U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2001
Commission File Number: 0-25761
LOG ON AMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 05-0496586
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Cookson Place, 6th Floor, Providence, Rhode Island 02903
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(Address of principal executive offices) (Zip Code)
(401) 459-6550
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal
year, if changed since last report)
Check mark whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
/X/ Yes / / No
As of April 30, 2001, a total of 8,795,704 shares of the Registrants Common
Stock, $.01 par value, were issued and outstanding.
1
LOG ON AMERICA, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2001 and December 31, 2000 ... 3
Statements of Operations for the Three Months Ended
March 31, 2001 and 2000 ................................... 4
Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 ................................... 5
Notes to Financial Statements ............................... 6
Item 2. Management's Discussion and Analysis .......................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 17
Item 2. Changes in Securities and Use of Proceeds .................. 18
Item 3. Defaults in Senior Securities .............................. 18
Item 4. Submission of Matters to a Vote of Security Holders ........ 18
Item 5. Other Information .......................................... 19
Item 6. Exhibits and Reports on Form 8-K ........................... 19
Signatures .............................................................. 20
2
Part 1. Financial Information
LOG ON AMERICA, INC
BALANCE SHEETS
(Unaudited) (Audited)
March 31, December 31,
--------- ------------
2001 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................................... $ 4,659,924 $ 7,858,973
Available-for-sale securities ........................................................... 1,373,955 1,749,335
Accounts receivable, net of allowance of $830,091 and $750,000, respectively ............ 1,894,381 1,612,818
Notes receivable from officers and related parties, net of valuation
allowance of $1,240,000 and $1,370,000 respectively ................................... 612,628 661,378
Other current assets .................................................................... 1,231,233 1,362,285
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TOTAL CURRENT ASSETS .................................................................. 9,772,121 13,244,789
------------ ------------
PROPERTY & EQUIPMENT, net .................................................................. 17,922,374 19,097,171
OTHER ASSETS
Goodwill and other intangible assets, net ............................................... 10,084,624 10,836,502
Other assets ............................................................................ 56,822 56,822
------------ ------------
TOTAL OTHER ASSETS ................................................................... 10,141,446 10,893,324
------------ ------------
TOTAL ASSETS ............................................................................... $ 37,835,941 $ 43,235,284
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations ............................................. $ 619,067 $ 757,512
Accounts payable ......................................................................... 3,392,448 3,831,019
Accrued expenses ......................................................................... 4,039,302 3,779,543
Borrowings under line of credit .......................................................... 875,000 875,000
Advances under multiple term loan agreement .............................................. 4,868,247 4,868,247
Deferred revenue ......................................................................... 1,086,100 1,133,298
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TOTAL CURRENT LIABILITIES ............................................................... 14,880,164 15,244,619
------------ ------------
LONG-TERM LIABILITIES
Capital lease obligations ................................................................ 423,770 422,075
------------ ------------
TOTAL LONG-TERM LIABILITIES ............................................................. 423,770 422,075
------------ ------------
TOTAL LIABILITIES .......................................................................... 15,303,934 15,666,694
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Redeemable convertible preferred stock, $ 01 par value; authorized 15,000,000 shares,
Series A 15,000 shares issued and outstanding at March 31, 2001 ......................... 10,260,274 9,643,836
Commitments and contingencies .............................................................. -- --
STOCKHOLDERS' EQUITY
Common stock, $ 01 par value; authorized 50,000,000 shares, 8,795,704
issued and outstanding at March 31, 2001 and December 31, 2000 ........................ 87,957 87,957
Additional paid-in capital ............................................................... 40,320,932 41,233,260
Accumulated other comprehensive income ................................................... 14,124 14,217
Accumulated deficit ...................................................................... (28,151,280) (23,410,680)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .............................................................. 12,271,733 17,924,754
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................. $ 37,835,941 $ 43,235,284
============ ============
The accompanying notes are an integral part of these financial statements.
