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Registration No. 333-80023
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
NETLOJIX COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 4813 87-0378021
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
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501 BATH STREET
SANTA BARBARA, CALIFORNIA 93101
(805) 884-6300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
ANTHONY E. PAPA
NETLOJIX COMMUNICATIONS, INC.
501 BATH STREET
SANTA BARBARA, CALIFORNIA 93101
(805) 884-6300 (Name, address,
including zip code, and telephone number,
including area code, of agent for service)
----------------------------
Copies to:
PHILIP J. NIEHOFF THOMAS N. HARDING
MAYER, BROWN & PLATT SEED, MACKALL & COLE LLP
190 SOUTH LASALLE STREET 1332 ANACAPA STREET, SUITE 200
CHICAGO, ILLINOIS 60603 SANTA BARBARA, CALIFORNIA 93101
(312) 782-0600 (805) 963-0669
----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/________
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. / /
<PAGE>
PROSPECTUS
1,037,214 SHARES
NETLOJIX COMMUNICATIONS, INC.
COMMON STOCK
---------------------
This prospectus may be used in connection with the resale by Cambois
Finance, Inc., from time to time, of up to 1,037,214 shares of common stock of
NetLojix. NetLojix will not receive any of the proceeds from the sale of the
shares by Cambois Finance. However, NetLojix will receive the sale price of any
common stock that it sells to Cambois Finance pursuant to an equity line
agreement. NetLojix has agreed to pay the costs of registering the shares under
this prospectus, including legal fees, commissions and other expenses of resale
of the common stock.
Cambois Finance may offer, pursuant to this prospectus, shares of
common stock to purchasers from time to time in transactions on the Nasdaq
SmallCap Market, in negotiated transactions, or otherwise, or by a combination
of these methods, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such market prices or at
negotiated prices. Sales of the shares may be effected through broker-dealers,
who may receive compensation from Cambois Finance in the form of discounts or
commissions. Cambois Finance is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with such sales.
NetLojix common stock is listed on the Nasdaq SmallCap Market under the
symbol "NETX." The last reported sales price for NetLojix common stock on the
Nasdaq SmallCap Market on May 2, 2000 was $3.97 per share.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS WHICH ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or accurate. Any representation to the contrary is a
criminal offense.
NetLojix's principal executive offices are located at 501 Bath Street,
Santa Barbara, California 93101, telephone number: (805) 884-6300.
------------------------
The date of this prospectus is _________, 2000
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TABLE OF CONTENTS
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NetLojix............................................................................................3
Recent Developments.................................................................................3
Risk Factors........................................................................................4
The Equity Line Agreement..........................................................................11
Price Range of NetLojix Common Stock...............................................................13
Dividend Policy....................................................................................13
Use of Proceeds....................................................................................14
Selected Consolidated Financial Data...............................................................14
Management's Discussion and Analysis of Financial Condition and Results of Operations..............16
Business...........................................................................................28
Management.........................................................................................39
Executive Compensation.............................................................................43
Certain Relationships and Related Transactions.....................................................46
Security Ownership of Beneficial Owners and Management ............................................49
Description of Capital Stock.......................................................................52
Selling Stockholder................................................................................54
Plan of Distribution...............................................................................55
Where You Can Find More Information................................................................57
Legal Matters......................................................................................57
Experts............................................................................................57
Index to Financial Statements.....................................................................F-1
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No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by NetLojix or Cambois Finance. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such an offer in such jurisdiction. Neither the delivery of
this prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained in this prospectus is
correct as of any time subsequent to the date of this prospectus or that there
has been no change in the affairs of NetLojix since such date.
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NETLOJIX
NetLojix is an eBusiness enabler providing advanced Internet, data, and
voice connectivity, technical support and application hosting services to the
mid-size business market. We are a single-source provider of enterprise network
solutions integrating our complete portfolio of broadband connectivity;
applications development and hosting; and system integration and maintenance.
Our offices and support teams provide design, implementation and management of
wide area networks (WANs), local area networks (LANs) and electronic commerce or
"eBusiness" solutions, including frame relay, digital subscriber line (DSL),
Internet -based virtual private networks (iVPN), voice products transported via
the Internet Protocol (VOIP) and Internet access. We offer these services on a
stand-alone basis or bundled as part of a total solution.
We also provide Internet access and email services under the recognized
brands of Silicon Beach and WestNet to approximately 10,000 customers through
DSL, ISDN, Frame Relay, wireless microwave, dial-up, and cable modem access on
the central coast of California.
RECENT DEVELOPMENTS
On March 3, 2000 we raised $1.5 million through a private placement of
375,000 shares of common stock at $4.00 per share. The purchaser was AMRO
International, S.A., an entity organized under the laws of Panama. We also
granted AMRO warrants to purchase up to 75,000 shares of common stock at a price
of $5.25 per share. We are required to file a registration statement to register
the public resale of these shares by AMRO. The registration statement must be
filed by May 28, 2000. We have to use our best efforts to have the registration
declared effective, and we face significant monetary penalties if the
registration statement is not declared effective within 90 days after the date
it is filed.
On April 4, 2000, we announced that we had entered into a letter of
intent to acquire Twisted Pair/BT Services Inc., a privately-held
telecommunications interconnect company that provides computer and integrated
PBX network design, integration and service for mid-size businesses in
Northern California (principally in the San Francisco Bay area). Twisted Pair
has told us that their unaudited revenues for the year ended March 31, 2000,
were $4 million. The letter of intent contemplates that we would acquire all
of the outstanding common stock of Twisted Pair for 450,000 shares of
NetLojix common stock, $200,000 in cash and the assumption of existing
obligations. The closing of the transaction is subject to the execution of a
definitive agreement between the parties, approval by our Board of Directors
and by the board and shareholders of Twisted Pair, the renegotiation of
Twisted Pair's obligations to certain shareholders, the satisfactory
completion of due diligence, and other conditions. We anticipate that,
subject to the satisfaction of these condition, the transaction will close in
the second quarter of 2000.
On April 19, 2000, we reached an agreement in principle to settle
all outstanding claims under the class action lawsuit pending against
NetLojix and certain of its officers. The agreement in principle is with
counsel for the plaintiff class and is subject to finalization and execution
of a definitive settlement agreement, passage of a class member notification
period and final approval by the court. We will record a charge against
earnings in the first quarter of 2000 of $998,000 relating to the expected
settlement. See "Business-Legal Proceedings."
On May 2, 2000, we announced our results for the quarter ended March
31, 2000. Revenues from continuing operations increased to $5.3 million for
the quarter ended March 31, 2000, compared to revenues of $3.7 million for
the same period in 1999. Gross profit from continuing operations increased
more than 49% over the prior-year period, to $2.2 million for the quarter
ended March 31, 2000.
Our Network Connectivity revenues, which accounted for approximately
59% of our total net revenues for the first quarter of 2000, continued to
grow, increasing to $3.1 million, or 42% over the same quarter in 1999.
Technical Support Services and Application Development and Hosting revenues
increased by 17%, to $1.4 million, and by 162%, to $762,000, respectively,
compared to the first quarter of 1999.
Net loss for the quarter ended March 31, 2000 totaled $2.5 million,
or $0.20 per share, on 12.8 million weighted average shares, compared to a
net loss of $3.1 million, or $0.29 per share, on approximately 10.5 million
weighted average shares for the first quarter of 1999. The first quarter net
loss in 2000 includes $998,121, or $0.08 per share, for settlement costs
associated with a class action lawsuit filed against NetLojix in November
1998, and a non-cash expense of $215,713 or $0.02 per share in January 2000
associated with warrants granted to NetLojix's investment banker for advisory
services. Excluding the lawsuit settlement and the non-cash charge for
issuance for the warrants, the loss from continuing operations for the
quarter ended March 31, 2000 would have been $1.3 million or $0.10 per share.
The 1999 first quarter loss from continuing operations totaled $1.6 million,
or $0.15 per share.
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On April 19, 2000, we announced that we had entered into a letter of
intent to acquire onShore, Inc., a privately-held data services company that
provides system integration, technical support, and web-centric applications
development services for mid-size businesses in the Chicago metropolitan area.
onShore has told us that their unaudited revenues for the year ended December
31, 1999 were $3.8 million. The letter of intent contemplates that we would
acquire all of the outstanding common stock of onShore in exchange for 1,500,000
shares of NetLojix common stock. The closing of the transaction is subject to
the execution of a definitive agreement between the parties, approval by our
Board of Directors and the board and shareholders of onShore, the satisfactory
completion of due diligence, and other conditions. We anticipate that, subject
to the satisfaction of these condition, the transaction will close late in the
second quarter of 2000.
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS,
TOGETHER WITH OTHER INFORMATION IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT
IN THE COMMON STOCK. ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS RELATIVE TO MARKETS FOR NETLOJIX'S PRODUCTS AND
TRENDS IN NETLOJIX'S OPERATIONS OR FINANCIAL RESULTS, AS WELL AS OTHER
STATEMENTS INCLUDING WORDS SUCH AS "ANTICIPATES," "BELIEVES," "ESTIMATES,"
"EXPECTS" AND "INTENDS" AND OTHER SIMILAR EXPRESSIONS, CONSTITUTE
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
BUSINESS AND ECONOMIC RISKS, INCLUDING BUT NOT LIMITED TO THOSE SET FORTH IN THE
FOLLOWING "RISK FACTORS," AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES FROM CONTINUING OPERATIONS IN EACH OF THE
LAST THREE YEARS AND EXPECT TO CONTINUE TO EXPERIENCE LOSSES FOR THE FORESEEABLE
FUTURE
We have incurred significant losses from continuing operations in each
of the last three years and we expect to continue to lose money for the
foreseeable future. We have not generated enough revenue to offset the
substantial amounts that we have spent to grow our business, and we plan to
continue to incur significant expenses.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL
Historically, our cash flow from operations, our secured borrowings,
our private placements and our equity line agreement with Cambois Finance, Inc.
have been sufficient to meet working capital and capital expenditure
requirements. On March 3, 2000 we raised $1.5 million through a private
placement of 375,000 shares of common stock at $4.00 per share. In March, 2000,
we restructured our secured credit facility with Coast Business Credit.
Currently no amount is outstanding under the credit facility.
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We believe that our cash flow from operations, our equity line
agreement and our secured line of credit with Coast Business Credit are
sufficient to meet our working capital requirements from our current operations
into the foreseeable future. However, our ability to raise capital by putting
common stock to Cambois Finance under the equity line agreement is subject to
the satisfaction of several conditions. Additionally, we have historically grown
our business through mergers and acquisitions. Over the past year we have been
limited in our ability to attract acceptable acquisition candidates because of
our low stock price and lack of capital resources. We believe that we will need
to raise additional capital in order to grow our business through acquisitions.
THE STOCK PRICE IS VOLATILE
Our common stock has been traded on The Nasdaq SmallCap Market since
May 28, 1998. Trading in our stock was halted by Nasdaq after the close of
trading on November 12, 1998, through the close of trading on November 13, 1998,
as a result of an unusual upsurge in its stock price and trading volume. See
"Business - Legal Proceedings." The trading volume of the common stock has been
variable, but often low. As a result, relatively small trades may significantly
affect the market price of the common stock. The market price of the shares of
common stock has been highly volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in our operating results,
announcements of potential acquisitions, changes in regulations, activities of
the largest domestic providers, industry consolidation and mergers, conditions
and trends in the market, adoption of new accounting standards affecting the
industry, changes in recommendations and estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the shares of emerging growth
companies like NetLojix. Many of these factors are beyond our control.
THE MARKET PRICE OF OUR COMMON STOCK WOULD BE ADVERSELY AFFECTED IF WE WERE
DELISTED FROM THE NASDAQ SMALLCAP MARKET BECAUSE WE FAILED TO CONTINUE TO MEET
THE LISTING STANDARDS
On November 19, 1999, The Nasdaq Stock Market Inc. notified us that we
no longer met the minimum requirements for net tangible assets and market
capitalization for continued listing on The Nasdaq SmallCap Market. As a result,
The Nasdaq Stock Market threatened to delist our common stock. Although we were
able to bring NetLojix back into compliance with the listing requirements prior
to being delisted, and are currently in compliance with the listing
requirements, there can be no assurance that NetLojix will continue to meet The
Nasdaq SmallCap Markets listing requirements in the future. If our common stock
were delisted, the price of the common stock would, in all likelihood, decline.
We are currently in full compliance with the listing requirements for the Nasdaq
SmallCap Market including net tangible assets and market capitalization.
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WE ARE A DEFENDANT IN A SECURITIES CLASS ACTION LITIGATION
As noted above, on November 12, 1998, we experienced an unusual
upsurge in our stock price and trading volume. This unusual event has
triggered the initiation of class action litigation under the federal
securities laws. See "Business-Legal Proceedings." We have reached an
agreement in principle to settle this lawsuit. However, a definitive
settlement agreement has not yet been finalized or executed. The settlement
must still be approved by the court. If the settlement is not approved, we
would continue to defend vigorously this litigation. However, it is not
possible at this time for us to predict with certainty the outcome of this
litigation. Our operating results and financial condition could be adversely
affected by an adverse outcome of this litigation. Even if we prevail in the
litigation, the expenses of the defense could have a material adverse effect
on our operating results and financial condition.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY
We have only recently begun to integrate our services under a single
enterprise network solutions offering. Previously, our telecommunications
services, IT services, Internet services and applications hosting services were
marketed separately under separate company names and marketing channels. We
believe there are significant opportunities for our single source strategy for
the mid-sized business. However, the industries in which we compete are
intensely competitive and subject to rapid change.
We compete with telecommunications services providers, technical
support providers, web development companies and other Internet service
providers. Within the telecommunications industry, competitors include
facilities-based and non-facilities-based providers, many of which have
substantially more resources than us. Providers compete on the basis of price,
customer service, transmission quality, breadth of service offerings and
value-added services.
The technical support industry is characterized by numerous competitors
offering one or more services that we provide. We compete with PC vendors and PC
resellers for maintenance and extended warranty services and large IT consulting
firms for our "help" desk and IT facilities management services. In addition,
there are numerous small companies that compete effectively for technical
support services within one or more industry specific niche markets or
geographic areas. Certain competitors are substantially larger than we are and
have greater financial, technical, service, and marketing resources.
We also compete with all Internet service providers that provide web
hosting and design. Many of our competitors are substantially larger than we are
and have substantially greater financial, infrastructure and personnel resources
than we have. Furthermore, many of our competitors have well established large
and experienced marketing and sales capabilities and greater name recognition.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE
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Our business is in a period of rapid technological evolution, marked by
the introduction of competitive product and service offerings, such as the use
of the Internet for international voice and data communications, the use of the
web for business connectivity and rapidly changing commercial uses of the
Internet. Our future success depends, in part, on our ability to use leading
technologies effectively, to develop technological expertise, to enhance
existing services and to develop new services that meet changing customer needs
on a timely and cost-effective basis. We are unable to predict which
technological development will challenge its competitive position or the amount
of expenditures that will be required to respond to a rapidly changing
technological environment. If we fail to respond in a timely and effective
manner to new and evolving technologies it could have a negative impact on our
operating results and financial condition.
WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS
We rely on traditional telecommunications carriers to transmit our
traffic over local and long distance networks. These networks may experience
disruptions that are not easily remedied. In addition, we depend on certain
suppliers of hardware and software. If the suppliers fail to provide network
services, equipment or software in the quantities, at the quality levels or at
the times we require, it will be difficult for us to provide services.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
Our business is subject to various federal and state laws, regulations,
agency actions and court decisions, some of which impose prior certification,
notification, registration and/or tariff requirements. As noted above, NetLojix
Telecom, a subsidiary of NetLojix, is currently in the process of applying for
Section 214 authority from the Federal Communications Commission and operating
authority from 49 states. Certificates of authority can generally be
conditioned, modified or revoked by state regulatory authorities for failure to
comply with state laws and regulations. Fines and other penalties may be
imposed. The loss of a certificate of authority or the imposition of fines or
other penalties could have a material effect on our business, operating results
and financial condition. In addition, future changes in any of these sources of
regulation could have a material adverse effect on our business, operating
results and financial condition.
OUR EXECUTIVE OFFICERS, DIRECTORS AND EXISTING STOCKHOLDERS WILL HAVE THE
ABILITY TO EXERCISE SIGNIFICANT CONTROL
Executive officers, directors and members of their families
beneficially own, in the aggregate, approximately 52% of our common stock.
Although this percentage will decrease if we sell common stock to Cambois
Finance under the equity line agreement, these stockholders will be able to
exercise control over all matters requiring approval by our shareholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of
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ownership may also have the effect of delaying or preventing a change of
control, which could negatively affect the stock price.
FUTURE SALES OF COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE
If requested by certain shareholders, we are required to register for
resale 6,457,123 shares of common stock that are held by executive officers and
directors of NetLojix, members of their families and certain charitable
foundations, pursuant to a registration rights and lockup agreement. The market
price of our common stock could decline as a result of sales of a large number
of shares of NetLojix common stock in the market, or the perception that such
sales could occur. These sales might also make it more difficult for us to sell
equity securities in the future at a time that we consider appropriate.
THE ISSUANCE OF SHARES UNDER THE EQUITY LINE AGREEMENT MAY DILUTE OUR COMMON
STOCKHOLDERS AND ADVERSELY AFFECT THE STOCK PRICE
On April 23, 1999, we entered into an equity line agreement with
Cambois Finance, Inc., a British Virgin Islands Corporation engaged in the
business of investing in publicly-traded equity securities. Under the equity
line agreement, subject to the satisfaction of certain conditions, we may issue
or sell, from time to time, up to an aggregate of $13,500,000, after deducting
discounts, of our common stock. As of April 25, 2000, NetLojix had sold a total
of $2,000,000 of common stock to Cambois Finance under the equity line
agreement. The equity line agreement provides that the number of shares that can
be put to Cambois Finance is based on a floating rate that will be below the
market price of the common stock. As a result, the lower the stock price goes,
the more common stock that Cambois Finance receives. The following table
illustrates the number of shares that NetLojix would be required to issue if it
chooses to raise additional capital under the equity line, at various assumed
prices pursuant to the equity line agreement, subject to the limitations
described in the text following the table, and the percentage of outstanding
stock that would be owned by existing stockholders as a result of the issuance
of NetLojix common stock at the indicated price. NetLojix is not obligated to
put shares to Cambois under the terms of the equity line agreement. The option
to draw funds is purely that of NetLojix. The table is for illustrative purposes
only, and you should not assume that it represents NetLojix's "best guess" of
the range of future prices.
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ASSUMED SHARES ISSUABLE UNDER THE OWNERSHIP OF EXISTING
NETLOJIX LOW CLOSING EQUITY LINE STOCKHOLDERS AS A RESULT OF
BID PRICE(1) AGREEMENT SHARE ISSUANCE(2)
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$0.7500 17,228,464 43.69%
$1.5000 8,614,232 60.81%
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ASSUMED SHARES ISSUABLE UNDER THE OWNERSHIP OF EXISTING
NETLOJIX LOW CLOSING EQUITY LINE STOCKHOLDERS AS A RESULT OF
BID PRICE(1) AGREEMENT SHARE ISSUANCE(2)
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$2.2500 5,742,821 69.95%
$3.0000 (3) 4,307,116 75.63%
$3.7500 3,445,693 79.51%
$4.5000 2,871,411 82.32%
$5.2500 2,461,209 84.45%
</TABLE>
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(1) NetLojix does not have the right to put common stock to Cambois unless
the low closing bid price determined at the date of the put is at least
$2.26.
(2) Based on 13,366,978 shares outstanding on April 20, 2000.
(3) Low closing bid price for a share of NetLojix common stock on April 25,
2000.
Notwithstanding the conversion formulas, in order to comply with the
listing requirements of the Nasdaq SmallCap Market the equity line agreement
provides that, without a vote of NetLojix's common stockholders, NetLojix may
not issue more than 2,103,939 shares of common stock in the aggregate to Cambois
Finance under the equity line, which number of shares is equal to 19.96% of the
outstanding shares of NetLojix common stock on the date of the equity line
agreement. As of April 25, 2000, NetLojix had sold a total of 1,066,725 shares
to Cambois Finance under the equity line agreement. As a result, NetLojix could
sell up to an additional 1,037,214 shares to Cambois Finance. In order to issue
shares in excess of that amount under the equity line agreement, NetLojix would
have to register additional shares with the Securities and Exchange Commission,
as well as obtain stockholder approval.
The significant downward pressure on the price of the common stock as a
result of sales by Cambois Finance could encourage short sales. This could exert
further downward pressure on the price of NetLojix common stock.
WE ARE DEPENDENT ON KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS
Our success depends to a significant degree upon the efforts of senior
management personnel, in particular, Anthony E. Papa, Chairman and Chief
Executive Officer, and James P. Pisani, President and Chief Operating Officer.
The departure of any officers or key employees could materially adversely affect
our ability to implement our business plan.
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED EMPLOYEES
We believe that our future success will depend in large part upon our
continuing ability to attract and retain highly skilled personnel. Competition
for qualified, high-level telecommunications personnel is intense and there can
be no assurance that we will be successful in attracting and retaining qualified
personnel. The loss of the services of one or more of our key
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individuals, or failure to attract and retain other key personnel, could
materially adversely affect our business, operating results and financial
condition.
WE MAY NOT BE ABLE TO SUCCESSFULLY MAKE ACQUISITIONS OF OTHER COMPANIES
An important component of our past growth has been to develop our
business through acquisitions. This growth strategy is dependent on the
continued availability of suitable acquisition candidates and subjects us to a
number of risks. Acquisitions may place significant demands on our financial and
management resources, as the process for integrating acquired operations
presents a significant challenge to management and may lead to unanticipated
costs or a diversion of management's attention from day-to-day operations. There
can be no assurance that we will be able to successfully integrate into its
operations any acquisitions it makes in the future.
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THE EQUITY LINE AGREEMENT
On April 23, 1999, NetLojix entered into an equity line agreement with
Cambois Finance, pursuant to which, subject to the satisfaction of certain
conditions, NetLojix may issue or sell, from time to time, up to an aggregate of
$13,500,000, after deducting discounts, of its common stock. As of April 25,
2000, NetLojix had sold a total of $2,000,000 worth of common stock to Cambois
Finance under the equity line agreement.
Until August 25, 2002, NetLojix may from time to time, in its sole
discretion, sell or "put" shares of its common stock to Cambois Finance at a
price equal to 89% of the then current market price of the common stock. The
current market price of NetLojix common stock, for purposes of calculating the
purchase price, is the single lowest closing bid price, as reported by Bloomberg
L.P., of its common stock on the Nasdaq SmallCap Market for the five days
beginning two days before and ending two days after NetLojix notifies Cambois
Finance of its intention to put the common stock to them. If both NetLojix and
Cambois Finance agree, the put price for any given put may be fixed at a price
higher than 89% of the then current market price of the common stock.
The following conditions must be satisfied (or, with respect to minimum
bid price, trading days and trading volume, waived by Cambois Finance at its
sole discretion) before NetLojix can put shares of common stock to Cambois
Finance, and before Cambois Finance becomes obligated to purchase the common
stock:
- The registration statement, of which this prospectus is a
part, must have been declared effective by the Securities and
Exchange Commission and must remain effective and available
for making resales of the put shares of NetLojix common stock;
- NetLojix's representations and warranties to Cambois Finance
contained in the equity line agreement must be accurate as of
the date of each put;
- No statute, rule, regulation, executive order, decree, ruling
or injunction may be in effect which prohibits or directly and
adversely affects any of the transactions contemplated by the
equity line agreement;
- At the time of a put, there must not have been any material
adverse change in NetLojix's business, operations, properties,
prospects or financial condition since the date of filing of
NetLojix's most recent report with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934;
- NetLojix common stock must not have been delisted from the
Nasdaq SmallCap Market nor suspended from trading by the
Securities and Exchange Commission or the Nasdaq SmallCap
Market;
11
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- NetLojix common stock must have a minimum bid price of $2.26
per share at the time of the put;
- At least 15 trading days must have elapsed since the date of
the last put notice; and
- The dollar value of the average daily trading volume of
NetLojix common stock during the 30 days prior to the put date
shall be at least $20,000.
Cambois Finance, in its sole discretion, may waive the minimum bid
price, 15 trading day and average daily trading volume requirements in
connection with any given put notice delivered by NetLojix. Cambois Finance
waived the minimum bid price and 15 trading day conditions in connection with
three puts made by NetLojix in November and December 1999.
Cambois Finance, or other underwriters of the securities, have the
right to review this registration statement and NetLojix's records and
properties to obtain information about it and the accuracy of this registration
statement and prospectus. Cambois Finance has the opportunity to comment on the
registration statement and prospectus, but is not entitled to reject a put by
NetLojix based on their review. Cambois Finance may be entitled to
indemnification by NetLojix for any lawsuits based on language in this
prospectus with which they do not agree.
There can be no assurance that NetLojix will satisfy all conditions
required under the equity line agreement, or will be able to sell any shares to
Cambois Finance under the agreement. Cambois Finance has agreed that it will not
engage in short sales of NetLojix common stock except that it may engage in
short sales or other hedging investments that it deems appropriate with respect
to the shares that it purchases in connection with a particular put, so long as
the number of shares sold short or used for hedging does not exceed the number
of shares being sold to Cambois Finance under the put, and the short sales are
otherwise in compliance with Regulation M under the Securities Act.
In conjunction with the equity line agreement, NetLojix issued to
Trinity Capital Advisors, NetLojix's financial advisor for the transaction,
3,000 shares of common stock as compensation for financial advisory services in
connection with the transactions set forth in the equity line agreement. Trinity
Capital Advisors, in its role as financial advisor, conducted a financial
analysis of NetLojix and presented it with a private placement structure.
Trinity also provided NetLojix with several contacts with investors known to
invest in the type of structure proposed.
