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 June 30, 1999
Commission File Number: 0-25761
LOG ON AMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 05-04966586
- ------------------------------- --------------------
(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
As of August 6, 1999, a total of 7,647,383 shares of the Registrants Common
Stock, $.01 par value, were issued and outstanding.
LOG ON AMERICA, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet as of June 30, 1999 .................................................. 3
Statements of Operations for the Three Months Ended and Six Months
Ended June 30, 1998 and 1999 ..................................................... 4
Statements of Cash Flows for the Six Months Ended June 30, 1998 and
1999 ............................................................................. 5
Notes to Financial Statements ...................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................................. 13
Item 2. Changes in Securities .............................................................. 13
Item 3. Defaults in Senior Securities ...................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ................................ 13
Item 5. Other Information .................................................................. 13
Item 6. Exhibits and Reports on Form 8-K ................................................... 13
Signatures ..................................................................................... 14
The accompanying notes are an integral part of these financial statements.
2
PART I
FINANCIAL INFORMATION
Item 1: Financial Statements
LOG ON AMERICA, INC.
BALANCE SHEET
(unaudited)
CURRENT ASSETS June 30, 1999
-------------
Cash.................................................................................... $ 21,280,959
Accounts receivable, net ............................................................. 147,373
Other current assets ................................................................. 108,009
------------
TOTAL CURRENT ASSETS ............................................................... 21,536,341
PROPERTY & EQUIPMENT, net ............................................................... 545,062
OTHER ASSETS
Goodwill, net ........................................................................ 215,149
Notes receivable ..................................................................... 282,843
Other assets ......................................................................... 17,816
------------
TOTAL OTHER ASSETS ................................................................ 515,808
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TOTAL ASSETS ............................................................................ $ 22,597,211
============
CURRENT LIABILITIES
Note payable ......................................................................... $ 13,512
Accounts payable ..................................................................... 526,775
Accrued expenses ..................................................................... 153,434
Deferred revenue ..................................................................... 59,251
------------
TOTAL CURRENT LIABILITIES ......................................................... 752,972
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 20,000,000 shares, 7,140,716
issued and outstanding at June 30, 1999 ............................................ 47,063
Additional paid-in capital ........................................................... 22,866,200
Accumulated deficit .................................................................. (1,069,024)
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TOTAL STOCKHOLDERS' EQUITY ............................................................. 21,844,239
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................................. $ 22,597,211
============
The accompanying notes are an integral part of these financial statements.
3
LOG ON AMERICA, INC.
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
----------------------------- -----------------------------
REVENUES
Total Revenues .......................................... $ 245,267 $ 176,973 $ 483,911 $ 346,847
OPERATING EXPENSES
Communication and internet services ...................... 123,284 80,764 243,225 153,147
General and administrative ............................... 726,190 130,857 1,033,377 255,748
----------- ----------- ----------- -----------
Total Operating Expenses ................................ 849,474 211,621 1,276,602 408,895
----------- ----------- ----------- -----------
OPERATING LOSS ............................................. (604,207) (34,648) (792,691) (62,048)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense ......................................... (597) -- (877) (60)
Interest income .......................................... 145,863 -- 146,605 --
----------- ----------- ----------- -----------
145,266 -- 145,728 (60)
----------- ----------- ----------- -----------
NET LOSS ................................................... $ (458,941) $ (34,648) $ (646,963) $ (62,108)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES USED IN COMPUTING
BASIC AND DILUTED LOSS PER SHARE ........................... 6,390,057 3,634,850 5,575,191 3,496,213
----------- ----------- ----------- -----------
BASIC AND DILUTED LOSS PER COMMON SHARE .................... $ (.07) $ (.01) $ (.12) $ (.02)
=========== =========== =========== ===========
4
LOG ON AMERICA, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
---------------------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (646,963) $ (62,108)
Adjustments:
Stock issued for services .................................................. -- 1,578
Stock issued for settlements of prior obligations .......................... -- 7,588
Notes receivable forgiven related to stock issuance ........................ -- 36,110
Notes receivable officer forgiven .......................................... 15,688 --
Deprecation and amortization ............................................... 42,964 37,890
Bad debt provision ......................................................... 8,285 (2,581)
Changes in:
Accounts receivable ...................................................... (62,498) (14,771)
Other current assets ..................................................... (102,443) (2,804)
Other assets ............................................................. (17,111) --
Accounts payable ......................................................... 98,200 72,542
