and competitive
developments, or if;
-demand for the Company's services or our anticipated cash flow from
operations is less or more than expected; or
-development plans or projections change or prove to be inaccurate; or
-the Company engages in any acquisitions; or
-the Company accelerates deployment of our network services or otherwise
alters the schedule or targets of our rollout plan.
As of December 31, 1999, the Company had an accumulated operating deficit of
$5,713,835 and cash and cash equivalents and available-for-sale securities of
$19,048,713. Net cash used in operating activities was $2,579,472 and $271,075
for the years ended December 31, 1999 and 1998, respectively. The net cash used
in operations was primarily due to net losses, offset in part by increases in
depreciation and amortization expenses, accounts payable, accrued expenses and
deferred revenue in 1999, and by an increase in depreciation and amortization
expenses and accounts payable 1998. The net cash used in investing activities
was $17,009,915 for the year ended December 31, 1999, related primarily to the
purchase of available-for-sale securities, acquisitions and purchases of
property and equipment. The net cash used in investing activities was $92,199
for the year ended December 31, 1998, related primarily to issuance of notes to
officers and purchases of property and equipment. Net cash provided by financing
activities was approximately $26,804,116 for the year ended December 31, 1999
and was primarily due to net proceeds from the issuance of common stock. Net
cash provided by financing activities was approximately $993,405 for the year
ended December 31, 1998 primarily related to the proceeds from issuance of
common stock.
On February 23, 2000, the Company sold 15,000 shares of Series A Convertible
Preferred Stock (the "Preferred Shares") and issued 594,204 common stock
purchase warrants (the "Warrants") for an aggregate consideration of
$15,000,000. Subject to certain conditions, the Company can sell an additional
20,000 Preferred Shares and related Warrants for an additional $20,000,000.
Simultaneously, the Company entered into a Senior Secured Credit Agreement (the
"Credit Agreement") with Nortel. Under the Credit Agreement, Nortel has
committed to an initial advance to the Company of up to $30,000,000 and a second
advance of up to an additional $15,000,000 to finance the Company's commitment
to purchase, by December 31, 2001, up to $47,000,000 of equipment and services
from Nortel. Under the Credit Agreement, the Company will begin repayment of the
facility over a five-year period upon completion of the purchases from Nortel.
The Company has granted a security interest in substantially all of the
Company's assets under the Credit Agreement. As of December 31, 1999 Nortel has
advanced $1,439,582 which has been considered advances under the Credit
Agreement.
<PAGE>
The Company intends to continue to expand its operations at a rapid pace and
expects to continue to operate at a loss for the foreseeable future. The nature
of the expenses contributing to our future losses will include network and
service costs in existing and new markets; legal, marketing, and selling
expenses as we enter each new market; payroll-related expenses as we continue to
add employees; general overhead to support the operational increases; and
interest expense arising from financing our expenditures.
The Company believes that the existing capital resources will be sufficient to
fund our expansion and operating deficits through 2000. However, the Company may
decide to seek additional capital earlier than the end of 2000, the timing of
which will depend upon market conditions, among other things. 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. The Company may also
need additional financing if: the Company alters the schedule, targets or scope
of the network rollout plan; the plans or projections change or prove to be
inaccurate; or the Company acquires other companies or businesses. The Company
may obtain additional financing through commercial bank borrowings, equipment
financing or the private or public sale of equity or debt securities. The
Company may be unsuccessful in raising sufficient additional capital. In
particular, the Company may be unable to raise additional capital on terms that
we consider acceptable, that are within the limitations contained in the
Company's financing agreements and that will not impair the Company's ability to
develop its business. If the Company fails to raise sufficient funds, the
Company 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 dividends to our shareholders and do not intend to pay
dividends in the foreseeable future.
Year 2000 Compliance
Many currently installed computer systems and software products were coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields needed to accept four digit entries to distinguish 21st
century dates from 20th century dates, and the failure to do so could result in
the loss of revenues.
The Company implemented a Year 2000 program to ensure that the Company's
computer systems and applications would function properly beyond 1999. All of
the Company's hardware and software systems successfully transitioned to the
year 2000. The Company did not experience any significant problems as a result
of Year 2000 problems with its own systems or those of our vendors. However, the
potential still exists for a non-compliant system, either within the Company or
at a vendor, to malfunction due to the Year 2000 issue and cause a disruption to
the Company's business. Due to the uncertain nature of this issue, we can not
determine at this time whether the consequences of Year 2000 failures will have
a material impact on our results of operations and financial condition. We
believe that, with the successful transition to the year 2000, the possibility
of significant interruptions of normal operations should be minimal. Actual
costs incurred were approximately $25,000. The Company's expenditures consisted
primarily of internal payroll costs related to the assessment and correction of
internal systems and assessment and communication with vendors. We do not
anticipate incurring further costs related to the project.
Item 7. FINANCIAL STATEMENTS
The response to this item is incorporated by reference to pages F- through F-14
herein.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 14, 1999, the Company ("Registrant") dismissed its former independent
accountants, Tauber & Balser, P.C. ("T&B"), and engaged Ernst & Young LLP to
audit the Registrant's financial statements. The decision to change independent
accountants was recommended and approved by the Registrant's Board of Directors.
<PAGE>
T&B served as independent accountants of the Registrant's financial statements
for the years ended December 31, 1998 and 1997. The report of T&B on the
Registrant's financial statements for the years ended December 31, 1998 and 1997
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle. In connection
with its audits for the years ended December 31, 1998 and 1997, and during the
fiscal year 1999 prior to T&B's dismissal, the Registrant had no disagreements
with T&B on matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of T&B would have caused them to make reference thereto in
their report on the consolidated financial statements for such years.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Based solely on its review of the copies of such forms received by the Company,
Log On America believes that, during the fiscal year ended December 31, 1999,
Log On America's officers, directors and ten percent Stockholders complied with
all applicable Section 16(a) filing requirements on a timely basis, except that
Messrs. Fornal and Head filled a late Form 3. Mr. Fornal, an executive officer
of the Company, failed to report on his Form 3, 1,000 shares on September 9,
1999. Mr. Head, an executive officer of the Company, failed to report on his
Form 3 on November 26, 1999, no shares. The failure of the reporting persons to
report was inadvertent and has been corrected on a subsequent Form 3.
Directors and Officers
The following table sets forth certain information concerning each of our
directors and officers as of March 10, 2000:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David R. Paolo 32 President, CEO and Chairman
Charles F. Cleary 51 Chief Operating Officer
Kenneth M. Cornell 31 Chief Financial Officer
Raymond Paolo 54 Executive Vice President, Secretary
Treasurer and Director
Steven Gilbert 55 Executive Vice President
Donald J. Schattle II 34 VP of Technology Initiatives
Shastri Divakaruni 51 Director
David M. Robert 37 Director
</TABLE>
David R. Paolo is President, Chief Executive Officer, Chairman and founder of
Log On America. Mr. Paolo attended Roger Williams University from 1986 to 1990
and concurrently held the position of sales representative for a Massachusetts
computer equipment corporation. In 1990, Mr. Paolo left Roger Williams
University to accept a promotion as sales manager responsible for over 3,500
computer dealers on the eastern seaboard representing over $5 million in annual
sales; a position he held until 1992. With the vision of the future growth of
the on-line and telecommunications industries Mr. Paolo founded Log On America,
Inc. in 1992. In 1994 Mr. Paolo was appointed as Ambassador for the Greater
Providence Chamber of Commerce and from 1996 to 1998 he was chairman of the
NYNEX Advisory Board.
<PAGE>
Charles F. Cleary has served as our Chief Operating Officer since January 2000
and as a director since February 22, 2000. Mr. Cleary was selected to serve as a
director. Mr. Cleary is a veteran of the communications industry with a proven
expertise in CLEC operations. Mr. Cleary most recently served as Area Vice
President and General Manager of AT&T Growth Markets in the Greater Philadelphia
Region. He was previously Regional Vice President of Teleport Communications
Group. Mr. Cleary earlier held executive positions with other blue chip
communications companies including Metromedia Communications Corporation and ITT
Communications Services. Mr. Cleary has a M.B.A. in Marketing and a B.A. in
Economics from LaSalle University.
Kenneth M. Cornell has served as our Chief Financial Officer since December 1998
and has served as a director since August 1999. From May 1997 to December 1998,
Mr. Cornell was President of Cornell & Associates, Inc., a company providing
financial advisory services. From July 1996 to May 1997, he served as Controller
of Global Telemedia International, Inc. From 1991 to 1996 he worked at Ernst &
Young LLP in the audit department. Mr. Cornell graduated with a BS from the
University of Florida's Fisher School of Accounting in May 1990. In 1991, he
graduated from said university with a Masters in Accounting.
Raymond Paolo has served as the company's Executive Vice President, Secretary,
Treasurer and Director since October, 1998. Prior to this he was Chief Financial
Officer of the company's predecessor from 1992 until October 1998. Before
co-founding LOA he was an Officer and Director of Video-Eez, Inc., a
Massachusetts corporation and a former Assistant Vice President of both Citizens
Bank and Old Stone Bank of Rhode Island. Mr. Paolo graduated from the University
of Rhode Island in 1968 with a BS in Business Administration and was certified
through the Williams School of Banking in 1980.
Steven Gilbert has served as the Company's Executive VP since August 1999. Prior
to this, he was the President and founder of cyberTours which the Company
acquired. Mr. Gilbert graduated from MIT's Sloan School of Management. During
that period he worked extensively in the fledging field of entrepreneurial
studies and helped form the Institute for New Enterprise Development (INED). Mr.
Gilbert was instrumental in the development of the underlying structural
foundation of various computer systems driving major corporations such as NCR,
Iron Mountain, and Gettysburg Insurance. Mr. Gilbert's Library Archival System
is still a mainstay for major research libraries such as Harvard, Cornell, Yale,
and the University of South Carolina.
Donald J. Schattle II has served as our Vice President of Technology Initiatives
since 1998 and as a director as of October 1998. On February 22, 2000 Mr.
Schattle resigned as a director and was replaced by Charles F Cleary. From 1997
to 1998, he served as Senior Systems Administrator, Director of Operations for
our predecessor. Prior to this, Mr. Schattle owned a computer consulting and
technical support firm, Cybersultants, Inc., from 1995 to 1996, and was a
systems administrator, and service and support engineer for AAA of South Central
New England from 1992 to 1996. Mr. Schattle graduated from the University of
Rhode Island in 1994 with a BA degree.
Shastri Divakaruni has served as a director of the Company since February 1998.
From March 1996 to the present, Mr. Divakaruni has worked at Cisco Systems under
various job titles, including Director of Service Provider Marketing and
Director of Broadband Fixed Wireless Engineering. From 1987 to March 1996, Mr.
Divakaruni worked with Southern New England Telecommunications Corp. where he
served as Senior Director of Product Development and Integrated Marketing. Mr.
Divakaruni received his BS in Electronics and Telecommunications from the
University of India in 1969. He received an MS in Electrical Engineering from
the University of Iowa in 1972 and received an MBA from New York University in
1993.
David M. Robert has served as a director of the Company since February 1998.
Since 1985, Mr. Robert has worked for Northern Telecom, Inc. in various
capacities, including Software Systems Engineer, Product Marketing Specialist,
Sales Manager and, currently, VP of Sales for Nortel Major Accounts. Mr. Robert
received a BS in Mathematics/Computer Science from State University of New York,
College at Cortland in 1984.
Directors are elected to serve until the next annual meeting of the stockholders
and until their successors have been duly elected and qualified. Raymond Paolo
is the father of David R. Paolo.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The Company currently intends to include the information required by Item 10 in
the Company's 1999 Proxy Statement and such information is incorporated herein
by reference. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the Company's fiscal year end.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company currently intends to include information required by Item 11 in the
Company's 1999 Proxy Statement and such information is incorporated herein by
reference. Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the Company's fiscal year end.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND SUBSEQUENT EVENTS
In 1997, Log On America, Inc., a Rhode Island corporation, sold 100% of its
assets to System 4, Inc., a Delaware corporation and a wholly owned subsidiary
of Global Telemedia International, Inc., and agreed to change its name to
Tekcom, Inc. In consideration of the sale, Global Telemedia agreed to assume all
of the Rhode Island corporation's outstanding liabilities and to pay the Rhode
Island corporation's shareholders, on the third anniversary date of the
purchase, 20% of the value of all of the Rhode Island corporation's business as
of that date. After the transfer of assets and liabilities to System 4, Inc.,
System 4 changed its name to Log On America, Inc.