3
LOG ON AMERICA, INC
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
---------------------------
2001 2000
----------- -----------
REVENUES ......................................... $ 3,644,976 $ 2,388,357
OPERATING EXPENSES
Costs of revenue ............................... 2,732,072 1,006,527
Selling, general and administrative ............ 4,049,635 3,496,688
Depreciation and amortization .................. 1,672,861 865,306
----------- -----------
Total operating expenses ...................... 8,454,568 5,368,521
----------- -----------
LOSS FROM OPERATIONS ............................. (4,809,592) (2,980,164)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense ............................... (65,327) (61,993)
Interest income ................................ 127,983 331,861
Other income (expense) ......................... 6,336 --
----------- -----------
Net other income (expense) ..................... 68,992 269,868
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NET LOSS ......................................... (4,740,600) (2,710,296)
Preferred stock dividends ...................... (295,890) --
Preferred stock accretion ...................... (616,438) --
----------- -----------
Net loss applicable to common stockholders ....... $(5,652,928) $(2,710,296)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES USED IN COMPUTING
BASIC AND DILUTED LOSS PER
SHARE .......................................... 8,795,704 8,302,990
=========== ===========
BASIC AND DILUTED LOSS PER COMMON
SHARE .......................................... (0.64) (0.33)
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
LOG ON AMERICA, INC
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
--------------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .............................................................................. (4,740,600) (2,710,296)
Adjustments to reconcile net loss to net cash used in operating activities:
Capital equipment write-off .......................................................... 398,979 --
Depreciation and amortization ....................................................... 1,672,861 865,306
Bad debt provision .................................................................. 80,091 5,040
Bad debt provision - notes .......................................................... (130,000) --
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ............................................................... (361,654) (113,995)
Other current assets .............................................................. 131,052 (296,777)
Other assets ...................................................................... -- (86,333)
Accounts payable and accrued expenses ............................................. (295,952) (502,891)
Deferred revenue .................................................................. (47,198) 16,668
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Total adjustments ............................................................... 1,448,179 (112,982)
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NET CASH USED IN OPERATING ACTIVITIES ................................................... (3,292,421) (2,823,278)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ................................................. (96,998) (2,195,889)
Sales of available-for-sale securities ................................................ 375,287 --
Purchases of available-for-sale securities ............................................ -- (1,483,941)
Acquisitions .......................................................................... -- (1,100,500)
------------ ------------
NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES ................................... 278,289 (4,780,330)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible preferred stock and stock warrants ... -- 15,000,000
Issuance costs on preferred stock ..................................................... -- (40,000)
Issuance costs on long term debt ...................................................... -- (300,000)
Principal payments on capital lease obligations ....................................... (184,917) (87,005)
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NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES ................................... (184,917) 14,572,995
------------ ------------
NET INCREASE / (DECREASE IN) CASH AND CASH EQUIVALENTS .................................. (3,199,049) 6,969,387
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD ........................................... 7,858,973 7,844,860
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CASH AND CASH EQUIVALENTS END OF PERIOD ................................................. $ 4,659,924 $ 14,814,247
============ ============
SUPPLEMENTAL SCHEDULES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .............................................................................. $ 233,549 $ 61,993,549
============ ============
Income taxes .......................................................................... $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Details of acquisitions
Fair value of assets acquired ......................................................... $ -- $ 100,000
============ ============
Intangibles established ............................................................... -- 1,620,000
============ ============
Liabilities assumed ................................................................... -- 14,000
============ ============
Common stock issued ................................................................... -- 605,500
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Details of financing activities
Equipment acquired under captial lease obligations .................................... $ 48,167 $ --
============ ============
Equipment acquired under Nortel financing agreement ................................... -- 882,016
============ ============
Accretions and dividends on preferred redeemable ...................................... $ 912,328 $ --
============ ============
The accompanying notes are an integral part of these financial statements.
5
1. Notes to Financial Statements (Unaudited).
March 31, 2001
A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Log On
America, Inc. ("Log On, our, we or us") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to form 10-QSB and article 10 of Regulation S-X. They do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended, March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in our Company's annual report on form 10-KSB for the
year ended, December 31, 2000.
Certain amounts in the prior period's consolidated financial statements have
been reclassified to conform to the current period presentation.