Under the equity line agreement, NetLojix agreed to register the common
stock for resale by Cambois Finance to permit the resale from time to time in
the market or in privately-negotiated transactions. NetLojix will prepare and
file such amendments and supplements to the registration statement as may be
necessary in accordance with the Securities Act of 1933 and the rules and
regulations promulgated thereunder, in order to keep it effective as long as
registrable securities
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<PAGE>
are outstanding. NetLojix has agreed to bear certain expenses, other than
broker discounts and commissions, if any, in connection with the registration
statement.
PRICE RANGE OF NETLOJIX COMMON STOCK
NetLojix common stock is currently listed on the Nasdaq SmallCap Market
under the symbol "NETX." For each quarter since the beginning of 1998, the high
and low bid quotations for our common stock, as reported by Nasdaq, were as
follows:
<TABLE>
<CAPTION>
-------------- --------------
HIGH LOW
1998
<S> <C> <C>
First Quarter...................................................................... $8.63 $ 4.94
Second Quarter..................................................................... 15.88 7.67
Third Quarter...................................................................... 8.00 1.75
Fourth Quarter..................................................................... 31.00 2.00
1999
First Quarter...................................................................... 12.50 4.00
Second Quarter .................................................................... 8.75 3.75
Third Quarter...................................................................... 4.88 1.63
Fourth Quarter..................................................................... 8.50 1.63
2000
First Quarter...................................................................... 8.50 2.72
Second Quarter (through May 2, 2000)............................................ 5.38 2.88
</TABLE>
The foregoing bid quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.
As of April 20, 1999, there were 549 record holders of NetLojix common
stock. The last reported sales price of NetLojix common stock on May 2, 2000
was $3.97.
DIVIDEND POLICY
NetLojix has never declared or paid any dividends on its common stock.
Further, NetLojix does not anticipate paying any dividends on the common stock
in the foreseeable future and
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intends to retain all available funds for use in the operation and
development of its business including future acquisitions. The board of
directors intends to review NetLojix's dividend policy from time to time.
Under its secured credit facility with Coast Business Credit, NetLojix is
prohibited from paying cash dividends unless approved by Coast Business
Credit. In addition, NetLojix cannot pay a cash dividend on its common stock
while any series A preferred stock is outstanding without the approval of at
least 50% of the outstanding shares of the series A preferred stock. Even if
NetLojix receives this approval, the holders of the outstanding series A
preferred stock are entitled to be paid any unpaid dividends for previous
periods and to have a sufficient amount of money set aside for payment of
dividends in respect of the then current dividend period, prior to the
holders of the common stock receiving any dividend.
USE OF PROCEEDS
The proceeds from the sale of common stock will be received directly by
Cambois Finance. No proceeds will be received by NetLojix from the sale of the
common stock offered by this prospectus. However, NetLojix will receive the put
price pursuant to the equity line agreement if and to the extent the common
stock is sold by NetLojix to Cambois Finance pursuant to the equity line
agreement. The put price equals 89% of the then current average market price of
NetLojix common stock, as determined under the equity line agreement. See "The
Equity Line Agreement." All proceeds from the sale of common stock under the
equity line agreement will be used for working capital and other general
corporate purposes.
SELECTED CONSOLIDATED FINANCIAL DATA
For accounting purposes, the acquisition of Matrix Telecom on December
1, 1997 was treated as a reverse acquisition of NetLojix by Matrix Telecom.
Accordingly, our results of operations reflect the operations of Matrix Telecom
prior to December 1, 1997 and reflect the combined operations of NetLojix and
Matrix Telecom subsequent to December 1, 1997. In August, 1999, we decided to
exit the residential long distance business. Consequently, the residential
long-distance business has been reflected as a discontinued operation and all
prior period amounts have been restated.
The following selected operations data of NetLojix for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995 and balance sheet data as of
December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from our (or
Matrix Telecom's) audited financial statements. These selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto included elsewhere herein.
14
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $16,864,283 $9,887,728 $6,435,246 $6,916,522 $3,532,758
Operating income (loss) (4,889,907) (3,467,346) (9,275,261) 397,650 (10,434)
Income (loss) from continuing
operations (4,947,398) (3,270,997) (9,212,521) 237,548 (1,850)
Income (loss) from
discontinued operations 2,749,663 (2,531,321) (979,199) 2,329,186 (2,438,643)
Net income (loss) (2,197,735) (5,802,318) (10,191,720) 2,566,734 (2,440,493)
Loss per common share from
continuing operations-basic
and diluted (0.49) (0.35) (1.11) N/A N/A
Income (loss) per common
share from discontinued
operations 0.26 (0.26) (0.12) N/A N/A
Net loss per common share-
basic and diluted (0.23) (0.61) (1.23) N/A N/A
Cash dividends per common
share -- -- -- -- --
</TABLE>
- ----------------
N/A - Not applicable
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $647,182 ($2,084,054) $5,570,657 $6,962,619 $206,071
Total assets 10,956,421 10,724,818 10,971,050 10,794,696 4,976,361
Long term borrowings -- -- -- -- --
</TABLE>
15
<PAGE>
<TABLE>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Stockholders' equity 6,299,193 4,510,253 7,809,048 7,861,883 3,539,522
</TABLE>
NOTES TO SELECTED FINANCIAL DATA
(1) Matrix Telecom was originally formed May 29, 1990 as a Texas general
partnership. The partners consisted of Matrix Communications, Limited
("MCL") a Texas limited liability partnership and Onward and Upward, Inc.
("OUI"). Effective January 1, 1994, the partnership was dissolved. Prior to
the dissolution, cash distributions were made to OUI in satisfaction of its
partnership interest. Concurrent with the dissolution, all remaining
tangible and intangible assets and liabilities of Matrix then owned by MCL
were transferred to Matrix Telecom, Inc., a Texas corporation. Effective
June 30, 1995, MCL was liquidated and its sole asset (Matrix Telecom
capital stock) was distributed to MCL's partners in proportion to their
ownership interests.
(2) Concurrent with the dissolution of MCL on June 30, 1995, Matrix Telecom's
then outstanding 1,000 shares of common stock were canceled and 100,000
shares were distributed to the prior MCL partners in proportion to the
ownership interest in MCL. Effective March 10, 1997, an 18 for 1 stock
split was declared resulting in 3,484,260 shares being then outstanding. On
December 1, 1997, NetLojix effected a one for four reverse stock split as
part of its reincorporation in Delaware, and then acquired Matrix Telecom
through the issuance of 9,582,493 shares of Common Stock (including
1,999,997 shares held as treasury stock after the share exchange which have
subsequently been cancelled). All share amounts have been restated to
reflect the stock splits and share exchanges.
(3) In October 1995, Matrix Telecom issued 2,405,499 shares of its common stock
valued at $3,607,682 in exchange for all of the outstanding common stock of
DNS Communications, Inc., a Houston based long distance reseller.
Subsequent to the acquisition, the operations of DNS generated substantial
losses. DNS's customer churn rate and bad debts as well as projected cash
flows were evaluated as of December 31, 1995, and it was determined that
the remaining investment in the DNS acquired customer base totaling
approximately $4,462,000 should be written off.
(4) Per share amounts are not reflected for 1996 and 1995 due to the
recapitalization of the Company as a result of the reverse acquisition in
1997.
(5) All amounts have been restated to give effect to the discontinued
operations treatment of the residential long distance business.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF NETLOJIX'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH NETLOJIX'S
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. ALL STATEMENTS, TREND ANALYSIS AND OTHER
16
<PAGE>
INFORMATION CONTAINED IN THIS PROSPECTUS RELATIVE TO MARKETS FOR NETLOJIX'S
SERVICES AND TRENDS IN NETLOJIX'S OPERATIONS OR FINANCIAL RESULTS, AS WELL AS
OTHER STATEMENTS INCLUDING WORDS SUCH AS "ANTICIPATES," "BELIEVES,"
"ESTIMATES," "EXPECTS" AND "INTENDS" AND OTHER SIMILAR EXPRESSIONS,
CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED IN "RISK
FACTORS," AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
THE FORWARD-LOOKING STATEMENTS.
BACKGROUND
DESCRIPTION OF OUR REVENUE SEGMENTS
We classify our business into three segments: network connectivity,
technical support and application development and hosting. The segmentation of
our company is how we manage the day-to-day operations of our business and is
based on the types of services we provide. All of our services are targeted
toward small to mid-sized businesses.
NETWORK CONNECTIVITY
The network connectivity segment includes services provided to our
customers that are connections for the transfer of data or voice traffic. We
provide numerous Internet service options, data and voice access and traditional
long distance services. Our Internet product offerings within the network
connectivity segment includes dial-up access, DSL, dedicated access and cable
access. Our telecommunications product offerings include dedicated or leased
lines, switched long distance, frame relay, ATM, calling cards, and "1-800"
services. This segment includes the Internet connectivity portion of our
Internet service provider business. Within this segment, our networking and
communications professionals will design, build and maintain a flexible,
cost-effective package of data networking and voice communication services to
meet our customer's needs.
TECHNICAL SUPPORT
Technical support services encompasses a broad array of solutions
including system integration, desktop and network support, asset management and
help desk solutions aimed at keeping our customers' IT systems operational and
their networks running smoothly. The IT support team is certified by over 40
hardware and software manufacturers. Service options within this segment include
systems and network installations, flat-fee maintenance contracts, prepaid time
block retainers, help desk management contracts, warranty repairs and a small
amount of hardware sales.
APPLICATION DEVELOPMENT AND HOSTING
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The applications development and hosting services segment includes
producing, designing, and programming creative multimedia and commerce
applications that can be produced as a web application or a stand alone
application. Once a web site has been designed we can also provide site
maintenance services, host the web site on our own web servers or provide
co-location space within one of our data centers.
FINANCIAL INFORMATION PRESENTATION
As described under "Business -- Background -- Acquisition of Matrix
Telecom," on December 1, 1997, we acquired Matrix Telecom through a share for
share exchange of common stock. (the "Share Exchange"). For accounting purposes,
the Share Exchange was treated as a reverse acquisition of NetLojix by Matrix
Telecom. Even though we were the legal acquirer, the historical financial
statements are required to be prepared as if Matrix Telecom acquired NetLojix.
Consequently, the following discussion of results of operations reflects the
operations of Matrix Telecom prior to December 1, 1997 and reflects the combined
operations of NetLojix and Matrix Telecom subsequent to December 1, 1997.
References to "the Company" or "our" financial statements and financial
information refer to operations of Matrix Telecom prior to the Share Exchange
and the combined operations of Matrix Telecom and NetLojix subsequent to the
Share Exchange.
The reverse acquisition of NetLojix by Matrix Telecom was accounted for
using the purchase method of accounting. In order to value the consideration
given in the Share Exchange, the market price of NetLojix's Common Stock for a
period immediately preceding the announcement of the Share Exchange was used. As
of the date of acquisition, we determined the fair value of the net tangible and
intangible assets and liabilities acquired. The underlying fair value of our net
assets was substantially less than the indicated market value of our common and
preferred stock. Accordingly, we recorded a charge to income of $9.1 million
immediately subsequent to the reverse acquisition.
In August, 1999 we decided to exit the residential long distance
business and focus exclusively on business customers. As of August, 1999 Matrix
Telecom was engaged in the residential long distance telephone business and
represented all of the Company's business in this segment. Consequently,
effective with the execution of a definitive agreement (the measurement date),
the residential long distance operations of Matrix Telecom have been reflected
as a discontinued operation in the consolidated financial statements. All prior
year financial information has been restated to conform to the discontinued
operations presentation.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
REVENUES
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Revenues from continuing operations increased $7.0 million or 70.6% to
$16.9 for the year ended December 31, 1999 as compared to $9.9 million for 1998.
Approximately $5.4 million of the increase is attributable to acquisitions that
were completed late in 1998. In September 1998 we acquired DMI and in November
1998 we acquired Remote Lojix. The acquisitions contributed a full year of
operations in 1999 compared with a partial year in 1998. We did not complete any
acquisitions during 1999 as we concentrated our efforts on integrating our 1998
acquisitions. As a result, we anticipate revenue growth to come solely from
organic or internal expansion of our business segments and future acquisitions.
NETWORK CONNECTIVITY SEGMENT
During 1999 we derived 56.8% of our revenues from network connectivity
services versus 80.9% in 1998. Segment revenues increased $1.6 million to $9.6
million for the year ended December 31, 1999 from $8.0 million for the year
ended December 31, 1998. Within the network connectivity segment, data and voice
services accounted for $1.2 million of the increase with the balance of the
increase attributable to Internet services.
Data and voice services revenue increased 24.5% in 1999 over 1998 as
the Company significantly expanded its sales force during 1999. The increase was
attributable to an increase of $0.5 million in dedicated access and an increase
in billable revenue minutes to 75.6 million minutes from 50.6 million minutes, a
49.3% increase. The increase in call traffic was partially offset by a decline
in billing rates per minute. Our average rate per minute during 1999 was 8.31
cents compared to 9.98 cents per minute in 1998 or a 16.7% decline. The decrease
in per minute rates is attributable to continued competitive pricing pressures
within the telecommunications industry. We believe that the downward competitive
pressure on long distance rates will continue to adversely effect our revenues
and gross margins for our traditional long distance products.
Internet connectivity services revenues increased 11.6% to $3.3
million. Demand for Internet connectivity in the central California area
continues to be strong with customer attrition rates running below industry
averages at about 1.5% per month. The increase in revenues is attributable to
dedicated Internet access products which include frame relay, cable, ISDN and
DSL. Our dedicated Internet access customer base increased over 350% in 1999 as
compared to 1998. We believe that demand for broadband Internet access products
will continue to be strong. We have upgraded our product offerings through
partnerships and alliances with major vendors so that we can continue to
increase our focus on broadband products.
TECHNICAL SUPPORT SERVICES SEGMENT
Technical support services revenues were $5.3 million for the year
ended December 31, 1999 compared to $1.0 million in 1998. In November, 1998 we
acquired Remote Lojix which started our technical support services. Therefore
the 1998 results represent two months of operating activity as opposed to 12
months in 1999.
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<PAGE>
APPLICATION DEVELOPMENT AND HOSTING SEGMENT
Application development and hosting segment revenues increased to $2.0
million for the year ended December 31, 1999 from $0.9 million for the year
ended December 31, 1998. During 1998 we recorded a $119,000 management fee
relating to the acquisition of DMI. Excluding the one time management fee,
revenues for this segment grew by $1.2 million or over 150%. The increase is
primarily attributable to applications services that were acquired in the DMI
acquisition in September 1998.
GROSS MARGIN
Gross margin on continuing operations as a percentage of revenues
increased to 44.4% for the year ended December 31, 1999 from 42.7% for the year
ended December 31, 1998. Total gross profit was $7.5 million for the year ended
December 31, 1999 compared with $4.2 million for 1998. The 77.3% increase is
primarily attributable to the 70.6% increase in total revenues, with the balance
attributable to increase in gross margin for several segments as described
below.
NETWORK CONNECTIVITY SEGMENT
The network connectivity segment recorded a gross margin of 45.0%
during 1999 compared to a gross margin 38.2% for the year ended December 31,
1998. The increase in gross margin was attributable to an increase in the gross
margins on our data and voice products.
Data and voice gross margins averaged 25.7% during 1999 compared with
13.2% in 1998. During 1999, the Company 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, the Company's gross margins for data and voice
services would have been 22.3%. Effective February 15, 1999, we negotiated
significantly lower rates with our 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 1999 traffic and
extend through October 2000.
Gross margins for Internet services continue to be strong averaging
81.8% during 1999 compared with 81.2% for 1998.
TECHNICAL SUPPORT SEGMENT
Technical support services gross margins averaged 36.0% during the year
ended December 31, 1999 compared with 39.5% during 1998. During 1999 salaries
expense for technical service employees increased which adversely effected
margins. We expect margins will continue to be
20
<PAGE>
under pressure as the projected demand for IT professionals is expected to
outweigh the supply. We are anticipating increasing retail prices in response
to the increased demand for IT professionals.
APPLICATION DEVELOPMENT AND HOSTING SEGMENT
Application development and hosting gross margins were 63.2% during
1999 compared with 86.5% for 1998. The decrease in gross margin is due to the
$119,000 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. Total gross profit increased to $1.3 million
from $.8 million in 1998.
SELLING, GENERAL, AND ADMINISTRATIVE COSTS
Selling, general, and administrative costs from continuing operations
increased $4.2 million to $11.3 million for the year ended December 31, 1999
from $7.1 million for the year ended December 31, 1998. Approximately $2.3
million of the increase is attributable to the acquisitions of DMI and Remote
Lojix which were completed late in 1998. The acquisitions contributed a full
year of operations in 1999 compared with a partial year in 1998. As a percentage
of revenues, selling, general and administrative costs decreased to 67.3% for
year ended December 31, 1999 from 71.6% for 1998.
Approximately $0.6 million of the increase is due to increased legal
and professional fees, primarily due to the class action lawsuit. The remaining
increase in selling, general and administrative costs was associated with
expanded sales force and related expenses including salaries, general office
expense, rent, utilities and travel expenditures.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $0.4 million to $1.0 million
for the year ended December 31, 1999 from $0.6 million for the year ended
December 31, 1998. The increase was primarily due to increased goodwill
amortization related to the purchase of Remote Lojix during the fourth quarter
of 1998.
DISCONTINUED OPERATIONS
As noted earlier, in August, 1999 we decided to exit the residential
long distance business and focus exclusively on business customers.
Consequently, effective with the execution of a definitive agreement, the
residential long distance operations of Matrix Telecom have been reflected as a
discontinued operation in the Company's consolidated financial statements. All
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<PAGE>
historical years have been restated to conform to the discontinued operations
presentation.
Loss from operations of our discontinued residential long distance
business was $3.0 million for the year ended December 31, 1999 compared with a
loss of $2.5 million 1998. The 1998 loss included a tax benefit of $1.4 million.
The tax benefit resulted from the loss from discontinued operations and the
carry back of a portion such loss to prior years. In accordance with APB 30,
since September 1, 1999, all losses of Matrix Telecom were deferred and were
recognized as a reduction of the gain on the sale.
On November 30, 1999, we sold all of the stock of Matrix Telecom to
Matrix Acquisition Holdings Corp., a wholly-owned subsidiary of Platinum Equity
Holdings, LLC, and recorded a gain of $5.8 million. The purchase price for the
Matrix Telecom stock was valued at $6.1 million and consisted of four
components. First, we received a credit against future charges incurred for long
distance wholesale telephone traffic pursuant to our service contract with
Matrix Telecom. We calculated the amount of this credit to be $0.6 million.
Second, we eliminated $4.2 million in intercompany indebtedness owed to Matrix
Telecom by NetLojix. Third, we retained federal income tax refunds paid to or
due Matrix Telecom in the total amount of $1.2 million. Fourth, we may receive a
cash payment based upon Matrix Telecom's Internet service customer base. We
currently do not expect any payment as a result of this component. In addition,
we received an indemnity from Platinum against certain claims or liabilities
arising under NetLojix's secured credit facility with Coast Business Credit.
NetLojix also has been released by Coast Business Credit from any claims or
liabilities relating to borrowings secured by the assets of Matrix Telecom.
The amount of the final purchase price is subject to adjustment based
on finalization of a balance sheet for Matrix Telecom as of August 31, 1999 and
agreement by both parties. We completed the balance sheet and we have been
notified by Platinum that they materially disagree with the closing balance
sheet that we prepared. We are currently attempting to negotiate a settlement of
the balance sheet items in disagreement. If the we are unable to resolve the
matter, the balance sheet will be submitted to an independent firm of
accountants chosen by the parties for final resolution. Any material
adjustments, as determined by the independent accountants, will effect the
purchase price and the recorded gain. At this time, we believe that the ultimate
resolution of the items in dispute will not materially affect the recorded gain.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES
Revenues from continuing operations increased $3.5 million or 53.7% to
$9.9 million from $6.4 million for the year ended December 31, 1998 as compared
to the same period in 1997. The increase is attributable to the Share Exchange
between NetLojix and Matrix. NetLojix contributed approximately $0.3 million of
revenues for the period December 1, 1997 through December 31, 1997 (subsequent
to the Share Exchange) compared with approximately $5.3 million in 1998.
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NETWORK CONNECTIVITY SEGMENT
Segment revenues, increased $1.6 million to $8.0 million for the year
ended December 31, 1998 from $6.4 million for the year ended December 31, 1998.
Within the network connectivity segment, data and voice services decreased $1.1
million or 17.7% and Internet services increased $2.7 million.
Data and voice billable minutes decreased to 50.6 million minutes or
7.5% from 54.7 million minutes in 1997. The decrease in 1998 compared with 1997
is attributable to the loss of a major customer in early 1997 and a decline in
the billing rates per minute. The loss of the major customer resulted in a
decrease of $0.7 million of revenues or approximately 6.5 million billable
minutes. Our average rate per minute during 1998 was 9.98 cents compared to 11.3
cents per minute in 1997 or an 11.7% decline. The decrease in per minute rates
is attributable to continued competitive pricing pressures within the
telecommunications industry.
Internet connectivity revenues increased to $2.9 million in 1998 from
$0.3 million in 1997. The increase is attributable to the Share Exchange as
Internet connectivity revenues for 1997 are for the period December 1, 1997
through December 31, 1997 (subsequent to the Share Exchange) compared with
twelve months in 1998.
TECHNICAL SUPPORT SEGMENT
Technical support services revenues were $1.0 million for the year
ended December 31, 1998 compared to zero in 1997. In November, 1998 we acquired
Remote Lojix which started our technical support services. Therefore the 1998
results represents two months of operating activity compared with none in 1997.
APPLICATION DEVELOPMENT AND HOSTING SEGMENT
Application development and hosting segment revenues were $0.9 million
for the year ended December 31, 1998 compared to zero in 1997. The increase is
primarily attributable to applications services that were acquired in the DMI
acquisition in September 1998 and a $119,000 management fee relating to the
acquisition of DMI that was recorded in 1998.
GROSS MARGIN
Gross margin from continuing operations increased $2.6 million to $4.2
million for the year ended December 31, 1998 from $1.6 million for the year
ended December 31, 1997. As a percentage of revenues, gross margin increased by
18.3 percentage points to 42.7% for the year ended December 31, 1998 from 24.4%
for the year ended December 31, 1997. The increase in gross margin was due to
the addition of Internet connectivity, technical support and applications
development and hosting segments in late 1997 and 1998 which typically
experience higher
23
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margins.
NETWORK CONNECTIVITY SEGMENT
The network connectivity segment recorded a gross margin of $3.1
million during 1998 compared to a gross margin $1.5 million for the year ended
December 31, 1997. The increase in gross margin was attributable to the addition
of Internet services on December 1, 1997.
Data and voice gross profit declined $0.6 million to $0.7 million in
1998 from $1.3 million in 1997. Gross margin as a percent of revenue averaged
13.2% during 1998 compared with 21.3% in 1998. Due to increasing market demands,
the Company was forced to continue to decrease retail rates in 1998, however,
the underlying network costs did not change due to contractual commitments.
Internet services contributed $2.4 million to gross margin in 1998
compared with $0.2 million in 1997. The increase is attributable to the Share
Exchange as Internet connectivity gross profit for 1997 includes the period
December 1, 1997 through December 31, 1997 (subsequent to the Share Exchange)
compared with 12 months in 1998.
TECHNICAL SUPPORT SEGMENT
Technical support services contributed $0.4 million to gross margin for
the year ended December 31, 1998 compared with none in 1997. In November, 1998
we acquired Remote Lojix which started our technical support services. Therefore
the 1998 results represents two months of operating activity compared with none
in 1997.
APPLICATION DEVELOPMENT AND HOSTING SEGMENT
Application development and hosting services contributed $0.8 million
to gross margin for the year ended December 31, 1998 compared to none in 1997.
The increase is primarily attributable to applications services that were
acquired in the DMI acquisition in September 1998 and a $119,000 management fee
relating to the acquisition of DMI that was recorded in 1998.
SELLING, GENERAL, AND ADMINISTRATIVE COSTS
Selling, general, and administrative costs from continuing operations
increased $5.4 million to $7.1 million for the year ended December 31, 1998 from
$1.7 million for the year ended December 31, 1997. The primary reasons for the
increase in selling, general, and administrative costs from continuing
operations were the Share Exchange and the acquisitions of Remote Lojix and DMI
in 1998. Effective December 1, 1997, the selling general and administrative
costs of NetLojix were included in selling general and administrative costs.
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Salaries and wages increased $3.4 million, of which $2.2 is a
attributable to twelve months of NetLojix selling, general and administrative
costs included in the total in 1998 compared with one month in 1997. The
acquisitions of DMI and Remote Lojix added approximately $0.4 million and $0.5
million, respectively of salaries and wages. The balance of the increase is
attributable to the addition of personnel and normal salary increases.
Stock compensation expense increased $0.4 million in 1998 compared with
1997. During 1998 an additional expense was recognized in connection with the
early vesting of a restricted stock grant to a departing director.
Professional services increased $0.5 million as a result of additional
expenses associated with public company reporting requirements.
ACQUISITION RELATED WRITE-OFF
The $9.1 million write-off relates to the Share Exchange as discussed
above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $0.5 million to $0.6 million
for the year ended December 31, 1998 from $0.1 million for the year ended
December 31, 1997. The increase primarily resulted from amortization of the
acquired customer base associated with the share exchange of NetLojix and Matrix
Telecom effective December 1, 1997. The customer base is amortized on a
straight-line basis over five years. Similarly, the acquisition and
consolidation of assets related to the Share Exchange resulted in some increases
in depreciation expense. As a result of the acquisitions of DMI and Remote Lojix
in the fourth quarter of 1998, NetLojix recognized goodwill in the amount of
$4.5 million. Goodwill is amortized on a straight-line basis over fifteen years.