Wan Secure, Inc. was organized in Delaware in January 1998 to purchase 100% of
the successor to System 4's outstanding capital from Global Telemedia. As a
result, we became a wholly owned subsidiary of Wan Secure. In consideration for
the purchase, Wan Secure executed a promissory note in the amount of $100,000 to
Global Telemedia. David Paolo, our president and Wan Secure's majority
shareholder, personally guaranteed this promissory note. In September 1998, Wan
Secure effected a merger with and into LOA whereby Wan Secure was the survivor.
Simultaneously with the merger, Wan Secure, a Delaware corporation, changed its
name to Log On America, Inc.
In and around February 1998, 100% of the shareholders of Tekcom, Inc., formerly
the Rhode Island corporation, agreed to surrender and release their rights and
claims to 20% of the value of the Delaware Log On America's business as of the
third anniversary date of Global Telemedia's purchase. As consideration for this
surrender and release, Tekcom shareholders received an aggregate of 795,130
shares of the Delaware Log On America's common stock. In July 1998, Global
Telemedia accepted $25,000 in settlement of the $100,000 Wan Secure note.
In May 1998, our president and CEO, and one of our officers and directors,
executed promissory notes to us in the amounts of $77,617.80 and $47,859.41,
respectively. Under the terms of the notes, we agree to forgive 25% of the
principal amount for each note per year. Accordingly, the notes will be
completely forgiven in 2002. The notes do not bear any interest.
We believe that all of our transactions set forth above with persons affiliated
with us were made on terms no less favorable to us than could have been obtained
from unaffiliated third parties.
Transactions with Others
Nortel Networks, Inc.
On May 18, 1999, the Company entered into an agreement with Nortel which
committed the Company to purchase $8,000,000 of equipment and services. The
agreement was amended on November 22, 1999 to increase the amount to
$47,000,000. The agreement expires on December 31, 2001. Nortel has agreed to
finance the purchases under this agreement with the a multiple advance term loan
credit facility
<PAGE>
On December 10, 1999, the Company completed the sale of $5,000,000 in common
stock to Nortel at a price of $19.50 per share ("Shares"). The sale was made in
accordance with the terms of a commitment from Nortel to purchase the Shares and
in addition to provide the Company with up to a $45,000,000 multiple advance
term loan facility. The Shares are subject to certain registration rights.
On February 23, 2000, the Company entered into a Senior Secured Credit Agreement
(the "Credit Agreement") with Nortel. Under the Credit Agreement, Nortel has
committed to an initial advance to the Company of up to $30,000,000 and subject
to certain conditions, a second advance of up to an additional $15,000,000 to
finance the Company's commitment to purchase of equipment and services from
Nortel.
Private Placement of Convertible Preferred Stock
On February 23, 2000, the Company sold 15,000 shares of Series A Convertible
Preferred Stock (the "Preferred Shares") and issued 594,204 common stock
purchase warrants (the "Warrants") for an aggregate consideration of
$15,000,000. Subject to certain conditions, the Company can sell, and may be
required to sell, an additional 20,000 Preferred Shares and related Warrants for
an additional $20,000,000.
Transactions with Management
Employment Agreements
On January 12, 1998, we amended an employment agreement with David R. Paolo
dated January 3, 1997, to serve as our president and Chief Executive Officer.
The term of the agreement is for six years commencing on January 12, 1998. We
increased Mr. Paolo's base compensation of $91,500 per year to $124,500 upon the
consummation of a previous private offering, dated August 28, 1998. Under the
terms of the agreement, Mr. Paolo will receive an annual increase in base
compensation of 10% for the term of the agreement. We further increased Mr.
Paolo's base compensation to $136,950, effective January 1, 1999. After further
review of comparable companies, the compensation committee elected on October 1,
1999 to increase Mr. Paolo's base compensation to $250,000. The agreement
contains a provision for performance based bonuses, including non-qualified
stock options, car allowance, and club membership. The employment agreement
contains a non-compete clause for a period of two years following the
termination of Mr. Paolo's employment. A state court might not enforce or only
partially enforce this non-compete provision. The employment agreement may be
terminated upon 90 days written notice by either party. In addition, if we
terminate the agreement without cause, Mr. Paolo may be entitled to receive the
balance of any unpaid salary which would otherwise be payable to him during the
remainder of the term of the agreement.
On January 12, 1998, we entered into an employment agreement with Raymond Paolo
to serve as our chief financial officer. On January 1, 1999 we amended this
agreement to reflect his current position as our Executive Vice President of
administration, secretary and treasurer. The agreement's term is for six years.
We increased Mr. Paolo's base compensation of $51,500 per year to $69,500 upon
the consummation of a previous private offering, dated August 8, 1998. Under the
terms and conditions of the agreement, Mr. Paolo will receive an annual increase
in base compensation of 10% for the term of the agreement. We further increased
Mr. Paolo's base compensation to $76,450, effective January 1, 1999. After
further review of comparable companies, the compensation committee elected on
October 1, 1999 to increase Mr. Paolo's base compensation to $200,000. The
agreement contains a provision for performance based bonuses, including
non-qualified stock options and car allowance. The agreement contains a
non-compete clause for a period of two years following the termination of Mr.
Paolo's employment. A state court might not enforce or only partially enforce
this non-compete provision. The employment agreement may be terminated upon 90
days written notice by either party. In addition, if we terminate the agreement
without cause, Mr. Paolo may be entitled to receive the balance of any unpaid
salary which would otherwise be payable to him during the remainder of the term
of the agreement.
On May 1, 1999, we entered into an employment agreement with Kenneth Cornell to
serve as our Chief Financial Officer. The agreement is for six years. Under the
terms and conditions of the agreement, Mr. Cornell will receive a base
compensation of $90,000, and an increase annually by 10%, plus such additional
increases as may be approved from time to time by us. After further review of
comparable companies, the Compensation Committee elected on
<PAGE>
October 1, 1999 to increase Mr. Cornell's base compensation to $200,000. The
agreement contains a provision for performance based bonuses, including
non-qualified stock options and car allowance. The agreement contains a
non-compete clause for a period of one-year following the termination of Mr.
Cornell's employment. A state court might not enforce or only partially enforce
this non-compete provision. The employment agreement may be terminated upon 90
days written notice by either party. In addition, if we terminate the agreement
without cause, Mr. Cornell may be entitled to receive the balance of any unpaid
salary which would otherwise be payable to him during the remainder of the term
of the agreement.
On August 4, 1999, the Company entered into a three year employment agreement
with Mr. Stephen Gilbert, (the former stockholder of cyberTours, Inc.), for the
position of Executive Vice President, reporting directly to Mr. Kenneth Cornell,
CFO. The agreement provides for an annual base salary of $125,000, plus certain
additional performance based compensation determined at the discretion of the
Compensation Committee. In addition, Mr. Gilbert was granted 250,000 stock
options that vest on certain performance base acquisition measurements. The
agreement contains a non-compete clause for a period of two-years following the
termination of Mr. Gilbert's employment. A state court might not enforce or only
partially enforce this non-compete provision. The employment agreement may be
terminated upon 30 day written notice by either parties. In addition, if we
terminate the agreement without cause, Mr. Gilbert may be entitled to receive up
to 50% of his then current base salary.
On January 4, 2000 the Company entered into a two year employment agreement with
Mr. Charles Cleary for the position of Chief Operating Officer reporting
directly to Mr. David Paolo, our President and CEO. The agreement provides for
an annual base salary of $200,000, plus certain additional performance based
compensation up to 60% of Mr. Cleary's base salary. In addition, Mr. Cleary was
granted 125,000 stock options, of which 50,000 vested immediately, with the
remaining balance vesting over two years. The agreement contains a non-compete
clause for a period of one-year following the termination of Mr. Cleary's
employment. A state court might not enforce or only partially enforce this
non-compete provision. The employment agreement may be terminated upon 10 days
written notice by either party. In addition, if we terminate the agreement
without cause, Mr. Cleary may be entitled to receive a lump sum payment equal to
one years annual base salary.
Item 13. EXHIBITS AND REPORTS ON FORM 8K
a) Financial Statements:
Independent Auditor's Reports F-1, 2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity (Deficit) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7, 14
b) Current Reports on Form 8K
On June 17, 1999, the Company filed a current report on Form 8-K relating to the
Company's dismissal of its former independent accountants, Tauber & Balser, P.C.
On August 12, 1999, the Company filed a current report on Form 8-K relating to a
stock purchase agreement among the Company and three sellers owning 100% of the
issued and outstanding Capital Stock of cyberTours, Inc., a Massachusetts
corporation, whereby the company purchased 100% of the cyberTours, Inc., in
exchange for 506,667 shares of the Company's common stock, valued at $15.00 a
per share or $7,600,000.
On December 12, 1999, we also filed a current report of Form 8-K in connection
with the sale of $5,000,000 in common stock to Nortel at a price of $19.50 per
share based on the average closing bid price of the shares, as of voted on the
Nasdaq National Market System over the twenty trading days proceeding the
closing date of December 2, 1999. The shares are subjects certain registration
rights.
On February 28, 2000, the Company filed a current report on Form 8-K relating to
a Securities Purchase Agreement among the Company and certain buyers named
therein for the purchase of 15,000 shares of the Company's
<PAGE>
Serieconvertible preferred stock and 594,204 common stock purchase warrants for
an aggregate consideration of $15,000,000, and relating to a loan facility of up
to $45,000,000 with Nortel c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Form of Certificate of Incorporation of Registrant, as amended
(incorporated by reference to the Company's Registration Statement on
Form SB-2 (Registration No. 333-70307).
3.2 Form of By-laws of Registrant, as amended (incorporated by reference to
the Company's Registration Statement on Form SB-2 (Registration No.
333-70307).
3.3 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of the Company, as filed with the Delaware
Secretary of State on February 23, 2000. 4.1 Securities Purchase
Agreement, dated as of February 28, 2000, by and among the Company and
certain Buyers. (incorporated by reference to the Company's Form 8-K,
dated February 23, 2000 (File No. 000-25761).
4.1 Specimen certificate representing Registrant's Common Stock
(incorporated by reference to the Company's Registration Statement on
Form SB-2 (Registration No. 333-70307).
4.2 Registration Rights Agreement, dated as of February 23, 2000, by and
among the Company and certain Buyers (incorporated by reference to the
Company's Form 8-K, dated February 23, 2000 (File No.
000-25761).
4.3 Form of Warrant to purchase shares of Common Stock (incorporated by
reference to the Company's Form 8-K, dated February 23, 2000 (File No.
000-25761).
10.1 David R. Paolo Employment Agreement (incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration No.
333-70307).
10.2 Raymond Paolo Employment Agreement (incorporated by reference to the
Company's Registration Statement on Form SB-2 (Registration No.
333-70307).
10.4 Lease Agreement for premises located at 3 Regency Plaza, Providence,
Rhode Island. (incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 333-70307).
10.5 1999 Stock Option Plan (incorporated by reference to the Company's
Registration Statement on Form SB-2 (Registration No. 333-70307).
10.6 Kenneth M. Cornell Employment Agreement (incorporated by reference to
the Company's Post Effective Amendment No.1 to Registration Statement
on Form SB-2 (Registration No. 333-70307).
10.7 Acquisition agreement between Cybertours, Inc. and Log On America, Inc.
(incorporated by reference to the Company's Form 8-K, dated August 12,
1999 (File No. 000-25761).
10.8 Equipment and Service Agreement with Nortel (incorporated by reference
to the Company's Post Effective Amendment No.1 to Registration
Statement on Form SB-2 (Registration No. 333-70307).
10.9 Line of Credit Agreement between Log On America, Inc. and Fleet
National Bank (incorporated by reference to the Company's Post
Effective Amendment No.1 to Registration Statement on Form SB-2
(Registration No. 333-70307).