B. Earnings (Loss) Per Common Share
Basic earnings per common share is computed by dividing income or loss
applicable to common stockholders by the weighted average number of common
shares of Log On's common stock outstanding during the period.
Diluted earnings per common share is determined in the same manner as basic
earnings per common share except that the number of common shares is increased
assuming exercise of dilutive stock options and warrants using the treasury
stock method. The diluted earnings per common share amount has not been reported
because we have a net loss and the impact of the assumed exercise of our stock
options and warrants is not dilutive.
C. Comprehensive Loss
Components of comprehensive loss are as follows:
6
March 31, March 31,
2001 2000
------------ ------------
Net loss $(4,740,600) $(2,710,296)
Other comprehensive income
(loss) -
Unrealized gains (losses) on
marketable securities (93) 29,586
----------- -----------
Comprehensive loss $(4,740,693) $(2,680,710)
=========== ===========
Accumulated other comprehensive income at March 31, 2001 and December 31, 2000
is composed of unrealized gains on marketable securities amounting to $14,124
and $14,217, respectively.
D. Financing
On February 23, 2000 we sold 15,000 shares of Series A Redeemable Convertible
Preferred Stock (the "Preferred Shares") and issued 594,204 common stock
purchase warrants (the "Warrants") for an aggregate consideration of
$15,000,000. The proceeds of the Preferred Shares have been allocated between
the Warrants ($7,500,000 in Additional Paid-in Capital) and the Preferred Shares
based on the estimate of the fair value of these instruments at the time of the
transaction. The Preferred Shares are redeemable no earlier than February 23,
2003 (unless certain triggering events have occurred), at a minimum redemption
price of $1,000 per share plus accumulated and unpaid additional amounts, which
accrue at a rate of 8% per annum and are treated as dividends. Accrued dividends
amounted to $1,324,932 as of March 31, 2001.
The fair value of the Preferred Shares at issuance was recorded as $7,500,000,
which was less than the mandatory redemption amount at issuance. Therefore,
periodic accretions from stockholders' equity are made so that the carrying
amount equals the redemption amount on the maturity date. Accretions amounted to
$2,760,274 as of March 31, 2001.
On August 18, 2000, we commenced an action against the Preferred Shareholders.
Shortly thereafter, as a result of our action, certain of the Preferred
Shareholders sent us conversion notices and redemption notices for all 15,000
Preferred Shares. Based on our claims as specified in our action, we have not
nor do we intend to honor these conversion notices and/or redemption notices.
Simultaneously with the sale of Preferred Shares, on February 23, 2000, we
entered into a Senior Secured Credit Agreement (the "Credit Agreement") with
Nortel. Under the Credit Agreement,
7
Nortel committed to an initial advance to Log On of up to $30,000,000 and
subject to certain conditions, a second advance of up to an additional
$15,000,000 to finance Log On's commitment to purchase equipment and services
from Nortel. We have granted a security interest in substantially all of our
assets under the Credit Agreement. The Credit Agreement has certain restrictive
financial covenants. Such covenants include minimum EBITDA and annualized EBITDA
with respect to financial ratios. At March 31, 2001, we were substantially not
in compliance with such covenants.
On November 14, 2000, we entered into an additional agreement with Nortel to
settle various claims arising out of certain professional services rendered by
Nortel. This agreement provided for a one-time cash payment of $3,500,000 by
Nortel to us, which was made in 2000. The agreement also provides for certain
product and service credits. In addition, Nortel provided a one-time reduction
of $5,000,000 on the outstanding balance of the Credit Agreement.
As of March 31, 2001, Nortel has advanced us $4,868,247 (net of the $5,000,000
credit). This has been considered as an advance under the Credit Agreement with
Nortel and classified as a current liability
On May 11, 2001 we reached a final settlement with Nortel in complete
satisfaction of all obligations owed to Nortel. The settlement provides for
payment by us of approximately $1,200,000 in cash and the return of all Nortel
equipment to Nortel. We anticipate that this will generate a loss in the range
of approximately $9 - 10 million.
E. Notes Receivable From Officers and Related Parties
Notes receivable consists of secured amounts loaned to our President and CEO and
secured amounts loaned to the former stockholders of cyberTours, Inc.