Accrued expenses ......................................................... 135,129 21,486
Deferred revenue ......................................................... 42,062 3,807
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Total Adjustments ...................................................... 160,276 160,845
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ............................ (486,687) 98,737
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ........................................ (494,270) (18,812)
Issuance of notes receivable ................................................. (200,000) --
Payments on note receivable officer .......................................... -- (85,940)
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NET CASH USED IN INVESTING ACTIVITIES .......................................... (694,270) (104,752)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ........................................... 25,300,000 --
Proceeds form note payable related party ..................................... -- 12,000
Issuance costs ............................................................... (3,465,186) --
Payments on note payable ..................................................... (3,029) (5,545)
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NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 21,831,785 6,455
------------ -------------
NET INCREASE IN CASH ........................................................... 20,650,828 440
CASH BEGINNING OF PERIOD ....................................................... 630,131 --
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CASH END OF PERIOD ............................................................. $ 21,280,959 $ 440
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES: 1999 1998
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Details of acquisition
Fair value of assets acquired ................................................ -- $ 362,665
============ ============
Goodwill established ......................................................... -- $ 125,739
============ ============
Liabilities assumed .......................................................... -- $ 488,404
============ ============
5
LOG ON AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
A. Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results may
differ from those estimates. The financial statements at June 30, 1999 and for
the three and six month periods ended June 30, 1998 and 1999 are unaudited, but
include all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of financial position
and operating results. Operating results for the three and six month periods
ended June 30, 1998 and 1999 are not necessarily indicative of results that may
be expected for any future periods. The information included in this report
should be read in conjunction with the Company's audited financial statements
and notes thereto included in the Company's Registration Statement on Form SB-2.
B. Earnings (Loss) Per Share
Basic earnings per share is computed by dividing income or loss applicable to
common shareholders by the weighted average number of shares of the Company's
common stock ("Common Stock"), after giving consideration to shares subject to
repurchase, outstanding during the period.
Diluted earnings per share is determined in the same manner as basic earnings
per share except that the number of shares is increased assuming exercise of
dilutive stock options and warrants using the treasury stock method. The diluted
earnings per share amount has not been reported because the Company has a net
loss and the impact of the assumed exercise of the stock options and warrants is
not dilutive.
6
Three Month Period Ended Three Month Period Ended
June 30, 1999 June 30, 1998
Earnings Weighted EPS Earnings Weighted EPS
Avg. Shares Avg. Shares
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Net loss as reported $ (458,941) $ (34,648)
------------- --------------
Basic Earnings per Share:
Loss available to
Common Shareholders $ (458,941) 6,390,057 $ (.07) $ (34,648) 3,634,850 $ (.01)
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Effect of dilutive securities:
Stock Options -- -- -- -- -- --
Diluted Earnings Per Share:
Loss available to
Common Shareholders $ (458,941) 6,390,057 $ (.07) $ (34,648) 3,634,850 $ (.01)
---------------------------------------------------------------------------------
Six Month Period Ended Six Month Period Ended
June 30, 1999 June 30, 1998
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Weighted Weighted EPS
Earnings Avg. Shares EPS Earnings Avg. Shares
---------------------------------------------------------------------------------
Net loss as reported $ (646,963) $ (62,108)
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Basic Earnings per Share:
Loss available to $ (646,963) 5,575,191 $ (.12) $ (62,108) 3,496,213 $(.02)
Common Shareholders
---------------------------------------------------------------------------------
Effect of dilutive securities:
Stock Options -- -- -- -- -- --
Diluted Earnings Per Share:
Loss available to $ (646,963) 5,575,191 $ (.12) $ (62,108) 3,496,213 $(.02)
Common Shareholders
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7
C. Subsequent Events
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
$15.00 per share or $7,600,000. Presented below is the Pro Forma Condensed
Combined Statement of Operations for the six months ended June 30, 1999 and June
30, 1998.
LOG ON AMERICA, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
1999 1998
-----------------------------------
Revenue $ 2,795,540 $ 1,687,349
Operating Expenses 4,839,212 2,771,010
-----------------------------------
Operating Loss (2,043,672) (1,083,661)
-----------------------------------
Other income (expense) 75,606 (33,427)
Benefit from income taxes -- --
-----------------------------------
Net loss $ (1,968,066) $ (1,117,088)
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Weighted average shares outstanding -- basic and diluted 6,081,858 4,002,880
===================================
Loss per common share -- basic and diluted $ (.32) $ (0.28)
===================================
8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and the
notes thereto. Certain statements set forth below constitute "forward-looking
statements". Forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, performance
or achievements, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, investors and prospective
investors are cautioned not to place undue reliance on forward-looking
statements. We disclaim any obligation to update information contained in any
forward-looking statement.
