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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For Fiscal Year Ended: December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ____________ to ___________.
Commission file number 0-27580
NetLojix Communications, Inc.
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(Exact Name of Registrant in Its Charter)
Delaware 87-0378021
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
501 Bath Street, Santa Barbara, CA 93101
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(Address of Principal Executive Offices) (Zip Code)
(805) 884-6300
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act:
Common Stock Par Value $0.01
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(Title of class)
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Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $69,111,309, computed at the
last sale price of such Common Stock on The Nasdaq SmallCap Market as of March
24, 2000.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of March 24, 2000, there were 13,242,381 shares of the Registrant's Common
Stock, par value $0.01, issued and outstanding, excluding treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
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Item Number Page Number
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PART I
1. Business 2
2. Properties 18
3. Legal Proceedings 19
4. Submission of Matters to a Vote of Security Holders 20
PART II
5. Market for Common Equity and Related Stockholder Matters 20
6. Selected Financial Data 22
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
7A. Quantitative and Qualitative Disclosures about
Market Risk 35
8. Financial Statements and Supplementary Data 35
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 36
PART III
10. Directors and Executive Officers of the Registrant 36
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and
Management 46
13. Certain Relationships and Related Transactions 48
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 49
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PART I
ITEM 1. BUSINESS
INTRODUCTORY STATEMENT
THIS ANNUAL REPORT ON FORM 10-K CONTAINS "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). FORWARD-LOOKING STATEMENTS ARE STATEMENTS OTHER
THAN HISTORICAL INFORMATION OR STATEMENTS OF CURRENT CONDITION AND RELATE TO
FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF NETLOJIX. FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF NETLOJIX'S
STRATEGIES, PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS. SOME
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY USE OF SUCH TERMS AS "BELIEVES,"
"ANTICIPATES," "INTENDS" OR "EXPECTS." NETLOJIX'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
NETLOJIX UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. THE CAUTIONARY STATEMENTS MADE IN THIS ANNUAL REPORT SHOULD
BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER
THEY APPEAR IN THIS ANNUAL REPORT.
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.
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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.
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
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/ / 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 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
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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 March 24, 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 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
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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 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
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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 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.
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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
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.
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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 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
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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.
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 March 24, 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
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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.
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 24, 2000, NetLojix and our subsidiaries had 154 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.
RECENT DEVELOPMENTS
STOCK REPURCHASE
In connection with a newly-established employee incentive plan, on
January 28, 2000, we commenced a small program to repurchase shares of NetLojix
Common Stock on the Nasdaq SmallCap Market. In connection with this program, we
spent approximately $40,000 to repurchase 11,830 shares of the Common Stock.
These shares will be held in treasury.
PRIVATE EQUITY PLACEMENT
On March 3, 2000 we raised $1.5 million through a private placement of
375,000 shares of
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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 within 60 days
after the date we file this Annual Report on Form 10-K. 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.
RISK FACTORS
IN EVALUATING NETLOJIX, ITS BUSINESS, OPERATIONS AND FINANCIAL
POSITION, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY, IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS FORM 10-K. THE FOLLOWING FACTORS,
AMONG OTHERS, COULD AFFECT NETLOJIX'S ACTUAL FUTURE OPERATING RESULTS AND COULD
CAUSE SUCH RESULTS TO DIFFER FROM THE RESULTS DISCUSSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF NETLOJIX.
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.
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
12
<PAGE>
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.
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 believe that these claims are without merit and
we intend 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
13
<PAGE>
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
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
14
<PAGE>
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 56% 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 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.
15
<PAGE>
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 March 24, 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.
<TABLE>
<CAPTION>
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)
--------- --------- --------------
<S> <C> <C>
$1.625 7,951,599 62.48%
$3.250 3,975,799 76.91%
$4.875 2,650,533 83.32%
$6.50 (3) 1,987,900 86.95%
$8.125 1,590,320 89.28%
$9.750 1,325,266 90.90%
$11.375 1,135,943 92.10%
</TABLE>
- ----------
(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 13,242,381 shares outstanding on March 24, 2000.