The notes receivable of $1,500,000 maturing on September 14, 2000 were extended
for a period of one year maturing on September 14, 2001. These notes are secured
by 421,333 shares of stock held by us as of June 1, 2000, and are interest free.
Also, in September 2000, our President and CEO executed a promissory note to us
in the amount of $500,000. The note is secured with 500,000 shares of Log On
common stock registered in the name of our President and CEO. The note is
payable upon demand and bears an annual interest rate of 9.5%
In 2000, our CEO was granted a bonus of $178,750, which was applied in reduction
of his promissory note. As of March 31, 2001, the balance on the note is
$321,250 and the pledge has been reduced to 321,250 shares.
F. Commitments and Contingencies
8
On August 18, 2000, we commenced an action against Promethean Asset Management
LLC, HFTP Investment LLC, Fisher Capital LTD, Wingate Capital, LTD, Citadel
Limited Partnership and Marshall Capital Management, Inc. ("Defendants"), in the
United States District Court for the Southern District of New York (CA NO. 00CIV
6218 (RMB) (MHD), alleging: (i) violations of federal securities laws,
including, but not limited to, insider trading and stock manipulation through
cross sales and short sales of our common stock, (ii) breach of contract, (iii)
fraud, and (iv) breach of the covenant of good faith and fair dealing. The
complaint seeks declaratory relief, injunctive relief, compensatory and punitive
damages in an amount to be determined at trial.
After the complaint was filed, Defendants sent conversion and redemption notices
to us. We have not honored these notices based on the allegations contained in
our complaint. As a result, we have not converted or redeemed any shares of our
outstanding preferred stock held by any of the Defendants. The Defendants have
filed a motion to dismiss our complaint, which is presently pending before the
court.
On September 19, 2000, Belenos, Inc., a Delaware corporation ("Belenos") filed
suit against us alleging that certain sums are due it for work performed and
equipment provided to us. The suit was filed in the Superior Court of Suffolk
County, Commonwealth of Massachusetts (CA 00-4177 (F)).
On May 11, 2001 we agreed to settle our dispute for approximately $1,000,000.
On January 12, 2001, we commenced an action against Credit Suisse First Boston
Corporation ("CSFB") seeking recovery of $100 Million for CSFB's gross
negligence and material conflicts of interest as our exclusive financial
advisor. We allege that CSFB was grossly negligent and was deceptive in
connection with the structuring and negotiation of our sale of convertible
preferred stock to certain institutional investors including Marshall Capital
Management Inc. ("Marshall"), a subsidiary of CSFB; and the structuring and
negotiation of an equipment purchase agreement and secured credit facility with
Nortel Networks Inc. ("Nortel").
The complaint, which was filed in the United States District Court, Southern
District of New York (Case No. 01 Civ 0272 (RMB)) alleges that CSFB, after being
retained by us as its exclusive financial advisor, represented that it would
raise substantial capital for us from "named investors" and when it failed to do
so, recommended we raise money by issuing floorless Convertible Preferred Stock
and promising to support our stock in the market. One half of the convertible
stock was placed by CSFB with Marshall. We have since sued Marshall and the
other holders of the convertible stock alleging market manipulation. It is
further alleged that CSFB negotiated the transaction with Nortel on unfavorable
terms while failing to disclose to us that CSFB was also representing Nortel in
other major financial transactions.
CSFB has filed a motion to dismiss our complaint, which is scheduled to be
submitted to the
9
court prior following the submission of our answer to the motion. We have
commenced conducting discovery in the action. The court has recently ordered the
parties into mediation, which is scheduled to commence on May 31, 2001.
G. Going Concern
The operating results as of March 31, 2001 caused us to violate certain of our
loan covenants with Nortel Networks, Inc. ("Nortel"). Nortel provided us with a
Senior Secured Credit Agreement (the "Credit Agreement") and agreed to finance
our commitment to purchase, by December 31, 2001, of up to $47,000,000 of
equipment and services from Nortel. We had borrowed $4,868,247 as of March 31,
2001. The March 31, 2001 operating loss caused us to violate the EBITDA,
Annualized EBITDA, and Minimum Gross Revenues covenants. In May 2001, we entered
into an agreement to satisfy all obligations due Nortel for a cash payment of
approximately $1,200,000 and the return of all Nortel equipment.
