Supplement dated November 29, 1999
to Prospectus dated August 25, 1999
NetLojix Communications, Inc.
(Formerly known as AvTel Communications, Inc.)
The following information supplements and amends the Prospectus,
dated August 25, 1999, of AvTel Communications, Inc. relating to the
issuance of 2,103,939 shares of AvTel's common stock. This Supplement
should be read in conjunction with the Prospectus dated August 25, 1999.
Name Change
On September 15, 1999, AvTel Communications, Inc. changed its name to
NetLojix Communications, Inc. NetLojix's common stock continues to be
traded on the Nasdaq SmallCap Market, but is now traded under the symbol
"NETX."
Sale of Matrix Telecom, Inc.
On August 31, 1999, NetLojix and its wholly-owned subsidiary,
Matrix Telecom, Inc., entered into a stock purchase agreement with Energy
TRACS Acquisition Corp. Energy TRACS Acquisition Corp. is a wholly-owned
subsidiary of Platinum Equity Holdings, LLC. Pursuant to the stock purchase
agreement, NetLojix agreed to sell all of the issued and outstanding
capital stock of Matrix to Energy TRACS Acquisition Corp. or its assignee.
On September 1, 1999, Energy TRACS Acquisition Corp. assigned its rights
under the stock purchase agreement to Matrix Acquisition Holdings Corp.
The closing of the transaction is subject to certain
contingencies, including regulatory consents and the approval of NetLojix
shareholders. Shareholders representing over 50% of votes required to
approve the transaction have indicated that they will vote in favor of the
agreement.
Directors and principal stockholders who, collectively, hold in
excess of 65.1% of NetLojix's issued and outstanding shares of common stock
have signed a written consent approving the sale and the stock purchase
agreement. Accordingly, no meeting of stockholders will be held to consider
the sale.
In accordance with Rule 14c-2 promulgated under the Securities
Exchange Act of 1934, NetLojix will not complete the sale until at least 20
calendar days after the Information Statement with respect to this action
has first been sent to stockholders. The Information Statement was first
sent to stockholders on or about November 8, 1999.
The unaudited pro forma financial statements giving effect to the
sale of Matrix are set forth on the following pages.
Potential Nasdaq SmallCap Stock Market Delisting
On November 9, 1999, NetLojix filed notice with The Nasdaq Stock
Market Inc. of its intent to appeal a decision made by the Nasdaq staff to
delist NetLojix's common stock from The Nasdaq SmallCap Stock Market. A
hearing has been set for December 9, 1999 before a Nasdaq Listing
Qualifications Panel. The staff had determined that NetLojix no longer met
the minimum requirements for continued listing on The Nasdaq
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SmallCap Market. Specifically the staff concluded that NetLojix no longer
met the minimum requirements for net tangible assets and market
capitalization.
Management intends to make a presentation to the Listing
Qualifications Panel regarding the successful completion of its recent
reorganization, the pending sale of Matrix Telecom, recent renewed interest
by prospective investors in NetLojix's business, the financial performance
of its continuing operations, and the possibility of raising additional
capital under its equity line agreement. There can be no assurance that
NetLojix will retain its Nasdaq SmallCap Market listing in the short term
or re-qualify for listing if it is delisted.
If the panel determines that NetLojix's stock is no longer
eligible for trading on The Nasdaq SmallCap Stock Market, NetLojix's stock
will commence trading on the Electronic Bulletin Board under the same
trading symbol.
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NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PR0 FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Assets Historical Adjustments Balance Sheets
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalent $ 355,216 355,216
Accounts receivable, net 1,835,835 (203,900) (a) 1,631,935
Due from affiliates 733,789 (313,095) (a) 420,694
Federal and state income tax receivable 246,047 246,047
Other current assets 467,096 488,872 (a) 955,968
------------- ---------- ------------
Total current assets 3,637,983 (28,123) 3,609,860
Property and equipment, net 888,090 888,090
Goodwill, net 4,133,267 4,133,267
Other assets, net 1,014.052 1,014,052
------------- ------------ ------------
Total assets $ 9,673,392 (28,123) 9,645.269
============= ============= ============
Liabilities and Stockholder's Equity
CURRENT LIABILITIES
Accounts payable and other accrued expenses $ 1,465,220 436,465 (a) 1,901,685
Accrued network services costs 2,005,137 (1,799,396) (a) 205,741
Sales and excise tax payable 198,126 198,126
Due to affiliates -
Liabilities on discontinued operations, net 4,701,562 (4,701,562) (a) -
Other current liabilities 1, 348,720 1,348,720
------------- ------------- ------------
Total current liabilities 9,718,765 (6,064,493) 3,654,272
Long-term borrowings 98,354 98,354
Common stock subject to put option 112,577 112,577
Long-term obligations under capital leases - -
------------- -------------- ------------
Total liabilities 9,929,696 (6,064,493) 3,865,203
------------- -------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 750,000 shares, $0.01 par value - -
Series A convertible preferred stock, authorized 250,000 shares,
$0.01 par value, cumulative as to 8% dividends, 147,700 shares
issued and outstanding. (Liquidation preference of $704,032
at September 30, 1999, including dividends in arrears.) 1,477 1,477
Series B convertible preferred stock, authorized 1,500 shares,
$0.01 par value, annual dividends of $30 per share, 980 shares
issued and outstanding. (Liquidation preference of $980,000 at
September 30, 1999) 10 10
Common stock, authorized 20,000,000 shares, $0.01 par value,
issued 10,867,440 and 10,409,473 shares at September 30, 1999
and December 31, 1998, respectively. 107,924 107,924
Additional paid in capital 21,631,122 256,132 (a) 21,887,254
Accumulated deficit (21,996,726) 5,780,238 (a) (16,216,488)
Treasury stock, $0.01 par value, 11,075 shares at
September 30, 1999 and none at December 31, 1998. (111) (111)
------------- ------------- ------------
Total stockholders' equity (256,304) 6,036,370 5,780,066
Commitments and contingencies
------------- ------------- ------------
Total liabilities and stockholders' equity $ 9,673,392 (28,123) 9,645,269
============= ============= ============
- ------------------
(a) To record a gain on disposition of Matrix.
</TABLE>
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NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
----------------- ------------------
Historical Historical
As Restated Adjustments Proforma As Restated Adjustments Proforma
----------- ----------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 9,887,729 9,887,729 12,161,481 12,161,481
COST OF REVENUES 5,668,958 5,668,958 6,704,199 6,704,199
---------------- ------------ ----------- -------------- ------------ -----------
GROSS MARGIN 4,218,771 - 4,218,771 5,457,282 - 5,457,282
Operating expenses
Selling, general and
administrative 6,701,289 6,701,28 8,310,933 8,310,933
Depreciation and amortization 611,911 611,911 766,425 766,425
Total operating expenses ---------------- ------------- ----------- -------------- ------------- -----------
7,313,200 - 7,313,200 9,077,358 - 9,077,358
---------------- ------------- ----------- -------------- ------------- ------------
OPERATING LOSS 3,094,429) - (3,094,429) (3,620,076) - (3,620,076)
Interest expense (31,178) (31,178) (97,600) - (97,600)
Other income (expense), net 92,337 92,337 9,621 9,621
Loss before income taxes and ----------------- -------------- ----------- -------------- -------------- -------------
discontinued operations
(3,033,270) - (3,033,270) (3,708,055) - (3,708,055)
Income tax benefit - - - - - -
Net loss before discontinued ---------------- -------------- ----------- -------------- ------------- -------------
(3,033,270) -- (3,033,270) (3,708,055) - (3,708,055)
Discontinued operations
Loss on operations (2,769,048) 2,769,048(a) - (3,009,460) 3,009,460(a) -
--------------- ------------- ----------- --------------- ---------------- ------------
NET LOSS $ (5,802,318) 2,769,048 (3,033,270) (6,717,515) 3,009,460 (3,708,055)
================ ============= =========== =============== ================ ===========
</TABLE>
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations:
The Unaudited Condensed Consolidated statements of operations have been
restated to give effect to the decision by the Company to exit the
residential long distance line of business. Consequently, all operations of
the Company's residential long distance businesses are reflected as
discontinued operations.