(3) Low closing bid price for a share of NetLojix common stock on
March 24, 2000.
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<PAGE>
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 March 24, 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 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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<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of NetLojix to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those set forth
above. GIVEN THESE UNCERTAINTIES, THE STOCKHOLDERS OF NETLOJIX ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS.
ITEM 2. PROPERTIES
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
Santa Barbara, CA 6,798 March 2003 $11,863
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
38 East 32nd St., 8th Floor 4,400 February 2004 $4,416
New York, NY
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CURRENT MONTHLY
LOCATION SQUARE FEET EXPIRATION DATE(2) RENT(1)
<S> <C> <C> <C>
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.
ITEM 3. LEGAL PROCEEDINGS
We are 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 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
19
<PAGE>
concerning that service, as reported by Bloomberg News, were misleading and
defrauded the market for NetLojix's publicly-traded securities.
This matter is still in the early stages of litigation. The plaintiffs
filed a consolidated and amended complaint on March 15, 1999. Discovery is under
way, with trial scheduled for February 2001. We contend that our statements were
not misleading, and we intend to defend vigorously this securities litigation.
However, it is not possible to predict at this time the likely outcome of this
action or the costs we will incur in defending the action.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since May 28, 1998, our Common Stock has been traded on The Nasdaq
SmallCap Market. The trading symbol is "NETX." Until September 15, 1999, the
stock traded under the trading symbol "AVCO". Prior to its listing on the Nasdaq
SmallCap Market, the Common Stock traded
20
<PAGE>
on the Electronic Bulletin Board. There is no established public trading market
for NetLojix's Preferred Stock. The following table sets forth, for the
indicated periods, high and low price information for NetLojix's Common Stock.
High and low bid information is provided with respect to periods prior to May
28, 1998. High and low prices for periods after May 28, 1998, reflect high and
low sales prices. Such information was provided by Nasdaq, various market makers
and on-line quote reporting services. The quotations provided reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
Year ending December 31, 1998 High Low
----------------------------- ---- ---
<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
<CAPTION>
Year ending December 31, 1999
-----------------------------
<S> <C> <C>
First Quarter $12.50 $4.00
Second Quarter $8.75 $3.75
Third Quarter $4.88 $1.63
Fourth Quarter $8.50 $1.63
</TABLE>
The number of shareholders of record of NetLojix Common Stock as of
March 24, 2000, was 566. At that date there were two record holders of NetLojix
Preferred Stock.
We have not paid any cash dividends on our Common Stock to date and we
do not anticipate paying dividends in the foreseeable future. We intend to
utilize all available funds for the development of our business. The terms of
NetLojix's Series A Convertible Preferred Stock prevent the payment of any
dividend on the Common Stock unless (1) all cumulative dividends on the Series A
Convertible Preferred Stock have been fully paid, and (2) the holders of at
least 50% of the outstanding shares of the Series A Convertible Preferred Stock
have approved such dividend. In addition, the terms of our secured credit
agreement provide that NetLojix cannot declare a dividend on any of its
ownership interests without the secured lender's approval.
On March 17, 1999, we issued 14,845 shares of common stock, which were
not registered under the Securities Act, to one of our distributors upon the
exercise of an existing stock option. No underwriters were used in this
transaction and none of such shares were issued publicly. We relied on the
exemptions from registration provided by Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder. We believe that the distributor
possesses the requisite level of financial sophistication and experience in
order to qualify for such exemptions. We made available to the distributor all
material information with respect to our company. The
21
<PAGE>
distributor signed a restricted stock agreement containing appropriate
investment representations and covenants.
On April 13, 1999, we issued 1,500 shares of 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. We
relied on the exemptions from registration provided by Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder. We believe
that the persons receiving securities possess the requisite level of financial
sophistication and experience in order to qualify for such exemptions. We made
available to the investors all material information with respect our company.
The investors signed a preferred stock and warrants purchase agreement
containing appropriate investment representations and covenants. All of the
shares of the Series B Convertible Preferred Stock were converted into an
aggregate of 804,328 shares of NetLojix common stock during 1999. Our
obligations as to 9,328 of the warrants were cancelled during 1999.