In May of 2001, we also settled the Belenos claim for approximately $1 million.
As a result of these capital outlays our existing capital resources may not be
sufficient to fund our operating deficits through 2001. If we do not
successfully continue the cost reduction programs which we commenced in the
beginning in year 2001, or additional unanticipated costs are incurred, we may
not have sufficient funds to continue as a going concern through December 31,
2001, without raising additional capital through an equity or debt financing,
which may or not be available to us or may not be available to us at acceptable
terms.
We may decide to seek additional capital earlier than the end of 2001, the
timing of which will depend upon, among other things, market conditions and
terms, which are acceptable to us.
The inability to obtain additional financing or funding, when needed, would have
a negative effect on us, including possibly requiring us to curtail or cease
operations. If any future financing involves the sale of our equity securities,
the shares of our common stock held by our stockholders would be substantially
diluted. If we incur indebtedness or otherwise issue debt securities, we will be
subject to risks associated with indebtedness, including the risk that interest
rates may fluctuate and the possibility that we may not be able to pay principal
and interest on the indebtedness.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The conditions mentioned above
raise substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.
Item 2. Management's Discussion and Analysis
10
Overview
Log On America is a solutions-centric Integrated Network Services Provider
("INSP"), offering digital IP transport and integrated network solutions to
individuals and businesses throughout New England. Log On's core products
include IT/Telecom/PBX managed services, high-speed Internet access, web and
data hosting, office productivity and security management application services,
local and long distance dial-tone and call management features utilizing a wide
range of system integration, broadband access, ASP technologies and
partnerships.
We have determined that the traditional competitive local exchange carrier /
direct local exchange carrier service delivery models do not adequately serve a
large portion of the growing communications marketplace in a cost effective
manner. We also have recognized that traditional communications products do not
fulfill the competitive business requirements of many of the fastest growing
business segments. Some of these segments have not been addressed nor identified
by the existing service providers. Two of the market segments, which will be
addressed by our highly leveraged, fully integrated end-to-end solutions based
business and management model will be the small to medium size business solution
market ("SMB markets") and the small office/home office market ("SOHO markets").
We have initiated penetrating target markets with assets that we already
possess, and we intend to build our delivery platform and our sales teams to
target the higher-end SMB markets. Using this approach, we should begin to
reduce our EBITDA losses at an accelerated pace, establish incumbency in the
local targeted markets, precisely build-out our infrastructure, strategically
utilize capital and operations funding, and position ourselves as the smart
solutions-based delivery provider.
Results of Operations.
Three Months Ended March 31, 2001
Versus Three Months Ended March 31, 2000
Revenues.
Our Data and Telecom services revenue is comprised of monthly recurring charges,
additional features on those lines, usage charges and initial, non-recurring
charges typically derived from installing new lines and services.
Revenues increased by $1,256,619 or 53% to $3,644,976 for the three months
ended, March 31, 2001 as compared to $2,388,357 for the comparable period in
2000. The increase in revenue is due primarily to approximately 9,000 new
residential telecom customers added during the summer of 2000, additional field
operations and PBX installation sales and new commercial customers acquired
during 2000.
11
Costs of revenue.
Costs of revenues are data and telecommunications expenses comprised primarily
of leased transport charges for facilities connecting our customers to our
network, our network to the Internet, our switch and physical co-locations.
Expenses are being incurred to the incumbent local exchange carrier for customer
lines, features on lines and usage.
Costs of revenue increased by $1,725,545 or 171%, to $2,732,072 for the three
months ended, March 31, 2001 as compared to $1,006,527 for the comparable period
in 2000. This increase is reflective of the costs associated with customer base
growth achieved year-to-date, additional network costs associated with
connecting our central offices and the costs associated with high speed data and
telecom network expansion. As we move away from the traditional co-concentric
model, we anticipate a reduction in our network costs.
Selling, general and administrative expense.