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.10* Stephen Gilbert Employment Agreement
10.11 Credit Agreement, dated as of January 31, 2000, by and between the
Company and Nortel Networks Inc. (Portions omitted pursuant to a
confidential treatment request.) Incorporated by reference to the
Company's Form 8-K, dated February 23, 2000 (File No. 000-25761).
10.12* Charles Cleary Employment Agreement
10.13 Investment agreement between Nortel Networks Inc. and Log On America
(incorporated by reference to the Company's Form 8-K, dated February
28, 2000 (File No. 000-25761).
10.14* Amended agreement Nortel
24.1* Power of Attorney (set forth on signature page of this Form 10-K)
27* Financial Data Schedule
* Filed herewith with this Form 10KSB
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: LOG ON AMERICA, INC.
BY: /S/ David R. Paolo
------------------------------
David R. Paolo, President
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below, hereby constitutes and appoints David R. Paolo, his
true and lawful attorney-in-fact, with full power of substitution and
resubstitution, for his and in his name, place and stead, in any and all
capacities, to sign any or all reports (including amendments thereto), with all
exhibits thereto and any and all documents in connection therewith, and
generally do all such things in our name and on our behalf in such capacities to
enable Log On America, Inc. to comply with the applicable provisions of the
Securities and Exchange Act of 1934, and all requirements of the securities and
exchange commission, granting unto said attorney-in-fact full power and
authority to do and perform each and every act and thing necessary or
appropriate to be done with respect to this Form 10-KSB and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLES DATE
<S> <C> <C>
/s/ David R. Paolo
- ---------------------
David R. Paolo President, CEO, and Chairman March 29, 2000
/s/ Charles F. Cleary
- ---------------------
Charles F. Cleary Chief Operating Officer, Director March 29, 2000
/s/ Kenneth M. Cornell
- ---------------------
Kenneth M. Cornell Chief Financial Officer, Director March 29, 2000
/s/ Raymond Paolo
- ---------------------
Raymond Paolo Executive Vice President, Secretary, Director March 29, 2000
/s/ Stephen Gilbert
- ---------------------
Stephen Gilbert Executive Vice President, Director March 29, 2000
/s/ Shastri Divakaruni
- ---------------------
Shastri Divakaruni Director March 29, 2000
/s/ David M. Robert
- ---------------------
David M. Robert Director March 29, 2000
</TABLE>
<PAGE>
Report of Independent Auditors
To the Stockholders and Directors
of Log On America, Inc.
We have audited the balance sheet of Log On America, Inc. as of December 31,
1999, and the related statements of operations, stockholders' equity, and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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. at
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
Providence, Rhode Island
March 4, 2000
F-1
<PAGE>
Report of Independent Auditors
To the Stockholders and Directors
of Log On America, Inc.
We have audited the balance sheet of Log On America, Inc. as of December 31,
1998, and the related statements of operations, stockholders' equity
(deficiency) and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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. at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
/s/ Tauber & Balser, P.C.
Atlanta, Georgia
February 12, 1999
F-2
<PAGE>
LOG ON AMERICA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents ................................................................ $ 7,844,860 $ 630,131
Available-for-sale securities-(Note 3) ................................................... 11,203,853 -
Accounts receivable, net of allowance of $66,448 and $16,239, respectively ............... 319,915 93,160
Notes receivable from officers and related parties-(Note 7) .............................. 1,562,757 31,378
Other current assets ..................................................................... 558,514 9,964
------------ ------------
TOTAL CURRENT ASSETS ..................................................................... 21,489,899 764,633
------------ ------------
PROPERTY & EQUIPMENT, net ................................................................ 4,967,968 71,845
OTHER ASSETS
Goodwill and other intangible assets, net-(Note 6) ....................................... 10,708,990 237,060
Notes receivable officers-(Note 7) ....................................................... - 62,757
Other assets ............................................................................. 11,558 705
------------ ------------
TOTAL OTHER ASSETS ....................................................................... 10,720,548 300,522
------------ ------------
TOTAL ASSETS ............................................................................. $ 37,178,415 $ 1,137,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations-(Note 10) ................................... $ 454,954 $ 0
Accounts payable ......................................................................... 1,495,918 428,575
Accrued expenses ......................................................................... 861,047 18,308
Deferred revenue ......................................................................... 1,135,651 17,188
Note payable ............................................................................. - 16,541
------------ ------------
TOTAL CURRENT LIABILITIES ................................................................ 3,947,570 480,612
------------ ------------
LONG-TERM LIABILITIES
Borrowings under line of credit-(Note 9) ................................................. 725,000 -
Advances under multiple term advance term loan agreement-(Note 12) ....................... 1,439,582 -
Capital lease obligations-(Note 10) ...................................................... 640,179 -
------------ ------------
TOTAL LONG-TERM LIABILITIES .............................................................. 2,804,761 -
------------ ------------
TOTAL LIABILITIES ........................................................................ 6,752,331 480,612
------------ ------------
COMMITMENTS-(Note 10) .................................................................... - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 15,000,000 shares,
no shares issued and outstanding at December 31, 1999 and 1998,
respectively-(Note 11) ................................................................. - -
Common stock, $.01 par value; authorized 125,000,000 shares, 8,289,793 and
4,610,716 issued and outstanding at December 31, 1999 and 1998, respectively-(Note 11).. 82,898 46,107
Additional paid-in capital ............................................................... 36,095,697 1,032,344
Accumulated other comprehensive loss ..................................................... (38,676) -
Accumulated deficit ...................................................................... (5,713,835) (422,063)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............................................................... 30,426,084 656,388
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................... $ 37,178,415 $ 1,137,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------
1999 1998
----------- -----------
REVENUES ....................................... $ 3,341,075 $ 759,878
OPERATING EXPENSES
Costs of revenue ............................. 1,460,854 403,508
Selling, general and administrative .......... 6,497,908 696,867
Depreciation and amortization ................ 1,275,279 79,522
----------- -----------
Total operating expenses .................... 9,234,041 1,179,897
----------- -----------
LOSS FROM OPERATIONS ........................... (5,892,966) (420,019)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense ............................. (91,260) (2,165)
Other income ................................. 5,001 -
Interest income .............................. 687,453 121
----------- -----------
Net other income (expense) ................... 601,194 (2,044)
----------- -----------
NET LOSS ....................................... $(5,291,772) $ (422,063)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES USED
IN COMPUTING BASIC AND DILUTED LOSS
PER SHARE .................................... 6,655,832 3,708,370
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE ........ $ (.80) $ (.11)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Issued Paid-In Accumulated Comprehensive Stockholders'
Shares Par Value Capital Deficit Loss Equity (Deficit)
---------- ---------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1997 .................. 100 $ 179,260 $ - $ (280,001) $ - $ (100,741)
Acquisition of assets and assumptions of
liabilities by WAN Secure, Inc. ......... (100) (179,260) - 280,001 - 100,741
Issuance of common stock, net of issuing
costs .................................... 4,610,716 46,107 1,032,344 - - 1,078,451
Net loss ................................... - - - (422,063) - (422,063)
---------- --------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1998 .................. 4,610,716 46,107 1,032,344 (422,063) - 656,388
Net loss ................................... (5,291,772) - (5,291,772)
Unrealized loss from available-for-sale
securities ............................... (38,676) (38,676)
-----------
Comprehensive loss ......................... (5,330,448)
-----------
Issuance of common stock, net of issuing
costs .................................... 3,156,410 31,564 27,073,246 - - 27,104,810
Issuance of common stock for acquisitions .. 522,667 5,227 7,990,107 - - 7,995,334
---------- --------- ----------- ----------- ----------- -----------
BALANCE DECEMBER 31, 1999 .................. 8,289,793 $ 82,898 $36,095,697 $(5,713,835) $ (38,676) $30,426,084
========== ========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LOG ON AMERICA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ..................................................................... $ (5,291,772) $ (422,063)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock issued for services .................................................. - 4,392
Stock issued for settlements of prior obligations .......................... - 10,022
Notes receivable forgiven related to stock issuance ........................ - 36,110
Notes receivable officers forgiven ......................................... 31,378 31,378
Depreciation and amortization .............................................. 1,275,279 79,522
Bad debt provision ......................................................... 50,249 3,516
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ...................................................... (28,188) (37,074)
Other current assets ..................................................... (545,105) (3,618)
Other assets ............................................................. 32,324 -
Accounts payable ......................................................... 704,145 112,951
Accrued expenses ......................................................... 782,860 (65,138)
Deferred revenue ......................................................... 409,358 (21,073)
------------ ------------
Total adjustments ...................................................... 2,712,300 150,988
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES .......................................... (2,579,472) (271,075)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ........................................ (2,097,176) (40,821)
Purchases of available-for-sale securities ................................... (11,242,529) -
Issuance of notes receivable related parties and officers .................... (1,500,000) (51,378)
Acquisitions, less cash acquired ............................................. (2,170,210) -
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .......................................... (17,009,915) (92,199)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants .......................... 30,670,000 1,475,000
Common stock issuance costs .................................................. (3,565,190) (447,073)
Proceeds from line of credit ................................................. 725,000 -
Payments on notes payable .................................................... (720,273) (34,522)
Principal payments on capital lease obligations .............................. (305,421) -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...................................... 26,804,116 993,405
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 7,214,729 630,131
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR .................................... 630,131 -
------------ ------------
CASH AND CASH EQUIVALENTS END OF YEAR .......................................... $ 7,844,860 $ 630,131
============ ============
SUPPLEMENTAL SCHEDULES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................................... $ 91,260 2,165
============ ============
Income taxes ................................................................. $ - $ -
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Details of acquisitions-(Note 4)
Fair value of assets acquired ................................................ $ 1,499,901 $ 362,665
============ ============
Intangibles established ...................................................... 11,429,890 125,739
============ ============
Liabilities assumed .......................................................... 2,764,247 488,404
============ ============
Common stock issued .......................................................... 7,995,334 -
============ ============
Details of financing activities
Equipment acquired under capital lease obligations-(Note 10) ................. $ 472,221 $ -
============ ============
Equipment acquired under Nortel financing agreement-(Note 12) ................ $ 1,439,582 $ -
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1. NATURE OF BUSINESS AND OPERATING HISTORY
In January 1998, Wan Secure, Inc. ("WS") was organized in Delaware by the former
president of Log On America, Inc., a Rhode Island corporation, ("LOARI") to
purchase 100% of the outstanding capital stock of Log On America, Inc., a
Delaware corporation, ("LOA") from Global Telemedia International, Inc.
("GTMI"). Pursuant to such acquisition, LOA became a wholly owned subsidiary of
WS. In September 1998, WS effected a merger with and into LOA, whereby WS was
the survivor. Simultaneously with the merger, WS changed its name to Log On
America, Inc. ("LOA" or the "Company"). LOA is a Northeast regional
Information/Internet service provider and competitive local exchange carrier.
The Company's services include high speed data and Internet service, principally
utilizing digital subscriber line technology, local exchange service and long
distance service. The Company's plan is to rapidly evolve into a leading
facilities-based integrated telecommunications provider by offering a single
source for competitively priced, high quality, customized telecommunications
services. The results of operations for the entire year of WS are included in
the 1998 financial statements as the acquisition occurred at the beginning of
the year.
Additionally, the Company operates for all periods presented, as a single
segment.
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
B. Credit Risk
Financial instruments that potentially subject the Company to a concentration of
credit risk consist of cash and cash equivalents, available-for-sale securities
and accounts receivable. All of the Company's available funds at December 31,
1999 and 1998, were deposited in accounts with financial institutions which
management believes are of high credit quality or in government securities and
commercial paper. The Company believes that concentration of credit risk with
respect to accounts receivable 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.
C. Compensating Balances
At December 31, 1999, the Company is required to maintain compensating balances
equal to 125% of borrowings outstanding on the line of credit. At December 31,
1999, the Company had $906,250 available-for-sale securities as compensating
balances.
D. Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives of the assets.
<TABLE>
<S> <C>
Leasehold improvements Shorter of lease term or useful life
Electronic communication equipment 3 to 5 years
Furniture and fixtures 3 to 7 years
Computer equipment 5 years
Office equipment 3 to 5 years
Computer software 3 to 5 years
</TABLE>
F-7
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
E. Equipment Under Capital Leases
The Company leases certain of its equipment and other fixed assets under capital
lease agreements. The assets and liabilities under capital leases are recorded
at the lesser of the present value of aggregate future minimum lease payments,
including estimated bargain purchase options, or the fair market value of the
assets under lease, whichever is less. Assets under lease are amortized over the
lease term or the useful life of the assets.