The Company expects to recognize a gain of approximately $5.8 million upon
closing of the sale which is not included in the pro forma statements of
operations.
(a) To reverse equity in net loss of discontinued operations associated
with Matrix.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in connection
with the unaudited condensed consolidated financial statements for the
three month and nine month periods ended September 30, 1999 and 1998 of the
Registrant and related notes included elsewhere in this supplement and the
consolidated financial statements and related management discussion and
analysis included in the attached prospectus.
Overview
NetLojix is a provider of Enterprise Network Solutions integrating
data, voice and Internet services. NetLojix sells and markets advanced
network services and information technology support services through
internal direct sales professionals and independent value added resellers
to business customers.
On August 31, 1999, NetLojix entered into a stock purchase
agreement to sell all of the stock of Matrix Telecom, Inc. ("Matrix), a
wholly-owned subsidiary of NetLojix to Matrix Acquisition Holdings Corp.
("Buyer"), a wholly-owned subsidiary of Platinum Equity Holdings, LLC. The
closing of the transaction is subject to certain regulatory and other
approvals.
Matrix Telecom, Inc. is engaged in the residential long distance
telephone business and represents all of NetLojix's business in this
segment. Consequently, the operations of Matrix Telecom, Inc. have been
reflected as a discontinued operation in NetLojix's condensed consolidated
financial statements as of September 30, 1999 and December 31, 1998 and for
the three month and nine month periods ended September 30, 1999 and 1998.
Concurrent with the execution of the Stock Purchase Agreement,
NetLojix, Matrix, and Buyer signed a Management Services Agreement relating
to the operations of Matrix. Under the Management Services Agreement,
NetLojix has appointed the Buyer as the sole and exclusive provider of all
services necessary or appropriate for the supervision and management of the
operations of Matrix.
As compensation for rendering services under the Management
Services Agreement, the Buyer has the right to retain all net profits of
Matrix during the term of the agreement. Matrix (and not NetLojix) bears
all costs and expenses related to such services. The term of the agreement
will continue until the earlier of the closing of the Sale or the
termination of the Stock Purchase Agreement
On September 25, 1998, NetLojix acquired all of the issued and
outstanding capital stock of Digital Media International, Inc. ("DMI"), a
privately-held corporation based in Santa Barbara, California, which
develops software for interactive, entertainment and other applications.
On November 19, 1998, NetLojix acquired all of the issued and
outstanding capital stock of Remote Lojix/PCSI, Inc. ("RLI"), a
privately-held corporation based in New York, which is a provider of system
integration and local area network ("LAN") services to corporate customers.
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<PAGE>
Results of Operations
Three Months Ended September 30, 1999 Compared With Three Months Ended
September 30, 1998
Revenues
- --------
Revenues from continuing operations for the three months ended
September 30, 1999 were $4.3 million, an increase of 96.3% or $2.1 million
from $2.2 million for the three months ended September 30, 1998.
Communications services revenues, increased $0.6 million to $2.5
million for the three months ended September 30, 1999 from $1.9 million for
the three months ended September 30, 1998. Within the communications
services segment, voice and data services accounted for $0.5 million of the
increase with the balance of the increase attributable to internet
services. Data and voice services increased 41.7% from the comparable
quarter in 1998 as NetLojix significantly expanded its sales force during
1999. Billable revenue minutes increased from 11.6 million to 20.7 million.
IT Support Services revenues were $1.3 million for the three
months ended September 30, 1999. NetLojix acquired the IT Support business
in its acquisition of Remote Lojix/PCSI in November, 1998, therefore there
were no IT support revenues for the three and nine month periods ended
September 30, 1998. IT support services include systems integration,
service contract, retainer contracts and help desk outsourcing. NetLojix
has recently integrated the IT Support services it acquired and is now
providing these services as part of a total enterprise wide solution in
each of its operating regions nationally.
eBusiness revenues increased to $0.6 million for the three months
ended September 30, 1999 from $0.3 million for the comparable quarter in
1998. eBusiness includes applications development and data warehousing and
management services. During the three months ended September 30, 1998
NetLojix recorded a $0.1 million management fee relating to the acquisition
of DMI. Excluding the one time management fee, revenues for the eBusiness
segment grew by $0.4 million or 271.8%. The increase is primarily
attributable to applications services that were acquired in the DMI
acquisition.
Gross Margin
- ------------
Gross margin on continuing operations as a percentage of revenues
increased to 47.7% for the three months ended September 30, 1999 from 46.5%
for the three months ended September 30, 1998. Gross margin from continuing
operations increased $1.0 million to $2.0 million for the three months
ended September 30, 1999 from $1.0 million for the three months ended
September 30, 1998.
Communications Services gross margin as a percent of revenue
increased to 51.5% for the three months ended September 30, 1999 from 40.4%
for the three months ended September 30, 1998. Within the Communications
services segment, data and voice gross margins averaged 35.1% vs. 10.9% in
the comparable quarter in 1998. During the three months ended September 30,
1999, NetLojix received a credit from its major vendor of $0.2 million
relating to prior periods network service costs. Excluding the effect of
the one time credit, NetLojix's gross margins for communications services
would have been 42.4% and gross margins for data and voice services would
have been 20.6%. Effective February 15, 1999, NetLojix negotiated
significantly lower rates with NetLojix's major underlying carrier for
dedicated traffic. The improvement in gross margins was partially offset by
the re-negotiation of a major customer contract which resulted in lower
retail business rates. The lower rates were effective with August traffic
and extend through
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<PAGE>
October 2000. As a result of the re-negotiated contract with the major
customer and other competitive pressures, NetLojix anticipates that gross
margins for data and voice services will be lower in the fourth quarter
than the current quarter.
Gross margins for Internet services continues to be strong
averaging 83.3% during the three months ended September 30, 1999 vs. 83.9%
for the comparable 1998 quarter.
IT Support services gross margins averaged 34.6% during the
quarter ended September 30, 1999.
eBusiness gross margins were 61.2% or $0.3 million during 1999 vs.
90.2% or $0.2 million for the comparable quarter in 1998. The decrease in
gross margin is due to the $0.1 million management fee relating to the
acquisition of DMI recorded in 1998 and the increase in applications
development projects within this segment. Gross margins for applications
development projects are negotiated on a project by project basis and tend
to fluctuate for each project depending on the total dollar amount,
deadline commitments and specialized expertise that may be required for a
particular project.
Selling, General, and Administrative Costs
- ------------------------------------------
Selling, general, and administrative costs from continuing
operations increased $1.3 million to $2.9 million for the three months
ended September 30, 1999 from $1.6 million for the three months ended
September 30, 1998. As a percentage of revenues, selling, general and
administrative costs decreased to 66.5% for the three months ended
September 30, 1999 from 72.7% for the three months ended September 30,
1998.
$0.9 million of the increase in selling, general and
administrative expenses is attributable to the acquisition of Remote
Lojix/PCSI in the fourth quarter of 1998. Approximately $0.1 million of the
increase is due to increased fees, primarily due to the class action
lawsuit. The remaining increase in cost was associated with expanded sales
force and related expenses including general office expense, rent,
utilities and travel expenditures.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased $106,000 to $249,000 for
the three months ended September 30, 1999 from $143,000 for the three
months ended September 30, 1998. The increase was primarily due to
increased goodwill amortization related to the purchase of RLI during the
fourth quarter of 1998.