Selling, general and administrative expenses increased by $552,947 or 16% to
$4,049,635 for the three months ended, March 31, 2001 as compared to $3,496,688
for the comparable period in 2000. This increase is due primarily to the
salaries and related expenses for the development of our business, the
establishment of our management team and the development of corporate
identification, promotional and advertising materials. This also includes the
corporate activities related to finance, regulatory, legal, executive, billing,
marketing, and other administrative functions.
Depreciation and amortization.
Depreciation and amortization increased by $807,555 to $1,672,861 for the three
months ended, March 31, 2001 as compared to $865,306 for the comparable period
in 2000. This increase is due primarily to the amortization expense related to
the intangible assets associated with the acquisitions and the depreciation on
the equipment costs associated with the buildout of our Internet Service
Provider network backbone, switch and collocation buildouts and the internal
infrastructure to accommodate the increased usage of our external and internal
network.
Other Income.
Other income decreased by $200,876 to $68,992 for the three months ended, March
31, 2001 as compared to $269,868 for the comparable period in 2000. This
decrease is related to the investment income generated from the cash balances on
hand for each Quarter and is reflective of lower cash and investment balances as
we continue to act on and execute our business plan.
12
Liquidity and Capital Resources.
During the three months ended, March 31, 2001, we had a net loss of $4,740,600.
Net cash used in operating activities was $3,292,421 and $2,823,278 for the
three months ended, March 31, 2001 and 2000, respectively. The net cash used in
operations was primarily to fund our operating loss. Also, in line with the
realignment of our operating plan, we made an effort to pay down our current
debt. The net cash provided by investing activities was $278,289 for the three
months ended, March 31, 2001, related to the sales of our securities to generate
cash. The net cash used in investing activities was $4,780,330 for the three
months ended March 31, 2000. This cash funded our capital expansion and
acquisitions during the first quarter of 2000. The net cash used in financing
activities was $184,917 for the three months ended March 31, 2001. This cash was
used to make principal payments on our existing capital leases. The net cash
provided by financing activities was $14,572,995 for the three months ended,
March 31, 2000. This cash was related to the net proceeds from the issuance of
our preferred stock and common stock warrants.
We are in the process of optimizing the assets that we have deployed and will
limit future capital expenditures to a success based smart build strategy. This
has lowered our overall capital expenditure requirements and has allowed us to
direct resources to high EBITDA opportunities. In addition, we have reduced our
overall EBITDA loss by implementing various cost reduction programs, which
included a reduction of staff headcount, a consolidation of certain redundant
offices, and a consolidation of certain network infrastructure. Our executive
officers have also agreed to defer a portion of their salaries, which will be
paid to them at such time as the compensation committee approves such payment to
be made either in the form of cash or of our common stock, which is subject to
shareholder approval. Certain of these programs have either been implemented or
we are in the process of implementing.
In May, we reached an agreement with Nortel to extinguish our debt obligation in
exchange for the return of equipment and a cash payment to Nortel of
approximately $1.2 million. In addition, in May we reached a settlement
agreement with Belenos, which calls for a payment of approximately $1 million.
With these recent capital outlays, we believe that the existing capital
resources may not be sufficient to fund our operating deficits through 2001. If
we are unsuccessful in implementing our cost reductions or additional
unanticipated costs are incurred, we may not have sufficient funds to continue
as a going concern through December 31, 2001. As a result, we may decide to seek
additional capital earlier than the end of 2001, the timing of which will depend
upon, among other things, market conditions and terms, which are acceptable to
us.
We may obtain additional financing through commercial bank borrowings, equipment
financing
13
or the private or public sale of equity or debt securities. We may be
unsuccessful in raising sufficient additional capital. In particular, we may be
unable to raise additional capital on terms that we consider acceptable, that
are within the limitations contained in our financing agreements and that will
not impair our ability to develop its business. If we fail to raise sufficient
funds, we may need to modify, delay or abandon some of the planned future
expansion or expenditures, which could have a material adverse effect on the
business, prospects, financial condition and results of operations.
We have not paid any cash dividends to our shareholders and do not intend to pay
cash dividends in the foreseeable future.