Overview
We are a Northeast Regional Competitive Local Exchange Carrier, "CLEC", and
Information/Internet Service Provider, "IISP", offering local dial-tone, instate
toll, long distance, high speed Internet access and cable programming solutions
over traditional copper wire using DSL technology, to residential and commercial
clients throughout the Northeast.
Our goal is to become a leading provider of a wide range of Internet, voice,
data, video, and cable programming solutions in the Northeast. To accomplish
this goal, we intend to develop, utilize and package our services for the
residential and commercial marketplace at competitive prices.
To date, we have focused our efforts on high revenue, high margin commercial
clients which enter into term contracts for service, generally 12 months in
duration. We intend to utilize these relationships and begin cross-selling
additional services as we roll out our high speed DSL backbone. We will utilize
this backbone to offer high margin, value added telecommunication services. In
our target market, the Northeast corridor, we will begin target marketing to
both traditional dial-up and local dial tone customers, offering a wide array of
services under one unified bill. We rely on service and performance to attract
and retain our customers. We also provide equipment and security products to our
commercial clients that enhance our understanding of their unique needs.
We employ the following marketing strategies: targeted direct marketing,
development of brochures, tradeshow participation and print media. We have begun
expanding our direct marketing sales team with the addition of a director of
marketing, and a vice president of sales and will begin employing additional
sales staff in the Northeast over the next 90 days.
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
approximately $7,600,000.
9
Results of Operations
We completed our initial public offering on April 22, 1999, and we raised
approximately $25,300,000 in gross proceeds thereby.
Pro Forma for Six Months Ended June 30, 1999 versus Six Months Ended June 30,
1998
Revenues
Our Pro Forma revenues are primarily comprised of dial-up services associated
with cyberTours, Inc. which was acquired on August 3, 1999. Pro Forma revenues
grew 66% from $1,687,349 to $2,795,540 for the six months ended June 30, 1999 as
compared to the comparable period in 1998. Revenue growth is attributable to
acquisitions and increased sales efforts, services offered, and an aggressive
marketing campaign in both Rhode Island and Maine.
Operating Expenses
Our Pro Forma operating expenses increased from $2,771,010 to $4,839,212 for the
six months ended June 30, 1999 for an increase of 75%. These increases were
primarily attributed to increases in personnel costs related to increase in the
staff headcount, an increase in marketing and sales costs, an increase in office
expense, and the goodwill and customer lists associated with the cyberTours
acquisition, and additional equipment costs associated with the buildout of our
network backbone to accommodate increase usage of our network.
Net Loss
As a result of the previously mentioned factors, Pro Forma net loss grew from
$1,117,088 to $1,968,066 for the six months ended June 30, 1998 and 1999,
respectively.
Three Months Ended June 30, 1999 versus Three Months Ended June 30, 1998
Revenues
Our revenues are primarily comprised of dial-up, dedicated access service and
web services. Revenues grew 39% from $176,973 to $245,267 for the three months
ended June 30, 1999 as compared to the comparable period in 1998. Revenue growth
performance is attributable to an increase in sales efforts, services offered
and an aggressive marketing campaign in our local market, Rhode Island.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services and
equipment. Gross profit increased from $96,209 to $121,983 for an increase of
27% as compared to the comparable period in 1998.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased from $130,857 to
$726,190 for the three months ended June 30, 1999 for an increase of 455%. These
increases were primarily attributed to increases in personnel cost related to an
increase in the staff headcount, an increase in marketing and sales costs, an
increase in office expense, and additional equipment costs associated with the
build out of our network backbone to accommodate increased usage of our network.
10
Other Income (Expense)
Other income and expense improved from $0 to $145,266 for the three months ended
June 30, 1999. This increase is primarily due to the investment income earned on
the proceeds from the initial public offering on April 22, 1999.
Net Loss
As a result of the previously mentioned factors, net loss grew from $34,648 to
$458,941 for the three months ended June 30, 1998 and 1999, respectively.
Six Months Ended June 30, 1999
versus Six Months Ended June 30, 1998
Revenues
Our revenues are primarily comprised of dial-up, dedicated access service and
web services. Revenues grew 40% from $346,847 to $483,911 for the six months
ended June 30, 1999 as compared to the comparable period in 1998. Revenue growth
performance is attributable to an increase in sales efforts, services offered
and an aggressive marketing campaign in our local market, Rhode Island.