On April 23, 1999, we issued 3,000 shares of common stock to Trinity
Capital Advisors, Inc. in compensation for financial advisory services in
connection with 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 us 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. We relied on the exemptions from registration provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D promulgated thereunder. We
believe that Trinity possesses the requisite level of financial sophistication
and experience in order to qualify for such exemptions. We made available to
Trinity all material information with respect our company. Trinity signed an
agreement containing appropriate investment representations and covenants.
ITEM 6. SELECTED 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.
22
<PAGE>
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.
STATEMENT OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
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 -- -- -- -- --
- --------------------
N/A - Not applicable
Balance Sheet Data:
- --------------------
<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
23
<PAGE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets 10,956,421 10,724,818 10,971,050 10,794,696 4,976,361
Long term borrowings -- -- -- -- --
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.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in connection with the
consolidated financial statements and the accompanying footnotes included later
in this Form 10-K. This discussion includes "forward-looking" statements which
are based on current expectations and judgements of management, which involve
risks and uncertainties. There are risks that what we expect may not happen in
the future. Because of these risks and uncertainties, what happens in the future
may be very different from what we contemplate in our 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.
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APPLICATION DEVELOPMENT AND HOSTING
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 previously, (see "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
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REVENUES
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
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operating activity as opposed to 12 months in 1999.
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
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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 historical years have been restated to conform to the discontinued
operations presentation.
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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 of 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 effect 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 margins.
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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.
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
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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
March 15, 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 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
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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 require any material expenditure on our part.
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% (10.75% at March 15, 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 March 15, 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.
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.
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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.
ITEM 7A 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of NetLojix and supplementary data are
included beginning
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immediately following the signature page to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
There are five members of our Board of Directors, each of whom is
standing for re-election at the 2000 annual meeting of stockholders.
Information with respect to the directors is set forth below:
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.
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
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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.
ANTHONY D. MARTIN, age 50, has been a director of NetLojix since
April 1999. Mr. Martin is Managing Director of CrossHill Financial Group
Inc., a position he has held since March 1998. 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information with respect to each executive
officer of NetLojix, other than Messrs. Papa and Pisani. Information with
respect to Messrs. Papa and Pisani is set forth above under "Directors."
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
37
<PAGE>
PricewaterhouseCoopers LLP. Mr. Ussery graduated from Stephen F. Austin State
University in 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.
There are no family relationships between any directors or executive
officers of NetLojix.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
NetLojix's officers and directors, and persons who own more than ten percent
of a registered class of NetLojix's equity securities to file reports of
ownership and changes in ownership with the SEC. Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to
furnish NetLojix with copies of all Section 16(a) forms they file.
During the year ended December 31, 1999, Mr. Renteria failed to file
a Form 3 on a timely basis after becoming an executive officer of NetLojix.
This form, which reported only Mr. Renteria's initial holdings at the time of
his elevation to executive officer status, has been filed subsequently. Based
solely on a review of the copies of Section 16(a) forms furnished to
NetLojix, and on written representations that no Forms 5 were required,
NetLojix believes that during 1999 no other officer, director or greater than
ten-percent shareholder failed to file on a timely basis any report required
under Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to NetLojix's
Chief Executive
38
<PAGE>
Officer, each other executive officer of NetLojix whose total annual salary
and bonus exceeded $100,000 for the fiscal year ended December 31, 1999 and
one individual that ceased to be an executive officer during such fiscal year
(the "Named Executive Officers"). Titles shown are those held by the Named
Executive Officers at December 31, 1999, or, in the case of the individual
that is no longer an executive officer, on the date he ceased to be an
executive officer.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------- ------------------------------------------------------- --------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
- ----------------------------- ------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
NAME AND
PRINCIPAL FISCAL OTHER ANNUAL SECURITIES UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION ($) OPTIONS (#)
- ----------------------------- --------- ------------ ---------- --------------------- --------------------------
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)
Executive Vice President of 1999 $165,000 -- $78,622 (2) --
Field Sales and Service 1998 27,000 -- -- 150,000
- ----------------------------- --------- ------------ ---------- --------------------- --------------------------
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)
Senior Vice President, 1999 $121,500 -- -- --
Channel Markets Group 1998 32,500 -- $15,000 (2) 150,000 (4)
- ----------------------------- --------- ------------ ---------- --------------------- --------------------------
</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.