Discontinued Operations
- ----------------------
Loss from discontinued operations was $0.5 million for the three
months ended September 30, 1999 vs. $0.3 million for the comparable quarter
in 1998. The 1998 period reflects three months of activity. In accordance
with APB 30, since September 1, 1999, the measurement date, all losses of
Matrix have been deferred and will be recognized upon completion of the
sale as a reduction of the gain.
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<PAGE>
Nine Months Ended September 30, 1999 Compared With Nine Months Ended
September 30, 1998
Revenues
- --------
Revenues from continuing operations for the nine months ended
September 30, 1999 were $12.2 million, an increase of 88.5% or $5.7 million
from $6.5 million for the nine months ended September 30, 1998.
Communications services revenues increased 18.9% or $1.1 million
to $7.0 million for the nine months ended September 30, 1999 from $5.9
million for the nine months ended September 30, 1998. Data and voice
revenues contributed $0.9 million of the increase due primarily to
NetLojix's expanded sales force. During the fourth quarter of 1999,
NetLojix is expected to increase the sales force by as much as 25% as the
future focus of NetLojix continues to move toward integrating NetLojix's
communications, IT support and eBusiness services. Billable revenue minutes
increased from 36.9 million to 53.8 million minutes reflecting NetLojix's
increasing customer base.
Revenues from IT Support services were $3.9 million for the nine
month period ended September 30, 1999. NetLojix acquired the IT Support
business in its acquisition of Remote Lojix/PCSI in November 1998,
therefore there were no IT support revenues for the comparable period in
1998.
Revenues in the eBusiness segment more than doubled to $1.3
million for the nine month period ended September 30, 1999 from $0.6
million in the comparable period in 1998. The increase is primarily
attributable to the DMI acquisition.
Gross Margin
- ------------
Gross margin from continuing operations as a percentage of
revenues increased to 44.9% for the nine months ended September 30, 1999
from 43.3% for the nine months ended September 30, 1998. Gross margin
increased $2.7 million to $5.5 million for the nine months ended September
30, 1999 from $2.8 million for the nine months ended September 30, 1998.
Communication services gross margin as a percent of revenues
increased to 47.4% for the nine months ended September 30, 1999 from 39.4%
for the nine months ended September 30, 1998. During the third quarter of
1999, NetLojix received a credit from its major vendor of $0.2 million
relating to prior periods network service costs. Excluding the effect of
the one time credit, NetLojix's gross margin for data and voice services
would have been 44.2%. Effective February 15, 1999, NetLojix negotiated
significantly lower rates with NetLojix's major underlying carrier for
dedicated traffic. The improvement in gross margins was partially offset by
the re-negotiation of a major customer contract which resulted in lower
retail business rates. The lower rates were effective with August traffic
and extend through October 2000. As a result of the re-negotiated contract
with the major customer and other competitive pressures, NetLojix
anticipates that gross margins for data and voice services in the future
will be lower than the current period.
IT Support services gross margins averaged 35.2% or $1.4 million
during the nine month period ended September 30, 1999.
eBusiness gross margins were 60.3% or $0.8 million during 1999 vs.
84.5% or $0.5 million for the comparable period in 1998. The decrease in
gross margin is due to the increase in applications development projects
within this segment. Gross margins for applications development projects
are negotiated on a project.
S-8
<PAGE>
by project basis and tend to fluctuate for each project depending on the
total dollar amount, deadline commitments and specialized expertise that
may be required for a particular project.
Selling, General, and Administrative Costs
- ------------------------------------------
Selling, general, and administrative costs from continuing
operations increased $3.7 million to $8.3 million for the nine months ended
September 30, 1999 from $4.6 million for the nine months ended September
30, 1998. As a percentage of revenues, selling, general and administrative
costs decreased to 68.3% for the nine months ended September 30, 1999 from
70.5% for the nine months ended September 30, 1998.
Approximately $2.9 million or 77.9% of the overall increase in
selling, general and administrative expenses is attributable to the
acquisition of Remote Lojix/PCSI in the fourth quarter of 1998.
Approximately $0.3 million of the increase is due to increased legal fees,
primarily due to the class action lawsuit. The remaining increase in cost
was associated with expanded sales force and related expenses including
general office expense, rent, utilities and travel expenditures.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased $332,000 to $766,000 for
the nine months ended September 30, 1999 from $434,000 for the nine months
ended September 30, 1998. The increase was primarily due to increased
goodwill amortization related to the purchase of RLI during the fourth
quarter of 1998.
Discontinued operations
- -----------------------
Loss from discontinued operations increased 57.2% or $1.1 million
to $3.0 million for the nine month period ended September 30, 1999 from
$1.9 million in the comparable period in 1998. The residential long
distance business continued to decline as competition forced long distance
rates down. Marketing programs, including direct mail and telemarketing
campaigns were stopped as they were determined not to be cost effective.
Customer accounts continued to decline as residential long distance
customers frequently change from long distance carrier to long distance
carrier. In accordance with APB 30, since September 1, 1999, the
measurement date, all losses of Matrix have been deferred and will be
recognized upon completion of the sale as a reduction of the gain.
Liquidity and Capital Resources
For the three months and nine months ended September 30, 1999,
NetLojix reported net losses of $1,530,784 and $6,717,515 respectively.
Discontinued operations for the three months and nine months ended
September 30, 1999 resulted in net losses of $465,288 and $3,009,460
respectively, while net losses from continuing operations for the same
periods were $1,065,496 and 3,708,055. In addition, as of September 30,
1999, NetLojix had a working capital deficit of $6,080,782, including
$4,701,562 of net liabilities for discontinued operations. For the nine
months ended September 30, 1999, cash used in continuing operations totaled
$2,056,538 and cash provided by discontinued operations totaled $691,942.
On August 31,1999, NetLojix entered into the stock purchase
agreement pursuant to which NetLojix will sell 100% of the stock of Matrix
to the Buyer. The consideration to NetLojix is to consist of a combination
of credits against long distance service, elimination of indebtedness and
certain contingent payments. The closing of the transaction is subject to
certain regulatory and other approvals.
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As of June 30, 1999, NetLojix was in violation of one provision of
the Loan and Security Agreement with Coast Business Credit that stipulates
that NetLojix must maintain a net worth equal to or greater than $2
million. Coast Business Credit has waived its right of acceleration of the
obligation as it relates to NetLojix not meeting the net worth covenant
subject to the closing of the Sale, but otherwise retains its right of
acceleration if the closing does not occur. The Buyer has indemnified
NetLojix from any claims or liabilities arising out of the credit facility
with Coast Business Credit in an amount not to exceed $2,750,000 plus any
amount drawn on such facility by Matrix after August 31, 1999. As of
September 30, 1999, borrowing outstanding under the credit facility for
continuing operations amounted to $98,354 with approximately $495,000
available for future borrowings. As of September 30, 1999, borrowings
outstanding for discontinued operations amounted to $822,107. Borrowings
under the credit facility are secured by substantially all of the assets of
NetLojix. The credit facility expires on October 31, 2000. NetLojix is
currently negotiation a revision to the credit facility to be effective
after closing of the sale of Matrix.