F. Intangible Assets
Intangible assets consist of the cost of the acquired customer bases,
non-compete agreements, and goodwill resulting from business combinations.
Intangible assets are amortized using the straight-line method over two to five
years. The carrying value of the intangible assets is reviewed on a quarterly
and annual basis for the existence of facts or circumstances both internally and
externally that may suggest impairment. To date, no such impairment has
occurred. The Company determines whether impairment has occurred based on gross
expected future cash flows and measures the amount of the impairment based on
the related future estimated discounted cash flows. The cash flow estimates used
to determine the impairment, if any, contain management's best estimates, using
appropriate and customary assumptions and projections at that time.
G. Revenue Recognition
Revenues are principally generated from dial-up Internet access, web site
hosting, commercial leased lines, and other related voice and data services.
These revenues are recognized at the time services are provided. Service plans
range from one month to one year. Advance collections relating to future access
services are recorded as deferred revenue and recognized as revenue when earned.
Revenues related to non-recurring installation and activation fees are recorded
when the services are provided. These fees are a result of the one-time events
related to the set-up of a new customer service. In certain situations, the
Company waives non-recurring installation and activation fees. The Company
expenses the related direct costs of installation and activation as incurred.
H. Advertising
Advertising costs are charged to expense as incurred and totaled approximately
$706,475 and $36,515 for the years ended December 31, 1999 and 1998,
respectively.
I. Costs of Revenue
Costs of services principally include costs of data transmission, Internet
access, and costs associated with resold lines, exclusive of depreciation and
amortization.
J. Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for temporary differences between financial statements and income
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured using the tax rates and laws that are currently in effect. In addition,
the amount of any future tax benefits is reduced by a valuation allowance until
it is more likely than not that such benefits will be realized.
K. Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) encourages
but does not require companies to record compensation cost for stock-based
employee compensation at fair value. The Company has chosen to account for
stock-based compensation granted to employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees,"and related interpretations. Accordingly, compensation cost
for stock options granted to employees is measured as the excess, if any, of the
fair value of the Company's stock at the date of the grant over the amount that
must be paid to acquire the stock. Compensation cost to non-employees is
measured using the fair value method prescribed by SFAS 123.
F-8
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
L. Use of Estimates
The presentation of financial statements in conformity with generally accepted
accounting principles 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 amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in these
financial statements include valuation of acquired assets and liabilities,
deferred tax assets, net realizable values and useful lives of intangible
assets.
M. Net Loss per Common Share
The Company calculates net loss per share under the provisions of SFAS 128,
"Earnings per Share" (SFAS 128). SFAS 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement. Basic
earnings per share is based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. No reconciliation of basic and diluted
is needed, as the effect of dilutive securities would be antidilutive. The
Company had 1,355,200 options outstanding at December 31, 1999. There were no
options outstanding at December 31, 1998. The Company had 995,667 and 1,131,922
warrants to purchase common stock outstanding at December 31, 1999 and 1998,
respectively. These options and warrants were not included in the calculation of
diluted loss per share because the effect would be antidilutive.
3. INVESTMENTS
Marketable securities that have a readily determined fair market value are
classified as available-for-sale securities and are carried at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Realized gains and losses and declines in values
determined to be other than temporary in available-for-sale securities are
included in interest income.
The following is a summary of available-for-sale securities at December 31,
1999. There were no available-for-sale securities at December 31, 1998.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Corporate debt securities $ 8,747,745 - $ (32,800) $ 8,714,945
Governmental debt securities 2,494,784 - (5,876) 2,488,908
------------- ----------- --------- -----------
$ 11,242,529 - $ (38,676) $11,203,853
============= =========== ========= ===========
</TABLE>
4. ACQUISITIONS
On August 3, 1999, the Company acquired all of the common stock of cyberTours,
Inc. in exchange for 506,667 shares of common stock of the Company, plus the
assumption of $2,764,247 in debt. The transaction was accounted for using the
purchase method. The purchase price including related acquisition costs and the
grant of 50,667 warrants to purchase the Company's common stock to consultants
was estimated to be approximately $11,328,580 based on the value of the
Company's common stock on the purchase date, and the assumed liabilities. The
fair value of the net tangible assets acquired approximated $1,484,191, which
consisted primarily of accounts receivables and computer, network and
communications equipment. The remaining purchase price was allocated to the
acquired customer base, non-compete agreements, and goodwill, which are each
being amortized over two to five years.
During 1999, the Company acquired certain assets of three Internet service
provider businesses for approximately $1,672,000, including related acquisition
costs. The total purchase price included cash and 16,000 shares of the Company's
common stock valued at the price of the Company's common stock on the purchase
date. The fair value of the net tangible assets acquired, consisting primarily
of computer, network and communications equipment approximated $86,500. The
remaining purchase price was allocated to the acquired customer base,
non-compete agreements and goodwill, which are each being amortized over two to
five years
F-9
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
The results of operations for the acquisitions listed above are included in the
Company's statement of operations from the respective acquisition dates.
The following table sets forth the unaudited pro forma results of operations of
the Company for the years ended December 31, 1999 and 1998. The unaudited pro
forma results of operations assume that the operations of the Company were
combined with the acquired companies as if the acquisitions occurred on January
1, 1998. The unaudited pro forma results of operations are presented after
giving effect to certain adjustments for depreciation and amortization of
intangibles. The unaudited pro forma results of operations are based upon
currently available information and upon certain assumptions that the Company
believes were reasonable. The unaudited pro forma results do not purport to
represent what the Company's results of operations would actually have been if
the transaction in fact had occurred on such date or at the beginning of the
period indicated or to project the Company's results of operations at any future
date or for any future period.
(unaudited)
1999 1998
----------------------------
Revenues $ 7,203,410 $ 4,950,828
Net loss $(7,113,607) $(3,365,534)
Net loss per share, basic and diluted $ (1.02) $ (.77)
Weighted average number of shares
outstanding, basic and diluted 6,964,376 4,384,591
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Computer, telecommunications, networking
and office equipment $ 4,805,083 $ 223,758
Leasehold improvements
126,013 11,954
Construction in progress 502,718 -
----------- -----------
5,433,814 235,712
Accumulated depreciation (465,846) (163,867)
----------- -----------
$ 4,967,968 $ 71,845
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 was $301,979
and $35,703, respectively.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
-----------------------------------
1999 1998
-----------------------------------
Acquired customer base $ 7,681,200 $ -
Covenants not to compete 597,000 -
Goodwill 3,458,426 306,736
------------ ------------
11,736,626 306,736
Accumulated amortization (1,027,636) (69,676)
------------ ------------
$ 10,708,990 $ 237,060
============ ============
F-10
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
7. NOTES RECEIVABLE FROM OFFICERS AND RELATED PARTIES
Notes receivable consists of unsecured amounts loaned to officers of the Company
and secured amounts loaned to the former stockholders of cyberTours, Inc.
The unsecured loans amount to $62,757 and $94,135 at December 31, 1999 and 1998,
respectively. In May 1998, the Company's President and CEO, and an officer and
director, executed promissory notes to the Company in the amounts of $77,618 and
$47,895, respectively (the "Notes"). Pursuant to the terms of the 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. During 1999 and 1998, respectively,
$31,378 was released and reported as salaries to these officers.
The secured notes receivable amount to $1,500,000 at December 31, 1999. On
November 29, 1999, two employees and the former principal of cyberTours, Inc.,
executed promissory notes to the Company in the amount of $500,000 each. These
notes are secured by 421,333 shares of the Company's common stock. Pursuant to
the terms of the Notes, the entire principal balance, together with all unpaid
interest, shall be paid on the earlier of (i) the effective registration of the
shares of the Company's stock securing these notes with the Securities and
Exchange Commission, or (ii) September 14, 2000.
8. INCOME TAXES
The Company recognizes deferred income taxes for temporary differences between
the financial reporting basis and income tax basis of assets and liabilities
based on enacted tax rates expected to be in effect when amounts are likely to
be realized or settled.
The following reconciles the federal statutory income tax rate to the effective
income tax rate reflected in the statements of operations:
<TABLE>
<CAPTION>
1999 1998
------------- ----------------
<S> <C> <C>
Federal statutory income tax rate 34.0% 34.0%
Increase (decrease) in taxes resulting from:
State income taxes, net 5.0 5.9
Goodwill (4.8) 0.0
Other-net (0.5) 0.0
Valuation allowance (33.7) (39.9)
----------- ---------------
Effective income tax rate 0.0% 0.0%
=========== ===============
</TABLE>
The components of net deferred tax assets were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- ----------------
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable $ 21,506 $ -
Amortization 71,937 -
Commissions 52,034 -
Net operating loss 2,285,905 180,220
Other 4,218 -
------------ ----------------
Total deferred tax assets 2,435,600 180,220
Deferred Tax Liabilities:
Fixed assets (31,223) -
Less: Valuation allowance (2,404,377) (180,220)
----------- ----------------
Net $ - $ -
=========== ================
</TABLE>
Net operating loss carryfowards of $5,714,762 will begin to expire in 2018. If
realized, the tax benefit of approximately $441,000 (relating to the
pre-acquisition period of cyberTours, Inc.) will be applied to reduce goodwill
related to the cyberTours, Inc. acquisition.
F-11
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
9. LINE OF CREDIT
On August 4, 1999 the Company entered into an agreement with a bank for a
$4,000,000 line of credit. The terms of the line of credit require that advances
be used for working capital purposes. Borrowings under the line of credit bear
interest at a rate equal to the three month LIBOR rate or one year LIBOR rate
plus one hundred fifty basis points or, the bank's floating prime rate of
interest. The principal balance plus any accrued interest are due and payable on
the maturity date. The line of credit matures on August 15, 2001. As of December
31, 1999 the outstanding balance on the line of credit balance was $725,000. The
carrying amounts of the Company's borrowings under the line of credit
approximate fair value due primarily to its variable interest rate
characteristics.
10. COMMITMENTS
A. Leases
The Company leases its facilities and certain equipment under operating and
capital leases. The leases expire at various dates through March 31, 2009 and
generally require the payment of real estate taxes, insurance, maintenance, and
operating costs. Amortization of assets recorded under capital leases is
included in depreciation expense.
The minimum aggregate future obligations under noncancelable leases are as
follows:
Operating Capital
Leases Leases
------------- ----------
2000 ............................................... $ 929,207 $ 563,053
2001 ............................................... 792,038 518,142
2002 ............................................... 589,248 208,449
2003 ............................................... 569,906 2,029
2004 ............................................... 436,275 -
Thereafter ......................................... 2,065,810 -
---------- ----------
Total minimum lease payments ......... $5,382,484 1,291,673
==========
Less amounts representing interest ................. 196,540
----------
Present value of future minimum lease payments ..... 1,095,133
Less current portion ............................... 454,954
----------
Present value of future minimum lease payments
less current portion ............................. $ 640,179
==========
The total net book value of assets on hand subject to capital lease obligations
amounted to $1,008,606 at December 31, 1999. There were no assets acquired under
capital lease obligations during 1998.
Total expense under these operating leases for the years ended December 31, 1999
and 1998 amounted to $300,787 and $74,553, respectively.
B. Strategic Agreements
On May 18, 1999, the Company entered into an agreement with Nortel Networks,
Inc. ("Nortel") which committed the Company to purchase $8,000,000 of equipment
and services. The agreement was amended on November 22, 1999 to increase the
amount to $47,000,000. The agreement expires on December 31, 2001. The Company
intends to finance the purchases under this agreement with the Nortel multiple
advance term loan credit facility described in Note 12.
F-12
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
11. COMMON STOCK
A. Stock options
On January 4, 1999, the Company's Board of Directors (the "Board") approved the
1999 Stock Option Plan (the "Plan"). The Plan authorized the grant of options
for the purchase of up to 1,000,000 shares of common stock. On November 17,
1999, the Board authorized the increase of the available grants of options from
1,000,000 to 2,500,000 shares of common stock.