Remote Lojix comprised $4.4 million of the goodwill. Goodwill was determined by
the purchase price in excess of the fair value of the assets received.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999 we had cash and cash equivalents of $1.1
million and working capital (current assets minus current liabilities) of $0.6
million. We had no debt outstanding as of December 31, 1999 and as of April 25,
2000 we continue to have no outstanding debt. For the year ended December 31,
1999, we incurred a loss from continuing operations of $4.9 million and we
incurred significant losses from continuing operations in each of the previous
two years. Our net loss totaled $2.2 million, $5.8 million and $10.2 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Net cash used by
continuing operations totaled $4.7 million, $4.1 million and $2.9 million for
the years ended December 31, 1999, 1998 and 1997.
In November 1999 we completed the sale of Matrix Telecom. The purchase
price for the
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Matrix Telecom stock was valued at $6,052,529 which is subject to adjustment
based on finalization of a balance sheet for Matrix Telecom, Inc. as of
August 31, 1999 and agreement by both parties. We completed the balance
sheet, and we have been notified by Platinum that it materially disagrees
with the closing balance sheet that we prepared. We are currently attempting
to negotiate a settlement of the balance sheet items in disagreement. If we
are unable to resolve the matter, the balance sheet will be submitted to an
independent firm of accountants chosen by the parties for final resolution.
Any material adjustments, as determined by the independent accountants, will
effect the purchase price and the recorded gain. At this time, we believe
that the ultimate resolution of the items in dispute will not materially
affect the recorded gain.
We used $225,000 of the long distance credit received in the sale of
Matrix Telecom during the period commencing on September 1, 1999 and ending on
November 30, 1999. After November 30, 1999, the amount of the long distance
credit used may not exceed $100,000 per month. We have used an additional
$100,000 in February, 2000. We intend to use this long distance credit, to the
extent available, to offset our costs for long distance service which we
continue to provide to our business customers. However, we are not obligated to
continue to purchase long distance services from Matrix Telecom.
In March, 2000, we restructured our secured credit facility with Coast
Business Credit. Under the restructured line of credit, we may borrow up to 75%
of eligible receivables (as defined) up to a total amount of $3.0 million. The
percentage may be increased to 80% of eligible receivables if we reach certain
operational targets. In addition, the line of credit may be used 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% (11.00% at April 25, 2000). Borrowings under the credit facility are
secured by substantially all of our assets. Currently no amount is outstanding
under the credit facility.
On April 23, 1999, we entered into the equity line agreement with
Cambois Finance. Under the terms of the equity line agreement, we may sell or
put our common stock to Cambois Finance, at our option at any time, subject to
the satisfaction of several conditions. The equity line agreement provides for
Cambois Finance to purchase up to $13,500,000 of our common stock, subject to
our 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. As of April 25, 2000, we had sold a total of 1,066,725
shares of common stock to Cambois Finance for total proceeds of $2,000,000.
On April 13, 1999, we sold 1,500 shares of newly-designated Series B
Convertible Preferred Stock to three private investors for $1,500,000. The
Series B Convertible Preferred Stock was convertible into common stock at the
option of the Series B investors at any time. As of December 2, 1999, all shares
of the Series B Convertible Preferred Stock had been converted into a total of
804,328 shares of NetLojix Common Stock. As a result, no shares of the Series B
Convertible Preferred Stock are outstanding.
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On March 3, 2000 we raised $1.5 million through a private placement of
375,000 shares of common stock at $4.00 per share.
Historically, our cash flow from operations, our secured borrowings,
our private placements of both common and preferred stock and our equity line
agreement with Cambois Finance, Inc. have been sufficient to meet working
capital and capital expenditure requirements. We believe that our cash flow from
operations, our equity line agreement and our secured line of credit with Coast
Business Credit are sufficient to meet our working capital requirements from our
current operations into the foreseeable future.
However, our ability to raise capital by putting common stock to
Cambois Finance under the equity line agreement is subject to the satisfaction
of several conditions, as discussed above. Additionally, an important component
of our past growth has been to develop our business through acquisitions. We
intend to continue this strategy. In appropriate circumstances, we may use our
capital stock for acquisitions in addition to debt and equity financing.
INFLATION
We do not believe that the relatively moderate rates of inflation over
the past three years have had a significant effect on our net sales or our
profitability.
RECENTLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. In July 1999, the Financial Accounting Standards Board
issued SFAS No. 137 which delayed the effective date of SFAS No. 133. SFAS No.
133 is now effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. We do not anticipate that this statement will have a material
impact on our consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not been exposed to material future earnings or cash flow
fluctuations from changes in interest rates on our long-term debt at December
31, 1999. A hypothetical increase of 100 basis points in interest rate (ten
percent of our overall borrowing rate) would not result in a material
fluctuation in future earnings or cash flow. We have not entered into any
derivative financial instruments to manage interest rate risk or for speculative
purposes and we are not currently evaluating the future use of such financial
instruments.
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BUSINESS
BACKGROUND
GENERAL
NetLojix is an eBusiness enabler providing advanced Internet, data, and
voice connectivity, technical support and application hosting services to the
mid-size business market. We are a single-source provider of enterprise network
solutions integrating our complete portfolio of broadband connectivity;
applications development and hosting; and system integration and maintenance.
Our offices and support teams provide design, implementation and management of
wide area networks (WANs), local area networks (LANs) and electronic commerce or
"eBusiness" solutions, including frame relay, digital subscriber line (DSL),
Internet -based virtual private networks (iVPN), voice products transported via
the Internet Protocol (VOIP) and Internet access. We offer these services on a
stand-alone basis or bundled as part of a total solution.
We also provide Internet access and email services under the recognized
brands of Silicon Beach and WestNet to approximately 10,000 customers through
DSL, ISDN, Frame Relay, wireless microwave, dial-up, and cable modem access on
the central coast of California.
HISTORY
The company now known as NetLojix was incorporated on October 31, 1981.
Prior to October 23, 1996, NetLojix conducted operations under the name "Hi,
Tiger International, Inc." On October 23, 1996, Hi, Tiger International, Inc.
acquired AvTel Holdings, Inc, a California corporation. We changed our name to
"AvTel Communications, Inc." and implemented a complete change in our board of
directors and executive management. AvTel Holding's Chairman and CEO and Chief
Operating Officer became the Chairman and CEO and the Chief Operating Officer of
AvTel Communications, Inc. As a result of the acquisition, we began to change
the focus and the direction of NetLojix. In the intervening years, we have
developed a sales and operational strategy to position us as an eBusiness
enabler providing advanced Internet, data, and voice connectivity, technical
support and application hosting services to the mid-size business market. We now
categorize our sources of revenue into three areas: network connectivity,
technical support services and application development and hosting.
The acquisition of AvTel Holdings was effected in exchange for
1,063,127 shares of NetLojix common stock, representing approximately 61% of the
issued and outstanding NetLojix common stock after giving effect to the
acquisition, and 250,000 shares of newly authorized shares of NetLojix's series
A convertible preferred stock. For accounting purposes, the acquisition was
treated as a reverse acquisition with AvTel Holdings as the acquirer.
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The acquisition of AvTel Holdings started us on our current
operational strategy which we have continued to enhance and refine through
acquisitions and mergers to support our sources of revenues; network
connectivity, technical support and application development and hosting.
NETWORK CONNECTIVITY
/ / In November, 1996, we acquired Silicon Beach Communications, Inc., a
provider of Internet services application development and hosting services.
/ / In February, 1997, we acquired WestNet Communications, Inc., a Ventura,
California Internet service provider. Following completion of this
acquisition, we began to integrate the customer bases, network facilities
and other operations of Silicon Beach Communications and WestNet
Communications in order to achieve efficiencies and economies of scale.
/ / On December 1, 1997, we acquired Matrix Telecom, a privately-held Texas
corporation. At the time of the acquisition, Matrix Telecom was a provider
of long distance telephone services to both business and residential
customers. See "Background--Acquisition of Matrix Telecom" below. This
acquisition provided us with certain carrier agreements, regulatory
approvals, licenses, provisioning capabilities and an expanded customer
base. Subsequent to the acquisition, we realigned Matrix Telecom to include
only residential customers. . On November 30, 1999, we sold Matrix Telecom
representing all of our residential customer base. See "Sale of Matrix
Telecom" below.
TECHNICAL SUPPORT SERVICES
/ / In November, 1998, we acquired Remote Lojix/ PCSI, Inc., a privately-held
corporation based in New York, which is a provider of system integration
and local area network services to corporate customers primarily in the
eastern United States. This acquisition provided us with the necessary
sales, technical resources and service capabilities to initiate our
strategy to provide technical support services to our existing and new
customers.
APPLICATION DEVELOPMENT AND HOSTING
/ / On September 25, 1998, we acquired Digital Media International, Inc., a
privately-held corporation based in Santa Barbara, California, which
develops software for educational, entertainment and other applications.
This acquisition significantly enhanced our development capabilities,
provided us with certain proprietary software applications and an expanded
customer base.
CORPORATE NAME CHANGE
On September 15, 1999, we changed our name to NetLojix Communications,
Inc. NetLojix was chosen to reflect our focus on providing enterprise-wide
network solutions including
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communications services and information technology (IT) support. This name
change was effected by the short-form merger of a wholly-owned subsidiary
with and into NetLojix.
ACQUISITION OF MATRIX TELECOM
We acquired Matrix Telecom through a stock for stock exchange which was
completed on December 1, 1997. In exchange for 100% of the outstanding stock of
Matrix Telecom, the Matrix Telecom shareholders received 9,582,493 shares of
newly issued common shares of NetLojix, representing approximately 83.9% of the
issued common stock of NetLojix. For accounting purposes, the acquisition was
treated as a reverse acquisition with Matrix Telecom as the acquirer.
In connection with the share exchange, the Matrix Telecom stockholders
and NetLojix entered into a registration rights and lockup agreement dated
December 1, 1997. Under the agreement, certain persons and entities who held an
aggregate of 85.2% of the outstanding Matrix Telecom common stock agreed not to
offer, pledge, sell, or otherwise dispose of any shares of NetLojix issued to
them pursuant to the terms of the stock exchange agreement for a two year
period. The two-year period expired on December 1, 1999.
Under the terms of the registration rights and lockup agreement, we are
required to use our best efforts to file a shelf registration statement
providing for the sale by such stockholders of all securities issued to them in
connection with the stock exchange agreement, if requested by such stockholders.
We must also use reasonable efforts to keep the shelf registration statement
effective on a continuous basis until either (1) all of the shares of common
stock are sold or (2) all of the shares of common stock could be sold in a
single transaction pursuant to Rule 144 of the Securities Act of 1933. These
stockholders may also require us to undertake up to two additional demand
registrations of their securities if the shelf registration is not in place. We
must pay all costs and expenses of both shelf and demand registrations
(excluding any underwriting discounts and fees of counsel to the stockholders.
As of April 25, 2000, no stockholders have requested NetLojix to file a
shelf registration and consequently, the shares remain unregistered. NetLojix's
obligations under the registration rights and lockup agreement relate to a total
of 6,457,123 shares of NetLojix stock held by the following shareholders: Ronald
L. Jensen (329,321 shares), Gladys Jensen (731,847 shares), James J. Jensen
(800,000 shares), Jami J. Jensen (851,738 shares), Janet J. Jensen (961,939
shares), Jeffrey J. Jensen (851,738 shares), Julie J. Jensen (851,738 shares),
The RJ & GJ Foundation (329,692 shares), The Janet Foundation (24,124 shares),
The OUI Foundation (75,862 shares), The Chasdrew Foundation (24,124 shares),
John E. Allen (125,000 shares), Anthony E. Papa (250,000 shares) and James P.
Pisani (250,000 shares).
At the time of the share exchange, Matrix Telecom was a provider of
domestic and international long distance telecommunication services primarily to
residential and small business customers in the United States and was licensed
to provide telecom services in 49 states. Matrix
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Telecom's strategy was to compete as a non-facilities based reseller,
contracting with Sprint Corporation, Pacific Gateway Exchange, Inc., and
other carriers to provide switching and transmission of its customers'
traffic. The acquisition of Matrix Telecom provided us with the telecom
licenses, billing services and technical support services needed to compete
effectively in the communications business.
SALE OF MATRIX TELECOM
After the purchase of Matrix Telecom, we began to realign our business
along customer oriented business segments. The business customers that were
acquired in the Matrix Telecom acquisition were moved to the business markets
segment which left Matrix Telecom focused almost exclusively on residential long
distance customers.
Since the time of the share exchange, competitive pressures within the
residential long distance market have increased dramatically. Pricing pressures
have continued to reduce retail pricing of long distance products. These
factors, similar in nature to those affecting all resellers of long distance
telephone services, together with our discontinuation of non-cost effective
telemarketing and direct mail marketing, resulted in significant decreases in
revenue. This business became overwhelmingly competitive with unprecedented
downward pricing pressure and rising customer attrition rates. We also believe
that the challenges we experienced in this area overshadowed the substantial
growth we experienced in providing data communications services and information
technology support to businesses.
In August, 1999 we decided to exit the residential long distance
business. Our decision was driven by our desire to maximize our focus on our
core competency of providing enterprise network solutions to business customers.
The sale of Matrix Telecom was the result of our decision to exit the
residential long distance business.
On November 30, 1999, we sold all of the stock of Matrix Telecom to
Matrix Acquisition Holdings Corp., a wholly-owned subsidiary of Platinum Equity
Holdings, LLC. The transaction was completed under a Stock Purchase Agreement
dated August 31, 1999, as amended. The purchase price for the Matrix Telecom
stock was valued at $6,052,529. There were four components to the purchase
price. First, we received a credit against future charges incurred for long
distance wholesale telephone traffic pursuant to our service contract with
Matrix Telecom. We calculated the amount of this credit to be $614,332. Second,
the parties eliminated $4,190,058 in intercompany indebtedness owed to Matrix
Telecom by NetLojix. Third, we retained federal income tax refunds paid to or
due Matrix Telecom in the total amount of $1,248,139. Fourth, we may receive a
cash payment based upon Matrix Telecom's Internet service customer base. We
currently do not anticipate any payment from this component. In addition, we
received an indemnity from Platinum against certain claims or liabilities
arising under our secured credit
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facility with Coast Business Credit. We have also been released by Coast
Business Credit from any claims or liabilities relating to borrowings secured
by the assets of Matrix Telecom.
The amount of the final purchase price is subject to adjustment based
on finalization of a balance sheet for Matrix Telecom, Inc. as of August 31,
1999 and agreement by both parties. We completed the balance sheet, and Platinum
has notified us that it materially disagrees with the closing balance sheet that
we prepared. We are currently attempting to negotiate a settlement of the
balance sheet items in disagreement. If we are unable to resolve the matter, the
balance sheet will be submitted to an independent firm of accountants chosen by
the parties for final resolution. Any material adjustments, as determined by the
independent accountants, will effect the purchase price and the recorded gain.
At this time, we believe that the ultimate resolution of the items in dispute
will not materially affect the recorded gain.
In connection with the sale, we agreed not to engage in the provision
of residential long distance telephone services within the United States prior
to August 31, 2002. However, we may continue to provide long distance service to
our business customers. During the same period we are also prohibited from,
directly or indirectly, soliciting the employment of or hiring certain employees
of Matrix Telecom.
The sale of Matrix Telecom was the result of NetLojix's decision in
August, 1999 to exit the residential long-distance business. Consequently, the
residential long-distance business has been reflected as a discontinued
operation and all prior period amounts have been restated.
BUSINESS OF THE COMPANY
We provide services that enable small to mid-sized businesses to
effectively compete in the increasingly complex world of electronic commerce and
communications. The services we provide include advanced Internet, data, and
voice connectivity, technical support and application development and hosting
services. We are a single-source provider of enterprise network solutions
integrating our complete portfolio of broadband connectivity; applications
development and hosting; and system integration and maintenance. Our offices and
support teams provide design, implementation and management of LAN, WAN and
eBusiness solutions, including frame relay, DSL, iVPN, VOIP and Internet access.
We offer these services on a stand-alone basis or bundled as part of a total
solution.
We target the enterprise networking needs of mid-size corporate
customers. Our objective is to become a leading single-source provider of
network connectivity, technical support, and application hosting. This includes
Internet access, data transport and voice services; systems integration, IT
service and technical support; and web-centric application hosting. Through a
value-added sales process, we design, install and manage our customers'
networks. We also provide a host of additional value-added services assisting
our customers to create enhanced Intranet and extranet applications. We believe
this strategy of focusing on the corporate customer for enterprise-wide network
solutions offers significant opportunity. We are able to cross-market to our
customer base
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a variety of traditional telecommunications products and services such as
long distance telephone service, executive calling cards and video/audio
conferencing as well as eBusiness and IT maintenance and support services.
Recently, we have implemented a facilities-based network strategy which
includes the deployment of multi-service points-of-presence ("mPOPs") in select
target markets. mPOPs are router-based network access points that allow us to
provide services we currently do not provide in certain markets, give us greater
control over portions of the network we provision for our customers and
therefore provide a higher quality of service. We will utilize local access
providers including local exchange carriers ("LEC's"), competitive local
exchange carriers ("CLEC's"), DSL providers and wireless carriers to
interconnect customer locations with our mPOP network. Each mPOP is connected to
the Internet through high-speed, broadband facilities provided by alternative
carriers. The mPOP strategy will also provide us with additional transport
facilities for other frame relay and ATM data services. Each mPOP is equipped
with, among other things, Cisco data routing equipment and other systems as
required to provide transport and hosting services. mPOPs provide NetLojix
greater network flexibility and control and cost benefits in providing data
services to our customers.
We currently operate one mPOP in Santa Barbara, California and we are
installing three additional locations which should be fully operational by May,
2000. The three additional mPOPs are located in San Francisco, California, Los
Angeles, California and New York, New York. We also operate nine smaller virtual
points-of-presence on the Central Coast of California. We expect to continue to
expand our mPOP network in the future.
We expect to upgrade each mPOP with Internet Protocol (IP) voice
routing capabilities as customer demand for such services increases. We believe
that the deployment of our mPOP strategy will provide additional, competitively
priced service offerings to our target customers.
We also provide Internet access and email services under the recognized
brands of Silicon Beach and WestNet to approximately 10,000 customers through
DSL, ISDN, Frame Relay, wireless microwave, dial-up, and cable modem access on
the central coast of California.
INDUSTRY. Information technology has fast become a driving force in
telecommunications. Our strategy is driven by corporate end users' needs for
network connectivity, integration and support as a result of new software
applications and technology advancements developed in the information technology
arena. This has become a critical element in the ability of businesses,
professional and other organizations to improve productivity and lower costs.
This can be accomplished through the use of a variety of communications
services, including branch office, remote office and telecommuter networking
("intranets") as well as providing network access to customers, vendors,
suppliers ("extranets") and the Internet. While we expect these factors to
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continue to increase market demand for these services, there are no
assurances regarding the size of such demand or that NetLojix will be
selected to provide its services in response to such demand.
INTERNETWORKING. At an increasing rate, business, professional and
other organizations are seeking to inter-network their local area networks, wide
area networks and virtual private networks to share information and computing
resources for applications such as e-mail, transaction processing, the sharing
of databases, multi-site engineering, product development and electronic image
transfer. The communications traffic of many organizations has grown steadily
during the past two decades leading to enterprise-wide networks facilitating
rapid and efficient data communications between work groups, departments and
branch locations. Additionally, a shift to enterprise-wide remote access has
occurred due to increased business mobility, increased telecommuting, reduced
cost of wide area network services and widespread adoption of remote access
standards. Internet and remote access devices extend the organization network
beyond the branch office, bringing remote users closer to the enterprise and
permitting connection to the corporate local area network so users can work
anywhere, any time. Users can access e-mail, databases and servers as if they
were in the corporate office. The recent availability of reliable Internet
protocol voice technology within an enterprise-wide data network has created
additional cost-saving incentives for businesses to implement advanced network
solutions.
We believe that, as a result of these shifts, internetworking, the
method used for interconnecting networks, will continue to grow. This is
reflected in the growth in sales and distribution of routers, remote access
servers, intranet software and other various components that enable
Internetworking. As the computing paradigm continues to migrate to Web-centric
architectures, enterprise-wide networks allow those technologies to be
implemented. Our strategy recognizes the opportunity to bridge the gap between
telecom and computer providers and simplify networking complexities by becoming
a single source for enterprise-wide services and support.
CONNECTIVITY AND BANDWIDTH. We believe that communications requirements
such as bandwidth availability and network design are replacing computer
requirements such as processor speed, memory or operating systems as the
delimiting factors for business applications. Video conferencing, remote patient
diagnostics with medical imaging and telecommuting are all business applications
in which the success of the deployment is defined by the available bandwidth.
The ultimate realization of this trend is the Web and applications developed
with Internet-specific tools. Web-based applications are computer platform and
operating system independent but depend entirely upon connectivity and bandwidth
for successful deployment and execution.
As a result, connectivity has become one of the most important factors
in enhancing business productivity and customer service. Large corporations have
historically created private wide area networks through leased dedicated data
lines. However, dedicated point-to-point facilities have several deficiencies:
leased lines are very expensive; remote offices and telecommuters are omitted;
and leased lines are not suited for unscheduled and asynchronous communications.
Accordingly, small and medium size companies that have sought the benefits of
Internetworking
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have been required to use modems and dial-up telephone lines which are
generally too slow to handle today's applications.
Growing demands for high speed capabilities have given way to the
emergence of new carrier-based data communication services to overcome the
deficiencies of both dedicated leased and dial-up lines. Wide area network
solutions vary substantially depending on an organization's size and
communications needs. Traditionally, wide-band digital transmission circuits
(such as T1 and DS-1) were leased from public carriers to provide voice, fax and
data communications links between larger offices and low speed leased lines
(such as DS-O) for branch office connectivity. For some applications, however,
this has proven expensive and inefficient because the entire bandwidth capacity
is dedicated 24 hours per day, whether or not it is used.
Packet-based services were developed to address the issue of allocation
and utilization. Today, "fast packet" networking technologies such as Frame
Relay and Asynchronous Transfer Mode have emerged as an integrated,
cost-effective, flexible wide area network solution. These networks allow for
"bandwidth on demand" between any two endpoints on a wide area network.
STRATEGY. The implementation of our strategy involves the marketing of
products and services integrated into enterprise-wide network solutions for
business customers. These enterprise-wide solutions include network design,
system integration and technical support, wide area network connectivity, voice
connectivity, Internet access and Web development, hosting and co-location.
NetLojix's sales and marketing activities result in monthly, recurring revenues
from networking customers under term agreements. Our sales strategy includes
in-house direct sales professionals and an agent program through which we
distribute our services through value-added resellers (VARs) of information
technology products. We leverage the existing customer relationships of these
VARs gaining more immediate access to a wider group of prospective customers and
greater credibility in the sales process. Additionally, this VAR channel becomes
the service organization for our business customers requiring on-site repair and
maintenance visits in remote markets.
REGULATION
The services which NetLojix provides, either directly or through our
subsidiaries, are subject to varying degrees of federal, state and local
regulation. The Federal Communications Commission exercises jurisdiction over
all facilities of, and services offered by, telecommunications common carriers
to the extent that they involve the provision, origination or termination of
jurisdictionally interstate or international communications. The state public
service commissions retain jurisdiction over jurisdictionally intrastate
communications. The Federal Communications Commission and relevant public
service commissions have the authority to regulate interstate and intrastate
rates, respectively, ownership of transmission facilities and the terms and
conditions under which our services are provided.
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In general, neither the Federal Communications Commission nor the
relevant state public service commissions exercise direct oversight over cost
justification for our services or profit levels, but either or both may do so in
the future. However, we are required by federal and state law and regulations to
file tariffs listing the rates, terms and conditions of services provided. We
are also generally required to obtain certification from the relevant state
public service commission prior to the initiation of certain intrastate service,
and are required to maintain a certificate issued by the Federal Communications
Commission in connection with the provision of certain international services.
Any failure to maintain proper federal and state tariffs or certification or any
difficulties or delays in obtaining required authorization could have a material
adverse effect on our business.
In order to continue providing long distance telephone services to our
business customers after the sale of Matrix Telecom, we formed NetLojix Telecom,
Inc., a wholly-owned subsidiary of NetLojix, which has applied for Section 214
authority from the Federal Communications Commission and operating authority
from all 49 states in which Matrix Telecom was qualified or registered. As
NetLojix Telecom has not yet received such approval in all such jurisdictions,
Matrix Telecom is continuing to provide service on behalf of NetLojix in such
jurisdiction until such approval is received. As of April 25, 2000, NetLojix
Telecom had received approval in 34 jurisdictions.
COMPETITION
The telecommunications and information technology industries are highly
competitive and affected by rapid regulatory and technological change. We face
substantial and growing competition from a number of telecommunications service
providers, Internet service providers and technical support service providers.
We do not believe that a significant number of other companies are providing the
bundle of services for enterprise-wide network solutions or a comparable range
of services integrating Internet, data and voice connectivity and technical
support to mid-sized businesses. However, we do face intense competition in each
of our individual product and service offerings.
Our network connectivity services offerings compete directly with
traditional long distance carriers, facilities based carriers as well as
Internet and web service providers. Our technical support services competes both
directly and indirectly with IT consulting firms and computer equipment
resellers.
We believe that the principal competitive factors in our business
include pricing, customer service, network quality, service offerings and the
flexibility to adapt to changing market conditions. Our future success depends
in part upon our ability to compete with national and local telecommunications
providers, national and local Internet service providers, and small and large
network services providers, many of which have considerably greater financial
and other resources than us.
36
<PAGE>
INTELLECTUAL PROPERTY
We use several unregistered trademarks in our marketing materials.
These include NetLojix -TM-, mPOP -TM-, Silicon Beach -TM-, WestNet
Communications -TM-, Remote Lojix -TM-, Addictive Media -TM- and Digital
Meteor -TM-, which we may seek to register. While these trademarks are important
to our business, we do not believe that failure to register these trademarks
poses any material risk of infringement on our rights to use such trademarks.