39
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
- --------------------- --------------- --------------- ----------- ---------------- ---------------------------------
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 ------ ------------ -------------
NAME GRANTED FISCAL YEAR PRICE EXPIRATION 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% -- -- -- -- --
- --------------------- --------------- --------------- ----------- ---------------- ------ ------------ -------------
September 23,
Joseph Renteria, Jr. 5,000(2) 1.0% $1.88 2009 $0 $5,912 $14,981
- --------------------- --------------- --------------- ----------- ---------------- ------ ------------ -------------
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.
OPTION EXERCISES DURING YEAR ENDED DECEMBER 31, 1999
AND OPTION VALUES AT DECEMBER 31, 1999
<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>
Anthony E. Papa -- -- 15,625 115,625 $0 $0
- ---------------------- ------------- -------------- --------------- --------------- --------------- ---------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXCRISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999 (2)
- ---------------------- ------------- -------------- --------------- --------------- --------------- ---------------
<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.
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
41
<PAGE>
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.
AGREEMENTS WITH EXECUTIVE OFFICERS
NetLojix has no employment agreements with its executive officers.
However, NetLojix does have separation arrangements in place with two of its
executive officers.
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
42
<PAGE>
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.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has overall responsibility for NetLojix's
executive compensation policies and practices. The Compensation Committee's
functions include:
X Determining the compensation of the Chief Executive Officer
and the President and Chief Operating Officer of NetLojix.
X Reviewing and approving all other executive officers'
compensation, including salary and bonuses, in each case based
in part upon the recommendations of the Chief Executive
Officer and the President and Chief Operating Officer of
NetLojix.
X Granting awards under NetLojix's 1997 Stock Incentive Plan
and 1998 Stock Incentive Plan.
During 1999, senior management of NetLojix negotiated and
successfully completed the disposition of NetLojix's long-distance
residential telephone subsidiary, Matrix Telecom. This successful disposition
of Matrix Telecom has allowed management to focus on NetLojix's business of
providing value-added integrated network solutions to small and medium sized
businesses. The Compensation Committee took these efforts and their
successful results into consideration in determining management's
compensation, including that of Messrs. Papa and Pisani.
The Compensation Committee bases its determinations of overall
executive compensation, which will include salary, bonus, certain benefits
and stock option and restricted stock awards and possibly other forms of
equity-based compensation, on subjective factors based upon consideration of,
among other factors, the annual and long-term financial performance of
NetLojix, including the creation of stockholder value, the historical
financial performance of NetLojix, the individual executive officer's
contribution to the achievement of operating goals
43
<PAGE>
and business objectives and levels of compensation in comparable companies at
similar stages of development, with particular emphasis on those operating in
the telecommunications industry. The Compensation Committee also considers
financial performance criteria, including the price of NetLojix stock, in the
context of the telecommunication industry as well as the economy in general.
The Compensation Committee believes that the best way to attract and
maintain high caliber executives is to encourage equity ownership in
NetLojix. Each of Mr. Papa and Mr. Pisani own in excess of six percent of
NetLojix's outstanding shares of Common Stock. In addition, each executive
officer of NetLojix has received substantial grants of stock options which
vest over time. As a result, such officers will benefit from a rise in the
price of the Common Stock on the same basis as other stockholders. The
Compensation Committee's compensation philosophy has been to couple this
equity incentive with salaries and bonuses that are competitive in NetLojix's
industry.
The Compensation Committee believes that equity-based compensation
is an effective way of aligning executive compensation with increases in
stockholder value. As discussed elsewhere in this Proxy Statement, the Board
of Directors has approved an amendment to the 1998 Stock Incentive Plan,
subject to stockholder approval, which increases the number of shares which
may be issued under such plan. The Compensation Committee believes that
NetLojix's Stock Incentive Plans increase the ability of NetLojix to tie
executive interests to the interests of NetLojix, thereby benefitting
NetLojix and its stockholders. The Compensation Committee believes equity
compensation, in the form of stock options and, potentially, restricted
stock, is vital to the long-term success of NetLojix. The Compensation
Committee is committed to this policy, recognizing the competitive market for
talented executives and that the nature of NetLojix's business may result in
highly variable compensation for a particular time period.