Options granted under the Plan are either (a) options intended to constitute
incentive stock options ("ISOs") under the Internal Revenue Code of 1986 (the
"Code") or (b) non-qualified options. ISOs may be granted under the Plan to
employees or officers of the Company. Non-qualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of the Company. ISOs granted under the Plan may not be granted at a
price less than the fair market value of the common stock on the date of grant
(or 110% of fair market value in the case of employees or officers holding 10%
or more of the voting stock of the Company). The aggregate fair market value of
shares for which ISOs granted to any employee are exercisable for the first time
by such employee during any calendar year (under all stock option plans of the
Company and any related corporation) may not exceed $100,000. The price of
non-qualified options granted under the Plan shall be determined by the Board,
provided that such price shall not be less than 85% of the fair market value of
the common stock at the time of grant.
Options granted under the Plan have a term of ten years and typically vest 50%
at the end of the first year of continuous employment and 50% at the end of the
second year of continuous employment.
The following is a summary of activity under the Plan as of December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
---------------------------
Number Fair Exercise
of Shares Value Price
--------------- -------------- ------------
<S> <C> <C> <C>
Outstanding at December 31, 1998 - $ - $ -
Granted at market price 1,162,700 10.16 13.48
Granted at 110% of market price 200,000 9.08 13.48
Cancelled (7,500) 9.68 12.83
------------
Outstanding at December 31, 1999 1,355,200
============
</TABLE>
The following summarizes the outstanding and exercisable options under the Plan
as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------- ---------------------------
Weighted Weighted Weighted
Avg. Life Average Average
Number Remaining Exercise Number Exercise
Exercise Price Range Outstanding (in years) Price Exercisable Price
-------------------------- --------------- ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$10.00 - 14.00 1,035,000 9.5 $ 12.68 - -
$15.00 - 21.25 320,200 9.7 15.57 - -
</TABLE>
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model. The following weighted-average assumptions were used for
1999: risk-free interest rate of 4.77%, volatility factors of the expected
market price of the Company's common stock of 97.2%, and a weighted average
expected life of the option of 5 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
December 31, 1999 pro forma net loss ($8,691,685)
December 31, 1999 pro forma diluted
Loss per share ($1.31)
F-13
<PAGE>
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
B. Warrants
The Company, at its discretion, issued warrants to consultants. For warrants
issued in 1998, consideration was paid or received by the recipient for each of
the instances when warrants were granted. Accordingly, the Company has
determined that the fair value of the options granted was nominal and no
compensation expense was recognized for the year ended December 31, 1998. During
1999, certain warrants were issued for which the Company did not receive
consideration from the recipient. Accordingly, the fair value of the warrants
granted is included as part of the purchase price as the services rendered by
the recipient related to an acquisition by the Company.
The following is a summary of the Company's warrant activity for the years ended
December 31, 1999 and 1998, respectively:
Weighted
Average
Number Exercise
of warrants Price
------------- -------------
Outstanding at December 31, 1997 - $ -
Granted 1,131,922 1.29
-------------
Outstanding at December 31, 1998 1,131,922
Granted 270,667 15.70
Exercised (370,000) 1.00
Cancelled (36,922) 2.94
-------------
Outstanding at December 31, 1999 995,667
=============
C. Common stock
On April 22, 1999, the Company completed an initial public offering ("IPO") of
2,530,000 common shares at a price of $10.00 per share. In connection with the
IPO, 220,000 underwriter warrants were granted. On December 10, 1999, the
Company completed the sale of 256,410 common shares to Nortel Networks Inc.
("Nortel") at a price of $19.50 per share. In addition, during 1999 the Company
issued 522,667 common shares in connection with acquisitions identified in Note
4.
On November 17, 1999, the Company filed an amendment to its Certificate of
Incorporation which increased the number of authorized shares of Common Stock,
$.01 par value, from 20,000,000 to 125,000,000 shares. In addition, the
amendment authorized up to 15,000,000 shares of a new class of undesignated
Preferred Stock ("Blank Check Preferred Stock") which would allow the Board of
Directors of the Company to issue, without further shareholder action, one or
more series of Preferred Stock.
12. SUBSEQUENT EVENTS
On February 23, 2000, the Company sold 15,000 shares of the Company's Series A
Convertible Preferred Stock, $.01 per share (the "Preferred Shares") and issued
594,204 common stock purchase warrants (the "Warrants") for an aggregate
consideration of $15,000,000. Subject to certain conditions, the Company can
sell, and may be obligated to sell, up to an additional 20,000 Preferred Shares
and related Warrants for an additional $20,000,000.
Simultaneously, the Company entered into a Senior Secured Credit Agreement (the
"Credit Agreement") with Nortel. Under the Credit Agreement, Nortel has
committed to an initial advance to the Company of up to $30,000,000 and, subject
to certain conditions an additional $15,000,000 to finance the Company's
commitment to purchase, by December 31, 2001, up to $47,000,000 of equipment and
services from Nortel. Under the Credit Agreement, the Company will begin
repayment of the facility over a five-year period upon completion of the
purchases from Nortel. The Company has granted a security interest in
substantially all of the Company's assets under the Credit Agreement. As of
December 31, 1999 Nortel has advanced $1,439,582 which has been considered
advances under the Credit Agreement.
F-14
<PAGE>
AMENDMENT NO. 1
TO
PURCHASE AGREEMENT
THIS AMENDMENT NO. 1 ("Amendment") effective as of this 22nd day of November,
1999 is made by and between Nortel Networks Inc. ("Nortel Networks") with
offices located at 4010 E. Chapel Hill - Nelson Hwy., Research Triangle Park,
North Carolina 27709 and Log on America, Inc. ("Company") with offices located
at 3 Regency Plaza, Providence, RI 02903.
WHEREAS, the parties entered into a master purchase agreement dated May 18, 1999
("Agreement") for the purchase of various products and services and capitalized
terms not otherwise defined herein have their respective meanings set forth in
the Agreement.
WHEREAS, in order to document a new multi-product commitment, the parties agree
to add terms and conditions for the purchase of certain additional products to
the Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein set
forth, the parties agree as follows:
1. Section 1.d) of the Agreement is hereby deleted in its entirety and
replaced with the following:
d) Company commits to purchase and pay for an aggregate net amount of
Products and Services as identified in Exhibit B ("Committed
Products") prior to December 31, 2001. Such Committed Products shall be
purchased under the terms and conditions of this Agreement, or under
the supervising provisions of a lease or loan agreement ("Financing
Agreement") which the parties intend to negotiate prior to shipment of
these Committed Products. Any Committed Products for which Company
chooses to use funds from the Financing Agreement shall hereinafter be
referred to as "Financed Product." The total purchase of the Committed
Products shall be for an aggregate net amount of forty-seven million
one hundred sixty-six thousand five hundred and thirty dollars
($47,166,530) ("Commitment"). In the event Company does not purchase
and pay for the total net amount of the Commitment by December 31,
2001, then Nortel Networks shall on or about December 31, 2001 invoice
Company for an amount equal to the difference between the aggregate net
amount of the Commitment then due and the net Committed Products
purchased by December 31, 2001. On or before December 1, 2001, the
parties may mutually agree in writing to extend the date by which the
Commitment must be fulfilled from December 31, 2001 to a date no later
than June 30, 2002. Notwithstanding anything to the contrary contained
herein, Company may at any time cancel and/or refuse to purchase and
pay for any portion of the Services defined within the terms of
Committed Products up to and including six million seven hundred
fifty-four thousand three hundred and eight dollars ($6,754,308) of the
Commitment.
2. A new Section 1.e) is hereby added to the Agreement as follows:
e) Nortel Networks and Company intend to enter into a separate
promotional allowance agreement on or before January 31, 2000.
3. Exhibit B of the Agreement shall be deleted in its entirety and replaced with
the Exhibit B attached hereto.
4. For purposes of this Agreement "Shares Products" shall mean Products listed
under the heading "Shares" in Exhibit B.
5. Exhibit A, Supplemental Terms Annex shall be amended by adding in the
reference to Article 9, Section a) the following warranty periods:
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Data Product Hardware Software Services
- -------------------------------------------------------------------------------------------------------
Shares Products 12 months from ship date 90 days from ship date 12 months from completion
- -------------------------------------------------------------------------------------------------------
</TABLE>
6. Attachment 1 to Exhibit A, Supplemental Terms Annex shall be amended by
adding Shasta Products.
Except as expressly amended above, all provisions of the Agreement shall remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
LOG ON AMERICA, INC. NORTEL NETWORKS INC.
By: /s/ Illegible By:
---------------------------- ------------------------
(signature) (signature)
Title: CEO Title:
------------------------- ---------------------
Date: 3/13/99 Date:
------------------------- ---------------------
Privileged and Confidential Page 1
Exhibit 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into the 4th
day of August, 1999 by and between Log on America, Inc., a Delaware corporation
("Corporation"), and Stephen J. Gilbert, a Maine resident ("Employee").
WHEREAS, Corporation and Employee desire that the term of this Agreement
begin on the date of execution hereof ("Effective Date").
WHEREAS, Corporation desires to employ Employee as its Executive Vice
President, Retail Dial-Up Services, and Employee is willing to accept such
employment by Corporation, on the terms and subject to the conditions set forth
in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Corporation as its Executive Vice President, Retail
Dial-Up Services, and Corporation agrees to employ and retain Employee in such
capacity. Employee shall devote a substantial portion of his business time,
energy, and skill to the affairs of the Corporation as Employee shall report to
the Corporation's Chief Executive Officer and at all times during the term of
this Agreement shall have powers and duties at least commensurate with his
position as Director, Retail Dial-Up Services. Employee's job description is
attached hereto as Exhibit A.
Section 2. Term of Employment.
a. Definitions. For the purposes of this Agreement the following terms
shall have the following meanings:
(1) "Termination For Cause" shall mean termination by Corporation of
Employee's employment by Corporation by reason of Employee's willful dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Corporation or
by reason of Employee's willful material breach of this Agreement which has
resulted in material injury to Corporation.
(2) "Termination Other Than For Cause" shall mean termination by
Corporation of Employee's employment by Corporation (other than in a Termination
for Cause) and shall include constructive termination of Employee's employement
by reason of material breach of this Agreement by Corporation, such constructive
termination to be effective upon notice from Employee to Corporation of such
constructive termination.
(3) "Voluntary Termination" shall mean termination by Employee of
Employee's employment by Corporation other than (i) constructive termination as
described in subsection 2.1(b), and (ii) termination by reason of Employee's
death or disability as described in Section 2.5 and 2.6.
b. Initial Term. The term of employment of Employment by Corporation shall
be for a period of three (3) year beginning with Effective Date ("Initial
Term"). Thereafter, the contract will automatically be renewed for successive
periods of one (1) year unless terminated by either party upon thirty (30) days
prior written notice.
<PAGE>
c. Termination For Cause. Termination For Cause may be effected by
Corporation at any time during the term of this Agreement and shall be effected
by written notification to Employee. Upon Termination For Cause, Employee shall
promptly be paid all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension play or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full extent of Employee's rights under such plans, accrued vacation pay
and any appropriate business expenses incurred by Employee in connection with
his duties hereunder, all to the date of termination, but Employee shall not be
paid any other compensation or reimbursement of any kind, including without
limitation, severance compensation.
d. Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Corporation may effect a Termination Other Than For Cause at any time
upon giving written notice to Employee of such termination. Upon any Termination
Other Than For Cause, Employee shall promptly be paid all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Corporation in
which Employee is a participant to the full extent of Employee's rights under
such plans (including accelerated vesting, if any, of awards granted to Employee
under the Corporation's stock option plan), accrued vacation pay and any
appropriate business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, and all severance compensation
provided in Section 4.2, but no other compensation or reimbursement of any kind.
e. Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the President and/or the
Chief Executive Officer, has failed to perform his duties under this Agreement
on account of illness or physical or mental incapacity, and such illness or
incapacity continues for a period of more than three (3) consecutive months,
Corporation shall have the right to terminate Employee's employment hereunder by
written notification to Employee and payment to Employee of all accrued salary,
bonus compensation to the extent earned, vested deferred compensation (other
than pension plan or profit sharing plan benefits which will be paid in
accordance with the applicable plan), any benefits under any plans of the
Corporation in which Employee is a participant to the full extent of Employee's
rights under such plans, accrued vacation pay and any appropriate business
expenses incurred by Employee in connection with his duties hereunder, all to
the date of termination, with the exception of medical and dental benefits which
shall continue through the expiration of this Agreement, but Employee shall not
be paid any other compensation or reimbursement of any kind, including without
limitation, severance compensation.
f. Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and Corporation shall
promptly pay to his estate or such beneficiaries as Employee may from time to
time designate all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Corporation in which Employee is a participant
to the full
2
<PAGE>
extent of Employee's rights under such plans, accrued vacation pay and any
appropriate business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, but Employee's estate shall not be
paid any other compensation or reimbursement of any kind, including without
limitation, severance compensation.
g. Voluntary Termination. In the event of a Voluntary Termination,
Corporation shall promptly pay all accrued salary, bonus compensation to the
extent earned, vested deferred compensation (other than pension plan or profit
sharing plan benefits which will be paid in accordance with the applicable
plan), any benefits under any plans of the Corporation in which Employee is a
participant to the full extent of Employee's rights under such plans, accrued
vacation pay and any appropriate business expenses incurred by Employee in
connection with his duties hereunder, all to the date of termination, but no
other compensation or reimbursement of any kind, including without limitation,
severance compensation.
h. Notice of Termination. Corporation may effect a termination of this
Agreement pursuant to the provisions of this Section upon giving thirty (30)
days' written notice to Employee of such termination, except in the case of
Termination For Cause where five (5) days' notice shall be deemed sufficient.