Gross Profit
Gross profit consists of total revenue less the cost of delivering services and
equipment. Gross profit increased from $193,700 to $240,686, for an increase of
24% as compared to the comparable period in 1998.
Selling, General, and Administrative Expenses
General and administrative expenses increased from $255,748 to $1,033,377 for
the six months ended June 30, 1999 for an increase of 304%. These increases were
primarily attributed to increases in personnel cost related to an increase in
the staff headcount, an increase in marketing and sales costs, an increase in
office expense, and additional equipment costs associated with the build out of
our network backbone to accommodate increased usage of our network.
Other Income (Expense)
Other income and expense increased from $(60) to $145,728 for the six months
ended June 30, 1999. This increase is primarily due to the investment income
earned on proceeds from the initial public offering on April 22, 1999.
Net Loss
As a result of the previously mentioned factors, net loss grew from $62,108 to
$646,963 for the six months ended June 30, 1998 and 1999, respectively.
Liquidity and Capital Resources
The development and expansion of our business requires significant capital
expenditures. These capital expenditures primarily include build-out costs such
as the procurement, design, and construction of our connection points and metro
service center locations in each market, as well as other costs that support our
network design.
The number of targeted central offices in each market varies, as does the
average capital cost to build our connection points in the given market. Capital
expenditures were nominal during the second quarter of 1999. We expect our
11
capital expenditures to be substantially higher in future periods, arising
primarily from payments of collocation fees and the purchase of infrastructure
equipment necessary for the development and expansion of our network.
Our capital requirements may vary based upon the timing and success of our
rollout and as a result of regulatory, technological, and competitive
developments, or if
- demand for our services or our anticipated cash flow from operations
is less or more than expected;
- our development plans or projections change or prove to be
inaccurate;
- we engage in any acquisitions; or
- we accelerate deployment of our network services or otherwise alter
the schedule or targets of our rollout plan.
We intend to continue to expand our operations at a rapid pace and expect to
continue to operate at a loss for the foreseeable future. The nature of expenses
contributing to our future losses will include network and service costs in
existing and new markets; legal, marketing, and selling expenses as we enter
each new market; payroll-related expenses as we continue to add employees;
general overhead to support the operational increases; and interest expense
arising from financing our expenditures.
We have not paid any dividends to our shareholders and will not pay dividends
for the foreseeable future.
Through June 30, 1999, we have financed our operations and market build-outs
primarily from the sale of our common stock in 1998, for which we received
approximately $1,250,000 in net proceeds, and through our April 22, 1999 initial
public offering, for which we received $21,800,000 in net proceeds. As of June
30, 1999, we had $21,280,959 in cash equivalents and we had an accumulated
deficit of $1,069,024.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessing to organize and properly address certain fields containing a
two-digit year is commonly referred to as the Year 2000 problem. As the year
2000 approaches, computer systems may be unable to accurately process certain
date-based information.
We have implemented a Year 2000 program to ensure that our computer systems and
applications will function properly beyond 1999. We have identified vendor and
business partner software with which we electronically interact, or from which
we purchase supplies, and have requested Year 2000 compliance certifications. We
have received verbal assurances from those vendors and business partners that
they and their respective suppliers are Year 2000 compliant. Although we believe
all of our systems are and will be Year 2000 compliant, there can be no
assurances that all of our vendors' and business partners' systems will be Year
2000 compliant. Our cost to comply with the Year 2000 initiative is not expected
to be material.
In June 1998, we began converting our computer system to be Year 2000 compliant.
As of December 15, 1998, all of our non-IT systems were compliant. As of June
30, 1999, we spent approximately $1,500 on our Year 2000 compliance efforts.
This figure includes all labor and expenses.
12
PART II
OTHER INFORMATION
Item 1: Legal Proceedings
There are no material legal proceedings pending or threatened against the
Company.
Item 2: Changes in Securities
The Company filed a Registration Statement on SB-2, to register shares of its
Common Stock in an initial public offering. The offering closed on April 22,
1999, resulting in the sale of all the 2,530,000 shares offered at an offering
price of $10.00 per share (constituting aggregate gross proceeds of $25,300,000
for the account of the Company).
The managing underwriters of the offering were Dirks and Company.
Item 3: Defaults in Senior Securities
Not Applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5: Other Information
Not Applicable
Item 6: Exhibits and Reports on Form 8K
(1) Exhibits:
27.1 Financial Data Schedule
(2) Reports on Form 8-K: None
13
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: August 10, 1999 Kenneth M. Cornell,
Chief Financial Officer (Principal
Financial and Accounting Officer)