As of April 23, 1999, NetLojix entered into an equity line
agreement which provides for investors to purchase up to $13,500,000 of
NetLojix's common stock, subject to NetLojix filing and maintaining an
effective registration statement, trading price and volume minimums, and
limits on the amount and frequency on sales of common stock under the line
(see Note 3). On September 13,1999, NetLojix put 104,521 shares of common
stock to Cambois Finance for $250,000 pursuant to the equity line
agreement. NetLojix cannot sell stock under the agreement if NetLojix's
stock price is below $2.25 per share unless the investor agrees to waive
the requirement. NetLojix's stock price closed at $1-27/32 on November 9,
1999. However, NetLojix is in discussions with Cambois Finance to continue
to allow NetLojix to utilize the equity line agreement. If NetLojix is able
to continue to utilize the Private Equity Line of Credit, NetLojix expects
that it will continue to put stock to Cambois Finance from time to time to
meet working capital needs.
NetLojix believes with the completion the sale of its residential
long distance business, NetLojix will need to renegotiate its credit
facility and raise additional capital in order to meet its working capital
requirements. If NetLojix does not complete the sale of its residential
long distance business or if it is unable to obtain other financing in a
timely manner and on acceptable terms, it may be in default under its
agreement with Coast Business Credit. In that event, management has
developed and intends to implement a plan that would allow NetLojix to
continue to operate through 2000. This plan would include reducing
NetLojix's workforce, eliminating marketing expenditures, reducing
professional services, reducing or eliminating other discretionary
expenditures.
The primary sources of operating cash flow for NetLojix are
revenues derived from the sale of communication services and information
technology services to businesses, its secured credit facility and the
equity line of credit agreement. The primary uses of cash are payments to
underlying network vendors for provisioning telecommunications facilities.
Net cash used in continuing operating activities is $2.1 million for the
nine months ended September 30, 1999, compared to $2.3 million for the
comparable period in 1998.
Net cash used in investing activities was $0.7 million for the
nine months ended September 30, 1999, and net cash provided by investing
activities was $1.0 million for the nine months ended September 30, 1998.
NetLojix loaned $2.0 million to an affiliated company during 1997. Of such
amount, $1.7 million was repaid during the first nine months of 1998.
Net cash provided by financing activities was $3.4 million for the
nine months ended September 30, 1999 and net cash provided by financing
activities was $0.4 million for the nine months ended September 30, 1998.
On October 2, 1998, NetLojix entered into a secured credit facility with
Coast Business Credit. This credit facility consists of a line of credit of
up to $7.5 million. Under the line of credit, NetLojix may borrow
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<PAGE>
up to 75% of eligible receivables (as defined). In addition, the line of
credit may be utilized in connection with certain acquisitions and
equipment purchases as well as to provide a facility for issuing letters of
credit. Borrowings under the line of credit bear interest, payable monthly,
based upon the prime rate of Bank of America NT & SA plus 2% (10.25% at
September 30, 1999). As of September 30, 1999, borrowing outstanding under
the credit facility for continuing operations amounted to $98,354 with
approximately $495,000 available for future borrowings. As of September 30,
1999, borrowings outstanding for discontinued operations amounted to
$822,107. Borrowings under the credit facility are secured by substantially
all of the assets of NetLojix. The credit facility expires on October 31,
2000. NetLojix is currently negotiating a revision to the credit facility
to be effective after closing of the sale of Matrix.
Year 2000
NetLojix recognizes the importance of Year 2000 Date ("Y2K")
Compliance to our customers, as well as our global community, and it is a
top corporate priority. In order to assist our customers in their
preparations related to Y2K Compliance for January 1, 2000 and beyond, the
following is an overview of NetLojix's Y2K efforts and our progress to
date.
Y2K Compliance is the inability of computer systems and certain
other equipment to properly recognize and process data that uses two digits
rather than four to designate particular years. In 1998, NetLojix initiated
a Y2K Project Plan ("the Plan") and Internal Project Team ("the Team") to
assess whether our network systems that process date sensitive information
will perform satisfactorily leading up to and beyond January 1, 2000. The
goal of the Plan and the Team is to correct, prior to January 1, 2000, any
Year 2000-related problem with our critical systems, the failure of which
could have a material or adverse effect on NetLojix's operations and/or our
ability to provide service to our existing and potential customers.
NetLojix's senior management team has also given the Team its full support
and backing. NetLojix's primary internal Y2K exposure is in the rating and
billing systems employed by Matrix Telecom, Inc. On August 31, 1999
NetLojix entered into a Stock Sale agreement, to dispose of NetLojix's
wholly-owned subsidiary, Matrix Telecom, Inc. The buyer has agreed to
assume management of all assets and liabilities of Matrix, including the
rating and billing system.
In September 1999 NetLojix entered into an agreement with a third
party vendor to provide rating and billing services for NetLojix customers.
The vendor has provided assurances that its rating and billing systems are
Y2K compliant
With respect to the remaining computer systems and external
exposure, NetLojix developed a plan to identify and remediate Y2K exposure.
The Plan includes steps to (1) identify each critical systems element that
requires data code remediation, (2) establish a plan to remediate such
systems, (3) implement all required remediations, (4) test the remediated
systems, and (5) develop a contingency plans.
The Y2K challenge is not only a technical issue of computer
hardware and software correctly storing and manipulating dates but also a
business issue affecting external customers and suppliers. NetLojix
receives critical services from providers of utilities and other services.
NetLojix is also critically reliant upon the systems of other
telecommunications providers on which NetLojix depends to deliver services
and invoices to its customers. NetLojix cannot control nor be responsible
for compliance by our vendors and suppliers; however, we are encouraging
their efforts to become compliant and are working to receive the
appropriate warranties and assurances that those third parties are, or will
be, compliant.
S-11
<PAGE>
The identification and planning phases of the Plan are materially
complete as they relate to Company-owned systems and to third-party vendors
and other telecommunications carriers.
With respect to Company-owned systems, the process of remediation
of Y2K issues, identified in the identification and planning phases, are
completed.
Based on work completed under the Plan to date, NetLojix has
contacted all third party vendors and other telecommunications carriers.
Thus far, the majority of those suppliers who have responded have indicated
that their systems and service delivery mechanisms are Y2K compliant or
will be made so through currently available modifications before the end of
the year. NetLojix plans to continue monitoring all of our third-party
remediation efforts and to develop an ongoing contingency plan for the
delivery of such services as necessary.
Contingency planning to maintain and restore service in the event
of natural disasters, power failures and systems-related problems is a
routine part of NetLojix's operations. NetLojix believes that such
contingency plans will assist NetLojix in responding to the failure by
outside service providers to successfully address Y2K issues. In addition,
NetLojix is currently identifying and considering various Y2K-specific
contingency plans, including identification of alternate vendors and
service providers and manual alternatives to system operations. These Y2K
specific contingency plans are expected to be materially complete in the
fourth quarter of 1999.
Because the impact of Y2K issues on NetLojix and its customers is
materially dependent on the mitigation efforts of parties outside
NetLojix's control, NetLojix cannot access with certainty the magnitude of
any such potential adverse impact. However, based upon risk assessment work
conducted thus far, NetLojix believes that it will be able to continue to
provide service to our customers at current service levels on January 1,
2000 and beyond.
Quantitative and Qualitative Disclosures about Market Risk
NetLojix is not exposed to material future earnings or cash flow
fluctuations, from changes in interest rates on its long-term debt at
September 30, 1999. A hypothetical increase of 100 basis points in interest
rate (ten percent of NetLojix's overall borrowing rate) would not result in
a material fluctuation in future earnings or cash flow. NetLojix had not
entered into any derivative financial instruments to manage interest rate
risk or for speculative purposes and is currently not evaluating the future
use of such financial instruments.