Employee may effect a termination of this Agreement pursuant to the provisions
of this Section upon giving thirty (30) days' written notice to Corporation of
such termination.
Section 3. Salary, Benefits and Bonus Compensation.
a. Base Salary. (1) As payment for the services to be rendered by Employee
as provided in Section 1 and subject to the terms and conditions of Section 2,
Corporation agrees to pay to Employee a "Base Salary" for the thirty six (36)
calendar months beginning the Effective Date at the rate of $100,000 per annum
payable in a manner consistent with the general practice of the Corporation in
meeting its payroll obligations subject to withholding required by law.
(2) The Base Salary shall be increased by the Compensation Committee
of the Company's Board of Directors, annually, to be effective on the
anniversary of the Effective Date, in manner consistent with the compensation
offered to executives within the Company.
b. Bonuses. Employee shall be eligible to receive a stock options in a
manner consistent with the incentive stock option agreement of even date hereof
("Incentive Stock Option Agreement").
c. Additional Benefits. During the term of this Agreement, Employee shall
be entitled to the following fringe benefits:
(1) Employee Benefits. Employee shall be eligible to participate
in such of Corporation's benefits as are now generally available or later made
generally available to executive officers of the Corporation, including, without
limitation, any dental and medical plans. For purposes of establishing the
length of service under any benefit plans or programs of Corporation, Employee's
employment with the Corporation will be deemed to have commenced on the
Employee's date of hire.
(2) Vacation. Employee shall be entitled to 3 weeks vacation during
each year during the term of this Agreement and any extensions thereof, prorated
for partial
3
<PAGE>
years.
(3) Reimbursement for Expenses. During the term of this Agreement,
Corporation shall reimburse Employee for reasonable and properly documented
out-of-pocket business and/or entertainment expenses incurred by Employee in
connection with his duties under this Agreement.
Section 4. Severance Compensation.
a. Severance Compensation in the Event of a Termination Other Than for
Cause. In the event Employee's employment is terminated in a Termination Other
Than for Cause, the Employee shall be paid as severance compensation 50% of his
then current annual Base Salary (at the rate payable at the time of such
termination), together with the vested rights to purchase 25,000 shares of the
common stock of the Company at $15.00 per share pursuant to the terms of the
Incentive Stock Option.
b. No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's disability pursuant to Section 2.6, Employee or his estate shall not
be paid any severance compensation.
Section 5. Payment Obligations. Corporation's obligation to pay Employee
the compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder.
Section 6. Board of Directors. During the term of Employee's employment,
Employee shall have the right to have himself or his nominee be appointed and
elected as a member of the Company's Board of Directors to serve at all times
during Employee's employment. Upon his termination, Employee shall resign or
cause his nominee to resign as a member of the Company's Board of Directors.
Section 7. Confidentially. Employee agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the term of this Agreement,
except as may be permitted in writing by Corporation's President and/or Chief
Executive Officer or as such information is within the public domain or comes
within the public domain without any breach of this Agreement.
Section 8. Non-Competition. (a) the Employee hereby covenants and agrees
that at no time during the Employee's employment by the Company, or in the event
of Employee's Termination Other Than For Cause, for a period of two (2) years
immediately following the termination thereof, will the Employee for himself or
on behalf of any other person, partnership, company or corporation, directly or
indirectly (i) acquire any financial or beneficial interest in, provide
consulting services to, be employed by, contract with, or own, manage, operate
or control any business engaged in any business which directly or indirectly
engages in the business of the business conducted by the Company in the New
England states and the State of New York, (ii) employ or seek to employ any
person or entity employed at that time by the Company or otherwise encourage or
entice such person or entity to leave employment or terminate such employment or
(iii) solicit any customer of the Company. Nothing in this Agreement shall
prevent the Employee from holding or investing in securities
4
<PAGE>
listed on a national securities exchange or sold in the over-the-counter market,
provided such investments do not exceed in the aggregate on percent (1%) of the
issued and outstanding capital stock of a corporation described in this
Section.
(b) In the event that this Section shall be determined by arbitrators or by
any court of competent jurisdiction to be unenforceable by reason of its
extending for too great a period of time or over too large a geographic area or
over too great a range of activities, it shall be interpreted to extend only
over the maximum period of time, geographic area or range of activities as to
which it may be inforceable.
Section 9. Withholdings. All compensation and benefits to Employee
hereunder shall be reduced by all federal, state, local and other withholdings
and similar taxes and payments required by applicable law.
Section 10. Indemnification. In addition to any rights to indemnification
to which Employee is entitled to under the Corporation's Articles of
Incorporation and Bylaws, Corporation shall indemnify Employee at all times
during and after the term of this Agreement to the maximum extent permitted
under the Delaware Business Corporation Act or any successor provision thereof
and any other applicable state law, and shall pay Employee's expenses in
defending any civil or criminal action, suit, or proceeding in advance of the
final disposition of such action, suit or proceeding, to the maximum extent
permitted under such applicable state laws.
Section 11. Notices. Any notices permitted or required under this Agreement
shall be deemed given upon the date of personal delivery or forty-eight (48)
hours after deposits in the United States mail, postage fully prepaid, return
receipt requested, addressed to the Corporation at:
3 Regency Plaza
Providence, Rhode Island 02903
Attn: Chief Financial Officer
addressed to the Employee at:
9 Rosewood Circle
Kennebunk, Maine 04043
or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section.
Section 12. Law Governing. This Agreement shall be governed by and
construed in accordance with the laws of the State of Rhode Island.
Section 13. Titles and Captions. All section titles or captions contained
in this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section 14. Entire Agreement. This Agreement contains the entire
understanding between and among the parties and supersedes any prior
understandings and agreements among them respecting the subject matter of this
Agreement.
Section 15. Agreement Binding. This Agreement shall be binding upon the
heirs.
5
<PAGE>
executors, administrators, successors and assigns of the parties hereto.
Section 16. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or
appellate court.
Section 17. Computation of Time. In computing any period of time pursuant
to this Agreement, the day of the act, event or default from which the
designated period of time begins to run shall be included, unless it is a
Saturday, Sunday, or a legal holiday, in which event the period shall begin to
run on the next day which is not a Saturday, Sunday, or legal holiday, in which
event the period shall run until the end of the next day thereafter which is not
a Saturday, Sunday, or legal holiday.
Section 18. Pronouns and Plurals. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, neuter, singular, or plural
as the identity of the person or persons may require.
Section 19. Arbitration. If at any time during the term of this Agreement
any dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in Providence, Rhode Island in accordance with the then
prevailing commercial rules of the American Arbitration Association, and
judgment upon the award rendered by the arbiter may be entered in any court
having jurisdiction thereof.
Section 20. Presumption. This Agreement or any section thereof shall not be
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section 21. Further Action. The parties hereto shall execute and deliver
all documents, provide all information and take or forbear from all such action
as may be necessary or appropriate to achieve the purposes of the Agreement.
Section 22. Parties in Interest. Nothing herein shall be construed to be to
the benefit of any third party, nor is it intended that any provision shall be
for the benefit of any third party.
Section 23. Savings Clause. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
6
<PAGE>
Section 24. Separate Counsel. The parties acknowledge that the Corporation
and the Employee have not been represented in this transaction by the
Corporation's attorneys, and the Employee has been advised that it is important
for the Employee to seek separate legal advise and representation in this
matter.
IN WITNESS WHEREOF, the parties have executed this agreement as of the day
and date first set forth above.
/s/ Frederick W. Stolle /s/ Stephen J. Gilbert
- -------------------------------- ------------------------------
Witness: Stephen J. Gilbert
Print Name: Frederick W. Stolle
Log on America, Inc.
By: /s/ David R. Paolo
---------------------------
David R. Paolo, President
7
<PAGE>
Exhibit A
Job Description
During the term of this Employment Agreement, Stephen J. Gilbert as the
Executive Vice President of the Retail Dail-Up Division of Log On America, Inc.,
shall be responsible for such Division's day-to-day operations and its
expansion, whether through an increased subscription base or through directed
acquisition of subscribers. Mr. Gilbert will confer with the Chief Executive
Officer as such officer from time to time requests reporting on technical
performance, profit/loss, expansion plans and capital needs for same.
8
Exhibit 10.12
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT by and between Log On America, Inc., a Delaware corporation (the
"Company"), and Charles F. Cleary (the "Executive"), dated as of the 30th day of
December 1999.
1. Employment Period. (a) The Company hereby agrees to employ the
Executive, and the Executive hereby agrees to remain in the employ of the
Company, pursuant to the terms and conditions set forth in this Agreement, for
the period commencing January 10, 2000 (the "Commencement Date") and ending on
the second anniversary of the Commencement Date (the "Employment Period"),
unless the Executive's employment terminates earlier pursuant to Section 4 of
this Agreement.
(b) The contract shall be automatically extended for successive one (1)
year periods unless either party gives one hundred and twenty (120) days advance
written notice prior to the end of the original Employment Period or any
extension thereof.
2. Position and Duties.
(a) During the Employment Period, the Executive shall be employed as the
Chief Operating Officer ("COO") of the Company. In addition, the Executive shall
be nominated to the Board of Directors of the Company. The Executive shall have
such powers and perform such duties as are customary for a COO at the Company
and from the Commencement Date shall report solely to the Chief Executive
Officer ("CEO") and the Board of Directors, or an executive committee thereof at
the Board of Director's direction. Executive's job description is attached
hereto as Exhibit A.
(b) During the Employment Period, and excluding any periods of vacation,
holiday, personal leave and sick leave to which the Executive is entitled, the
Executive shall devote the Executive's full business time, attention and ability
to the business and affairs of the Company
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and shall use the Executive's best efforts to carry out the Executive's
responsibilities faithfully and efficiently in a professional manner. It shall
not be considered a violation of the foregoing for the Executive to (a) serve on
corporate or civic boards approved in writing by the Company (which approval
shall not be unreasonably withheld) or on charitable boards of committees, (b)
deliver lectures or fulfill speaking engagements and (c) manage personal
investments so long as the activities referred to in clauses (a) through (c)
above do not substantially interfere with the performance of the Executive's
responsibilities as COO of the Company in accordance with this Agreement.
(c) The Executive's primary office shall be located in Providence;
provided, that the Executive's primary office may be relocated in connection
with the relocation of the Company's headquarters within Massachusetts,
Connecticut, New Jersey, New York or Pennsylvania, subject to reimbursement for
all of Executive's reasonable and approved expenses in connection with any move
he is required to make. In addition, the Executive shall be reimbursed for all
reasonable moving expenses, approved in writing, in connection with his
relocation from Pennsylvania to Rhode Island, including all living expenses and
travel costs from period January 10, 2000 to date of relocation but no later
than July 10, 2000.