EMPLOYEES
As of March 31, 2000, NetLojix and our subsidiaries had 148 full-time
employees. None of the employees are represented by a union. We supplement our
work force from time to time with contractors, administrative personnel through
employment agencies, and part time employees. We believe that we have good
relations with our employees.
FACILITIES
We do not own any real property. The table below sets forth certain
information with respect to the material properties that we lease, including the
executive offices in Santa Barbara, California. All of such properties consist
of office space. NetLojix and subsidiaries also operate points-of-presence for
the purpose of creating local access points to its network backbone.
<TABLE>
<CAPTION>
CURRENT MONTHLY
LOCATION SQUARE FEET EXPIRATION DATE(2) RENT(1)
<S> <C> <C> <C>
501 Bath Street 6,798 March 2003 $11,863
Santa Barbara, CA
1421 State Street 3,000 March 2003 $4,950
Suite I
Santa Barbara, Ca
104 West Anapamu 3,441 November 2001 $4,800
Suites C&D
Santa Barbara, CA
70 West 36th St., Suite 605 2,500 December 2002 $4,800
New York, NY
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
CURRENT MONTHLY
LOCATION SQUARE FEET EXPIRATION DATE(2) RENT(1)
<S> <C> <C> <C>
38 East 32nd St., 8th Floor 4,400 February 2004 $4,416
New York, NY
1600 Parkwood Circle (3) 2,190 December 2001 $3,750
Suite 603
Atlanta, GA
7001 Grapevine Highway 3,183 May 2003 $3,382
Suite 525
North Richland Hills, TX
2333 Mill Creek Drive 1,446 February 2001 $3,370
Suite 120
Laguna Hills, CA
</TABLE>
- ---------------------
(1) All amounts shown are on a triple net basis.
(2) Subject to certain renewal options held by NetLojix.
(3) Subleased to an unrelated third party for the balance of the lease term
for $3,385 per month
In addition, NetLojix has leases at four other facilities throughout
the United States. These facilities are used primarily for sales offices. The
rent on these facilities is less than $3,000 per month per facility.
LEGAL PROCEEDINGS
NetLojix is a defendant in a class action under the federal securities
laws (IN RE AVTEL SECURITIES LITIGATION, Case No. 98-9236) currently pending in
the United States District Court for the Central District of California.
This litigation is the consolidation of five separate class action
suits that were filed against us and certain of our officers, alleging
securities fraud. The plaintiffs are purported investors who purchased shares of
NetLojix common stock on November 12, 1998. On that day, the trading price for
the common stock on The Nasdaq SmallCap Market rose from $2.125 to $31 per
share, with
38
<PAGE>
more than 3 million shares trading. The plaintiffs allege that a press
release issued by NetLojix on November 12, 1998, announcing the launch of its
subsidiaries' DSLink Service for high speed Internet access, and an interview
with NetLojix Chief Executive Officer Anthony E. Papa concerning that
service, as reported by Bloomberg News, were misleading and defrauded the
market for NetLojix's publicly-traded securities.
The plaintiffs filed a consolidated and amended complaint on March
15, 1999. Discovery has begun, with trial scheduled for February 2001. We
contend that our statements were not misleading.
On April 19, 2000, we reached an agreement in principle to settle
all outstanding claims under the class action lawsuit with counsel for the
plaintiff class. This agreement is subject to finalization and execution of a
definitive settlement agreement, passage of a class member notification
period and final approval by the court. Under the terms of the settlement, we
will issue 232,000 shares of common stock and warrants to purchase 200,000
shares of common stock at an exercise price of $8.00 per share. The warrants
will have a term of 2 years. In addition, we will pay $150,000 in
administrative costs and other expenses. As of March 31, 2000, we have
incurred in excess of $100,000 in legal costs and other expenses and numerous
hours of senior management time has been diverted away from the day-to-day
operations of NetLojix because of the class action lawsuit. While we continue
to believe we have strong defenses against the lawsuit, considering the
ongoing costs of defending the lawsuit in terms of management time and legal
fees as well as the uncertainty associated with a jury trial, we believe the
settlement is fair and equitable. We will record a charge against earnings in
the first quarter of 2000 of $998,000 relating to the expected settlement.
On May 28, 1999, Matrix Telecom was served with a complaint filed in
the District Court of Dallas County, Texas, by E. Craig Sanders. Mr. Sanders
was an executive of Matrix Telecom from late 1994 until he was terminated by
Matrix Telecom in May 1995. In addition to Matrix Telecom, the defendants in
the action are Ronald L. Jensen, United Group Association, Inc. (an entity
formerly owned by Mr. Jensen) and NetLojix. The complaint alleges that Mr.
Jensen wrongfully foreclosed on Matrix Telecom stock allegedly owned by Mr.
Sanders after Mr. Sanders failed to repay a debt to Mr. Jensen. Matrix
Telecom's stock records do not indicate that any shares were issued in Mr.
Sanders' name, and the shares in dispute, which had been issued in Mr.
Jensen's name, were subsequently repurchased from Mr. Jensen by Matrix
Telecom. In addition to his claims against Mr. Jensen, Mr. Sanders is
apparently seeking 171,548 shares of NetLojix's common stock, or its monetary
equivalent, from NetLojix.
NetLojix and Matrix Telecom have filed an answer denying the
allegations of this complaint, and discovery in the matter is under way.
NetLojix intends to defend this complaint vigorously.
NetLojix is not aware of any proceedings against it contemplated by
any governmental authority.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of NetLojix are as follows:
39
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION WITH NETLOJIX
<S> <C> <C>
Anthony E. Papa....................... 37 Chairman of the Board and Chief
Executive Officer
James P. Pisani....................... 35 President, Chief Operating Officer,
Secretary and Director
Michael J. Ussery..................... 41 Chief Financial Officer
Frank A. Leone........................ 53 Executive Vice President of Field
Sales and Service
Joe Renteria, Jr...................... 53 Vice President, Information Systems
John E. Allen......................... 63 Director
Jeffrey J. Jensen..................... 41 Director
Anthony D. Martin..................... 50 Director
</TABLE>
ANTHONY E. PAPA, age 37, has been the Chairman of the Board and
Chief Executive Officer of NetLojix since October 1996. Mr. Papa was also
President of NetLojix from October 1996 until February 1998. Prior to October
1996, Mr. Papa had served as President of ICS Communications, Inc.,
Richardson, Texas, a national provider of cable television, wireless paging,
local and long-distance telephone services from December 1992. Before joining
ICS Communications, Mr. Papa served as general manager for Spectradyne, Inc.,
the largest provider of pay-per-view entertainment and interactive services
to the hospitality industry. Mr. Papa is a director of ABC-Clio, Inc., an
international publisher of historical reference materials for institutions of
higher education. Mr. Papa received a B.S. in Management from Iona College,
in New Rochelle, New York.
JAMES P. PISANI, age 35, has been the President of NetLojix since
February 1998, and has served as Chief Operating Officer and Secretary of
NetLojix since October 1996. Mr. Pisani has also served as Chief Accounting
Officer of NetLojix since October 1998. From October 1996 to May 1999, Mr.
Pisani was the Chief Financial Offer of NetLojix. From October 1996 to
February 1998, Mr. Pisani was the Executive Vice President of NetLojix. Prior
to October 1996, he served as Vice President of Sales and National Accounts
for ICS Communications. While at ICS, Mr. Pisani was responsible for that
firm's business-to-business and consumer sales activities. Prior to joining
ICS Communications, from June 1989 to June 1994, Mr. Pisani served as Vice
President of a national mortgage banking firm serving, primarily,
institutional accounts. Mr. Pisani graduated from Princeton University in
1986, with a degree in Economics.
MICHAEL J. USSERY, age 41, has been Chief Financial Officer of
NetLojix since May 3, 1999. From July 1998 until May 1999, he served as a
lecturer and consultant to several accounting firms and corporations on
issues of Securities and Exchange Commission compliance and accounting
interpretations. Mr. Ussery served as Controller of Triton Energy, Ltd. in
Dallas, Texas from October 1993 to July 1998. Prior to that, Mr. Ussery was a
senior audit manager for PricewaterhouseCoopers LLP. Mr. Ussery graduated
from Stephen F. Austin State University in
40
<PAGE>
1981, with a B.B.A. in Accounting and Finance.
FRANK A. LEONE, age 53, was appointed Executive Vice President of
Field Sales and Service of NetLojix effective January 1, 2000. He joined
NetLojix as President of its Business Market Group in November 1998. From
November 1996 to July 1998, Mr. Leone was Executive Vice President of Sales
for First Image Management Company, a division of First Data Corporation.
From November 1994 to November 1996, Mr. Leone was President of FAL
Consultants, in which capacity he provided strategy and marketing consulting
to corporations. Prior to that time, Mr. Leone held an executive management
position with Recycled Paper Greetings, the fourth largest greeting card
manufacturer in the United States, and executive management positions with
Baxter Healthcare Corporation and Xerox Corporation. Mr. Leone graduated from
Gannon University, Erie, Pennsylvania, with a B.S. in Business Administration.
JOE RENTERIA, JR., age 53, was appointed Vice President, Information
Systems of NetLojix in February 1999. Prior to that time, he had been
employed for more than five years by Matrix Telecom, Inc. During his tenure
with Matrix Telecom, Mr. Renteria has served as Manager of Data Processing,
Director of Information Services and was promoted to Vice President of
Information Services in May of 1997. Prior to joining Matrix Telecom, Mr.
Renteria held various information technology management positions, primarily
in the manufacturing sector.
JOHN E. ALLEN, age 63, has been a director of NetLojix since
December 1997. He is Vice Chairman of the Boards of Amli Residential
Properties Trust (NYSE: AML) and Amli Commercial Properties Trust, and
President of Amli Realty Co., a commercial real estate firm, which he
co-founded in 1980. Since August, 1999, he has been Executive Vice President,
Secretary and General Counsel of United CreditServ, Inc., a financial
services company. United CreditServ, Inc. is a subsidiary of UICI, a
publicly-traded insurance and financial services company (NYSE: UCI). Prior
to co-founding Amli Realty Co., he was a partner at the Chicago law firm of
Mayer, Brown & Platt, with which he had been associated since 1964. Mr. Allen
is also a member of the Board of Directors of Excell Global Services, an
owner and operator of telephone call centers, United CreditServ, Inc. and its
subsidiary, United Credit National Bank. Mr. Allen received a B.S. in
Business from Indiana University and a J.D. from Indiana University School of
Law.
JEFFREY J. JENSEN, age 41, has been a director of NetLojix since
January 1998. He has been the President of Specialized Association Services,
Ltd., which provides marketing and administrative services to trade
associations, for more than five years. Between 1996 and July 1998,
Specialized Association Services was known as CORE Marketing, Inc. and
provided direct mail and telemarketing facilities in addition to its other
activities. Mr. Jensen has also been the President of United Group Service
Centers, Inc., an employee leasing company, since January 1, 2000, and prior
to that was its Vice President for more than five years. In addition, from
1992 to 1995, Mr. Jensen was a founding partner of Association Dental Plan,
which provided discounted dental services to 40,000 members. Mr. Jensen is a
Trustee of Amli Commercial Properties Trust. He also holds equity interests
in several Internet and technology companies. Mr. Jensen received B.A.
degrees in Economics and Philosophy from Cornell College`, in Mount Vernon,
Iowa and holds an M.S. in Information Systems from the University of Texas at
Arlington.
41
<PAGE>
ANTHONY D. MARTIN, age 50, has been a director of NetLojix since
April 1999. Mr. Martin has been the President and Chief Operating Officer of
PF.Net Communications, Inc., a facilities-based provider of high capacity
fiber optic network and infrastructure and communications services since
April 2000. Mr. Martin was Managing Director of CrossHill Financial Group
Inc. from March 1998 to April 2000. From January 1997 through July 1997, he
served as President and CEO of Nexus Communications, Inc., a start-up company
providing information services. From January 1994 to December 1996, he served
as Vice President, Business Development of MCI Metro, MCI Telecommunications,
Inc.'s local service initiative. Prior to that, he held several senior
management positions at MCI, including Vice President, Access Services
Project Management; Vice President, Systems Engineering and Support
Operations; Vice President, Carrier Marketing and Alliances; Vice President,
Finance Administration; and Vice President, Technical Planning. He received a
B.S. from the United States Naval Academy and an M.B.A. from the University
of Detroit.
There are no family relationships between any directors or executive
officers of NetLojix. The directors are elected annually to serve a one-year
term and until his respective successor is elected and qualified.
DIRECTOR COMPENSATION
NetLojix's policy is to pay each non-employee director a fee of $1,000
for each Board or committee meeting he attends in person in excess of four such
meetings a year; employee directors do not receive this fee. NetLojix did not
have more than four in-person meetings during 1999. NetLojix reimburses
directors' reasonable expenses in connection with attendance at board and
committee meetings. Directors (including non-employee directors) are also
eligible to receive grants of stock options and restricted stock under
NetLojix's 1997 Stock Incentive Plan and 1998 Stock Incentive Plan.
In April 1999, directors John E. Allen, Jeffrey J. Jensen and Anthony
D. Martin received grants of 25,000 options each under NetLojix's 1998 Stock
Incentive Plan. One-half of such options became exercisable in April 2000, and
the remainder will become exercisable in April 2001. Unless exercised, the
options will expire in April 2004. The exercise price for Mr. Allen's and Mr.
Jensen's options is $4.88 per share. The exercise price for Mr. Martin's options
is $4.6875 per share.
In January 2000, directors John E. Allen, Jeffrey J. Jensen and Anthony
D. Martin received grants of 50,000, 25,000 and 25,000 options, respectively,
under NetLojix's 1998 Stock Incentive Plan. One-half of such options will become
exercisable in January 2001, and the remainder will become exercisable in
January 2002. Unless exercised, the options will expire in January 2005. The
exercise price for these options is $3.28 per share.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to NetLojix's
Chief Executive Officer, each other executive officer of NetLojix whose total
annual salary and bonus exceeded $100,000 for the fiscal year ended December 31,
1999 and one individual that ceased to be an executive officer during such
fiscal year (the "Named Executive Officers"). Titles shown are those held by the
Named Executive Officers at December 31, 1999, or, in the case of the individual
that is no longer an executive officer, on the date he ceased to be an executive
officer.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ---------------
- ------------------------------------------------------------------------------------------------------------
NAME AND
PRINCIPAL FISCAL OTHER ANNUAL SECURITIES UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION ($) OPTIONS (#)
-------------- ---- --------- ------- ----------------- ---------------------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Anthony E. Papa 1999 $237,187 $25,000 -- 100,000
Chairman and Chief 1998 198,000 50,000 -- --
Executive Officer 1997 158,459 -- -- 31,250
- ------------------------------------------------------------------------------------------------------------
James P. Pisani 1999 $215,625 $25,000 -- 100,000
President, Chief Operating 1998 180,000 50,000 -- --
Officer and Secretary 1997 152,500 -- -- 31,250
- ------------------------------------------------------------------------------------------------------------
Frank A. Leone (1) 1999 $165,000 -- $78,622 (2) --
Executive Vice President of 1998 27,000 -- -- 150,000
Field Sales and Service
- ------------------------------------------------------------------------------------------------------------
Joseph Renteria, Jr. 1999 $117,559 $50,000 -- 5,000
Vice President, Information 1998 102,504 -- -- 20,000
Systems 1997 93,726 -- -- --
- ------------------------------------------------------------------------------------------------------------
M. Scott Hall (3) 1999 $121,500 -- -- --
Senior Vice President, 1998 32,500 -- $15,000 (2) 150,000 (4)
Channel Markets Group
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Became employed by NetLojix on November 2, 1998.
(2) Consists of sales commissions paid.
(3) Became employed by NetLojix on October 1, 1998. Mr. Hall ceased to be
an executive officer as of August 31, 1999, and ceased to be employed
by NetLojix as of November 30, 1999.
(4) Of these options, 75,000 were cancelled during 1999.
The following table summarizes all option grants to the Named Executive
Officers during the year ended December 31, 1999. No stock appreciation rights
were awarded during such year.
43
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
- -----------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM (1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 0% 5% 10%
- ---- ----------- ------------- -------- ---------- -- -------- --------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony E. Papa 100,000 (2) 20.9% $4.88 April 1, 2009 $0 $306,900 $777,746
- -----------------------------------------------------------------------------------------------------------------
James P. Pisani 100,000 (2) 20.9% $4.88 April 1, 2009 $0 $306,900 $777,746
- -----------------------------------------------------------------------------------------------------------------
Frank A. Leone 0 0% -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Joseph Renteria, Jr. 5,000(2) 1.0% $1.88 September 23, $0 $5,912 $14,981
2009
- -----------------------------------------------------------------------------------------------------------------
M. Scott Hall 0 0% -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(1) The potential realizable value portion of the foregoing table
illustrates value that might be realized upon exercise of options
immediately prior to the expiration of their term, assuming (for
illustrative purposes only) the specified compounded rates of
appreciation of the price of the Common Stock over the term of the
respective option. These amounts represent certain assumed rates of
appreciation in the value of the Common Stock from the fair market
value on the date of grant. The 5% and 10% assumed annual rates of
compounded stock price appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent NetLojix's
estimate or projection of its future Common Stock prices. These numbers
do not take into account provisions providing for the termination of
the option following termination of employment, nontransferability or
difference in vesting terms.
(2) Options vest in annual increments of 25% over the four years after the
grant date.
The following table provides information with respect to stock options
exercised by the Named Executive Officers during the year ended December 31,
1999, and the unexercised stock options held as of December 31, 1999, by the
Named Executive Officers.
<TABLE>
<CAPTION>
OPTION EXERCISES DURING YEAR ENDED DECEMBER 31, 1999
AND OPTION VALUES AT DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999 (2)
ACQUIRED ON VALUE ---------------------------------------------------------------
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ---------- ------------ ------------ ------------- ----------- --------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Anthony E. Papa -- -- 15,625 115,625 $0 $0
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999 (2)
ACQUIRED ON VALUE ---------------------------------------------------------------
NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ---------- ------------ ------------ ------------- ----------- --------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James P. Pisani -- -- 15,625 115,625 $0 $0
- -------------------------------------------------------------------------------------------------------------------
Frank A. Leone -- -- 37,500 112,500 $0 $0
- -------------------------------------------------------------------------------------------------------------------
Joseph Renteria, Jr. -- -- 5,000 20,000 $0 $3,400
- -------------------------------------------------------------------------------------------------------------------
M. Scott Hall 12,500 $12,500 25,000 37,500 $0 $0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(1) Calculated on the basis of the fair market value of NetLojix's common
stock on the date of exercise, minus the exercise price of the options.
(2) Calculated on the basis of the fair market value of NetLojix's common
stock on December 31, 1999, minus the exercise price of the options.
The closing price of the Common Stock on The Nasdaq SmallCap MarketSM
on December 31, 1999 was $2.56 per share.
LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR
(1999 Go Plan)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
NAME NUMBER OF UNITS (1) PERIOD UNTIL PAYOUT
- ---- --------------- -------------------
- -------------------------------------------------------------------------------------
<S> <C> <C>
Anthony E. Papa (2) 0 --
- -------------------------------------------------------------------------------------
James P. Pisani (2) 0 --
- -------------------------------------------------------------------------------------
Frank A. Leone 1 Annually over 4 years (1)
- -------------------------------------------------------------------------------------
Joseph Renteria, Jr. 1 Annually over 4 years (1)
- -------------------------------------------------------------------------------------
M. Scott Hall (2) 0 --
- -------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Under its 1999 Go Plan, NetLojix used a total of $78,900 to repurchase
11,075 shares of its own Common Stock commencing on January 29, 1999
(the "Effective Date"). One quarter of such shares are to be sold at
the prevailing market price on or about each of the first four
anniversaries of the Effective Date (each a "Payout Date"). Each person
who was a NetLojix employee on the Effective Date will receive a pro
capita share of the proceeds received from the sale of such shares on
each Payout Date if, and only if, such person remains a NetLojix
employee on such Payout Date.
(2) Mr. Papa and Mr. Pisani are not participants in the 1999 Go Plan. Mr.
Hall ceased to be eligible to participate in the 1999 Go Plan as a
result of the termination of his employment.
AGREEMENTS WITH EXECUTIVE OFFICES
NetLojix has no employment agreements with its executive officers.
However, NetLojix does have separation arrangements in place with two of its
executive officers.
45
<PAGE>
Michael J. Ussery became NetLojix's Chief Financial Officer on May 3,
1999. At that time, Mr. Ussery was granted options to purchase 50,000 shares at
an exercise price of $5.63 per share under the 1998 Stock Incentive Plan. On
January 10, 2000, Mr. Ussery was granted options to purchase an additional
30,000 shares at an exercise price of $3.28 per share. Both option grants became
exercisable in annual increments of 25% over the four years after their
respective grant dates. In the event that Mr. Ussery is terminated without cause
by NetLojix, or declines to relocate from Dallas, Texas to NetLojix's Santa
Barbara offices and resigns or is terminated as a result thereof, the 30,000
share option grant shall immediately become exercisable in full and will then
expire on December 31, 2001.
NetLojix has agreed to provide certain salary continuation benefits to
Mr. Leone in the event his employment is terminated by NetLojix. If he is
terminated by NetLojix for non-performance, Mr. Leone will continue to receive
his salary for a period of six months following termination. If he is terminated
by NetLojix without cause, he will continue to receive his salary for a period
of twelve months following termination. Mr. Leone's annual salary is currently
$165,000. All stock options held granted to Mr. Leone will become immediately
exercisable in full upon any merger or consolidation of NetLojix with or into
another entity or any other corporate reorganization, if more than 50% of the
combined voting power of the continuing or surviving entity's securities
outstanding immediately after such merger, consolidation or other reorganization
is owned by persons who were not stockholders of NetLojix immediately prior to
such merger, consolidation or other reorganization.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, the Compensation Committee consisted of Mr. Allen, Mr.
Jensen and Mr. Martin. None of such Compensation Committee members was or has
been an officer or employee of NetLojix or any of its subsidiaries. Certain
entities with which Mr. Jensen was affiliated received payments from NetLojix
during 1999. See "Certain Relationships and Related Transactions."
No executive officer of NetLojix served at any time during the year
ended December 31, 1999 as a member of the Board of Directors or Compensation
Committee of any entity that has one or more executive officers serving as a
member of NetLojix's Board or Compensation Committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DEALINGS WITH UICI ORGANIZATIONS IN CONNECTION WITH MARKETING SERVICES.
Director Jeffrey J. Jensen, his father, Ronald L. Jensen, and his adult siblings
own approximately 34% of UICI, a publicly-traded insurance and financial
services company. Director John E. Allen is a director and officer of certain
subsidiaries of UICI. Among their other activities during the last three years,
UICI's marketing organizations sold certain long distance and Internet products
of
46
<PAGE>
NetLojix's former subsidiary, Matrix Telecom, to their customers. Matrix
Telecom paid sales commissions and related payments to UICI, together with
certain other affiliated entities, of $122,930, $133,142 and $990,553 in
1999, 1998 and 1997, respectively. NetLojix completed the sale of Matrix
Telecom to a third party on November 30, 1999, and no longer sells products
or services through the UICI marketing organizations. NetLojix believes that
it received the foregoing services on terms no less favorable to NetLojix
than could be obtained from unrelated third parties.
LONG DISTANCE SERVICES. NetLojix provides long distance telephone
service and Internet access to certain affiliates of Mr. Jensen, his father
and his adult siblings, including UICI. NetLojix received $4,662,921,
$4,521,561 and $3,351,375 in 1999, 1998 and 1997, respectively, from UICI and
its affiliates for such services. NetLojix also provided long distance
telephone service and Internet access to Amli Residential Properties Trust,
Amli Commercial Properties Trust, Amli Realty Co. and their affiliates.
Director John A. Allen is a director or trustee and officer of each of these
entities, and director Jeffrey J. Jensen is trustee of Amli Commercial
Properties Trust. NetLojix received $78,788 and $70,479 in 1999 and 1998,
respectively, from these entities for such services. NetLojix believes that
it provides the foregoing services on terms no less favorable to NetLojix
than could be obtained from unrelated third parties.
EMPLOYEE LEASING. Until December 31, 1998, Matrix Telecom leased a
substantial portion of its employees from United Group Service Center
("UGSC"). Mr. Jensen was the Vice President of UGSC, an entity affiliated
with Mr. Jensen, his immediate family and UICI. Matrix paid UGSC $5,581,428
and $4,395,820 for such employees' services in 1998 and 1997, respectively.
Matrix Telecom terminated this employee leasing arrangement effective
December 31, 1998. NetLojix believes that it received the foregoing services
on terms no less favorable to NetLojix than could be obtained from unrelated
third parties
LOAN TO AFFILIATE. During 1997, Matrix Telecom made an interest-free
loan to CORE Marketing, Inc. ("CORE") in the total amount of $2,000,000 as an
advance against commissions to be incurred by Matrix for marketing services
supplied by CORE. Mr. Jensen was the President of CORE, and he and his adult
siblings owned a controlling interest in CORE. The loan was repaid in full
during 1998.
RENTERIA NOTE. In October 1996, Joseph Renteria, Jr., NetLojix's
Vice President, Information Systems, financed the purchase of 53,608 shares
of Common Stock through a loan from Ronald L. Jensen, who was then an
affiliate of NetLojix. In 1998, NetLojix acquired the note representing this
obligation, which was then in the amount of $80,400. The note bears interest
at the rate of 6% per annum, and is due on the earlier of NetLojix's demand
or September 30, 2001. At December 31, 1999, the total amount owing by Mr.
Renteria under this note was $91,844, which was also the largest amount
outstanding during 1999. Under the original terms of the note and related
documents, the note was secured by all 53,608 shares of common stock, and the
shares were subject to certain put and call rights in Mr. Renteria and
NetLojix, respectively, in the event of the termination of Mr. Renteria's
employment. The put and call provisions were to terminate in increments over
five years. During 1999, NetLojix and Mr. Renteria agreed to terminate all of
the remaining put and call provisions and 23,608 shares of common stock were
released from security
47
<PAGE>
for the note. In February, 2000, Mr. Renteria paid the note down to a balance
of $62,750 and the security for the note was reduced to 15,000 shares of
stock.