S-12
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
(Unaudited
------------ ------------
<S>
CURRENT ASSETS <C> <C>
Cash and cash equivalents $ 335,216 $ 222,059
Accounts receivable, net 1,835,835 1,295,459
Due from affiliates 733,789 773,667
Federal and state income tax receivable 246,047 1,325,000
Other current assets 467,096 340,078
-------------- ---------------
Total current assets 3,637,983 3,956,263
Property and equipment, net 888,090 973,791
Goodwill, net 4,133,267 4,463,747
Other assets, net 1,014,042 1,260,341
-------------- ---------------
Total assets $ 9,673,392 $ 10,654,142
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other accrued expenses $ 1,465,220 $ 1,559,034
Accrued network services costs 2,005,137 1,261,016
Sales and excise tax payable 198,126 473,072
Net current liabilities of discontinued operations 4,701,562 1,218,288
Other current liabilities 1,348,720 1,458,231
-------------- ---------------
Total current liabilities 9,718,765 5,969,641
Long-term borrowings 98,354 --
Common stock subject to put option 112,577 168,867
Long-term obligations under capital leases -- 5,381
-------------- ---------------
Total liabilities 9,929,696 6,143,889
-------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 750,000 shares, $0.01 par value -- --
Series A convertible preferred stock, authorized 250,000 shares, $0.01
par value, cumulative as to 8% dividends, 147,700 shares issues
and outstanding. (Liquidation preference $704,032 at September
30, 1999 including dividends in arrears.) 1,477 1,477
Series B convertible preferred stock, authorized 1,500 shares, $0.01
par value, annual dividends of $30 per share, 980 shares issued
and outstanding. (Liquidation preference of $980,000 at September
30. 1999.) 10 --
Common stock, authorized 20,000,000 shares, $0.01 par value, issued
10,867,440 and 10,409,473 shares at September 30, 1999 and December
31, 1998, respectively. 107,924 102,969
Additional paid in capital 21,631,122 19,630,404
Accumulated deficit (21,996,726) (15,224,597)
Treasury stock, $0.01 par value, 11,075 shares at September 30, 1999
and none at December 31, 1998. (111) --
--------------- -------------
Total stockholders' equity (256,304) 4,510,253
Commitments and contingencies ----------------
Total liabilities and stockholders' equity $ 9,673,392 $ 10,654,142
================ ===============
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
S-13
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 4,292,072 $ 2,186,542 $12,161,481 $ 6,452,826
COST OF REVENUES 2,244,104 1,170,688 6,704,199 3,657,854
------------- ------------ ------------ ----------
GROSS MARGIN 2,047,968 1,015,854 5,457,282 2,794,972
Operating expenses
Selling, general and administrative 2,854,211 1,589,279 8,310,933 4,551,433
Depreciation and amortization 249,252 143,256 766,425 433,902
------------- ------------ ------------ -----------
Total operating expenses 3,103,463 1,732,535 9,077,358 4,985,335
------------- ------------ ------------ -----------
OPERATING LOSS (1,055,495) (716,681) (3,620,076) (2,190,363)
Interest expense (11,318) (5,169) (97,600) (19,769)
Other income (expense), net 1,317 57 9,621 4,481
------------- ------------ ------------ -----------
Loss from continuing operations
before income taxes (1,065,496) (721,793) (3,708,055) (2,205,651)
Income taxes -- -- -- --
------------- ------------ ------------ -----------
Loss from continuing operations (1,065,496) (721,793) (3,708,055) (2,205,651)
Loss from operations of discontinued
residential long distance business (net
of income taxes) (465,288) (330,740) (3,009,460) (1,914,867)
------------- ------------ ------------- -----------
NET LOSS $(1,530,784) $(1,052,533) $(6,717,515) $(4,120,518)
------------- ------------ ------------- -----------
Loss from continuing operations
per share--basic and diluted $(0.11) $(0.08) $(0.38) $(0.24)
Loss from discontinued operations
per share--basic and diluted $(0.04) $(0.03) $(0.28) $(0.20)
------- ------- ------- -------
Net loss per share--basic and diluted $(0.15) $(0.11) $(0.66) $(0.44)
======= ======= ======= =========
Weighted average number of
common shares--basic and diluted 10,738,993 9,526,410 10,588,843 9,518,132
=========== =========== =========== ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
S-14
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
1999 1998
----- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (3,708,055) $ (2,205,651)
Adjustments to reconcile net loss from continuing
operations to cash provided (used) by continuing
operating activities:
Depreciation and amortization 766,425 433,902
Loss on disposition of assets 14,562 --
Provision for bad debts 194,371 46,208
Stock compensation earned 111,657 399,649
Changes in certain operating assets and liabilities:
Accounts receivable (734,747) (37,163)
Due from affiliates 39,878 (148,044)
Federal and state income tax receivable 1,078,953 (970,648)
Other current assets (127,018) 390,063
Accounts payable and accrued liabilities 307,436 (247,376)
Due to affiliate -- 1,138
----------- -----------
Cash used by continuing operating activities (2,056,538) (2,337,922)
Cash provided (used) by discontinued operating
activities 691,942 (527,666)
------------ ------------
Cash used by operating activities (1,364,596) (2,865,588)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (201,157) (235,910)
Additions to property and equipment - discontinued
operations (461,057) (53,504)
Loan to company to be acquired -- (500,000)
Payments received on loans to affiliates - discontinued
operations -- 1,726,601
Cash received in acquisition -- 25,917
Proceeds from sale of property and equipment 1,050 --
Proceeds from sale of property and equipment -
discontinued operations 6,600 450
------------ ------------
Cash provided (used) by investing activities (654,564) 963,554
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases (46,967) (43,926)
S-15
<PAGE>
Principal payments on capital leases - discontinued
operations (20,886) --
Issuance of common stock for exercise of options 327,164 93,876
Issuance of common stock on equity line of credit 92,499 --
Issuance of Series B preferred stock 1,407,325 --
Preferred stock dividend payments (54,614) --
Borrowing on line of credit 752,430 --
Amounts paid on line of credit (654,076) --
Borrowing on short term note - discontinued operations 2,000,000 --
Borrowing on line of credit - discontinued operations 22,689,149 --
Amounts paid on line of credit - discontinued operations (22,979,932) --
Purchase from third party of note receivable for stock
purchase -- (435,000)
Purchase of common stock for treasury (77,400) --
Cash provided (used) by financing activities 3,434,692 (385,050)
------------- -----------
Net decrease in cash and cash equivalents 1,415,532 (2,287,084)
Cash and cash equivalents at beginning of period for
continuing and discontinued operations 911,179 4,807,441
-------------- -----------
Cash and cash equivalents at end of period for continuing
and discontinued operations (see note 5) $ 2,326,711 $ 2,520,357
============== ===========
Cash paid (received) during the period:
Interest - continuing operations 61,211 19,595
============== ===========
Interest - discontinued operations $ 312,855 $ 15,946
============== ===========
Income taxes - continuing operations $ 6,344 $ 8,562
============== ===========
Income taxes - discontinued operations $ (1,069,438) (512,242)
============== ===========
See accompanying Notes to Condensed Financial Statements
</TABLE>
S-16
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999 and 1998
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of NetLojix
Communications, Inc. and Subsidiaries, formerly AvTel Communications, Inc.
(the "Company") as of September 30, 1999 and for the three month and nine
month periods ended September 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting. Accordingly, they do not include all of the
disclosures required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Forms 10-K and 10-K/A for the year ended December 31, 1998. All
significant intercompany balances and transactions have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of the interim financial information have been included. The
results of operations for any interim period are not necessarily indicative
of the results of operations for the entire year.
On August 31, 1999 the Company entered into a definitive agreement to
sell the Company's wholly owned subsidiary, Matrix Telecom, Inc. Matrix
Telecom represented all of the Company's residential long distance
business. As a result of the Company's decision to exit the residential
long distance business, the Company's condensed consolidated financial
statements as of September 30, 1999 and December 31, 1998 and for the three
month and nine month periods ended September 30, 1999 and 1998 reflect the
Company's residential long distance business as a discontinued operation.