3. Compensation
(a) Base Salary. During the first year of the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary") of
$200,000, payable pursuant to the Company's normal payroll practices. Effective
as of the first anniversary date of Employment and each succeeding anniversary
date, the Annual Base Salary then in effect shall be reviewed by the
Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee") and increased (but not decreased) in its sole
discretion based upon the performance of the Executive and the Company and the
base salary (and raises) paid by the Company to the CFO and similarly situated
senior executives of the Company (the "peer senior executives").
(b) Annual Bonus. For each fiscal year or part thereof the Company during
the Employment Period, if the target performance goals communicated by the CEO
to the
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Executive for the Company's fiscal year are met, which goals for the first
fiscal year are set forth in Exhibit B attached hereto, the Executive's annual
target bonus shall be equal to 60% of the Annual Base Salary paid during such
fiscal year (the "Target Bonus") and shall be reduced in accordance with an
appropriate payout curve (established annually by the Compensation Committee
after consultation with the Executive) if such target performance goals are not
met, which payout curve for the first fiscal year is set forth in Exhibit C
attached hereto. After the first full fiscal year of the Company, the
Executive's Target Bonus shall be reviewed and set by the Compensation Committee
in light of attainable performance goals and in accordance with the principles
set forth in Section 3 (a) above for salary increases.
The Executive shall receive on the Commencement Date a sign on bonus of
$50,000 which shall be returned to the Company on a ratable basis of the
Executive's employment is terminated upon death, Disability or without good
reason, as those latter terms are hereinafter defined, within the first twelve
(12) months of the Employment Term and in full if the Executive's employment is
terminated for "Cause" or without "Good Reason," as those terms are hereinafter
defined, within the first eighteen (18) months of the Employment Term.
(c) Benefit Plans. The Executive shall be treated in the same manner as,
and shall be entitled to such benefits and other perquisites and terms and
conditions of employment no less favorable than those provided to the CFO and
other peer senior executives as determined by the Compensation Committee.
(d) Long-Term Incentives. (i) The Executive shall receive an initial grant
of a Company stock option to purchase 125,000 shares of Company common stock,
subject to Rule 144 of the Securities and Exchange act, as amended (the "Act")
on the Commencement Date ("Initial Option Grant"). The purchase price shall be
equal to the mean between the open and closing price of the common stock less
$5.00 either on the Commencement Date or on any day between December 9, 1999 and
the Commencement Date, whichever purchase price is lower. Such Initial Option
Grant shall vest as follows:
(A) 50,000 shares of such grant shall vest immediately;
(B) 37,500 shares of such grant shall vest on the first anniversary of the
Commencement Date; and
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(C) 37,500 shares shall vest on the second anniversary of the Commencement
Date.
(ii) On first and second anniversaries of the Commencement Date, the
Company shall make additional option grants commensurate with that of the CFO
and other peer senior executives ("Additional Option Grants"); provided,
however, that each grant shall not be less than 75,000 shares, restricted by
Rule 144 of the Act, at a purchase price equal to the then fair market value of
the Company's common stock on either the date of grant or a date between
December 9, 1999 and the Commencement Date less $5.00 per share, whichever is
lower. Such Additional Option Grants shall vest in the same time manner as
provided above for the Initial Option Grant unless the Compensation Committee
shall provide a shorter vesting period.
Each grant of stock options shall be designated as incentive stock options
to the maximum extent permitted by the Internal Revenue Code of 1986, as
amended, and the Company's Stock Option Plan, dated January 4, 1999, and the
remainder shall be designated as non-qualified stock option.
(e) Expenses. During the Employment Period, the Executive shall be entitled
to receive reimbursement for all reasonable business expenses incurred by the
Executive in carrying out the Executive's duties under this Agreement in
accordance with the policies of the Company, provided that the Executive
complies with the policies of the Company for submission of expense reports,
receipts, or similar documentation of such expenses as promulgated from time to
time by the Company's Human Resources Department for the CFO and other peer
senior executives.
(f) Vacation. During the Employment Period, the Executive shall be entitled
to paid vacation equal to that of the Executive's peer senior executives as set
by the Compensation Committee from time to time.
4. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. The
Executive's employment under this Agreement shall terminate for "Disability" if,
during the Employment Term,
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Executive, in the reasonable and good faith judgment of the Compensation
Committee, has failed to perform his duties under this Agreement on account of
illness or physical or mental incapacity, and such illness or incapacity
continues for a period of more than six (6) consecutive months.
(b) By the Company. The Company may terminate the Executive's employment
during the Employment Period for Cause or without Cause. For purposes of this
Agreement, "Cause" shall mean the Executive's (i) conviction of or plea of nolo
contendere to a felony involving moral turpitude; (ii) willful misconduct or
dishonesty towards, fraud upon, or deliberate injury or attempted injury to
Company; (iii) repeated failure to undertake communicated directives on business
matters despite written instruction to do so by the Board of Directors and/or
the CEO of the Company; and/or (iv) any willful material breach of this
Agreement which has resulted in material injury to the Company.
Notwithstanding the foregoing, the Executive shall not be deemed to have
been terminated for Cause without (a) no less than ten (10) days prior written
notice to the Executive setting forth the reasons for the Company's intention to
terminate for Cause, (b) an opportunity for the Executive to be heard (together
with comments of counsel) before the Board of Directors of the Company and (c)
delivery to the Executive of a notice of termination from the Board of Directors
of the Company stating its opinion that the Executive was guilty of the conduct
set forth above and specifying the particulars thereof.
(c) Good Reason. The Executive may terminate employment for Good Reason.
"Good Reason" means, without the Executive's written consent: (i) a material
adverse change in the Executive's title or the assignment of duties to the
Executive materially and adversely inconsistent with the Executive's position;
(ii) any material failure by the Company to comply with Section 3 or other
provisions of this Agreement; or (iii) any requirement by the Company that the
Executive's primary office location be other than in the states of New York, New
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Jersey, Connecticut, Pennsylvania, Massachusetts or Rhode Island. In the event
the Executive determines that Good Reason exists, the Executive must notify the
Company of such determination in writing, within sixty (60) days following the
Executive's actual knowledge of the event which the Executive determines
constitutes Good Reason, or such event shall not constitute Good Reason under
this Agreement. Following receipt of such notice, if the Company remedies such
event within twenty (20) days following notice, the Executive may not terminate
employment for Good Reason as a result of such event.
(d) Date of Termination. "Date of Termination" means: (i) if the
Executive's employment is terminated by the Company or by the Executive (other
than for death or Disability) the tenth (10th) day after the mailing of the
Notice of Termination or any later date specified therein; or (ii) if the
Executive's employment is terminated by reason of death or Disability, the Date
of Termination shall be the date of death of the Executive or the date of the
determination of Disability as set forth heretofore, as the case may be.
5. Obligations of the Company upon Termination.
(a) Other Than for Cause, Death or Disability, Good Reason. If, during
the Employment Period, the Company terminates the Executive's employment, other
than for Cause, death or Disability, or if the Executive terminates employment
for Good Reason:
(i) the Company shall pay the Executive, in one lump cash sum the sum of
100% Executive's Annual Base Salary;
(ii) within thirty (30) days following the Date of Termination, the
Company shall pay the Executive his Annual Base Salary through the Date of
Termination, or any earned bonus to the extent not yet paid;
(iii) at the time annual bonuses for the fiscal year in which the Date of
Termination occurs are paid, the Company shall pay the Executive a pro rata
annual bonus based upon actual performance under the annual bonus plan for such
fiscal year, to the extent not otherwise paid;
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(iv) any unvested Company stock options or restricted stock held by the
Executive as of the Date of Termination will continue to vest as if Executive
had remained employed by the Company;
(v) to the extent vested and exercisable, any Company stock option will
remain exercisable in accordance with their original terms; and
(vi) the Executive shall continue to receive medical benefits for a
period of six (6) months following the Date of Termination and the Executive's
eligible dependents will continue to be eligible to participate in the Company's
medical insurance plans (subject to the Executive continuing to make any
required contributions to such plans) for a period of six (6) months
following the Date of Termination; provided, that such continued
benefits shall cease upon the Executive becoming eligible for comparable
benefits from a subsequent employer.
(vii) other benefits, if applicable, shall be paid to the Executive in
accordance with applicable plans and programs of the Company.
(b) Death or Disability. If the Executive's employment is terminated by
reason of the Executive's death or Disability during the Employment Period;
(i) the Company shall pay the Executive (or the Executive's survivors,
if applicable) the Executive's Annual Base Salary through the Date of
Termination, to the extent not yet paid;
(ii) to the extent vested and exercisable with a minimum of 125,000
shares, any Company stock option will remain exercisable until the original term
of the stock option;
(iii) in the case of Disability, the Executive shall continue to receive
medical benefits for a period of six (6) months following the Date of
Termination and the Executive's eligible dependents will continue to be eligible
to participate in the Company's medical insurance plans (subject to the
Executive continuing to make any required contributions to such plans) for a
period of six (6) months following the Date of Termination; provided, that such
continued benefits shall cease upon the Executive becoming eligible for
comparable benefits from a subsequent employer; and
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(iv) in the case of Death, the Executive's eligible dependents will
continue to be eligible to participate in the Company's medical insurance plans
(subject to the said dependents continuing to make any required contributions to
such plans) for a period of six (6) months following the Date of Termination.
(c) Cause, Other than Good Reason. If the Executive's employment is
terminated by the Company for Cause during the Employment Period or the
Executive voluntarily terminates employment during the Employment Period (other
than for Good Reason), the Company shall pay to the Executive the Executive's
Annual Base Salary through the Date of Termination or any earned bonus to the
extent not yet paid, and any vested and exercisable Company stock options will
remain exercisable in accordance with the original term of the stock option. The
Company shall have no further obligations under this Agreement.
6. Change of Control. If there is a Change of Control of the Company (as
defined below) all unvested stock options or restricted stock awards shall
become 100% vested. In addition, the Executive may elect within six (6) months
following such change of control to terminate his employment and such
termination shall be treated as a termination for Good Reason and the Executive
shall receive the benefits provided in Section 5 (a) above for such Termination.
As used hereinafter "Change of control" means the occurrence of any of the
following: (i) the Company consolidates with or merges with or into another
person pursuant to the transaction in which the outstanding securities of the
Company are converted into or exchanged for cash or other property or for
securities possessing less than 50% of the voting power of the outstanding
securities of the person surviving such merger or consolidation; (ii) the
Company sells, assigns, conveys, transfers, leases or otherwise disposes of all
or substantially all of its assets to any person; or (iii) any "person" or
"group" (as such terms are used in Sections 13(d) and 14(d) of the Act), other
than the holders of the securities of the Company as of the date hereof, shall,
by virtue of ownership of securities or by agreement or otherwise, be entitled
to elect a majority of the directors of the Company.
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7. Non-Competition; Non-Solicitation; Confidential Information. The Executive
hereby agrees that for a period of two (2) years after the date hereof, such
Executive will not, singly, jointly, or as an employee, agent or partner of any
partnership or as an officer, agent, employee, director, stockholder (except of
not more than one percent (1%) of the outstanding stock of any company listed on
a national securities exchange or actively traded in the over-the-counter
market) or investor in any other corporation or entity, or as a consultant,
advisor, or independent contractor to any such partnership, corporation or
entity, or in any other capacity, directly, indirectly or beneficially: (i) own,
manage, operate, join, control, or participate in the ownership, management,
operation, or control of, or work for (as an employee, agent, consultant,
advisor or independent contractor), or permit the use of his name by, or provide
financial or other assistance to, any person, partnership, corporation, or
entity which is in direct or indirect competition anywhere in the New England
states and the States of New York and New Jersey (the "Protected Territory")
with the business as conducted by Company on the date hereof; (ii) induce or
attempt to induce any person who, on the date hereof or at any time during the
period covered by this restrictive covenant is an employee of the Company, to
terminate his or her employment with the Company; provided, however, that
nothing herein shall prohibit the Executive from general advertising for
personnel not specifically targeting any Executive or other personnel of the
Company; or (iii) induce or attempt to induce any person, business, or entity
which is a supplier, distributor, or customer of the Company or which otherwise
is a contracting party with the Company, as of the date hereof or at any time
during the period covered by this restrictive covenant, to terminate or modify
in any way materially adverse to the interests of the Company, any written or
oral agreement or understanding with the Company. The Executive and the Company
agree that the covenants set forth in this Section 7 have been negotiated with
advice of counsel in the course of the Executive's employment with the Company,
and therefore the Company and the Executive agree that these covenants should
and shall be enforced to the fullest extent
<PAGE>
permitted by law. Accordingly, if in any judicial or similar proceeding a court
or any similar judicial body shall determine that such covenant is unenforceable
because it covers too extensive a geographical area or survives too long a
period of time, or for any other reason, then the parties intend that such
covenant shall be deemed to cover only such maximum geographical area and
maximum period of time and shall otherwise be deemed to be limited in such
manner as will permit enforceability by such court or similar body.