POLICY ON RELATED PARTY TRANSACTIONS. In connection with its listing on
The Nasdaq SmallCap Market(SM), NetLojix has undertaken to conduct an
appropriate review of all related party transactions on an ongoing basis and to
utilize the Audit Committee to review potential conflict of interest situations
where appropriate. For additional information with respect to the transactions
described above, please see Note 7 of the Notes to Consolidated Financial
Statements included in this Prospectus.
48
<PAGE>
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 20,
2000, with respect to the beneficial ownership of NetLojix common stock by
each person known by NetLojix to be the beneficial owner of more than 5% of
its outstanding common stock, by each director, by each of NetLojix's
executive officers whose annual salary and bonus exceeded $100,000 for the
fiscal year ended December 31, 1999, and by all executive officers and
directors as a group. Except as indicated in the footnotes to the table, the
persons named in the table have sole voting and investment power with respect
to all shares of common stock beneficially owned by them.
Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of NetLojix common stock subject to options held by that person that
are exercisable within sixty (60) days following April 20, 2000 are deemed
outstanding. However, such shares of common stock are not deemed outstanding
for the purpose of computing the percentage ownership of any other person.
Unless otherwise indicated in the footnotes to this table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite such Company's name. The percentages
of beneficial ownership shares in this table are based upon 13,366,978 shares
of the common stock outstanding.
<TABLE>
<CAPTION>
- ---------------------------------------------- ---------------------------------- ----------------------------------
AMOUNT
NAME AND BENEFICIALLY PERCENT
ADDRESS OWNED OF CLASS
- ---------------------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
Janet J. Jensen (1) 961,939 7.2%
9003 Airport Freeway
Fort Worth, TX 76180
- ---------------------------------------------- ---------------------------------- ----------------------------------
Jeffrey J. Jensen(1)(2) 864,238 6.5%
2121 Precinct Line Road
Hurst, TX 76054
- ---------------------------------------------- ---------------------------------- ----------------------------------
James J. Jensen(1) 800,000 6.0%
6304 Alexandria Circle
Atlanta, GA 30326
- ---------------------------------------------- ---------------------------------- ----------------------------------
Jami J. Jensen(1) 851,738 6.4%
1933 Swede Gulch
Golden, CO 80120
- ---------------------------------------------- ---------------------------------- ----------------------------------
</TABLE>
49
<PAGE>
<TABLE>
- ---------------------------------------------- ---------------------------------- ----------------------------------
AMOUNT
NAME AND BENEFICIALLY PERCENT
ADDRESS OWNED OF CLASS
- ---------------------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
Julie J. Jensen(1) 851,738 6.4%
Box 540, Kenwood Station
5257 River Road
Bethesda, MD 20816
- ---------------------------------------------- ---------------------------------- ----------------------------------
Gladys J. Jensen(1) 731,847 5.5%
c/o United Group Association, Inc.
4001 McEwen Drive, Suite 200
Dallas, TX 75244
- ---------------------------------------------- ---------------------------------- ----------------------------------
Anthony E. Papa(3)(4) 811,401 6.0%
- ---------------------------------------------- ---------------------------------- ----------------------------------
James P. Pisani(3)(4) 805,001 6.0%
- ---------------------------------------------- ---------------------------------- ----------------------------------
John E. Allen (4)(5) 197,500 1.5%
- ---------------------------------------------- ---------------------------------- ----------------------------------
Anthony D. Martin (2)(4) 12,500 *
- ---------------------------------------------- ---------------------------------- ----------------------------------
Frank A. Leone (4)(6) 37,500 *
- ---------------------------------------------- ---------------------------------- ----------------------------------
Joseph Renteria, Jr. (4)(7) 58,608 *
- ---------------------------------------------- ---------------------------------- ----------------------------------
Michael J. Ussery (2)(4) 12,500 *
- ---------------------------------------------- ---------------------------------- ----------------------------------
All directors and executive officers 2,799,248 20.6%
as a group (8 persons) (7)
- ---------------------------------------------- ---------------------------------- ----------------------------------
</TABLE>
* Represents less than 1%
(1) Information is derived from a Schedule 13D filed with the Securities and
Exchange Commission on December 11, 1997 and a Schedule 13D/A filed with
the Securities and Exchange Commission (by Gladys J. Jensen only) on
July 10, 1998 (the "Schedule 13D's"). Pursuant to the terms of the
registration rights and lockup agreement dated December 1, 1997, these
shares may not be sold until December 1, 1999. The Schedule 13D's note
that, because each of these stockholders agreed to the restrictions
contained in the registration rights and lockup agreement, such persons
may be considered to be a "group" within the meaning of Section 13 of
the Securities Exchange Act of 1934, as amended. However, the
50
<PAGE>
Schedule 13D's state that each of such persons disclaims beneficial
ownership of the shares held by any other person.
(2) Includes 12,500 shares that may be acquired under options that were
exercisable within 60 days of April 20, 2000.
(3) As to each of Mr. Papa and Mr. Pisani, includes 48,438 shares that
may be acquired under options that were exercisable within 60 days of
April 20, 2000.
(4) The address of these stockholders is c/o NetLojix Communications, Inc.,
501 Bath Street, Santa Barbara, CA 93101.
(5) Includes 60,000 shares of restricted stock awarded to Mr. Allen under
NetLojix's 1997 Stock Incentive Plan. These shares are subject to
restrictions on transfer which will lapse as to 30,000 of such shares on
February 24, 2001, and as to the remaining 30,000 shares on February 24,
2002. The lapse of these restrictions will be accelerated upon Mr.
Allen's retirement from the Board of Directors and upon certain other
events set forth in the 1997 Stock Incentive Plan. Also includes 12,500
shares that may be acquired under options that were exercisable within
60 days of April 20, 2000.
(6) Includes 37,500 shares that may be acquired under options that were
exercisable within 60 days of April 20, 2000.
(7) Includes 5,000 shares that may be acquired under options that were
exercisable within 60 days of April 20, 2000.
(8) Includes 189,376 shares that may be acquired under options that were
exercisable within 60 days of April 20, 2000.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summarizes the material provisions of NetLojix's
certificate of incorporation and bylaws. Such summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the certificate of incorporation and the bylaws,
including the definitions therein of certain terms, copies of which are filed
as exhibits to the registration statement of which this prospectus is a part.
AUTHORIZED STOCK; ISSUED AND OUTSTANDING SHARES
As of the date of this prospectus, NetLojix's authorized capital
stock consists of 20,000,000 shares of common stock, par value $0.01 per
share, and 1,000,000 shares of preferred stock, $0.01 per share, of which
250,000 shares have been designated series A convertible preferred stock. The
Board of Directors has approved an amendment to NetLojix' Certificate of
Incorporation that would increase the authorized common stock to 40,000,000
shares. This amendment will be considered by NetLojix's stockholders at the
annual meeting of stockholders to be held on May 25, 2000. The description
below is a summary of all material provisions of NetLojix common stock,
preferred stock and convertible preferred stock.
As of April 20, 2000, 13,366,978 shares of common stock were issued
and outstanding, excluding treasury shares, 185,672 shares of common stock
were reserved for issuance upon the exercise of outstanding warrants and
approximately 3,481,681 shares were reserved for issuance pursuant to stock
option plans. As of April 20, 2000, 147,700 shares of series A convertible
preferred stock were issued and outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote per share on
all matters voted on by the stockholders, including elections of directors.
Except as otherwise required by law or as provided in any resolutions adopted
by the board of directors with respect to the preferred stock of NetLojix,
the holders of shares of common stock will exclusively possess all voting
power. Subject to the preferential rights, if any, of holders of any then
outstanding preferred stock, the holders of common stock are entitled to
receive dividends when, as and if declared by the board of directors of
NetLojix out of funds legally available therefor. The terms of the common
stock do not grant to the holders thereof any preemptive, subscription,
redemption, conversion or sinking fund rights. Subject to the preferential
rights of holders of any then outstanding preferred stock, the holders of
common stock are entitled to share ratably in the assets of NetLojix legally
available for distribution to stockholders in the event of the liquidation,
dissolution or winding up of NetLojix.
PREFERRED STOCK
52
<PAGE>
Pursuant to the certificate of incorporation, NetLojix has the
authority to issue up to 1,000,000 shares of preferred stock, $0.01 par value
per share, in one or more series as determined by the board of directors of
the NetLojix. NetLojix's board of directors may, without further action by
the stockholders of NetLojix, issue one or more series of preferred stock and
fix the rights and preferences of such shares, including the dividend rights,
dividend rates, conversion rights, exchange rights, voting rights, terms of
redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designation of such series.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of preferred stock issued by
NetLojix in the future. In addition, the issuance of preferred stock could
have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of NetLojix.
THE SERIES A CONVERTIBLE PREFERRED STOCK
The series A convertible preferred stock has a liquidation
preference of $4.00 per share. The series A convertible preferred stock bears
a cumulative dividend, payable semi-annually, equal to 8% of the liquidation
preference, or $.32. NetLojix cannot pay a cash dividend on its common stock
while any series A convertible preferred stock is outstanding without the
approval of at least 50% of the outstanding shares of the series A
convertible preferred stock. The series A convertible preferred stock is
redeemable in whole or in part at any time after the second anniversary of
its issue date, so long as NetLojix redeems at least 25% of the series A
convertible preferred stock. The redemption price is the cash amount equal to
the liquidation preference per share of the series A convertible preferred
stock. The series A convertible preferred stock is convertible, upon the
happening of certain events, into shares of NetLojix common stock. The series
A convertible preferred stock is convertible, at the option of the holder,
into such number of fully paid and nonassessable shares of NetLojix common
stock as determined by dividing $4.00 by the conversion price applicable to
such share. The conversion price is initially set at $4.00 per share, subject
to adjustments for stock splits, combinations, dividends, distributions,
reclassification, reorganizations, mergers, consolidations or sales of
assets. If NetLojix sells its common stock, pursuant to a registered public
offering, at a public offering price equal to or exceeding $10.00 per share
and the proceeds to NetLojix are not less than $15 million, then each share
of the series A preferred stock shall automatically convert into common stock
of NetLojix, at a conversion price equal to the lower of (1) $4.00 per share
and (2) a price determined by multiplying .80 times the price per share of
the common stock issued in the public offering.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corp. is the transfer agent and registrar for the
common stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
53
<PAGE>
NetLojix is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is
publicly traded or held of record by more than 2,000 stockholders and an
"interested stockholder" are prohibited for a three-year period following the
date that such a stockholder became an interested stockholder, unless (i) the
corporation has elected in its original certificate of incorporation not to
be governed by Section 203; (ii) the business combination was approved by the
board of directors of the corporation before the other party to the business
combination became an interested stockholder, (iii) upon consummation of the
transaction that made it an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock
owned by directors who are also officers or held in employee benefit plans in
which the employees do not have a confidential right to tender or vote stock
held by the plan); or (iv) the business combination was approved by the board
of directors of the corporation and ratified by two-thirds of the voting
stock which the interested stockholder did not own. The three-year
prohibition also does not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of the majority of the
corporation's directors.
The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets
or stock of the corporation or its majority-owned subsidiaries and
transactions which increase an interested stockholder's percentage ownership
of stock. The term "interested stockholder" is defined generally as a
stockholder who, together with affiliates and associates, owns (or, within
three years prior, did own) 15% or more of a Delaware corporation's voting
stock. Section 203 could prohibit or delay a merger, takeover or other change
in control of NetLojix and therefore could discourage attempts to acquire
NetLojix.
SELLING STOCKHOLDER
Cambois Finance, Inc. is a British Virgin Islands Corporation
engaged in the business of investing in publicly-traded equity securities.
Cambois Finance's offices are located at Auelestrasse 74, Vaduz,
Liechtenstein. Cambois Finance's investment decisions are made by its Board
of Directors, Mr. Hans Gassner, Dr. Kurt Alig and Dr. Alex Wiederkehr.
Cambois Finance does not own any shares of NetLojix common stock or other
NetLojix securities as of the date of this prospectus, and other than its
obligations to purchase shares under the equity line agreement, Cambois
Finance has no other commitments or arrangements to purchase or sell any
other securities of NetLojix. There are no business relationships between
Cambois Finance and NetLojix other than the equity line agreement.
54
<PAGE>
PLAN OF DISTRIBUTION
NetLojix has been advised by Cambois Finance that it may sell the
common stock from time to time in transactions on the Nasdaq SmallCap Market,
in negotiated transactions, or otherwise, or by a combination of these
methods, at fixed prices which may be changed, at market prices at the time
of sale, at prices related to market prices or at negotiated prices. Cambois
Finance may effect these transactions by selling the common stock to or
through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from Cambois Finance or the purchasers
of the common stock for whom the broker-dealer may act as an agent or to whom
they may sell the common stock as a principal, or both. The compensation to a
particular broker-dealer may be in excess of customary commissions. Cambois
Finance is an "underwriter" within the meaning of the Securities Act in
connection with the sale of the common stock offered hereby. Broker-dealers
who act in connection with the sale of the common stock may also be deemed to
be underwriters. Profits on any resale of the common stock as a principal by
such broker-dealers and any commissions received by such broker-dealers may
be deemed to be underwriting discounts and commissions under the Securities
Act. Any broker-dealer participating in such transactions as agent may
receive commissions from Cambois Finance (and, if they act as agent for the
purchaser of such common stock, from such purchaser). Broker-dealers may
agree with Cambois Finance to sell a specified number of common stock at a
stipulated price per share, and, to the extent such a broker-dealer is unable
to do so acting as agent for Cambois Finance, to purchase as principal any
unsold common stock at the price required to fulfill the broker-dealer
commitment to Cambois Finance. Broker-dealers who acquire common stock as
principal may thereafter resell such common stock from time to time in
transactions (which may involve crosses and block transactions and which may
involve sales to and through other broker-dealers, including transactions of
the nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or
at negotiated prices, and in connection with such resales may pay to or
receive from the purchasers of such common stock commissions computed as
described above.
To the extent required under the Securities Act, a supplemental
prospectus will be filed, disclosing (a) the name of any such broker-dealers;
(b) the number of shares of common stock involved; (c) the price at which
such common stock is to be sold; (d) the commissions paid or discounts or
concessions allowed to such broker-dealers, where applicable; (e) that such
broker-dealers did not conduct any investigation to verify the information
set out or incorporated by reference in this prospectus, as supplemented; and
(f) other facts material to the transaction.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the common stock may not simultaneously
engage in market making activities with respect to such securities for a period
beginning when such person becomes a distribution participant and ending upon
such person's completion of participation in a distribution, including
stabilization activities in the common stock to effect covering transactions, to
impose penalty bids or to effect passive market making bids. In addition and
without limiting the foregoing, in connection with
55
<PAGE>
transactions in the common stock, NetLojix and Cambois Finance will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Rule 10b-5 and,
insofar as NetLojix and Cambois Finance are distribution participants,
Regulation M and Rules 100, 101, 102, 103, 104 and 105 thereof. All of the
foregoing may affect the marketability of the common stock.
Cambois Finance has agreed that it will not engage in short sales of
NetLojix common stock except that it may engage in short sales or other
hedging investments that it deems appropriate with respect to the shares that
it purchases in connection with a particular put, so long as the number of
shares sold short or used for hedging does not exceed the number of shares
being sold to Cambois Finance under the put, and the short sales are
otherwise in compliance with Regulation M under the Securities Act.
Cambois Finance will pay all commissions and certain other expenses
associated with the sale of the common stock. The common stock offered hereby is
being registered pursuant to contractual obligations of NetLojix, and NetLojix
has agreed to pay the costs of registering the shares hereunder, including legal
fees, commissions and certain other expenses for resale of the common stock.
NetLojix has also agreed to indemnify Cambois Finance with respect to the common
stock offered by this prospectus against certain liabilities, including, without
limitation, certain liabilities under the Securities Act, or, if such indemnity
is unavailable, to contribute toward amounts required to be paid in respect of
such liabilities.
NetLojix has also agreed to reimburse Cambois Finance for certain
costs and expenses incurred in connection with this offering. These may
include the fees, expenses and disbursements of counsel for Cambois Finance
incurred in the preparation of the equity line agreement and associated
documentation and the registration statement of which this prospectus forms a
part. NetLojix's reimbursement obligation is limited to $5,000, plus $750 per
closing of each put.
Prior to April 25, 2000, NetLojix had put a total of 1,066,725
shares of common stock to Cambois Finance for total proceeds to NetLojix of
$2,000,000. The underwriting compensation for Cambois Finance for these
transactions was approximately $250,000, based on the difference between the
low closing bid price on the date of the put and the put price, multiplied by
the number of shares put (or in the case of one put at an agreed put price, a
percentage of the put price equivalent to that used to calculate underwriting
compensation for the other puts, multiplied by the number of shares put). The
price at which the common stock will be issued by NetLojix to Cambois Finance
shall be 89% of the low closing bid price on the date NetLojix issues shares,
as defined in the equity line agreement, unless the parties agree on another
price. Assuming an offering price of $3.125 (based on the average of the high
and low bid prices of the common stock as reported by the Nasdaq SmallCap
Market on April 25, 2000), underwriting compensation for Cambois Finance for
the remaining 1,037,214 shares registered under this Prospectus, based on the
discounted purchase price, is $356,542.
56
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
NetLojix files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
NetLojix has filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to NetLojix and
the common stock offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference. A copy of the registration
statement may be inspected without charge at the Securities and Exchange
Commission's public reference facilities in the Washington, D.C., New York,
New York or Chicago, Illinois. You may also read and copy any document
NetLojix files with the Securities and Exchange Commission at prescribed
rates by writing to the Public Reference Section of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the operation of the public reference facilities. The
Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants, such as NetLojix, that file electronically with the
Securities and Exchange Commission.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby and
certain other legal matters will be passed upon for NetLojix by Mayer, Brown
& Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements and related financial
statement schedule of NetLojix Communications, Inc. and subsidiaries at
December 31, 1999 and 1998, and for each of the years in the three-year
period ended December 31, 1999, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
57
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets, December 31, 1999 and 1998................... F-3
Consolidated Statements of Operations, Years ended
December 31, 1999, 1998 and 1997.......................................... F-4
Consolidated Statements of Stockholders' Equity, Years
ended December 31, 1999, 1998 and 1997.................................... F-5
Consolidated Statements of Cash Flows, Years ended
December 31, 1999, 1998 and 1997.......................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Schedule II - Valuation and Qualifying Accounts, Years
ended December 31, 1999, 1998 and 1997.................................... S-1
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NetLojix Communications, Inc.:
We have audited the consolidated financial statements of NetLojix
Communications, Inc. (formerly AvTel Communications, Inc.) and subsidiaries as
listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NetLojix
Communications, Inc. (formerly AvTel Communications, Inc.) and subsidiaries as
of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 18, 2000, except
as to Note 13, which is as
of April 19, 2000
F-2
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,134,625 222,059
Accounts receivable, net 2,471,941 1,295,459
Due from affiliates 715,457 773,667
Federal and state income tax receivable - 1,325,000
Other current assets 982,387 340,078
--------------------- -----------------------
Total current assets 5,304,410 3,956,263
Property and equipment, net 917,571 1,039,493
Goodwill, net 3,802,307 4,463,747
Other assets, net 932,133 1,265,315
--------------------- -----------------------
Total assets $ 10,956,421 10,724,818
===================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other accrued expenses $ 2,317,587 2,004,498
Accrued network services costs 874,830 1,261,016
Sales and excise tax payable 118,503 473,072
Unearned revenue 990,699 954,101
Net liabilities of discontinued operations - 843,500
Other current liabilities 355,609 504,130
--------------------- -----------------------
Total current liabilities 4,657,228 6,040,317
Common stock subject to put option - 168,867
Long-term obligations under capital leases - 5,381
--------------------- -----------------------
Total liabilities 4,657,228 6,214,565
===================== =======================
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 $727,664
at December 31, 1999 and 1998 including dividends in arrears) 1,477 1,477
Common stock, authorized 20,000,000 shares, $0.01 par value,
issued 12,562,741 and 10,409,473 shares at December 31, 1999
1998, respectively 125,627 102,969
Additional paid-in capital 23,650,546 19,630,404
Accumulated deficit (17,476,946) (15,224,597)
Treasury stock, $0.01 par value, 151,075 common shares at
December 31, 1999 and none at December 31, 1998 (1,511) -
---------------------- -----------------------
Total stockholders' equity 6,299,193 4,510,253
Commitments and contingencies (Notes 2, 9 and 12)
---------------------- -----------------------
Total liabilities and stockholders' equity $ 10,956,421 10,724,818
====================== =======================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES $ 16,864,283 9,887,729 6,435,246
COST OF REVENUES 9,383,318 5,668,958 4,862,195
----------------------- ------------------------ -----------------------
GROSS MARGIN 7,480,965 4,218,771 1,573,051
Operating expenses
Selling, general and administrative 11,348,665 7,074,206 1,671,504
Acquisition related write off - - 9,098,545
Depreciation and amortization 1,022,207 611,911 78,263
----------------------- ------------------------ -----------------------
Total operating expenses 12,370,872 7,686,117 10,848,312
----------------------- ------------------------ -----------------------
OPERATING LOSS (4,889,907) (3,467,346) (9,275,261)
Interest expense (80,550) (31,178) (3,220)
Other income, net 23,059 92,337 37,219
----------------------- ------------------------ -----------------------
Loss from continuing operations
before income taxes (4,947,398) (3,406,187) (9,241,262)
Income tax benefit - 135,190 28,741
----------------------- ------------------------ -----------------------
Loss from continuing operations (4,947,398) (3,270,997) (9,212,521)
Discontinued operations
Loss from operations of discontinued
residential long distance business
(net of income tax benefit of $0,
$1,391,389, and $247,611 in 1999,
1998 and 1997, respectively) (3,030,575) (2,531,321) (979,199)
Gain on disposition 5,780,238 - -
----------------------- ------------------------ -----------------------
Income (loss) from discontinued operations 2,749,663 (2,531,321) (979,199)
----------------------- ------------------------ -----------------------
NET LOSS $ (2,197,735) (5,802,318) (10,191,720)
======================= ======================== =======================
Loss from continuing operations
per common share - basic and diluted $ (0.49) (0.35) (1.11)
Income (loss) from discontinued operations
per common share - basic and diluted 0.26 (0.26) (0.12)
----------------------- ------------------------ -----------------------
Net loss per common share - basic and diluted $ (0.23) (0.61) (1.23)
======================= ======================== =======================
Weighted average number of
common shares - basic and diluted 10,794,584 9,633,474 8,267,296
======================= ======================== =======================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCES,
December 31, 1996 - $ - 8,336,654 $ 7,532,026 $ -
Acquisition of BestConnections - - 934,987 3,361,208 -
Share for share exchange between
NetLojix and Matrix:
Reverse acquisition of NetLojix 207,700 2,077 1,839,563 18,396 9,129,040
Reflect new capitalization of company - - (171,548) (10,802,234) 7,064,710
Issuance of common stock for exercise
of options - - 15,000 150 52,350
Expired put options - - 96,480 965 143,755
Stock compensation earned - - - - 748,884
Net loss - - - - -
----------- ---------- ------------ -------------- -------------
BALANCES,
December 31, 1997 207,700 2,077 11,051,136 110,511 17,138,739
Conversion of preferred stock (60,000) (600) 60,000 600 -
Issuance of common stock for exercise
of options and restricted common stock - - 473,326 4,733 512,879
Issuance of common stock for acquisitions - - 680,000 6,800 1,526,950
Expired put options - - 48,187 482 36,770
Called put options 185,847 1,859 372,918
Purchase of officer note receivables - - - - (435,000)
Stock compensation earned - - - - 477,148
Retirement of treasury stock - - (2,201,601) (22,016) -
Net loss - - - - -
----------- ---------- ------------ -------------- -------------
BALANCES,
December 31, 1998 147,700 1,477 10,296,895 102,969 19,630,404
Issuance of common stock for exercise
of options and restricted common stock - - 315,477 3,155 481,990
Stock compensation earned - - - - 560,725
Issuance of common stock per equity
line of credit - - 1,066,725 10,667 1,917,350
Purchase of treasury stock - - - - (77,289)
Shares acquired in legal settlement - - - - (429,827)
Cancelled put options - - 112,578 1,126 167,741
Retire treasury stock - - (36,262) (363) -
Issuance of preferred stock 1,500 15 3,000 30 1,407,480
Preferred stock dividends paid - - - - -
Conversion of preferred stock (1,500) (15) 804,328 8,043 (8,028)
Net loss - - - - -
---------- ---------- ------------ -------------- --------------
BALANCES,
December 31, 1999 147,700 $ 1,477 12,562,741 $ 125,627 $ 23,650,546
=========== ========= ============ ============== =============
<CAPTION>
Retained
Earnings /
(Accumulated Treasury Stock
Deficit) Shares Amount Total
--------- ------ ----- -----
<S> <C> <C> <C> <C>
BALANCES,
December 31, 1996 $ 769,441 (171,548) $ (439,584) $ 7,861,883
Acquisition of BestConnections - (1,999,997) (3,317,940) 43,268
Share for share exchange between
AvTel and Matrix:
Reverse acquisition of AvTel - - - 9,149,513
Reflect new capitalization of company - 171,548 3,737,524 -
Issuance of common stock for exercise
of options - - - 52,500
Expired put options - - - 144,720
Stock compensation earned - - - 748,884
Net loss (10,191,720) - - 10,191,720)
--------------- ----------- ------------- ------------
BALANCES,
December 31, 1997 (9,422,279) (1,999,997) (20,000) 7,809,048
Conversion of preferred stock - - - -
Issuance of common stock for exercise
of options and restricted common stock - - - 517,612
Issuance of common stock for acquisitions - - - 1,533,750
Expired put options - - - 37,252
Called put options - (201,604) (2,016) 372,761
Purchase of officer note receivables - - - (435,000)
Stock compensation earned - - - 477,148
Retirement of treasury stock - 2,201,601 22,016 -
Net loss (5,802,318) - - (5,802,318)
--------------- ----------- ------------- ------------
BALANCES,
December 31, 1998 (15,224,597) - - 4,510,253
Issuance of common stock for exercise
of options and restricted common stock - - - 485,145
Stock compensation earned - - - 560,725
Issuance of common stock per equity
line of credit - - - 1,928,017
Purchase of treasury stock - (11,075) (111) (77,400)
Shares acquired in legal settlement - (176,262) (1,763) (431,590)
Cancelled put options - - - 168,867
Retire treasury stock - 36,262 363 -
Issuance of preferred stock - - - 1,407,525
Preferred stock dividends paid (54,614) - - (54,614)
Conversion of preferred stock - - - -
Net loss (2,197,735) - - (2,197,735)
-------------- ----------- ------------- ------------
BALANCES,
December 31, 1999 $ (17,476,946) (151,075) $ (1,511) $ 6,299,193
=============== =========== ============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (4,947,398) (3,270,997) (9,212,521)
Adjustments to reconcile net loss from continuing operations
to cash used by continuing operating activities:
Depreciation and amortization 1,022,207 611,911 78,263
(Gain)loss on disposition of assets 9,555 (87,371) -
Acquisition related write off - - 9,098,545
Provision for bad debts 296,238 384,162 255,635
Deferred income tax - (498,712) (80,377)
Stock compensation earned 156,551 372,917 -
Changes in certain operating assets and liabilities:
Accounts receivable (1,472,720) (716,557) (320,365)
Due from affiliates 58,210 74,580 631,567
Federal and state income tax receivable 1,325,000 (741,094) (598,970)
Other current assets (642,309) 342,349 (541,276)
Accounts payable and accrued liabilities (499,217) (550,432) (966,234)
Due to affiliate - (24,329) (1,259,215)
--------------- -------------- --------------
Cash used by continuing operating activities (4,693,883) (4,103,573) (2,914,948)
Cash provided (used) by discontinued operating activities (2,983,421) (1,875,224) 4,582,718
--------------- -------------- --------------
Cash provided (used) by operating activities (7,677,304) (5,978,797) 1,667,770
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (369,442) (323,128) (86,177)
Additions to property and equipment - discontinued operations (409,947) (149,961) (126,244)
Loans to affiliate - discontinued operations - - (2,000,000)
Payments received on loans to affiliates - discontinued operations - 1,798,889 201,111
Cash received (paid) in acquisitions - (474,082) 477,643
Proceeds from sale of property and equipment 1,050 94,370 -
Proceeds from sale of property and equipment - discontinued operations 6,600 - 2,749
--------------- -------------- --------------
Cash provided (used) by investing activities (771,739) 946,088 (1,530,918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases (45,753) (59,055) (4,306)
Principal payments on capital leases - discontinued operations (20,886) - -
Issuance of common stock for exercise of options 485,145 517,612 52,500
Issuance of common stock on equity line of credit 1,928,017 - -
Issuance of Series B preferred stock 1,407,525 - -
Preferred stock dividend payments (54,614) - -
Borrowings on line of credit 2,617,182 - -
Amounts paid on line of credit (2,617,182) - -
Borrowings on short-term note - discontinued operations 2,000,000 - -
Borrowings on long-term note - discontinued operations 3,160,294 - -
Borrowings on line of credit - discountinued operations 24,606,519 9,753,467 -
Amounts paid on line of credit - discontinued operations (24,716,358) (8,640,577) -
Purchase from third party of note receivable for stock purchase - (435,000) -
Purchase of common stock for treasury (77,400) - -
--------------- -------------- --------------
Cash provided by financing activities 8,672,489 1,136,447 48,194
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 223,446 (3,896,262) 185,046
Cash and cash equivalents at beginning of period for continuing
and discontinued operations 911,179 4,807,441 4,622,395
--------------- -------------- --------------
Cash and cash equivalents at end of period for continuing and
discontinued operations (see Note 3) $ 1,134,625 911,179 4,807,441
=============== ============== ==============
Cash paid (received) during the period:
Interest - continuing operations $ 83,624 31,178 3,220
=============== ============== ==============
Interest - discontinued operations $ 309,271 54,943 8,374
=============== ============== ==============
Income taxes - continuing operations $ (112,201) (50,649) 89,741
=============== ============== ==============
Income taxes - discontinued operations $ (1,162,814) (436,358) 835,420
=============== ============== ==============
Noncash investing and financing activities:
Common stock issued for Best acquisition $ - - 3,361,208
=============== ============== ==============
Treasury stock acquired with Best acquisition $ - - (3,317,940)
=============== ============== ==============
Common and preferred stock issued in NetLojix reverse acquisition $ - - 9,149,513
=============== ============== ==============
Common stock issued for DMI acquisition $ - 1,462,500 -
=============== ============== ==============
Common stock issued for RLI acquisition $ - 71,250 -
=============== ============== ==============
Common shares acquired in legal settlement $ (431,590) - -
=============== ============== ==============
Net liabilities relinquished in Matrix sale $ 5,780,238 - -
=============== ============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business and Background
NetLojix is an eBusiness enabler, with offices principally located in
California, New York and Texas, providing advanced Internet, data and voice
connectivity, technical support and application hosting services, primarily to
mid-sized businesses. NetLojix currently sells and markets advanced network
services and IT Support through internal direct sales professionals and
independent VAR's.