(See note 5)
The Company's condensed consolidated financial statements for the three
month and nine month periods ended September 30, 1998 have been restated to
give effect to the recognition of an income tax benefit from discontinued
operations of $156,006 and $873,458, respectively. As a result of this
restatement, net loss for the three month and nine month periods ended
September 30, 1998 have been decreased by $156,006 ($0.02 per common
share-basic and diluted), and $873,458 ($0.09 per common share-basic and
diluted), respectively from amounts previously reported.
On September 15, 1999, the Company changed its name to NetLojix
Communications, Inc. from AvTel Communications, Inc. This name change was
effected by the short-form merger of a wholly-owned subsidiary with and
into the Company.
(2) EARNINGS PER COMMON SHARE
Earnings per common share for the three and nine month periods ended
September 30, 1999 are as follows:
S-17
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Loss on continuing ---------- --------- ------------ -----------
operations per share -
<S> <C> <C> <C> <C>
Numerator:
Net loss......................... $ (1,065,496) $ (721,793) $ (3,708,055) $ (2,205,651)
Preferred dividends.............. 46,028 11,816 292,041 35,448
------------ ------------ ------------- --------------
Loss applicable to
common shareholders.............. $ (1,111,524) $ (733,609) $ (4,000,096) $ (2,241,099)
============= ============ ============= ==============
Denominator:
Weighted average number
of common shares used in
basic and diluted loss per
common share.................... 10,738,993 9,526,410 10,588,843 9,518,132
============= ========== ========== ==========
Basic and diluted loss
per common share................. $(0.11) $(0.08) $(0.38) $(0.24)
======= ========= ======= =======
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Loss from discontinued -------- ------- ----------- ----------
operations per share -
Numerator:
Net loss......................... $ (465,288) $ (330,740) $ (3,009,460) $ (1,914,867)
=========== =========== ============= =============
Denominator:
Weighted average number
of common shares used in
basic and diluted loss per
common share.................... 10,738,993 9,526,410 10,588,843 9,518,132
========== ========= ========== =========
Basic and diluted loss
per common share................. $(0.04) $(0.03) $(0.28) $(0.20)
======= ====== ========== =======
S-18
<PAGE>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Net loss per share - -------- -------
Numerator:
Net loss........................... $ (1,530,784) $ (1,052,533) $ (6,717,515) $ (4,120,518)
Preferred dividends................ 46,028 11,816 292,041 35,448
--------------- ------------- -------------- --------------
Loss applicable to
common shareholders................ $ (1,576,812) $ (1,064,349) $ (7,009,556) $ (4,155,966)
============= ============= ============= =============
Denominator:
Weighted average number
of common shares used in
basic and diluted loss per
common share...................... 10,738,993 9,526,410 10,588,843 9,518,132
========== ========= ========== =========
Basic and diluted loss
per common share................... $(0.15) $(0.11) $(0.66) $(0.44)
======= ======= ======= =======
</TABLE>
As of September 30, 1999, there are 2,264,002 potential common shares
excluded from the diluted per common share calculation because the effect
is determined to be antidilutive.
(3) STOCKHOLDERS' EQUITY
COMMON STOCK SUBJECT TO PUT OPTION
In 1996, approximately 482,000 shares of common stock were issued to
officers of Matrix Telecom, Inc. at $1.50 per share. Such shares can be put
or called at a price of $1.50 per share plus the earnings per share or
minus the losses per share of the Company from the period July 1, 1996 to
the end of the month prior to the date of notification of termination of
employment by the employee or the Company. There were 75,051 and 112,578
shares outstanding subject to put options as of September 30, 1999 and
December 31, 1998, respectively.
ISSUANCE AND CONVERSION OF PREFERRED STOCK
On April 13, 1999, the Company sold 1,500 shares of its newly-designated
Series B Convertible Preferred Stock (the "Series B Stock") to AMRO
International, S.A., Austinvest Anstalt Balzers and Esquire Trade & Finance
Inc., (the "Series B Investors") for $1,500,000. The Series B Stock has a
liquidation preference of $1,000 per share. The Series B Stock is entitled
to an annual dividend of $30 per share, payable in cash or Common Stock, at
the Company's option. The annual dividend will increase to $60 per share if
the Company ever ceases to be listed on The NASDAQ Stock Market or any
national securities exchange. The Series B Stock is convertible into Common
Stock at the option of the Series B Investors at any time. The number of
shares of Common Stock to be received by a Series B Investor upon
conversion will equal the liquidation preference of the amount converted,
divided by the conversion price. The conversion price will be the lesser of
(1) $6.875, or (2) 89% of the lowest closing bid price for the Common Stock
on The NASDAQ SmallCap
S-19
<PAGE>
Market during the five day trading period prior to the date of conversion.
There is no minimum conversion price for the Series B Stock.
On July 12, 1999, Series B Investors converted 520 shares of Series B
Stock into 155,804 shares of NetLojix common stock at a conversion price of
$3.3375 per share and on October 21, 1999 an additional 60 shares of Series
B stock were converted (see note 8). Unless the Company shall have obtained
the approval of its voting stockholders in accordance with the rules of The
NASDAQ Stock Market, the Company will not issue shares of Common Stock upon
conversion of any shares of Series B Stock if such issuance of Common
Stock, when added to the number of shares of Common Stock previously issued
by the Company upon conversion of or as dividends on shares of the Series B
Stock, would exceed 19.9% of the number of shares of Common Stock which
were issued and outstanding on the original issuance date of the Series B
Stock. The Company will pay converting Series B Investors in cash for any
excess over such amount.
The Company also issued the Series B Investors warrants to purchase up
to 20,000 shares of Common Stock at a price of $8.60 per share. The
warrants may be exercised beginning September 30, 1999, and terminate on
March 31, 2002.
The Company and the Series B Investors entered into a Registration
Rights Agreement that requires the Company to file, and obtain and maintain
the effectiveness of, a Registration Statement with the Securities and
Exchange Commission (the "Commission") in order to register for public
resale all shares of the Common Stock acquired by the Series B Investors
(a) upon conversion of the Series B Stock, (b) in payment of dividends on
the Series B Stock, and (c) upon exercise of the warrants. The Company will
be subject to significant monetary penalties if it fails to maintain the
effectiveness of such Registration Statement.
The Company paid Trinity Capital Advisors, Inc. $60,000 as
compensation for financial advisory services in connection with the
placement of the Series B Stock.
EQUITY LINE AGREEMENT
On April 23, 1999, the Company entered into an equity line of credit
agreement with Cambois Finance, Inc., through which the Company may sell or
"put" NetLojix common stock to Cambois Finance, Inc. subject to the
satisfaction of several conditions. The equity line agreement provides for
Cambois Finance to purchase up to $13,500,000 of NetLojix common stock,
subject to the Company filing and maintaining an effective registration
statement, trading price and volume minimums, and limits on the amount and
frequency on sales of common stock under the line. The Company filed the
registration statement, which was declared effective by the Securities and
Exchange Commission on August 25, 1999. On September 13,1999, the Company
put 104,521 shares of common stock to Cambois Finance for $250,000 pursuant
to the equity line agreement. The Company's stock price subsequently
declined below the minimum threshold of $2.25 per share required in the
equity line agreement. Under the terms of the agreement, the Company is
unable to draw on the equity line. However, the Company is in discussions
with Cambois Finance to continue to allow the Company to utilize the equity
line agreement. (See note 6)
The Company has issued 3,000 shares of Common Stock to Trinity Capital
Advisors, Inc. as compensation for financial advisory services in
connection with the transactions as set forth in the Private Equity Line.