Under no circumstances and at no time, during or after the period specified
in this Section 7, shall Executive, in any manner, whether directly or
indirectly, use for his own benefit or the benefit of any other person, entity
or corporation, nor disclose, divulge, render or offer, any knowledge or
information with respect to the confidential affairs or plans, trade secrets or
know-how of the Company ("Confidential Information"). The Executive acknowledges
and agrees that any and all such Confidential Information will be held by him in
a confidential capacity, and that disclosure of such Confidential Information
would pose a direct threat to the Company in the hands of its competitors. For
purposes of this Section 7, the term "Confidential Information" shall not
include any information which is generally available to the public other than as
a result of a disclosure by Executive.
Promptly upon the termination of this Agreement for any reason, the
Executive agrees to return to the Company any and all documents, memoranda,
drawings, notes and other papers and items (including all copies thereof,
whether electronic or otherwise) embodying any confidential information of the
Company which are in the possession or control of the Executive.
The provisions of this Section 7 shall survive the termination of this
Agreement.
8. Intangible Assets.
The Executive shall not at any time have or claim any right, title or
interest in any trade name, trademark, copyright, or, other similar rights
belonging to or used by the Company and shall not have or claim any rights,
title or interest in any material or matter of any sort prepared for or used in
connection with the business of the Company or promotion of the Company, whether
produced, prepared or published in whole or in part by the Executive.
<PAGE>
9. Release. Effective upon the Date of Termination pursuant to the
provisions of Sections 4(a), (b) or (c) of this Agreement, in consideration of
the payments be made to the Executive pursuant to Sections 5(a), (b) or (c) of
this Agreement and as a condition to the payment thereof, the Executive
acknowledges that all such payments, if made in accordance with the terms of
this Agreement, shall constitute complete satisfaction of all obligations owed
by the Company to the Executive and shall further constitute the Executive's
sole remedy against the Company.
10. Arbitration. Any dispute controversy, or question arising under, out
of, or relating to this Agreement (or the breach thereof) or, Executive's
employment with the Company or termination thereof, shall be referred for
arbitration in the State of Rhode Island to a neutral arbitrator selected by the
Executive and the Company and this shall be the exclusive and sole means for
resolving such dispute. The arbitration proceeding shall be governed by the
Employment Rules of the American Arbitration Association then in effect or such
rules last in effect (in the event such Association is no longer in
existence) but shall not be conducted under the auspices of the Association,
and the decision of the arbitrator shall be governed by the rule of law. If the
parties are unable to agree upon a neutral arbitrator within thirty (30) days
after each party has given the other written notice of the desire to submit the
dispute, controversy or question for decision as aforesaid, then either party
may apply to the court of competent jurisdiction in the City and County of
Providence, State of Rhode Island for the appointment of a neutral arbitrator to
hear the parties and settle the dispute, controversy or question. Such right to
submit a dispute arising hereunder to arbitration and the decision of the
neutral arbitrator shall be final, conclusive and binding on all parties and
interested persons and no action at law or in equity shall be instituted or, if
instituted, further prosecuted by either party other than to enforce the award
of the neutral arbitrator. The arbitrator shall take submissions and hear
testimony, if necessary, and shall render a written decision as promptly as
possible. The arbitrator may require any form of discovery (e.g., depositions)
in making his decision. In connection with any such arbitration, the Company
will reimburse the Executive for all reasonable attorney's fees and
disbursements as incurred in
<PAGE>
connection therewith up to and including the aggregate sum of $25,000 following
the receipt of invoices for such fees and disbursements. If the Company prevails
on all substantial claims in the dispute submitted for arbitration then the
Executive shall pay the Company its reasonable legal fees and disbursements as
incurred by it in connection therewith and reimburse the Company for all such
fees and expenses that it paid on behalf of the Executive as provided herein. If
the Company does not so prevail, then the Company shall reimburse the Executive
for all of the remaining fees and disbursements.
11. Assignment; Successors.
(a) This Agreement is personal to the Executive and, without the prior
written consent of the Company, shall not be assignable by the Executive. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
heirs, executors and administrators.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns, provided that the Company may not assign
this Agreement except in connection with the assignment or disposition of all or
substantially all of the assets or stock of the Company, or by law as a result
of a merger or consolidation. In the event of such assignment a failure by the
successor to specifically assume in writing, delivered to the Executive, the
obligations and liabilities of the Company hereunder shall be deemed a material
breach of this Agreement.
(c) The Company shall require any successor or assignee to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Compay would have been required to perform it if no such assignment had
taken place.
12. Indemnification. In addition to any rights to indemnification to which
Executive is entitled to under the Corporation's Articles of Incorporation and
Bylaws, Company shall indemnify Executive at all times during and after the term
of this Agreement to the maximum extent permitted under Rhode Island Business
Corporation Act or any successor provision thereof and any other applicable
state law, and shall pay Executive's expenses in defending any civil action,
suit or proceeding in advance of the final disposition of such action, suit or
proceeding, to the maximum extent permitted under such applicable state laws for
Executive's
<PAGE>
action or inaction on behalf of the Company under the terms of this Agreement.
In connection herewith, if the Company has or obtains directors or officers
insurance, so-called, Executive shall be covered by such policy to the same
extent as the CFO and other peer senior executives.
13. Miscellaneous
-------------
(a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Rhode Island, without reference to its conflict
of law rules.
(b) The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect.
(c) This Agreement may not be amended or modified except by a written
agreement executed by the parties hereto or their respective successors and
legal representatives.
(d) All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
--------------------
Charles F. Cleary
1035 Wellington Road
Jenkintown, PA 19046
If to the Company:
------------------
Log On America, Inc.
Three Regency Plaza
Providence, Rhode Island 02903
Attention: Chief Executive Officer
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph. Notices and communications shall be effective
when actually received by the addressee or three (3) days after the initiation
of delivery.
<PAGE>
(e) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(f) Notwithstanding any other provision of this Agreement, the Company
may withhold from amounts payable under this Agreement all federal, state, local
and foreign taxes that are required to be withheld by applicable laws or
regulations.
(g) The Executive's or the Company's failure to insist upon strict
compliance with any provisions of, or to assert any right under, this Agreement
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
(h) Except as provided herein, the Executive and the Company acknowledge
that this Agreement constitutes the entire agreement between the parties and
supersedes any prior agreement between the Executive and the Company concerning
the subject matter hereof.
(i) This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and said counterparts shall constitute but one and
the same instrument.
(j) In computing any period of time pursuant to this Agreement, the day
of the act, event or default from which the designated period of time begins to
run shall be included, unless it is a Saturday, Sunday, or a legal holiday, in
which event the period shall begin to run on the next day which is not a
Saturday, Sunday, or legal holiday, in which event the period shall run until
the end of the next day thereafter which is not a Saturday, Sunday, or legal
holiday.
(k) All pronouns and any variations thereof shall be deemed to refer to
the masculine, feminine, neuter, singular, or plural as the identity of the
person or persons may require.
(l) This Agreement or any section thereof shall not be construed against
any party due to the fact that said Agreement or any section thereof was drafted
by said party.
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(m) The parties hereto shall execute and deliver all documents, provide all
information and take or forbear from all such action as may be necessary or
appropriate to achieve the purposes of the Agreement.
(n) Nothing herein shall be construed to be to the benefit of any third
party, nor is it intended that any provision shall be for the benefit of any
third party.
(o) If any provision of this Agreement, or the application of such
provision to any person or circumstance, shall be held invalid, the remainder of
this Agreement, or the application of such provision to persons or circumstances
other than those as to which it is held invalid, shall not be affected thereby.
(p) The parties acknowledge that the Executive has not been represented in
this transaction by the Company's attorneys; and the Executive has been advised
by Company to seek separate legal advise and representation in this matter; and,
Executive hereby represents that, at his sole choice, he has been advised
separately by KST Consulting Group, Inc., an executive compensation organization
and attorneys.
(q) The Company shall reimburse Executive for all fees and expenses
incurred in connection with the negotiation and preparation of this agreement.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
Log On America, Inc.
By: /s/ David R. Paolo /s/ Charles F. Cleary
----------------------------- --------------------------------------
David R. Paolo, Chairman, CEO Charles F. Cleary, Executive
and President
<PAGE>
AMENDMENT NO. 1
TO
PURCHASE AGREEMENT
THIS AMENDMENT NO.1 ("Amendment") effective as of this 22nd day of November,
1999 is made by and between Nortel Networks, Inc. ("Nortel Networks") with
offices located at 4010 E. Chapel Hill - Nelson Hwy., Research Triangle Park,
North Carolina 27709 and Log on America, Inc. ("Company") with offices located
at 3 Regency Plaza, Providence, RI 02903.
WHEREAS, the parties entered into a master purchase agreement dated May 18, 1999
("Agreement") for the purchase of various products and services and capitalized
terms not otherwise defined herein have their respective meanings set forth in
the Agreement;
WHEREAS, in order to document a new multi-product commitment, the parties agree
to add terms and conditions for the purchase of certain additional products to
the Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein set
forth, the parties agree as follows:
1. Section 1.(d) of the Agreement is hereby deleted in its entirety and replaced
with the following:
d) Company commits to purchase and pay for an aggregate net amount of
"Products and Services as identified in Exhibit B ("Committed Products")
prior to December 31, 2001. Such Committed Products shall be purchased
under the terms and conditions of this Agreement, or under the superseding
provisions of a lease or loan agreement. ("Financing Agreement") which the
parties intend to negotiate prior to shipment of those Committed Products.
Any Committed Products for which Company chooses to use funds from the
Financing Agreement shall hereinafter be referred to as "Financed Product."
The total purchase of the Committed Products shall be for an aggregate net
amount of forty-seven million one hundred sixty-six thousand five hundred
and thirty dollars ($47,166,530) ("Commitment"). In the event Company does
not purchase and pay for the totl net amount of the Commitment by December
31, 2001 then Nortel Networks shall on or about December 31, 2001, the
parties may mutually agree in writing to extend the date by which the
Commutment must be fulfilled from Decmeber 31, 2001 to a date no later than
June 30, 2002. Notwithstanding anything to the contrary contained herein,
Company may at any time cancel and/or refuse to purchase and pay for any
portion of the Services defined within the term of Committed Products up to
and including six million seven hundred fifty-four thousand three hundred
and eight dollars ($6,754,308) of the Commitment.
2. A new Section 1.e) is hereby added to the Agrement as follows:
c) Nortel Networks and Company intend to enter into a separate promotional
allowance agreement on or before January 31, 2000.
3. Exhibit B of the Agreement shall be deleted in its entirety and replaced with
Exhibit B attached hereto.
4. For purposes of this Agreement "Shasta Products" shall mean Products listed
under the heading "Shasta" in Exhibit B.
5. Exhibit A, Supplemental Terms Annex shall be amended by adding in the
reference to Article 9, Section a) the following warranty periods;
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Data Product Hardware Software Services
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shasta Products 12 months from ship date 90 days from ship date 12 months from completion
- -------------------------------------------------------------------------------------------------
</TABLE>
6. Attachment I to Exhibit A Supplemental Terms Annex shall be amended by adding
F. Shasta Products.
Except as expressly amended above, all provisions of the Agreement shall remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
LOG ON AMERICA, INC. NORTEL NETWORKS, INC.
By: /s/ By:
----------------------------- ----------------------------
(signature) (signature)
Title: CE Title:
-------------------------- -------------------------
Date: / /99 Date:
--------------------------- ---------------------------
Priveleged and Confidential Page 1
<TABLE> <S> <C>
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