In May 2001, we received notification from Nasdaq that our common stock has
failed to maintain certain continued listing requirements. We are currently in
the process of preparing a response to the Nasdaq notification, which allows us
until August 7, 2001 to respond. We intend to maintain our common stock on the
Nasdaq National Market; however, if Nasdaq delists our common stock we will
attempt to have our common stock listed on the Nasdaq Small Cap Market, or on
another exchange. If those attempts fail, we will attempt to have our common
stock trade in the over-the-counter market on the so-called "pink sheets" or the
NASD's OTC Bulletin Board. Consequently, the liquidity of our common stock could
be impaired.
Special Note Regarding Forward-Looking Statements and Risk Factors
Any statements in this Quarterly Report on Form 10-QSB about our expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and are forward-looking statements. These statements are often,
but not always, made through the use of words or phrases such as "will," "will
likely result," "expect," "will continue," "anticipate," "estimate," "intend,"
"plan," "projection," "would," "should" and "outlook." Accordingly, these
statements involve estimates, assumptions and uncertainties, which could cause
actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout this Report and our Annual Report on Form 10-KSB,
as amended, for the year ended December 31, 2000. The following cautionary
statements identify important factors that could cause our actual results to
differ materially from those projected in the forward-looking statements made in
this prospectus. Among the key factors that have a direct bearing on our results
of operations are:
o general economic and business conditions;
o the existence or absence of adverse publicity;
o changes in, or failure to comply with, government regulations;
o changes in marketing and technology;
o change in political, social and economic conditions;
o increased competition in the Internet ;
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o Internet capacity; general risks of the Internet;
o success of acquisitions and operating initiatives;
o changes in business strategy or development plans;
o management of growth;
o availability, terms and deployment of capital;
o construction schedules; costs and other effects of legal and
administrative proceedings;
o dependence on senior management;
o business abilities and judgment of personnel;
o availability of qualified personnel;
o labor and employee benefit costs;
o development risks and ability to raise additional capital and other
factors referenced below in this Report and the Form 10-KSB, as amended.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
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PART II
OTHER INFORMATION
Item 1: Legal Proceedings
On August 18, 2000, we commenced an action against Promethean Asset Management
LLC, HFTP Investment LLC, Fisher Capital LTD, Wingate Capital, LTD, Citadel
Limited Partnership and Marshall Capital Management, Inc. ("Defendants"), in the
United States District Court for the Southern District of New York (CA NO. 00CIV
6218 (RMB) (MHD), alleging: (i) violations of federal securities laws,
including, but not limited to, insider trading and stock manipulation through
cross sales and short sales of our common stock, (ii) breach of contract, (iii)
fraud, and (iv) breach of the covenant of good faith and fair dealing. The
complaint seeks declaratory relief, injunctive relief, compensatory and punitive
damages in an amount to be determined at trial.
After the complaint was filed, Defendants sent conversion and redemption notices
to us. We have not honored these notices based on the allegations contained in
our complaint. As a result, we have not converted or redeemed any shares of our
outstanding preferred stock held by any of the Defendants. The Defendants have
filed a motion to dismiss our complaint, which is presently pending before the
court.
On January 12, 2001, we commenced an action against Credit Suisse First Boston
Corporation ("CSFB") seeking recovery of $100 Million for CSFB's gross
negligence and material conflicts of interest as our exclusive financial
advisor. We allege that CSFB was grossly negligent and was deceptive in
connection with the structuring and negotiation of our sale of convertible
preferred stock to certain institutional investors including Marshall Capital
Management Inc. ("Marshall"), a subsidiary of CSFB; and the structuring and
negotiation of an equipment purchase agreement and secured credit facility with
Nortel Networks Inc. ("Nortel").
The complaint, which was filed in the United States District Court, Southern
District of New York (Case No. 01 Civ 0272 (RMB)) alleges that CSFB, after being
retained by us as its exclusive financial advisor, represented that it would
raise substantial capital for us from "named investors" and when it failed to do
so, recommended we raise money by issuing floorless convertible preferred stock
and promising to support our stock in the market. One half of the convertible
stock was placed by CSFB with Marshall. We have since sued Marshall and the
other holders of the convertible stock alleging market manipulation. It is
further alleged that CSFB negotiated the transaction with Nortel on unfavorable
terms while failing to disclose to us that CSFB was also representing Nortel in
other major financial transactions.