S-20
<PAGE>
COMMON STOCK REPURCHASES/RELIGUISHMENTS
During February 1999, the Company purchased 11,075 shares of its common
stock at prices ranging from $5.875 to $7.41 in the open market pursuant to
the Company's 1999 GO Plan. The 1999 GO Plan was established to provide the
Company's employees with cash bonuses for up to four years to promote
longevity of employment.
On April 6, 1999 a former employee of the Company relinquished 36,262
shares of the Company's common stock to settle an employee receivable. The
shares were subsequently canceled and retired. The value of the shares
relinquished was equal to the receivable balance.
PREFERRED STOCK DIVIDENDS
As a result of issuance of the Series B stock, the Company is required
to record the benefit of the conversion feature in a manner similar to a
preferred stock dividend equal to the difference between the market price
of the Company's common stock at the date the Company committed to issue
the Series B stock and the conversion price, times the number of common
shares issuable upon conversion. The preferred stock dividends are recorded
ratably over the period to the earliest conversion date (90 days from date
of issuance). During the three and nine month periods ended September 30,
1999, the Company recorded preferred dividends on Series B stock of $34,212
and $256,593, respectively.
On January 31, 1999 and July 31, 1999, the Company declared and paid in
cash semi-annual dividends of $23,632 to the holders of the Company's
Series A convertible preferred stock.
On September 30, 1999, the Company declared and paid in cash quarterly
dividends of $7,350 to the holders of the Company's Series B preferred
stock.
STOCK OPTION GRANTS
During the nine month period ended September 30, 1999 the Company
granted nonstatutory stock options to three board members to purchase a
total of 75,000 shares of the Company's common stock at exercise prices
ranging from $4.625 to $4.88 (average exercise price of $4.82 per share),
which was equivalent to the fair market value at date of grant. The stock
options vest at a rate of 50% per year over two years and were granted
pursuant to the Company's 1998 Stock Incentive Plan.
During the nine month period ended September 30,1999, the Company
granted incentive stock options to four executive officers to purchase a
total of 350,000 shares of the Company's common stock at exercise prices
ranging from $4.88 to $5.625 (average exercise price of $4.99 per share)
which was equivalent to the fair market value at date of grant. The options
vest at a rate of 25% per year over four years and were granted pursuant to
the Company's 1998 Stock Incentive Plan.
The Company also granted incentive stock options to various
non-executive managers and employees to purchase a total of 77,000 shares
of the Company's common stock at exercise prices ranging from $1.875 to
$4.15 (average exercise price of $3.51 per share) which was equivalent to
the fair market value at date of grant. The options vest at a rate of 25%
per year over four years and were granted pursuant to the Company's 1998
Stock Incentive Plan.
S-21
<PAGE>
(4) SALE OF SUBSIDIARY
The Company has agreed to sell all of the stock of Matrix Telecom, Inc.
("Matrix), a wholly-owned subsidiary of the Company to Matrix Acquisition
Holdings Corp. ("Buyer"), a wholly-owned subsidiary of Platinum Equity
Holdings, LLC, pursuant to a Stock Purchase Agreement dated August 31, 1999
(the "Sale"). In return, the Company will receive consideration of up to
$7,052,529, consisting of (1) up to $614,332 in credits against long
distance service usage, (2) the elimination of $4,190,058 in intercompany
indebtedness owed to Matrix by the Company, (3) the retention by the
Company of federal tax refunds to Matrix in the amount of $1,248,139, and
(4) an incentive payment of up to $1 million based on additions to Matrix's
Internet service customer base. In addition, the Buyer will indemnify the
Company from certain amounts owing to Coast Business Credit, the secured
lender to the Company and Matrix. The closing of the transaction is subject
to certain regulatory and other approvals.
Concurrent with the execution of the Stock Purchase Agreement, the
Company, Matrix, and Buyer signed a Management Services Agreement relating
to the operations of Matrix. Under the Management Services Agreement, the
Company appointed the Buyer as the sole and exclusive provider of all
services necessary or appropriate for the supervision and management of the
operations of Matrix. As compensation for rendering services under the
Management Services Agreement, the Buyer has the right to retain all net
profits of Matrix during the term of the agreement. Matrix (and not the
Company) bears all costs and expenses related to such services. The term of
the agreement will continue until the earlier of the closing of the Sale or
the termination of the Stock Purchase Agreement.
The Buyer has advanced funds to Matrix for working capital and other
general corporate purposes. As of September 30, 1999, the Buyer had
advanced $2,000,000 to Matrix. Matrix must repay the advance if the Stock
Purchase Agreement is terminated without fault by either the buyer or
seller.
On September 30, 1999, Matrix entered into a revised note agreement with
Sprint LLC to defer approximately $4,500,000 in network costs. The
agreement provides for an initial payment of $1,500,000 with the balance
payable in semi-annually payments starting at $200,000 and increasing to
$900,000 through September 2001, with a final payment of $1,277,000 due in
March 2002. The revised note agreement bears interest at 12% per annum.
Both the advance from the Buyer and the note agreement are included in
net liabilities of discontinued operations.
(5) DISCONTINUED OPERATIONS
Matrix Telecom, Inc. is engaged in the residential long distance
telephone business and represents all of the Company's business in this
segment. Consequently, effective with the execution of a definitive
agreement (the measurement date), the operations of Matrix Telecom, Inc.
have been reflected as a discontinued operation in the Company's condensed
consolidated financial statements as of September 30, 1999 and December 31,
1998 and for the three month and nine month periods ended September 30,
1999 and 1998.
The Company anticipates that the sale of Matrix will result in a gain
for accounting purposes. In accordance with APB No. 30, all losses of a
discontinued operation from the time of the measurement date until the
disposal date are deferred and recognized as a component of the gain. Since
September 1, 1999 all losses of Matrix have been deferred and will be
recognized as a reduction of the gain.
S-22
<PAGE>
Selected financial information for the residential long distance business
discontinued operations are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ------------------
1999 1998 1999 1998
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Sales $4,757,955 $8,402,595 $15,539,321 $27,876,016
Expenses (5,223,243) (8,889,341) (18,548,781) (30,664,341)
----------- ----------- ------------ ------------
Loss before income tax
benefit (465,288) (486,746) (3,009,460) (2,788,325)
Tax benefit -- 156,006 -- 873,458
Loss from ----------- ----------- ---------- ------------
discontinued
operations $(465,288) $ (330,740) $(3,009,460) $(1,914,867)
========== ============ ============ ============
September 30, December 31,
1999 1998
------------ ------------
Cash $ 1,971,495 $ 689,120
Accounts receivable 2,856,780 3,237,264
Other assets 1,510,010 1,378,828
--------- ---------
Total assets $ 6,338,285 $ 5,305,212
=========== ===========
Liabilities $11,039,847 $ 6,523,500
Accumulated deficit (4,701,562) (1,218,288)
----------- -----------
Total liabilities and deficit $ 6,338,285 $ 5,305,212
============ ===========
</TABLE>
(6) LIQUIDITY
For the three months and nine months ended September 30, 1999, the
Company reported net losses of $1,530,784 and $6,717,515 respectively.
Discontinued operations for the three months and nine months ended
September 30, 1999 resulted in net losses of $465,288 and $3,009,460
respectively, while net losses from continuing operations for the same
periods were $1,065,496 and 3,708,055. In addition, as of September 30,
1999, the Company had a working capital deficit of $6,080,782, including
$4,701,562 of net liabilities for discontinued operations. For the nine
months ended September 30, 1999, cash used in continuing operations totaled
$2,056,538 and cash provided by discontinued operations totaled $691,942.
Cash provided by discontinued operations was primarily due to the Company's
deferral of payments to vendors.