NetLojix had previously been organized into two primary business units:
the Business Markets Group and the Channel Markets Group. On September 15, 1999,
NetLojix realigned its businesses and business segments in order to support
NetLojix's core mission of providing Enterprise Network Solutions to businesses.
As a result of this realignment, the Company's primary business segments are
Network Connectivity, Technical Support Services and Application Development and
Hosting.
Services provided by NetLojix include the transport of data, voice and
Internet traffic; systems integration, service and technical support; and
application development and web hosting. Through a value-added sales process,
NetLojix designs, installs and manages its customers' networks. NetLojix will
provide a host of additional value added services assisting its customers to
create enhanced intranet and extranet applications. NetLojix cross-markets to
its customer base a variety of traditional telecommunications products and
services such as long distance telephone service, executive calling cards and
video/audio conferencing.
On December 1, 1997, NetLojix Communications, Inc. ("NetLojix") and
Matrix Telecom, Inc. ("Matrix Telecom") completed a stock for stock exchange
pursuant to a share exchange agreement ("Share Exchange"). For accounting
purposes, the Share Exchange was treated as a reverse acquisition of NetLojix by
Matrix Telecom. NetLojix was the legal acquirer and accordingly, the Share
Exchange was effected by the issuance of 9,582,493 shares of NetLojix common
stock in exchange for all of the common stock then outstanding of Matrix
Telecom. In addition, holders of outstanding Matrix Telecom stock options
received 22,338 non-qualified stock options of NetLojix. The purchase method of
accounting was used, with Matrix Telecom being treated as the acquirer for
accounting purposes. The results of operations reported in the accompanying
consolidated financial statements reflect the operations of Matrix Telecom prior
to December 1, 1997 and the combined operations of NetLojix and Matrix Telecom
subsequent to December 1, 1997. References to the "Company" refer to operations
of Matrix Telecom prior to the Share Exchange and the combined operations of
Matrix Telecom and NetLojix subsequent to the Share Exchange. As a result of the
Share Exchange, Matrix Telecom became a wholly-owned subsidiary of NetLojix.
(See note 2).
The Share Exchange provided that Matrix Telecom shareholder would receive
2.4819 NetLojix common shares for each common share of Matrix Telecom then
issued including treasury shares held by Matrix Telecom. For periods prior to
the December 1, 1997 Share Exchange, all share amounts have been restated to
reflect the Share Exchange as a 2.4819 for one stock split. In addition, on
March 10, 1997 Matrix Telecom declared an 18 for one stock split. All share
amounts have also been restated to reflect this stock split.
On November 30, 1999, the Company sold its wholly-owned subsidiary,
Matrix Telecom. 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 consolidated financial statements as of
December 31, 1999 and 1998, and for the years ended December 31, 1999, 1998 and
1997 reflect the Company's residential long distance business as a discontinued
operation. (See note 3)
(B) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
F-7
<PAGE>
(C) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
demand deposits, time deposits, and other highly liquid investments with an
original maturity at date of purchase of less than ninety days to be cash
equivalents.
(D) Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts and
other provisions of $290,000 and $249,000 as of December 31, 1999 and 1998,
respectively. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of its customers, historical trends and
other information.
(E) Revenue Recognition
Revenues for long distance, frame relay, Internet, and applications
development and web hosting services are recognized as service is provided.
Amounts paid in advance are recorded as unearned revenue and recognized as
services are provided. Within the Technical Support Services segment, the
Company sells its services under hourly service contracts (whether prepaid or
billed in arrears), flat fee service call contracts or prepaid maintenance
contracts. For prepaid maintenance contracts, the Company recognizes revenues
ratably over the service period. For all other services, revenues are recognized
when the services are rendered.
(F) Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs
are charged against income as incurred, while renewals and major replacements
are capitalized. The cost and related accumulated depreciation of assets sold or
retired are removed from the accounts, and any resulting gain or loss is
reflected in operations. The Company provides depreciation of fixed assets using
the straight-line method over the estimated useful lives of the respective
assets.
(G) Goodwill
Goodwill of $3,802,000 and $4,464,000 as of December 31, 1999 and 1998,
respectively, is net of accumulated amortization of $336,000 and $19,000 for the
same periods. Goodwill represents the excess of purchase price over fair value
of net assets acquired in the Digital Media, Inc. (DMI) and Remote Lojix (RLI)
acquisitions and is being amortized on a straight-line basis over fifteen years.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on discounted future
operating cash flows expected to be generated by the acquired business. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
(H) Acquired Customer Base
Acquired customer base of $923,000 and $1,240,000 as of December 31,
1999 and 1998, respectively, is net of accumulated amortization of $660,000 and
$343,000 for the same periods. The acquired customer base is included in other
assets and is being amortized on a straight-line basis over five years. The
Company assesses the recoverability of this intangible asset by comparing the
recorded value to estimated undiscounted future cash flows from the use of the
asset. The amount of impairment, if any, is measured based on the difference
between the recorded net book value and the estimated fair value of the
intangible asset. The assessment of the recoverability of the acquired customer
base will be impacted if the estimated fair value declines below the recorded
book value.
F-8
<PAGE>
(I) Income Taxes
The Company utilizes the asset and liability method for accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(J) Use of Estimates
Management of the Company has made a number of estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(K) Concentrations of Credit Risk
The Company's subscribers are primarily small to mid-size business
owners and are not concentrated in any specific geographic region of the United
States. The Company generally extends credit to its customers and accounts
receivable are generally not collateralized. As of December 31, 1999 four
customers comprise $1,300,000 or 52.6% of the accounts receivable balance as
listed below.
<TABLE>
<S> <C>
Society Generale $ 623,880
Mattel Media 372,000
Infosys Technologies Limited 201,290
US Search.com 102,816
----------
$1,299,986
==========
</TABLE>
(L) Financial Instruments
The Company's financial instruments include cash, receivables,
payables, and accrued expenses. The carrying amount of such financial
instruments approximates fair value because of the short maturity of these
instruments.
(M) Loss Per Share
Basic and diluted loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period. The
Company has excluded all outstanding convertible preferred stock and outstanding
options and warrants to purchase common stock from the calculation of diluted
net loss per share, as such securities are antidilutive for all periods
presented. Comprehensive income (loss) for the years ended December 31, 1999,
1998 and 1997 is equal to net income (loss) reported for such periods.
(N) Segment Reporting
F-9
<PAGE>
During 1999, the Company realigned its businesses into three business
segments: Network Connectivity, Technical Support Services and Application
Development and Hosting. In accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information", segment information is based on internal management reporting
segmentation. Consequently, the Company's segment reporting has been changed to
reflect the realignment and amounts presented for prior years have been
reclassified to conform with the current presentation. (See Note 11)
(O) Reclassifications
Certain reclassifications have been made to prior period amounts in
order to conform to current year presentation including the reclassifications
necessary to reflect the residential long distance business of Matrix Telecom as
a discontinued operation.
(2) ACQUISITIONS AND DISPOSITIONS
MATRIX TELECOM, INC.
On December 1, 1997, NetLojix and Matrix Telecom completed the Share
Exchange. For accounting purposes the Share Exchange was treated as a reverse
acquisition of NetLojix by Matrix Telecom. NetLojix was the legal acquirer and,
accordingly, the Share Exchange was effected by the issuance of NetLojix common
stock in exchange for all of the common stock then outstanding of Matrix
Telecom. In addition, holders of outstanding Matrix Telecom stock options
received non-qualified stock options of the Company. Immediately after the Share
Exchange the former shareholders of Matrix Telecom held approximately 84% of the
then outstanding common stock of the Company.
The reverse acquisition of NetLojix by Matrix Telecom was accounted for
using the purchase method of accounting. In order to value the consideration
given in the Share Exchange the market price of NetLojix's common stock for a
period immediately preceding the announcement of the Share Exchange was used. As
of the date of acquisition, the Company determined the fair value of the net
tangible and intangible assets acquired and liabilities assumed. Concurrently,
the Company determined that the carrying amount of recorded goodwill was not
recoverable. Accordingly, the Company recorded a charge to expense of $9,098,545
immediately subsequent to the reverse acquisition.
In connection with the completion of the Share Exchange, the Company
entered into a Registration Rights and Lockup Agreement dated December 1, 1997
(the "Registration Rights and Lockup Agreement"). The Registration Rights and
Lockup Agreement requires that the Company use its best efforts to file a shelf
registration statement providing for the sale by certain stockholders of all
securities issued to them in connection with the Share Exchange, subject to a
two-year holding restriction imposed on such stockholders. Under the
Registration Rights and Lockup Agreement, the Company is obliged to use its
reasonable efforts to keep the shelf registration statement effective on a
continuous basis for a period described in the Registration Rights and Lockup
Agreement. Such stockholders may also require the Company to undertake up to two
additional demand registrations of their securities if the shelf registration is
not in place. As of December 1, 1999, the two-year holding restriction imposed
on such shareholders by the Registrations Rights and Lockup Agreement expired.
On November 30, 1999, the Company sold all of the stock of Matrix
Telecom to Matrix Acquisition Holdings Corp., a wholly-owned subsidiary of
Platinum Equity Holdings, LLC. (Platinum) and recorded a gain of $5,780,000. The
purchase price for the Matrix Telecom stock was valued at $6,052,000 and
consisted of four components. First,
F-10
<PAGE>
the Company received a credit against future charges incurred for long distance
wholesale telephone traffic pursuant to a telecommunications service contract
with Matrix Telecom. The amount of the credit was calculated to be approximately
$614,000. Second, $4,190,000 in intercompany indebtedness owed to Matrix Telecom
by NetLojix was eliminated or forgiven. Third, the federal income tax refunds
paid to or due Matrix Telecom in the total amount of $1,248,000 were assigned to
NetLojix. Fourth, NetLojix is to receive a future cash payment based upon Matrix
Telecom's Internet service customer base. The Company will recognize any amounts
due based on Matrix Telecom's Internet services as earned. The Company also
received an indemnity from Platinum against certain claims or liabilities
arising under NetLojix's secured credit facility with Coast Business Credit.
NetLojix also has been released by Coast Business Credit from any claims or
liabilities relating to borrowings secured by the assets of Matrix Telecom. The
residential long distance operations of Matrix Telecom have been reflected as a
discontinued operation and all prior period amounts have been restated. The
Company has recorded a receivable due from Platinum Equity in the amount of
$674,000 relating to the sale of Matrix Telecom, which is included in other
current assets as of December 31, 1999.
The final amount of the purchase price is subject to adjustment based
on finalization of a balance sheet for Matrix Telecom as of August 31, 1999 and
agreement by both parties. The Company has been notified by Platinum that it
materially disagrees with the balance sheet of Matrix Telecom prepared by the
Company. The Company and Platinum are currently attempting to negotiate a
settlement of the balance sheet items in disagreement. If the Company is unable
to resolve the matter, the balance sheet will be submitted to an independent
firm of accountants chosen by the parties for final resolution. Any adjustments,
as determined by such independent accountants, will affect the purchase price
and the recorded gain. At this time, the Company does not believe that the
ultimate resolution of the items in dispute will materially affect the recorded
gain.
BEST CONNECTIONS, INC. ("BEST")
Effective July 1, 1997, shareholders of Best, an affiliate of the
Company through common ownership, contributed their ownership of Best to the
Company in exchange for 934,987 shares of the Company's common stock. Best's
primary assets were 1,999,997 shares of the Company's common stock and cash of
$211,000. Because the companies were under common control, the assets and
liabilities of Best were recorded at their historical cost, which approximated
the fair value of such assets as of July 1, 1997. As a result of the
combination, the Company assumed the obligation to grant up to 1,999,997 stock
options to agents of Best and certain employees of affiliated companies. Such
option grants relate to services, including sales promotion activities, which
have been performed by the recipients on behalf of the Company. Accordingly, the
fair value of such options has been charged to expense by the Company as the
related services were provided.
DIGITAL MEDIA, INC. ("DMI")
Effective September 25, 1998, the Company acquired all of the capital
stock of DMI, a California based developer of multimedia software. The Company
exchanged 30,000 shares of its common stock valued at $71,250 for all of the
outstanding common stock of DMI. The transaction was accounted for under the
purchase method of accounting. The assets and liabilities of DMI were recorded
at their historical cost which approximated their fair value at September 25,
1998. The Company recorded goodwill of approximately $117,000, which represents
the excess of the purchase price over the fair value of the net identifiable
assets received. The goodwill is being amortized on a straight-line basis over
fifteen years.
REMOTE LOJIX/PCSI, INC. ("RLI")
F-11
<PAGE>
Effective November, 1998, the Company acquired all of the capital stock
of RLI, a New York based provider of information technology services to
corporate customers. The Company exchanged 650,000 shares of its common stock
valued at $1,462,500 and the outstanding balance of a $500,000 loan from the
Company for all of the outstanding common stock of RLI. The transaction was
accounted for under the purchase method of accounting. The assets and
liabilities of RLI were recorded at their historical cost which approximated the
fair value at the date of acquisition. The Company recorded goodwill of
approximately $4,365,000, which represents the excess of the purchase price over
the fair value of the assets received. The goodwill is being amortized on a
straight-line basis over fifteen years. During 1999 the Company settled all
outstanding claims against the former majority stockholder of RLI in exchange
for relinquishment of 176,262 shares of common stock of the Company. The
relinquishment was recorded as a reduction of goodwill in the amount of $432,000
during 1999.
Unaudited pro forma results of operations of the Company as if the
share exchange of Matrix Telecom and the acquisitions of Best, DMI and RLI had
occurred as of the beginning of the periods presented are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31
-----------
1998 1997
---- ----
<S> <C> <C>
Revenue $ 15,585,671 14,013,434
Operating loss (4,953,083) (11,912,522)
Loss from continuing operations (5,403,049) (12,063,724)
Pro forma loss from continuing operations per
share $ (0.53) (1.00)
</TABLE>
The pro forma financial information has been prepared for comparative
purposes only and does not purport to indicate the results of operations that
would have occurred had the acquisition been made at the beginning of the
periods indicated, or which may occur in the future.
As of the date of acquisitions, the fair market value of the assets
acquired and liabilities assumed included the following:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
DMI RLI Total
--- --- -----
<S> <C> <C> <C>
Current assets other than cash $ 50,105 1,034,803 1,084,908
Property and equipment 44,313 132,169 176,482
Goodwill 117,169 4,375,191 4,492,360
Current liabilities (166,255) (3,579,663) (3,745,918)
Common stock issued (71,250) (1,462,500) (1,533,750)
------------ ---------- ----------
Cash acquired (paid) $ 25,918 (500,000) (474,082)
============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Matrix Telecom Best Total
-------------- ---- -----
<S> <C> <C> <C>
Current assets other than cash $ 258,041 -- 258,041
Property and equipment 577,836 15,137 592,973
</TABLE>
F-12
<PAGE>
<TABLE>
<S> <C> <C> <C>
Customer base 1,583,000 -- 1,583,000
Goodwill 9,098,545 -- 9,098,545
Current liabilities (1,945,526) (183,041) (2,128,567)
Long-term liabilities (688,854) -- (688,854)
Common and preferred stock issued (9,149,513) (3,361,208) (12,510,721)
Treasury stock acquired -- 3,317,940 3,317,940
------------ ----------- ------------
Cash acquired $ 266,471 211,172 477,643
============ =========== ============
</TABLE>
(3) DISCONTINUED OPERATIONS
Selected financial information for the residential long distance
business discontinued operations is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales $ 18,993,330 34,125,769 44,953,834
Expenses (22,023,905) (38,048,479) (46,180,644)
Loss before income tax benefit (3,030,575) (3,922,710) (1,226,810)
Income tax benefit -- 1,391,389 247,611
--------------- ------------ ------------
Loss from operations of discontinued operations $ (3,030,575) (2,531,321) (979,199)
=============== ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998
-----
<S> <C>
Cash $ 689,120
Accounts receivable 3,237,264
Other assets 1,308,152
---------------
Total assets $ 5,234,536
===============
Liabilities $ 6,078,036
Accumulated deficit (843,500)
---------------
Total liabilities and deficit $ 5,234,536
---------------
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
Estimated ------------
useful life 1999 1998
----------- ---- ----
<S> <C> <C> <C>
Communications system 2-5 years $ 1,151,779 $ 979,659
Office furniture and equipment 1-7 years 423,082 396,688
Leasehold improvements Lease term 134,558 105,098
----------- -----------
Total property and equipment 1,709,419 1,481,445
Accumulated depreciation and amortization (791,848) (441,952)
----------- -----------
Property and equipment, net $ 917,571 $ 1,039,493
=========== ===========
</TABLE>
F-13
<PAGE>
The Company recognized total depreciation expense of $714,000, $737,000
and $632,000 for 1999, 1998 and 1997, respectively. Depreciation expense for
continuing operations was $372,000, $254,000 and $65,000 for the same periods.
(5) STOCKHOLDERS' EQUITY
COMMON STOCK SUBJECT TO PUT OPTION
In 1996, approximately 482,000 shares of common stock were sold to
officers of the Company at $1.50 per share. Upon the termination of the
recipient's employment, such shares could 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. As
of December 31, 1999 all put/call rights had been rescinded.
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
Sale of common shares subject to put 482,400 $ 723,600
Increase in share value subject to put charged to expense -- 172,400
-------- ---------
Balance, December 31, 1996 482,400 896,000
Decrease in share value subject to put recorded
as a reduction to expense -- (172,400)
Vested shares no longer subject to put (96,480) (144,720)
-------- ---------
Balance, December 31, 1997 385,920 578,880
Vested shares no longer subject to put (48,187) (72,281)
Called shares subject to put (225,155) (337,732)
-------- ---------
Balance, December 31, 1998 112,578 168,867
Vested shares no longer subject to put (37,527) (56,290)
Cancellation of put/call rights (75,051) (112,577)
-------- ---------
Balance, December 31, 1999 -- $ --
======== =========
</TABLE>
ISSUANCE AND CONVERSION OF PREFERRED STOCK
The Series A Convertible Preferred Stock ("Series A Stock") is
convertible, on a one-to-one basis, into shares of the Company's common
stock. During 1998, a total of 60,000 shares of the Series A Stock was
converted to 60,000 shares of the NetLojix common 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 three private investors for $1,500,000. The Series B Convertible Preferred
Stock was convertible into common stock at the option of the Series B
investors at any time. The conversion price was the lesser of $6.875 or 89%
of the closing bid price for the Company's common stock at the time of
conversion. All of the shares of the Series B Stock were converted into an
aggregate of 804,328 shares of NetLojix common stock during 1999.
F-14
<PAGE>
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.
During 1999, 9,328 of such warrants were cancelled.
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. As of
December 31, 1999, the Company had put a total of 1,066,725 shares of its common
stock to Cambois Finance for $2,000,000 pursuant to the equity line agreement.
The equity line agreement provides that, without a vote of the Company's common
stockholders, the Company may not issue more than 2,103,939 shares of common
stock in the aggregate to Cambois Finance, Inc. under the equity line, which
number of shares is equal to 19.96% of the outstanding shares of the Company's
common stock on the date of the equity line agreement. As a result, as of
December 31, 1999, the Company could sell up to an additional 1,037,214 shares
to Cambois Finance, Inc. In order to issue shares in excess of that amount under
the equity line agreement, the Company would have to register additional shares
with the Securities and Exchange Commission, as well as obtain stockholder
approval.
The Company 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.
COMMON STOCK REPURCHASES/RELINQUISHMENTS
In December 1998, the Company retired all of its then outstanding
treasury stock, which consisted of 2,201,601 shares.
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. For four consecutive years starting in February 2000, the Company
will sell 25% of the shares held under the 1999 GO Plan and distribute the
proceeds as cash bonuses to the employees who were employed at both the date of
the establishment of the 1999 GO Plan and at the date of distribution.
During 1999, the former majority stockholder of RLI relinquished
176,262 shares of the Company's common stock to the Company in accordance with
two separate legal settlements related to disputes concerning the purchase of
RLI. These shares were originally issued in connection with the purchase of RLI.
Of these shares, 140,000 shares are held as treasury stock while 36,262 shares
were subsequently canceled and retired. The value of the shares relinquished was
recorded as an adjustment to goodwill.
PREFERRED STOCK DIVIDENDS
F-15
<PAGE>
As a result of issuance of the Series B preferred stock, the Company
was required to account for 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 effect of these preferred stock dividends on
earnings per share was recognized ratably over the period to the earliest
conversion date (90 days from date of issuance). During 1999, the Company
included preferred dividends related to the conversion feature on Series B stock
of $256,593 in the calculation of earnings per share.