CSFB has filed a motion to dismiss our complaint, which will be submitted to the
court following the filing of our answer to the motion. We have commenced
discovery against CSFB. The courts have ordered the parties into mediation.
Mediation is scheduled to commence on May 30, 2001.
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We intend to vigorously pursue both of these actions because we believe that we
acted appropriately in connection with the matters at issue in these cases and
that we were damaged by the defendants wrongful conduct. However, we can make no
assurances that we will not determine that the advantages of entering into a
settlement outweigh the risk and expense of protracted litigation or that
ultimately we will be successful in pursuing our claims against either party. If
we are unsuccessful in prevailing, the holders of preferred stock could convert
the preferred stock into common stock or compel us to redeem the preferred
stock. If the holders of the preferred stock were to convert the preferred stock
into common stock and sell such shares of common stock into the market, such
sales could have a negative effect on the market price of our common stock and
will dilute your holdings in our common stock. Dilution or the potential for
dilution could also materially impair our ability to raise capital through the
future sale of equity securities and have a material adverse effect on our
financial condition. Moreover, we may not be in a position to redeem the
preferred stock and could be subject to substantial and additional penalties for
failing to do so, which would have a material adverse effect on our financial
condition or results of operations.
On September 19, 2000, Belenos, Inc., a Delaware corporation ("Belenos") filed
suit against us alleging that certain sums are due it for work performed and
equipment provided to us. The suit was filed in the Superior Court of Suffolk
County, Commonwealth of Massachusetts (CA 00-4177 (F)).
On May 11, 2001 we agreed to settle our dispute with Belenos for approximately
$1,000,000.
Item 2: Changes in Securities and Use of Proceeds
None
Item 3: Defaults in Senior Securities
Following the commencement of the action against the holders of our series A
convertible preferred stock and the announcement that we will not honor requests
for conversions, the holders of the preferred stock requested redemption of the
preferred stock. The holders have asserted that they are entitled to redemption
of their preferred shares under our Certificate of Designations, Preferences and
Rights of Series A Preferred Stock by reason of the our announcement that we
will not honor conversion requests and of the failure by us to have our shares
of common stock underlying the preferred shares and their related warrants
registered under Securities Act of 1933. We have refused to honor the redemption
requests upon the basis set forth in our action against the preferred holders.
Holders of fifty percent of the preferred stock have requested an aggregate
redemption amount of $10.8 million. The holder of the other fifty percent has
not specified a redemption amount.
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The operating results as of March 31, 2001 caused us to violate certain of our
loan covenants with Nortel Networks, Inc. ("Nortel"). Nortel provided us with a
Senior Secured Credit Agreement and agreed to finance our commitment to
purchase, by December 31, 2001, of up to $47,000,000 of equipment and services
from Nortel. We had borrowed $4,868,247 as of March 31, 2001. The March 31, 2001
operating loss caused us to violate the EBITDA, Annualized EBITDA, and Minimum
Gross Revenues covenants.
On May 11, 2001 we reached a final settlement with Nortel in complete
satisfaction of all obligations owed to Nortel. The settlement provides for
payment by us of approximately $1,200,000 in cash and the return of all Nortel
equipment to Nortel. We anticipate that this will generate a loss in the range
of approximately $9 - 10 million.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8K
(1) Exhibits:
(2) Form 8K filed on January 16, 2001, in connection with the registrant's
commencement of legal proceedings against Credit Suisse First Boston Corporation
seeking recovery of $100 Million for CFSB's gross negligence and material
conflicts of interest as LOA'a exclusive financial advisor.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LOG ON AMERICA, INC.
By: /S/ Kenneth M. Cornell
-------------------------------------------
Date: May 18, 2001 Kenneth M. Cornell,
Chief Financial Officer, Principal
Financial and Accounting Officer
(duly authorized to sign on behalf of registrant)
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