Each member of the Compensation Committee, except Mr. Jensen, meets
the definition of "non-employee director" under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and is an "outside
director" within the meaning of Section 162(m) of the Internal Revenue Code
of 1986, as amended (the Code).
Section 162(m) of the Code limits NetLojix's deduction for
compensation paid to a Named Executive Officers to $1 million unless certain
requirements are met. The policy of the Compensation Committee with respect
to Section 162(m) has been to establish and maintain a compensation program
which will optimize the deductibility of compensation. In that regard, no
executive officer received compensation in excess of $1 million during fiscal
1999. The Compensation Committee, however, reserves the right to use its
judgment, where merited by the Compensation Committee's need for flexibility
to respond to changing business conditions or by an executive officer's
individual performance, to authorize compensation which may not, in a
specific case, be fully deductible by NetLojix.
By the Compensation Committee
44
<PAGE>
John E. Allen
Jeffrey J. Jensen
Anthony D. Martin
STOCK PERFORMANCE GRAPH
The following graph compares the total return on the Common Stock
with the cumulative total return on the Nasdaq Composite Index (a broad
market index) and the Nasdaq Telecommunications Index (an industry index) for
the period from March 16, 1996, the date upon which the Common Stock was
registered pursuant to Section 12 of the Exchange Act, through December 31,
1999. The comparison reflects the investment of $100 on March 16, 1996, and
the reinvestment of dividends (if paid), in each of NetLojix's Common Stock
(for which no dividends have been paid), the Nasdaq Composite Index and the
Nasdaq Telecommunications Index. NetLojix's Common Stock traded under the
name Hi, Tiger International, Inc. from the date of registration under the
Exchange Act until October 23, 1996. The stock price performance of NetLojix
reflected in this comparison is not necessarily indicative of the future
stock price performance of NetLojix's Common Stock.
<TABLE>
<CAPTION>
- ---------------- -------------------------------- ------------------------------- ----------------------------------
NETLOJIX NASDAQ TELECOMMUNICATIONS
COMMUNICATIONS, INC. INDEX NASDAQ COMPOSITE INDEX
- ---------------- -------------------------------- ------------------------------- ----------------------------------
<S> <C> <C> <C>
3/18/96 100.00 100.00 100.00
- ---------------- -------------------------------- ------------------------------- ----------------------------------
6/30/96 142.86 104.159 106.951
- ---------------- -------------------------------- ------------------------------- ----------------------------------
9/30/96 114.29 98.043 110.760
- ---------------- -------------------------------- ------------------------------- ----------------------------------
12/30/96 100.00 98.172 116.233
- ---------------- -------------------------------- ------------------------------- ----------------------------------
3/31/97 89.43 91.021 109.930
- ---------------- -------------------------------- ------------------------------- ----------------------------------
6/30/97 435.71 114.257 130.067
- ---------------- -------------------------------- ------------------------------- ----------------------------------
9/30/97 542.86 132.341 152.079
- ---------------- -------------------------------- ------------------------------- ----------------------------------
12/31/97 235.71 143.562 142.422
- ---------------- -------------------------------- ------------------------------- ----------------------------------
3/31/98 214.29 182.731 166.680
- ---------------- -------------------------------- ------------------------------- ----------------------------------
6/30/98 219.64 193.257 171.259
- ---------------- -------------------------------- ------------------------------- ----------------------------------
9/30/98 67.86 171.035 154.653
- ---------------- -------------------------------- ------------------------------- ----------------------------------
12/31/98 107.14 236.370 200.691
- ---------------- -------------------------------- ------------------------------- ----------------------------------
- ---------------- -------------------------------- ------------------------------- ----------------------------------
45
<PAGE>
- ---------------- -------------------------------- ------------------------------- ----------------------------------
NETLOJIX NASDAQ TELECOMMUNICATIONS
COMMUNICATIONS, INC. INDEX NASDAQ COMPOSITE INDEX
- ---------------- -------------------------------- ------------------------------- ----------------------------------
3/31/99 148.23 293.722 224.493
- ---------------- -------------------------------- ------------------------------- ----------------------------------
6/30/99 114.29 312.261 245.622
- ---------------- -------------------------------- ------------------------------- ----------------------------------
9/30/99 51.80 289.438 251.244
- ---------------- -------------------------------- ------------------------------- ----------------------------------
12/31/99 73.23 411.624 362.570
- ---------------- -------------------------------- ------------------------------- ----------------------------------
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth stock ownership information for (i)
each director and executive officer of NetLojix, (ii) the directors and
executive officers as a group, and (ii) all persons known to NetLojix to be
owners of more than five percent of its outstanding shares of common stock.