On January 31, 1999 and July 31, 1999, the Company declared and paid in
cash semi-annual dividends of $23,632 each 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
NETLOJIX OPTIONS--Prior to the Share Exchange, NetLojix adopted a 1997
Incentive Stock Option Plan (the "NetLojix 1997 Plan") for option grants to
officers and key employees. The NetLojix 1997 Plan authorizes grants of options
to purchase up to 250,000 shares of authorized but unissued common stock and
125,000 shares of restricted common stock. Stock options are to be granted with
an exercise price greater than or equal to the stock's fair market value at the
date of grant. Options generally vest 25% after one year and 25% each year
thereafter until fully vested. Such options typically expire after ten years. As
of December 31, 1999, 57,585 options had been exercised and 120,938 options were
outstanding. In addition, NetLojix had other options which had been granted
prior to the adoption of the NetLojix 1997 Plan. After the Share Exchange all
outstanding options became obligations of the Company. As of December 31, 1999,
all options granted prior to the adoption of the NetLojix 1997 Plan had expired.
On January 1, 1998, the Company granted options to purchase 75,000
shares of the Company's common stock at an exercise price of $1.50 per share. On
March 1, 1998, the Company granted options to purchase 100,000 shares of the
Company's common stock at an exercise price of $1.50 per share. These options
become exercisable based on qualified billings to long distance customers
generated by the optionees from the respective dates of grant through December
31, 2000. As of December 31, 1999, and in connection with the sale of Matrix
Telecom, all grants under these agreements had been cancelled except for 26,657
options left outstanding with an expiration date of December 31, 2002.
On February 24, 1998, the Company's Board of Directors approved a grant
of a total of 120,000 shares of restricted common stock to two board members
pursuant to the NetLojix 1997 Plan. The restricted stock provisions will lapse
over four years or fully lapse in the event of death or permanent disability of
the grantees. During 1998, one of the board members resigned from the board and
his 60,000 shares were vested immediately. As of December 31, 1999, only those
60,000 shares of restricted common stock are vested.
During 1998, the Company adopted the 1998 Stock Incentive Plan (the
"NetLojix 1998 Plan"), which provides for the issuance of up to 1,500,000 shares
of NetLojix common stock pursuant to stock options and issuances of restricted
stock, as well as for the grant of stock appreciation rights. Stock options are
to be granted with an exercise price greater than or equal to the stock's fair
market value at the date of grant. Options generally vest 25% after one year and
25% each year thereafter until fully vested. Such options typically expire after
ten years. As of December 31, 1999, the Company had granted options to purchase
1,040,500 shares and granted 20,000 shares of restricted stock
F-16
<PAGE>
under the NetLojix 1998 Plan. Exercise prices range from $1.875 to $5.625 per
share. Options to purchase 998,000 shares were outstanding as of December 31,
1999.
During 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 of the stock at the
respective dates of grant. The stock options vest at a rate of 50% per year over
two years and were granted pursuant to the NetLojix 1998 Plan.
During 1999, the Company granted incentive stock options to four
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 of the stock at the
respective dates of grant. The options vest at a rate of 25% per year over four
years and were granted pursuant to the NetLojix 1998 Plan.
The Company also granted incentive stock options to various
non-executive managers and employees to purchase a total of 100,000 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 of the stock at date of grant. The options vest at a rate of 25%
per year over four years and were granted pursuant to the NetLojix 1998 Plan.
MATRIX TELECOM OPTIONS--Prior to the Share Exchange, the Board of
Directors of Matrix Telecom approved stock options for certain officers and
employees. Stock option transactions of Matrix Telecom are included in the table
below. At the time of the Share Exchange, Matrix Telecom had 22,338 options
outstanding to purchase its common stock. In connection with the Share Exchange,
the Company reissued these stock options and they vested immediately. These
reissued options expire in December 2002.
The Company applies APB Opinion No. 25 in accounting for the NetLojix
1997 Plan, NetLojix 1998 Plan and the Matrix Telecom options discussed above;
accordingly, no compensation cost has been recognized in the financial
statements for stock options issued to employees. For stock options granted to
non-employees, the Company accounts for such options in accordance with the
requirements of SFAS No. 123. Had the Company determined compensation cost based
on the fair value at the grant date for stock options issued to employees under
SFAS No. 123, the Company's financial statements would have reflected the
following amounts:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Additional compensation expense $ 621,467 63,671 --
Pro forma net loss from continuing operations (5,568,865) (3,334,668) (9,212,521)
Pro forma net loss from continuing operations per
common share (0.54) (0.35) (1.11)
</TABLE>
Compensation cost for 1999 and 1998 was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: expected volatility of 50% and 30%, respectively; risk-free
interest rate of 6.0% for all years; expected life of 10.0 and 9.0 years,
respectively; and no expected dividend yield for any year.
BEST CONNECTIONS OPTIONS--As discussed in Note 2, as a result of the
Matrix Telecom combination with Best, Matrix Telecom assumed the obligation to
issue stock options to Best's agents under Best's 1997 Option Plan. Effective as
of the date of combination, July 1, 1997, 1,292,000 options to purchase common
shares at $1.50 per share were granted to Best agents, which resulted in
aggregate commission expense of approximately $762,000 over the vesting period.
The agents' options became exercisable based on qualified billings of long
distance customers generated by the agents during six month measurement periods.
After the Share Exchange such options became obligations of the Company. As of
December 31, 1999, all 1,292,000 options have vested and 410,002 have been
F-17
<PAGE>
exercised under the Plan. The Company recorded expenses totaling approximately
$381,000, $132,000 and $249,000 related to such options based on qualified
billings for 1999, 1998 and 1997, respectively. These amounts are included in
loss from discontinued operations. The options will expire on May 22, 2000.
The per share weighted average fair value of stock options granted on
July 1, 1997 was $.59 on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: expected
volatility of 30%, risk-free interest rate of 6.0%, and an expected life of 3.5
years.
OPTIONS SUMMARY-Stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted Average
----------------
Exercise Grant-date
Options Price Fair Value
------- -------- ----------
<S> <C> <C> <C>
Outstanding as of December 31, 1995 53,607 $ 2.24
Canceled (31,269) 2.24
---------
Outstanding as of December 31, 1996 22,338 2.24
NetLojix options outstanding at time of Share Exchange 255,109 4.52
Granted 1,539,500 1.50 $ 0.61
Exercised (15,000) 3.50
---------
Outstanding as of December 31, 1997 1,801,947 1.78
Granted 1,024,500 3.31 2.63
Expired (46,750) 1.54
Forfeited (106,999) 1.91
Exercised (353,327) 1.81
---------
Outstanding as of December 31, 1998 2,319,371 2.45
Granted 553,000 4.55 3.02
Expired (11,111) 2.40
Canceled (515,852) 3.21
Exercised (295,477) 1.63
---------
Outstanding as of December 31, 1999 2,049,931 2.94
=========
</TABLE>
The per share weighted average grant-date fair value for options
granted during 1999, 1998 and 1997 was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions: expected
volatility of 50% for 1999 and 30% for 1998 and 1997; risk-free interest rate of
6.0% for all years; expected life of 9.3, 8.4 and 3.7 years, respectively; and
no expected dividend yield for any year.
Total expense recorded for stock based awards during 1999, 1998 and
1997 was $560,725, $477,148 and $748,884, respectively. Total expense associated
with continuing operations for stock based awards was $156,551, $372,917 and $0
for the same periods.
The following table summarizes certain information about the Company's
stock options at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Number of Average
Range of Number of Contractual Exercise Options Exercise
Exercise Prices Options Life Price Exercisable Price
--------------- ------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 1.50 - 2.25 981,993 1.0 years $ 1.54 930,993 $ 1.52
2.38 - 3.30 247,250 8.2 years 2.96 83,625 3.02
4.00 - 6.00 806,826 8.6 years 4.51 103,701 4.00
8.00 - 12.00 13,862 6.7 years 10.73 13,862 10.73
--------- ---------
2,049,931 4.9 years 2.94 1,132,181 1.97
========= =========
</TABLE>
(6) FEDERAL AND STATE INCOME TAXES
The provision for income taxes allocated to continuing operations
consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current tax expense (benefit):
Federal $ -- -- (24,430)
State and local -- -- (4,311)
----- ---------- --------
-- -- (28,741)
----- ---------- --------
Deferred tax expense (benefit):
Federal -- (135,190) --
----- ---------- --------
Continuing operations $ -- (135,190) (28,741)
===== =========== =========
Discontinued operations $ -- (1,391,389) (247,611)
===== =========== =========
</TABLE>
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to loss from continuing operations
before income taxes as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ (1,682,115) (1,158,104) (3,142,029)
State and local taxes, net of federal income tax effect (183,054) (79,814) (27,359)
Other permanent items (144,812) 22,539 3,093,522
Losses not providing tax benefit 2,046,753 1,270,810 160,686
Other (36,772) (190,621) (113,561)
---------- ---------- -----------
$ -- (135,190) (28,741)
========== ========== ===========
</TABLE>
Deferred income taxes as of December 31, 1999 and 1998 reflect the
impact of temporary differences between financial statement carrying amounts and
tax bases of assets and liabilities. The tax effects of temporary differences
and net operating loss carryforwards that give rise to significant portions of
the net deferred tax assets at December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
December 31
-----------
<S> <C> <C>
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 3,918,385 3,133,874
Compensation related items 416,350 480,137
Contingent liabilities and other 450,353 268,340
----------- ----------
Gross deferred tax asset 4,785,088 3,882,351
Less valuation allowance (4,428,328) (3,418,198)
----------- ----------
Net deferred tax asset 356,760 464,153
----------- ----------
Deferred tax liabilities:
Customer base intangible (342,537) (464,153)
Other (14,223) -
----------- ----------
Net deferred tax asset $ - -
=========== ==========
</TABLE>
The valuation allowance for deferred tax assets increased $1,010,130,
$2,233,529 and $1,184,669 during 1999, 1998 and 1997, respectively.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and prior taxes paid in making this assessment. Based upon its
evaluation of these factors, management believes that it is more likely than not
that the Company will realize the benefits of these deductible differences, net
of the valuation allowance, at December 31, 1999. At December 31, 1999, the
Company has net operating loss carryforwards for federal tax purposes of
approximately $8,956,000 which are available on a limited basis to offset future
federal taxable income, if any, through 2019. When realized, approximately
$3,000,000 of such benefit will first be utilized to reduce intangible assets
recorded in the reverse acquisition of AvTel by Matrix Telecom and the
acquisition on Remote Lojix.
(7) RELATED PARTY TRANSACTIONS
The Company has had transactions in the normal course of business with
various companies who are affiliated with shareholders of the Company. Pacific
Gateway Exchange, Inc. ("PGE") has provided the Company with significant
domestic and international transmission services. As of January 1, 1998, PGE was
no longer affiliated with the Company. During 1998, a director and several
significant holders of the Company's common stock divested themselves of a
substantial portion of their holdings of PGE common stock; they have advised the
Company that they no longer could be deemed to be in control of PGE. A
significant number of the Company's employees were leased from United Group
Service Center, an affiliate, which provides such services to a number of
affiliated companies. This lease agreement was terminated on December 31, 1998,
at which time these individuals became employees of the Company. The Company
provides long distance and data network service to a number of affiliated
companies. Balances with affiliates related to operating activities are settled
monthly. In addition, the Company has made both interest bearing and
non-interest bearing advances to affiliated companies.
Due from affiliates consists of the following:
F-20
<PAGE>
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
UICI Administrators (long distance services) $ 572,101 580,155
Interactive Media Works (IMW) (long distance services) 786 6,214
Core Marketing (long distance services) 94,397 82,695
AMLI Management Co. (long distance services) 32,730 10,695
Other receivables from various affiliates 15,443 93,908
---------- -------
$ 715,457 773,667
========== =======
</TABLE>
Significant services and transactions incurred in the normal course of
operations with affiliated companies are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues include the following:
Continuing operations
Long distance revenues from affiliates:
UGA, UICI, IMW, Core Marketing, and AMLI $ 4,741,709 4,592,040 3,351,375
Discontinued operations
U.S. Telco-billing and collection services, customer service
and accounting services -- -- 200,370
----------- --------- ----------
$ 4,741,709 4,592,040 3,551,745
=========== ========= ==========
Cost of revenues includes the following:
Discontinued operations
Network transmission services-PGE (not an affiliate in 1999
and 1998) $ -- -- 15,917,688
=========== ========= ==========
Selling, general and administrative expenses include the following:
Continuing operations
Expenses incurred for leasing employees from United Group
Service Center $ -- 826,051 624,206
Overhead expenses reimbursed to/from UGA divisions 20,555 30,468 13,181
----------- --------- ----------
20,555 856,519 637,387
----------- --------- ----------
Discontinued operations
Expenses paid on behalf of PGE (not considered and
affiliate in 1999 and 1998) for access services, for
which the Company was reimbursed -- -- 3,534,154
Expenses incurred for leasing employees from United Group
Service Center -- 4,755,377 3,771,614
Sales commissions to affiliates:
Core Marketing, UICI, UGA, Best Connections and AMLI 30,937 140,187 990,533
Overhead expenses reimbursed to UGA/from divisions 51,770 211,342 97,580
Core Marketing-casual mailings and telemarketing 19,668 21,425 603,742
----------- --------- ----------
102,375 5,128,331 8,997,623
----------- --------- ----------
$ 122,930 5,984,850 9,635,010
=========== ========= ==========
</TABLE>
F-21
<PAGE>
During 1997, the Company loaned $2,000,000 to an affiliated company,
Core Marketing, LLC. Of such amount, $201,000 was repaid in 1997 and the
remainder was repaid in 1998.
In July 1998, the Company purchased notes receivable from one of the
Company's significant shareholders at a discount. The notes receivable evidenced
loans made by the significant shareholder in 1996 to Matrix Telecom employees to
finance their purchases of Matrix Telecom common stock (which was subsequently
converted to shares of the Company's common stock). Each of the employees who
delivered a note receivable also entered into a Buyback Agreement dated October
6, 1996 (the "Buyback Agreement"), pursuant to which the Company has the option
(but no obligation) to repurchase a portion of such employee's stock upon the
termination of his or her employment. The original notes, plus accrued interest,
at the date of purchase by the Company were $573,000. The Company purchased
these notes for $435,000.
In connection with the purchase of the notes receivable above, the
Company repurchased 240,912 shares of its common stock subject to the Buyback
Agreement from terminated employees. The Company exercised its right to
repurchase 225,154 of such shares at a price range of $1.51 to $1.70 per share,
and the former employees used the $373,081 in proceeds to reduce the amount of
their notes. The Company repurchased an additional 15,758 shares in satisfaction
of the remaining balance of $116,085 on the former employees' notes.
(8) LOSS PER COMMON SHARE
Loss per common share for the years ended December 31, 1999, 1998 and
1997 is as follows:
Loss from continuing operations per share -
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net loss $ (4,947,398) (3,270,997) (9,212,521)
Preferred dividends 303,857 47,264 5,540
-------------- ---------- ----------
Loss applicable to common shareholders $ (5,251,255) (3,318,261) (9,218,061)
========== ========== ==========
Denominator:
Weighted average number of common
shares used in basic and diluted
loss per common share 10,794,584 9,633,474 8,267,296
========== ========== ==========
Basic and diluted loss per common share $ (0.49) (0.35) (1.11)
========== ========== ==========
</TABLE>
Discontinued operations
Loss from operations per share -
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net loss $ (3,030,575) (2,531,321) (979,199)
========== ========== ==========
Denominator:
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average number of common
shares used in basic and diluted loss
per common share 10,794,584 9,633,474 8,267,296
========== ========== ==========
Basic and diluted loss per common share $ (0.28) (0.26) (0.12)
========== ========== ==========
</TABLE>
Gain on disposition per share -
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income $ 5,780,238 -- --
========== ========== ==========
Denominator:
Weighted average number of common
shares used in basic and diluted loss
per common share 10,794,584 -- --
========== ========== ==========
Basic and diluted income per common
share $ 0.54 -- --
========== ========== ==========
</TABLE>
Income (loss) from discontinued operations per share -
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 2,749,663 (2,531,321) (979,199)
========== ========== ==========
Denominator:
Weighted average number of common
shares used in basic and diluted
loss per common share 10,794,584 9,633,474 8,267,296
========== ========== ==========
Basic and diluted income (loss) per
common share $ 0.26 (0.26) (0.12)
========== ========== ==========
</TABLE>
Net loss per share -
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net loss $ (2,197,735) (5,802,318) (10,191,720)
Preferred dividends 303,857 47,264 5,540
-------------- ---------- -----------
Loss applicable to common shareholders $ (2,501,592) (5,849,582) (10,197,260)
========== ========== ==========
Denominator:
</TABLE>
F-23
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY AVTEL COMMUNICATIONS, INC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<S> <C> <C> <C>
Weighted average number of common
shares used in basic and diluted loss
per common share 10,794,584 9,633,474 8,267,296
========== ========= =========
Basic and diluted net loss per common
share $ (0.23) (0.61) (1.23)
========== ========= =========
</TABLE>
There are 2,049,931, 2,319,371 and 1,801,947 potential common shares
excluded from the diluted loss per common share calculation for 1999, 1998 and
1997, respectively, because the effect is determined to be antidilutive.
(9) LEASING ACTIVITIES
The Company leases office space and various equipment under operating
leases expiring in various years through 2005. In the normal course of business,
operating leases are generally renewed or replaced by other leases. Total rental
expense was $829,000 in 1999, $546,000 in 1998, and $259,000 in 1997. Rental
expense associated with continuing operations was $652,000, $319,000, and
$54,000 in the same periods. Future minimum lease payments under non-cancelable
operating leases (with initial or remaining lease terms in excess of one year)
as of December 31, 1999 are: 2000 - $631,000; 2001 - $636,000; 2002 - $484,000;
2003 - $188,000; and 2004 - $50,000.
(10) REVOLVING LINE OF CREDIT
In 1998, the Company entered into a Loan and Security Agreement with
Coast Business Credit, which provides for an asset-based revolving credit line
with a floating interest rate of prime plus 2%. As a result of the sale of
Matrix Telecom, NetLojix was released by Coast Business Credit and received an
indemnity from Platinum from any claims or liabilities relating to borrowings
secured by the assets of Matrix Telecom. As of December 31, 1999, no borrowings
were outstanding under the credit line and approximately $348,000 was available
for future borrowings.
In March, 2000 the Loan and Security Agreement was restructured.
(see Note 13)
(11) SEGMENT REPORTING
The Company's primary business segments are Network Connectivity,
Technical Support Services and Application Development and Hosting. The
segmentation is based on the types of services provided. All of the Company's
services are targeted toward mid-sized businesses.
The network connectivity segment includes services that are
point-to-point connections of voice or data traffic. The Company provides
traditional long distance services, calling card, dedicated voice and data
access and numerous Internet service options. Telecommunications product
offerings include dedicated or leased lines, switched long distance, frame
relay, ASM, calling cards, and "1-800" services. Internet product offerings
within the network connectivity segment include dial-up access, DSL, dedicated
access and cable access. This segment includes the Internet connectivity portion
of the Company's Southern California based ISP.
Technical support services encompasses a broad array of technical
support services and solutions including system integration, desktop and network
support, asset management and help desk solutions. Services provided include
F-24
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY AVTEL COMMUNICATIONS, INC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
flat-fee maintenance contracts, prepaid time block retainers, help desk
management contracts, LAN installations, warranty repairs and a small amount of
hardware sales.
The applications development and web hosting services segment includes
producing, designing, and programming creative multimedia applications that can
be produced as a web application or a stand alone application as well as web
hosting services.
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 years ended December 31, 1999, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1999
----
Application
Network IT Support Development
Connectivity Services and Hosting Overhead Total
------------ -------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 9,572,259 5,264,709 2,027,315 -- 16,864,283
Gross margin 4,305,064 1,895,356 1,280,545 -- 7,480,965
Selling, general and
administration 3,298,814 2,760,844 843,381 4,445,626 11,348,665
Depreciation and amortization 194,100 372,100 47,724 408,283 1,022,207
Interest expense (26,223) (52,635) (1,692) -- (80,550)
Other income (expense) (545) 19,504 4,100 -- 23,059
------------ ---------- ----------- --------- ----------
Income (loss) before discontinued
operations $ 785,382 (1,270,719) 391,848 (4,853,909) (4,947,398)
Discontinued operations -- -- -- -- 2,749,663
------------ ---------- ----------- --------- ----------
Net income (loss) $ 785,382 (1,270,719) 391,848 (4,853,909) (2,197,735)
============ ========== =========== ========= =========
EBITDA $ 1,005,705 (845,984) 441,264 (4,445,626) (474,866)
Total assets $ 5,066,055 5,128,691 656,094 105,581 10,956,421
<CAPTION>
1998
----
Application
Network IT Support Development
Connectivity Services and Hosting Overhead Total
------------ -------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 7,996,910 1,010,736 880,083 -- 9,887,729
Gross margin 3,058,413 399,276 761,082 -- 4,218,771
Selling, general and
administration 3,159,190 579,493 727,063 2,608,460 7,074,206
Depreciation and amortization 194,629 25,795 35,658 355,829 611,911
Interest expense (27,084) (1,353) (2,741) -- (31,178)
Other income (expense) 77,287 -- 15,050 -- 92,337
Income tax benefit 135,190 -- -- -- 135,190
------------ ---------- ----------- --------- ----------
Income (loss) before discontinued
operations $ (110,013) (207,365) 10,670 (2,964,289) (3,270,997)
</TABLE>
F-25
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY AVTEL COMMUNICATIONS, INC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Discontinued operations -- -- -- -- (2,531,321)
------------ ---------- ----------- --------- ----------
Net income (loss) (110,013) (207,365) 10,670 (2,964,289) (5,802,318)
============ ========== =========== ========= =========
EBITDA (111,700) (180,217) 49,069 (2,608,460) (6,135,325)
Total assets 5,102,175 5,429,829 132,348 60,466 10,724,818
<CAPTION>
1997
----
Application
Network IT Support Development
Connectivity Services and Hosting Overhead Total
------------ -------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 6,390,427 -- 44,819 -- 6,435,246
Gross margin 1,533,448 -- 39,603 -- 1,573,051
Selling, general and
administration 736,690 -- 20,543 10,012,816 10,770,049
Depreciation and amortization 13,511 -- 2,525 62,227 78,263
Interest expense (2,911) -- (309) -- (3,220)
Other income (expense) 37,040 -- 179 -- 37,219
Income tax benefit 28,741 -- -- -- 28,741
------------ ---------- ----------- --------- ----------
Income (loss) before discontinued
operations $ 846,117 -- 16,405 (10,075,043) (9,212,521)
Discontinued operations -- -- -- -- (979,199)
------------ ---------- ----------- --------- ----------
Net income (loss) $ 846,117 -- 16,405 (10,075,043) (10,191,720)
============ ========== =========== ========= =========
EBITDA $ 833,798 -- 19,239 (10,012,816) (9,776,524)
Total assets $ 4,054,025 -- 182,246 500,000 4,736,271
</TABLE>
(12) CONTINGENCIES
The Company is a defendant in a class action lawsuit under the federal
securities laws (IN RE AVTEL SECURITIES LITIGATION, Case No. 98-9236) currently
pending in the United States District Court of the Central District of
California. This litigation is alleging securities fraud as it relates to an
unusual upsurge in the Company's stock price and trading volume on November 12,
1998 when trading in the Company's stock was halted by Nasdaq. This matter is
still in the early stages of litigation. The plaintiffs filed a consolidated
amended complaint on March 15, 1999. Discovery is under way, with trial
scheduled for February 2001. The Company believes that these claims are without
merit and intends to defend vigorously this litigation. However, it is not
possible at this time for the Company to predict with certainty the outcome of
this litigation.
In connection with the sale of Matrix Telecom (see Note 2), the amount
of the purchase price is subject to reduction based upon a comparison of Matrix
Telecom's adjusted stockholders' equity on August 31, 1999, to adjusted
stockholders' equity on May 31, 1999. Platinum has indicated that it materially
disagrees with NetLojix's calculation of the reduction. If the parties are
unable to resolve the matter, the calculation will be submitted to an
independent firm of accountants chosen by the parties for final resolution. If
the dispute is determined in Platinum's favor the amount of the long distance
credits would be reduced below the amount calculated by the Company. If the
amount exceeds the total of the unused amount of long distance credit plus the
Internet service customer base payment, then the Company would be required to
pay Platinum such excess in cash.
The Company presently has other contingent liabilities relating to
various lawsuits and other matters related
F-26
<PAGE>
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY AVTEL COMMUNICATIONS, INC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
to the conduct of its business. On the basis of information furnished by counsel
and others, management believes these contingencies upon resolution will not
materially affect the financial condition or results of operations of the
Company.
(13) SUBSEQUENT EVENTS
During January 2000, the Company purchased 11,830 shares of its common
stock for $36,794 in the open market pursuant to the Company's 2000 GO Plan. The
2000 GO Plan was established to provide the Company's employees with cash
bonuses for up to four years to promote longevity of employment. For four
consecutive years starting in February 2001, the Company will sell 25% of the
shares held under the 2000 GO Plan and distribute the proceeds as cash bonuses
to the employees who were employed at both the date of the establishment of the
2000 GO Plan and at the date of distribution.
In January 2000, the Company entered into a negotiated contractual
agreement for switching and transmission facilities committing the Company to
$720,000 minimum usage through January 2003. The Company expects to sign an
additional agreement with another supplier in April 2000 for switching and
transmission facilities committing the Company to $5,250,000 minimum usage
for the life of the contract through March 2002.