S-23
<PAGE>
On August 31,1999, the Company entered into the Stock Purchase Agreement
pursuant to which the Company will sell 100% of the stock of Matrix to the
Buyer. The consideration to the Company is to consist of a combination of
credits against long distance service, elimination of indebtedness and
certain contingent payments. The closing of the transaction is subject to
certain regulatory and other approvals.
As of June 30, 1999, the Company was in violation of one provision of
the Loan and Security Agreement with Coast Business Credit that stipulates
that the Company must maintain a net worth equal to or greater than $2
million. Coast Business Credit has waived its right of acceleration of the
obligation as it relates to the Company not meeting the net worth covenant
subject to the closing of the Matrix Sale, but otherwise retains its right
of acceleration if the closing does not occur. The Buyer has indemnified
the Company from any claims or liabilities arising out of the credit
facility with Coast Business Credit in an amount not to exceed $2,750,000
plus any amount drawn on such facility by Matrix after August 31, 1999. As
of September 30, 1999, borrowing outstanding under the credit facility for
continuing operations amounted to $98,354 with approximately $495,000
available for future borrowings. As of September 30, 1999, borrowings
outstanding for discontinued operations amounted to $822,107. Borrowings
under the credit facility are secured by substantially all of the assets of
the Company. The credit facility expires on October 31, 2000. The Company
is currently negotiating a revision to the credit facility to be effective
after closing of the sale of Matrix.
As of April 23, 1999, the Company entered into an equity line agreement
which provides for investors to purchase up to $13,500,000 of the Company's
common stock, subject to the Company filing and maintaining an effective
registration statement, trading price and volume minimums, and limits on
the amount and frequency on sales of common stock under the line (see Note
3). On September 13,1999, the Company put 104,521 shares of common stock to
Cambois Finance for $250,000 pursuant to the equity line agreement. The
Company cannot sell stock under the agreement if the Company's stock price
is below $2.25 per share unless the investor agrees to waive the
requirement. The Company's stock price closed at $1-27/32 on November 9,
1999. However, the Company is in discussions with Cambois Finance to
continue to allow the Company to utilize the equity line agreement. If the
Company is able to continue to utilize the equity line agreement, the
Company expects that it will continue to put stock to Cambois Finance from
time to time to meet working capital needs.
The Company believes that with the completion the sale of its
residential long distance business, the Company will need to renegotiate
its credit facility and raise additional capital in order to meet its
working capital requirements. If the Company does not complete the sale of
its residential long distance business or if it is unable to obtain other
financing in a timely manner and on acceptable terms, it may be in default
under its agreement with Coast Business Credit. In that event, management
has developed and intends to implement a plan that would allow the Company
to continue to operate through 2000. This plan would include reducing the
Company's workforce, eliminating marketing expenditures, reducing
professional services, reducing or eliminating other discretionary
expenditures.
(7) SEGMENT REPORTING
The Company's primary business segments are Communication Services, IT
Support and eBusiness. NetLojix is an Enterprise Network Solutions company
targeting small to mid sized corporate customers.
The Communication Services segment offers a vast set of data, voice, and
Internet service options. This segment employs networking and
communications professionals that will design, build and maintain a
flexible, cost-effective package of data networking and voice
communications services to meet our customer's needs.
S-24
<PAGE>
IT Support provides a broad array of technical support services and
solutions including system integration, desktop and network support, asset
management, and help desk solutions aimed at keeping our customers systems
operational and their networks running smoothly. The IT Support team is
certified by over 40 hardware and software manufacturers.
The eBusiness segment offers strategic uses of electronic communications
and information technologies to accelerate the achievement of our
customers' goals. eBusiness develops solutions and applications for most
interactive platforms including the Internet, proprietary intranets and
extranets, CD-ROMs and kiosks.
The Company measures its performance based on revenues, gross margin,
net income or loss and earnings before interest, taxes, depreciation and
amortization ("EBITDA"). EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered
as an alternative to net income or cash flows from operations, as a measure
of performance.
The results for the three months ended September 30, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
Three months ended September 30, 1999
Communication
Services IT Support eBusiness Total
------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $2,461,694 $1,281,010 $549,368 $4,292,072
Gross margin 1,268,141 443,697 336,130 2,047,968
Selling, general &
administrative 1,565,579 916,014 372,618 2,854,211
Depreciation &
amortization 141,290 93,698 14,264 249,252
Interest expense (6,806) (2,965) (1,547) (11,318)
Other income (expense) 1,317 -- -- 1,317
Discontinued operations -- -- -- (465,288)
----------- ----------- --------- ------------
Net loss $ (444,217) $ (568,980) $(52,299) $(1,530,784)
=========== =========== ========= ============
EBITDA $(296,121) $(472,317) $(36,488)
Total assets $4,029,780 $5,418,128 $225,484 $9,673,392
S-25
<PAGE>
Three months ended September 30, 1998
<CAPTION>
Communication
Services IT Support eBusiness Total
-------------- ------------ ------------ -----------
Revenues $1,920,032 $ -- $266,510 $2,186,542
Gross margin 775,580 -- 240,274 1,015,854
Selling, general &
administrative 1,386,694 -- 202,585 1,589,279
Depreciation &
amortization 134,489 -- 8,767 143,256
Interest expense (4,305) -- (864) (5,169)
Other income (expense) 57 -- -- 57
Income tax benefit -- -- -- --
Discontinued operations -- -- -- (330,740)
----------- ----------- --------- ----------
Net loss $ (749,851) -- $28,058 $(1,052,533)
=========== =========== ========= ============
EBITDA $(611,057) $-- $37,689
Total assets $5,040,531 $-- $21,292 $5,061,823
The results for the nine months ended September 30, 1999 and 1998 are
as follows:
Nine months ended September 30, 1999
Communication
Services IT Support eBusiness Total
------------- -------------- ----------- -------------
Revenues $7,000,247 $3,875,543 $1,285,691 $12,161,481
Gross margin 3,319,904 1,362,363 775,015 5,457,282
Selling, general &
administrative 4,468,827 2,926,908 915,198 8,310,933
Depreciation &
amortization 414,909 309,102 42,414 766,425
Interest expense (27,958) (64,322) (5,320) (97,600)
Other income (expense) (3,759) 10,000 3,380 9,621
Income tax benefit -- -- -- --
Discontinued operations -- -- -- (3,009,460)
Net loss ------------- -------------- ------------- ------------
$ (1,595,549) $ (1,927,969) $(184,537) $(6,717,515)
============= ============== ============= ============
EBITDA $(1,152,682) $(1,554,545) $(136,803)
Total assets $4,029,780 $5,418,128 $225,484 $9,673,392
S-26
<PAGE>
Nine months ended September 30, 1998
Communication
Services IT Support eBusiness Total
---------------- --------------- ------------ ------------
Revenues $5,887,573 $ -- $565,253 $6,452,826
Gross margin 2,317,289 -- 477,683 2,794,972
Selling, general &
administrative 3,961,960 -- 589,473 4,551,433
Depreciation &
amortization 408,391 -- 25,511 433,902
Interest expense (17,402) -- (2,367) (19,769)
Other income (expense) 4,336 -- 145 4,481
Discontinued operations -- -- -- (1,914,867)
--------------- --------------- ----------- -------------
Net loss $ (2,066,128) $ -- $(139,523) $(4,120,518)
=============== =============== =========== =============
EBITDA $(1,640,335) $ -- $(111,645)
Total assets $5,040,531 $ -- $ 21,292 $5,061,823
(8) SUBSEQUENT EVENTS
On October 21, 1999, Series B Investors converted 60 shares of Series B
Stock into 35,956 shares of NetLojix common stock at a conversion price of
$1.6687 per share.
</TABLE>
S-27