In January, 2000, the Company granted an additional 840,500 options at
an exercise price of $3.28 pursuant to the NetLojix 1998 Plan. Of these options,
380,500 are contingent upon shareholder approval of an amendment to the NetLojix
1998 Plan to increase the number of shares reserved for issuance under the plan.
In January, 2000, the Company retained a major investment banking firm
to act as the Company's financial advisor and investment banker. As compensation
for investment banking services the Company has agreed to pay $25,000 plus
100,000 warrants to purchase common stock of the Company at an exercise price of
$3.28 with a term of five years. In addition, the Company has agreed to
compensate the investment banking firm for any financing transactions
facilitated by them in the form of a placement fee which will be equal to 5% of
the gross proceeds raised from the sale of equity securities plus warrants equal
to 3.5% of the shares sold in the transaction at an exercise price of 120% of
the price per share of the common stock purchased. A merger fee equal to 3% of
the aggregate consideration of the completed transaction will apply if the
Company enters into an acquisition transaction involving the ownership of the
Company whereby the Company's existing shareholders own less than 50% of the
equity of the surviving entity. This relationship is effective until August 31,
2000, automatically renewing for successive months until terminated in writing
by either the Company or the investment banking firm. Either the Company or the
investment banking firm can terminate this relationship on 90 days written
notice.
In March 2000, the Company sold 375,000 shares of its common stock at
$4.00 per share to a private investor, for total proceeds of $1,500,000. The
terms of the transaction include 75,000 warrants at an exercise price of $5.25
per share with a three year expiration period and certain registration rights.
In March, 2000, the Company restructured the secured credit facility
with Coast Business Credit. Under the restructured line of credit, the Company
may borrow up to 75% of eligible receivables (as defined) up to a total amount
of $3,000,000. The percentage may be increased to 80% of eligible receivables if
the Company reaches certain operational targets. In addition, the line of credit
may be used 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% (10.5% at December 31, 1999). Borrowings
under the credit facility are secured by substantially all of the Company's
assets. Currently, no amount is outstanding under the credit facility.
On April 19, 2000, the Company and the counsel to the plaintiff
class reached an agreement in principle to settle all outstanding claims
under the class action lawsuit. The agreement is subject to finalization and
execution of a definitive settlement agreement, passage of a class member
notification period and final approval by the court. Under the terms of the
settlement, the Company will issue 232,000 shares of common stock and
warrants to purchase 200,000 shares of the Company's common stock at an
exercise price of $8.00 per share with a term of 2 years. In addition, the
Company would be required to pay $150,000 in administrative costs and other
expenses. As of March 31, 2000, the Company has incurred in excess of
$100,000 in legal costs and other expenses and numerous hours of senior
management time has been diverted away from the day-to-day operations of the
Company relating to the class action lawsuit. While the Company continues to
believe it has strong defenses against the lawsuit, considering the ongoing
costs of defending the lawsuit in terms of management time and legal fees as
well as the uncertainty associated with a jury trial, the Company believes
the settlement is fair and equitable. The Company will record a charge
against earnings in the first quarter of 2000 of $998,000 relating to the
expected settlement.
F-27
<PAGE>
NETLOJIX COMMUNICATIONS, INC., AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Balance at Balance
beginning of At end
period Additions Deductions of period
------ --------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts and other
provisions - years ended:
December 31, 1999 $ 249,000 296,000 (a) 255,000 (b) 290,000
======= ======= ======= =======
December 31, 1998 $ 156,000 384,000 (a) 291,000 (b) 249,000
======= ======= ======= =======
December 31, 1997 $ 104,000 256,000 (a) 204,000 (b) 156,000
======= ======= ======= =======
Valuation allowance for deferred tax asset:
December 31, 1999 $ 3,418,000 1,010,000 (c) -- 4,428,000
========= ========= ======= =========
December 31, 1998 $ 1,185,000 2,233,000 (c) -- 3,418,000
========= ========= ======= =========
December 31, 1997 $ -- 1,185,000 (c) -- 1,185,000
========= ========= ======= =========
</TABLE>
(a) Charged to selling, general and administration expense.
(b) Amounts written off.
(c) Recognized as a component of deferred tax assets.
S-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
common stock offered hereby, other than underwriting discounts and commissions:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee................................... $ 2,814
Additional Listing Fee for Nasdaq SmallCap Market..................................... 7,000
Blue Sky Fees and Expenses (including attorneys' fees)................................ 1,000
Accounting Fees and Expenses.......................................................... 10,000
Attorneys' Fees and Expenses.......................................................... 50,000
Transfer Agent's and Registrar's Fees................................................. 1,000
Miscellaneous ...................................................................... 8,186
Total ...................................................................... $80,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Delaware General Corporation Law (Section 145) gives Delaware
corporations broad powers to indemnify their present and former directors and
officers and those of affiliated corporations against expenses incurred in the
defense of any lawsuit to which they are made parties by reason of being or
having been such directors or officers, subject to specified conditions and
exclusions, gives a director or officer who successfully defends an action the
right to be so indemnified, and authorizes the Registrant to buy directors' and
officers' liability insurance. Such indemnification is not exclusive of any
other rights to which those indemnified may be entitled under any bylaws,
agreement, vote of stockholders or otherwise.
(b) Article Eighth of the Certificate of Incorporation of the
Registrant permits, and Article Sixth of the Bylaws of the Registrant provides
for, indemnification of directors, officers, employees and agents to the fullest
extent permitted by law provided that NetLojix is not required to advance
expenses incurred by directors and officers in connection with an action, suit
or proceeding (or part thereof) brought by NetLojix which was authorized by a
majority of its board of directors and which alleges (i) willful
misappropriation of corporate assets by such director, officer, employee or
agent, (ii) disclosure of confidential information in violation of law or (iii)
any other willful and
II-1
<PAGE>
deliberate breach in bad faith of the duty of such director, officer,
employee or agent to NetLojix or its stockholders.
(c) In accordance with Section 102(b)(7) of the Delaware General
Corporation Law, the Registrant's Certificate of Incorporation provides that
directors shall not be personally liable for monetary damages for breaches of
their fiduciary duty as directors except for (1) breaches of their duty of
loyalty to the Registrant or its stockholders, (2) acts or omissions not in
good faith or which involve intentional misconduct or knowing violations of
law, (3) under Section 174 of the Delaware General Corporation Law (unlawful
payment of dividends) or (4) transactions from which a director derives any
improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended September 30, 1997, NetLojix issued
shares of its common stock, which were not registered under the Securities Act,
in connection with the acquisition of NetLojix Holdings, the acquisition of
Silicon Beach and the acquisition of WestNet. NetLojix also issued shares of
series A convertible preferred stock in connection with the acquisition of
NetLojix Holdings. (Such shares are convertible into common stock on a one for
one basis.) No underwriters were used in these transactions and none of such
shares were issued publicly. In each case NetLojix relied on the exemptions from
registration provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder. In each case, the number of individuals
receiving shares of stock was very small, and such individuals were and are
believed by NetLojix to possess the requisite level of financial sophistication
and experience in order to qualify for such exemptions. In each case, NetLojix
made available to the recipients of such common stock all material information
with respect to NetLojix and the respective transaction. The specific details of
such issuances were disclosed as part of relevant Form 8-K, Form 10-KSB or Form
10-QSB filings. Certain summary information is set forth in the following table.
All share numbers have been adjusted to reflect the subsequent reverse stock
split.
<TABLE>
<CAPTION>
DATE SHARES ISSUED ENTITY ACQUIRED PURCHASERS
- ---- ------------- --------------- ----------
<S> <C> <C> <C>
October 23, 1996 1,063,127 (Common Stock) NetLojix Holdings Anthony E. Papa, James P.
Pisani, Barry A. Peters
October 23, 1996 250,000 (Preferred Stock) NetLojix Holdings Tommy Lin, Patrick Lin
November 20, 1996 28,750 Silicon Beach Frank Dziuba
February 21, 1997 8,750 WestNet Theodore E. Padova, Howard
M. Tamaroff, Hallas Color
Photo Lab, Inc.
</TABLE>
II-2
<PAGE>
On December 1, 1997, NetLojix issued 9,582,493 shares of its common
stock, which were not registered under the Securities Act, in connection with
the acquisition of Matrix Telecom; 1,999,997 of such shares were held by a
subsidiary of NetLojix as treasury stock after the transaction and were
subsequently canceled. No underwriters were used in this transaction and none
of such shares were issued publicly. NetLojix relied on the exemptions from
registration provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder. The persons receiving shares were the 23
former Matrix Telecom shareholders. NetLojix also issued options for 22,338
shares of common stock to three former Matrix Telecom option holders with an
exercise price of $2.24 per share. These persons were and are believed by
NetLojix to possess the requisite level of financial sophistication and
experience in order to qualify for such exemptions. NetLojix made available
to the recipients of such common stock all material information with respect
to NetLojix and the share exchange. Each such person signed an exchange
statement containing appropriate investment representations and covenants.
The specific details of the issuances were disclosed in NetLojix's definitive
Proxy Statement dated October 31, 1997, and as part of relevant Form 8-K and
Form 10-KSB filings.
In June 1997, New Best Connections, Inc., a subsidiary of Matrix
Telecom, awarded options to purchase shares of Matrix Telecom common stock to
members of its outside sales force in recognition of their past services to
Best Connections, Matrix Telecom and related companies (and in satisfaction
of certain obligations of Best Connections to shareholders of Matrix Telecom
who had contributed shares of Matrix Telecom stock to Best Connections). As a
result of the share exchange, the shares of Matrix Telecom common stock
subject to such options were converted into 1,292,000 shares of NetLojix
common stock. The exercise price for such options is $1.50 per share.
NetLojix subsequently registered such shares of its common stock prior to any
of such options becoming exercisable.
In July 1997, Best Connections issued options to purchase Matrix
Telecom common stock to 41 individuals in recognition of their past services
to Best Connections, Matrix Telecom and related companies (and in
satisfaction of certain obligations of Best Connections to shareholders of
Matrix Telecom who had contributed shares of Matrix Telecom stock to Best
Connections for this purpose). As a result of the share exchange, the shares
of Matrix Telecom common stock subject to such options were converted into
shares of NetLojix common stock. The exercise price for such options was
$1.50 per share. During the fiscal year ending December 31, 1998, (1) options
were exercised for 107,250 shares, (2) options for 67,250 shares were
canceled in connection with the exercise of other options, and (3) options
for 73,000 shares were forfeited or expired unexercised. At December 31,
1998, none of such options remained outstanding. No underwriters were used in
connection with these option exercises and none of the shares issued upon
exercise was issued publicly. NetLojix has relied on the exemptions from
registration provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder. The optionees were and are
II-3
<PAGE>
believed by NetLojix to possess the requisite level of financial
sophistication and experience in order to qualify for such exemptions.
NetLojix made available to the recipients of such common stock all material
information with respect to NetLojix.
On September 25, 1998, NetLojix issued 30,000 shares of its common
stock, which were not registered under the Securities Act, in connection with
the acquisition of Digital Media, by means of a stock-for-stock exchange. No
underwriters were used in the transaction and none of such shares were issued
publicly. NetLojix relied on the exemptions from registration provided by
Sections 3(a) (11) and 4(2) of the Securities Act and Rule 505 of Regulation
D promulgated thereunder. The persons receiving shares were the three former
Digital Media shareholders. These persons were and are believed by NetLojix
to possess the requisite level of financial sophistication and experience in
order to qualify for such exemptions. NetLojix made available to the
recipients of such common stock all material information with respect to
NetLojix and the share exchange. Each such person signed an exchange
agreement containing appropriate investment representations and covenants.
On November 19, 1998, NetLojix issued 650,000 shares of its common
stock, which were not registered under the Securities Act, in connection with
the acquisition of Remote Lojix. No underwriters were used in this
transaction and none of such shares were issued publicly. NetLojix relied on
the exemptions from registration provided by Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. The persons
receiving shares were the 20 shareholders of Remote Lojix. These persons are
believed by NetLojix to possess the requisite level of financial
sophistication and experience in order to qualify for such exemptions.
NetLojix made available to the recipients of such common stock all material
information with respect to NetLojix. Each such person signed a stock
purchase agreement containing appropriate investment representations and
covenants.
On March 17, 1999, NetLojix issued 14,845 shares of its common
stock, which were not registered under the Securities Act, to one of its
distributors upon the exercise of an existing stock option. No underwriters
were used in this transaction and none of such shares were issued publicly.
NetLojix relied on the exemptions from registration provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
The distributor receiving shares is believed by NetLojix to possess the
requisite level of financial sophistication and experience in order to
qualify for such exemptions. NetLojix made available to the distributor all
material information with respect to NetLojix. The distributor signed a
restricted stock agreement containing appropriate investment representations
and covenants.
On April 13, 1999, NetLojix issued 1,500 shares of its series B
convertible preferred stock and 20,000 common stock purchase warrants, which
were not registered under the Securities Act, to three private investors. No
underwriters were used in this transaction and none of such shares were
issued publicly. NetLojix relied on the exemptions from registration provided
by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder. The persons receiving
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<PAGE>
securities are believed by NetLojix to possess the requisite level of
financial sophistication and experience in order to qualify for such
exemptions. NetLojix made available to the investors all material information
with respect to NetLojix. The investors signed a preferred stock and warrants
purchase agreement containing appropriate investment representations and
covenants.
On April 23, 1999, NetLojix issued 3,000 shares of common stock to
Trinity Capital Advisors, Inc. in compensation for financial advisory
services in connection with the offering described in this registration
statement. Trinity Capital Advisors, in its role as financial advisor,
conducted a financial analysis of NetLojix and presented it with a private
placement structure. Trinity also provided NetLojix with several contacts
with investors known to invest in the type of structure proposed. No
underwriters were used in this transaction and none of such shares were
issued publicly. NetLojix relied on the exemptions from registration provided
by Section 4(2) of the Securities Act and Rule 506 of Regulation D
promulgated thereunder. Trinity is believed by NetLojix to possess the
requisite level of financial sophistication and experience in order to
qualify for such exemptions. NetLojix made available to Trinity all material
information with respect to NetLojix. Trinity signed an agreement containing
appropriate investment representations and covenants.
On January 10, 2000, NetLojix issued 100,000 common stock purchase
warrants to Kaufman Bros., L.P. in partial compensation for financial
advisory services unrelated to the offering described in this registration
statement. No underwriters were used in this transaction and none of such
shares were issued publicly. NetLojix relied on the exemptions from
registration provided by Sections 4(2) and 4(6) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder. Kaufman Bros., L.P. is an
investment bank, and is believed by NetLojix to possess the requisite level
of financial sophistication and experience in order to qualify for such
exemptions. NetLojix made available to Kaufman Bros., L.P. all material
information with respect to NetLojix. Kaufman Bros., L.P. signed an agreement
containing appropriate investment representations and covenants.
On March 3, 2000, NetLojix issued 375,000 shares of its common stock
and 75,000 common stock purchase warrants, which were not registered under
the Securities Act, to AMRO International, S.A. No underwriters were used in
this transaction and none of such shares were issued publicly. NetLojix
relied on the exemptions from registration provided by Sections 4(2) and 4(6)
of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
AMRO International, S.A. is believed by NetLojix to possess the requisite
level of financial sophistication and experience in order to qualify for such
exemptions. NetLojix made available to AMRO International, S.A. all material
information with respect to NetLojix. AMRO International, S.A. signed a
common stock and warrants purchase agreement containing appropriate
investment representations and covenants.
On March 24, 2000, NetLojix issued 30,000 shares of its common
stock, which were not registered under the Securities Act, in exchange for
substantially all of the assets of Flash Internet,
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Inc., a California corporation. No underwriters were used in this transaction
and none of such shares were issued publicly. NetLojix relied on the
exemptions from registration provided by Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder. The agreement and plan
of reorganization entered into among NetLojix, Flash Internet and the sole
shareholder of Flash Internet contemplates that Flash Internet will be
dissolved and all such shares will be distributed to its sole shareholder.
That person is believed by NetLojix to possess the requisite level of
financial sophistication and experience in order to qualify for such
exemptions. NetLojix made available to Flash Internet and its shareholder all
material information with respect to NetLojix. Both Flash Internet and its
shareholder signed executed the agreement and plan of reorganization, which
contains appropriate investment representations and covenants.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
A list of the exhibits included as part of this Registration Statement
is set forth in the Exhibit Index which immediately precedes such exhibits and
is incorporated herein by reference.
(b) Financial Statement Schedules:
Other than Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1999, 1998 and 1997 for NetLojix Communications,
Inc. and its subsidiaries, which is included herein, all other schedules for
which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission have been omitted because they are not
required, are inapplicable or the required information has already been
provided elsewhere in the registration statement.
ITEM 17. UNDERTAKINGS
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
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(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(i) and (a)(ii) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with the
Commission by the registrants pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrants pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective; and
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(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrants pursuant to the provisions set forth or described in Item 15 of this
registration statement, or otherwise, the registrants have been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by a registrant of expenses incurred or paid
by a director, officer or controlling person of such registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Barbara, California, on May 2, 2000.
By /s/ ANTHONY E. PAPA
---------------------------
Anthony E. Papa
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities indicated on the 2nd day of May, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
*
- --------------------------------------------------------- Chairman of the Board and Chief Executive Officer
Anthony E. Papa (Principal Executive Officer)
*
- --------------------------------------------------------- President, Chief Operating Officer, Secretary and
James P. Pisani Director
*
- --------------------------------------------------------- Chief Financial Officer (Principal Financial and
Michael J. Ussery Accounting Officer)
*
- --------------------------------------------------------- Director
John E. Allen
*
- --------------------------------------------------------- Director
Jeffrey J. Jensen
*
- --------------------------------------------------------- Director
Anthony D. Martin
</TABLE>
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<PAGE>
* By: /s/ ANTHONY E. PAPA
- ---------------------------------------------------------
Attorney-in-Fact
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<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
NUMBER EXHIBIT
<S> <C>
2.1 Acquisition Agreement, dated as of August 30, 1996, by and among
Hi-Tiger International, Inc., a Utah corporation, NetLojix
Communications, Inc., a Utah corporation, and NetLojix Holdings,
Inc., a California corporation. (Incorporated by reference to
Exhibit A to Registrant's Information Statement on Schedule 14C
dated October 2, 1996, File No. 0-27580).
2.2 Amendment No. 1 to Acquisition Agreement, dated as of October 22,
1996, among Hi-Tiger International, Inc., NetLojix
Communications, Inc., a Utah corporation, and NetLojix Holdings,
Inc., (Incorporated by reference to Exhibit 2.2 to Registrant's
Current Report on Form 8-K dated October 23, 1996, File No.
0-27580).
2.3 Stock Exchange Agreement, dated as of April 29, 1997, by and
between the Registrant and Matrix Telecom, Inc. (Incorporated by
reference to Exhibit 2 to Registrant's Current Report on Form 8-K
dated April 30, 1997, File No. 0-27580).
2.4 Amendment to Stock Exchange Agreement, dated as of August 25,
1997, by and between the Registrant and Matrix Telecom, Inc.
(Incorporated by reference to Exhibit 2 to Registrant's Current
Report on Form 8-K dated August 25, 1997).
2.5 Agreement and Plan of Merger, dated as of October 3, 1997,
between NetLojix Communications, Inc., a Delaware corporation and
NetLojix Communications, Inc., a Utah corporation. (Incorporated
by reference to Exhibit 2.7 to Registrant's Annual Report on Form
10-KSB for the year ended September 30, 1997).
2.6 Stock Purchase Agreement, dated as of July 22, 1998, among the
Registrant and the shareholders of Remote Lojix/PCSI, Inc.
(Incorporated by reference to Exhibit 2.6 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998, File
No. 0-27580).
2.7 First Amendment to Stock Purchase Agreement, dated as of August
</TABLE>
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<TABLE>
<S> <C>
18, 1998, among the Registrant and the shareholders of Remote
Lojix/PCSI, Inc. (Incorporated by reference to Exhibit 2.7 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998, File No. 0-27580).
2.8 Earnout Agreement, dated as of October 30, 1998, among the
Registrant and certain shareholders of Remote Lojix/PCSI, Inc.
(Incorporated by reference to Exhibit 2.8 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998, File
No. 0-27580).
2.9 Stock Purchase Agreement dated August 31, 1999, among AvTel
Communications, Inc., Matrix Telecom, Inc. and Energy TRACS
Acquisition Corp. (Incorporated by reference to Exhibit 2.1 to
Registrant's Current Report on Form 8-K dated September 8, 1999).
2.10 First Amendment to Stock Purchase Agreement dated as of September
16, 1999, among NetLojix Communications, Matrix Telecom, Inc. and
Matrix Acquisition Holdings Corp. (Incorporated by reference to
Exhibit 2.2 to Registrant's Current Report on Form 8-K dated
December 8, 1999)
3.1 Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.1 to Registrant's Annual Report on Form
10-KSB for the year ended September 30, 1997, File No. 0-27580).
3.2 By laws of the Registrant. (Incorporated by reference to Exhibit
3.2 to Registrant's Annual Report on Form 10-KSB for the year
ended September 30, 1997, File No. 0-27580).
3.3 By laws of the Registrant. (Incorporated by reference to Exhibit
3.2 to Registrant's Annual Report on Form 10-KSB for the year
ended September 30, 1997, File No. 0-27580).
4.1 Specimen Certificate of common stock of Registrant (Incorporated
by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 dated May 22, 1998, File No. 333-53435).
5.1 Opinion of Mayer, Brown & Platt*
10.1 Rights Agreements dated October 23, 1996, between the Registrant
and holders of the Registrant's Series A Convertible Preferred
Stock. (Incorporated by reference to Exhibit 4.2 to Registrant's
Current
</TABLE>
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<TABLE>
<S> <C>
Report on Form 8-K dated October 23, 1996, File No. 0-27580).
10.2 1997 Stock Incentive Plan. (Incorporated by reference to Exhibit
A to the Registrant's definitive Proxy Statement on Schedule 14A
dated January 8,1997, File No. 0-27580).
10.3 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit
A to Registrant's definitive Proxy Statement on Schedule 14A
dated April 28, 1998, File No. 0-27580).
10.4 Amended 1998 Stock Incentive Plan.*
10.5 New Best Connections, Inc. Amended and Restated 1997 Option Plan.
(Incorporated by reference to Exhibit 4.2 to Registrant's
Registration Statement on Form S-8 dated May 22, 1998, File No.
333-53435).
10.6 First Amendment to New Best Connections, Inc. Amended and
Restated 1997 Option Plan (Incorporated by reference to Exhibit
10.5 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998, File No. 0-27580).
10.7 Registration Rights and Lockup Agreement dated December 1, 1997,
between the Registrant and Matrix Telecom, Inc., on behalf of the
stockholders of Matrix, (Incorporated by reference to Exhibit 4
to Registrant's Current Report on Form 8-K dated December 1,
1997, File No. 0-27580).
10.8 Triple Net Real Property Lease (Multi-Tenant Building) dated as
of February 16, 1998, by and between Bath Street Partners, a
California limited partnership and the Registrant. (Incorporated
by reference to Exhibit 10.8 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997, File No.
0-27580).
10.9 Loan and Security Agreement dated October 2, 1998, among
Registrant, Matrix Telecom, Inc. and Coast Business Credit.
(Incorporated by reference to Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998, File No. 0-27580).
10.10 Convertible Preferred Stock and Warrants Purchase Agreement dated
as of April 5, 1999, among Registrant, AMRO International, S.A.,
</TABLE>
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<TABLE>
<S> <C>
Austinvest Anstalt Balzers, and Esquire Trade & Finance Inc.
(Incorporated by reference to Exhibit 10.13 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998,
File No. 0-27580).
10.11 Registration Rights Agreement dated as of April 5, 1999, among
Registrant, AMRO International, S.A., Austinvest Anstalt Balzers,
and Esquire Trade & Finance Inc. (Incorporated by reference to
Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998, File No. 0-27580).
10.12 Stock Purchase Warrants granted by Registrant to AMRO
International, S.A., Austinvest Anstalt Balzers, and Esquire
Trade & Finance Inc. as of April 5, 1999. (Incorporated by
reference to Exhibit 10.15 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1998, File No. 0-27580).
10.13 Private Equity Line of Credit Agreement dated as of April 23,
1999, between the Registrant and Cambois Finance, Inc.
(Incorporated by reference to Exhibit 10.1 to Registrant's
Current Report on Form 8-K dated May 3, 1999, File No. 0-27580).
10.14 Registration Rights Agreement dated as of April 23, 1999, between
the Registrant and Cambois Finance, Inc.(Incorporated by
reference to Exhibit 10.2 to Registrant's Current Report on Form
8-K dated May 3, 1999, File No. 0-27580).
10.15 Stock Purchase Warrants granted by Registrant to Kaufman Bros.,
L.P. as of January 10, 2000. (Incorporated by reference to
Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999, File No. 0-27580).
10.16 Common Stock and Warrants Purchase Agreement dated as of March 2,
2000, between Registrant and AMRO International, S.A.
(Incorporated by reference to Exhibit 10.16 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999,
File No. 0-27580)
10.17 Registration Rights Agreement dated as of March 2, 2000, between
Registrant and AMRO International, S.A. (Incorporated by
reference to Exhibit 10.17 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1999, File No. 0-27580)
</TABLE>
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<TABLE>
<S> <C>
10.18 Stock Purchase Warrants granted by Registrant to AMRO
International, S.A. as of March 3, 2000. (Incorporated by
reference to Exhibit 10.18 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1999, File No. 0-27580)
10.19 Letter agreement between Registrant and Coast Business Credit
regarding restructuring of Loan and Security Agreement.
(Incorporated by reference to Exhibit 10.19 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999,
File No. 0-27580)
21 List of Subsidiaries (Incorporated by reference to Exhibit 21 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999, File No. 0-27580)
23.1 Consent of KPMG LLP
23.2 Consent of Mayer, Brown & Platt is contained in their Opinion
filed as Exhibit 5.1 to this Registration Statement*
24 Power of Attorney for certain officers and directors*
- ------------
* Previously filed.
</TABLE>
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Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
NetLojix Communications, Inc.:
We consent to the use of our report included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Dallas, Texas
May 2, 2000