All information is as of March 24, 2000.
<TABLE>
<CAPTION>
- ---------------------------------------------- ---------------------------------- ----------------------------------
Amount
Name and Beneficially Percent
Address Owned Of Class (1)
- ---------------------------------------------- ---------------------------------- ----------------------------------
<S> <C> <C>
Janet J. Jensen (2)
9003 Airport Freeway
Fort Worth, TX 76180 961,939 7.3%
- ---------------------------------------------- ---------------------------------- ----------------------------------
Jeffrey J. Jensen(2)(3)
2121 Precinct Line Road
Hurst, TX 76054 864,238 6.5%
- ---------------------------------------------- ---------------------------------- ----------------------------------
James J. Jensen(2)
6304 Alexandria Circle
Atlanta, GA 30326 800,000 6.0%
- ---------------------------------------------- ---------------------------------- ----------------------------------
Jami J. Jensen(2)
1933 Swede Gulch
Golden, CO 80120 851,738 6.4%
- ---------------------------------------------- ---------------------------------- ----------------------------------
Julie J. Jensen(2)
Box 540, Kenwood Station 851,738 6.4%
- ---------------------------------------------- ---------------------------------- ----------------------------------
46
<PAGE>
- ---------------------------------------------- ---------------------------------- ----------------------------------
Amount
Name and Beneficially Percent
Address Owned Of Class (1)
- ---------------------------------------------- ---------------------------------- ----------------------------------
5257 River Road
Bethesda, MD 20816 851,738 6.4%
- ---------------------------------------------- ---------------------------------- ----------------------------------
Gladys J. Jensen(2)
c/o United Group Association, Inc.
4001 McEwen Drive, Suite 200
Dallas, TX 75244 731,847 5.5%
- ---------------------------------------------- ---------------------------------- ----------------------------------
Anthony E. Papa(4) 811,401 6.1%
- ---------------------------------------------- ---------------------------------- ----------------------------------
James P. Pisani(4) 805,001 6.1%
- ---------------------------------------------- ---------------------------------- ----------------------------------
John E. Allen (5) 197,500 1.5%
- ---------------------------------------------- ---------------------------------- ----------------------------------
Anthony D. Martin (3) 12,500 *
- ---------------------------------------------- ---------------------------------- ----------------------------------
Frank A. Leone 37,500 *
- ---------------------------------------------- ---------------------------------- ----------------------------------
Joseph Renteria, Jr. 58,608 *
- ---------------------------------------------- ---------------------------------- ----------------------------------
Michael J. Ussery 12,500 *
- ---------------------------------------------- ---------------------------------- ----------------------------------
All directors and executive officers
as a group (8 persons) (6) 2,799,248 20.8%
- ---------------------------------------------- ---------------------------------- ----------------------------------
</TABLE>
* Represents less than 1%.
47
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC"). In computing the number
of shares beneficially owned by a person and the percentage ownership
of that person, shares of NetLojix's Common Stock subject to options
held by that person that are exercisable within sixty (60) days
following March 24, 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, each person named in the
table has sole voting and sole investment power with respect to the
shares set forth opposite such person's name. The percentages of
beneficial ownership shares in this table are based upon 13,242,381
shares of the Common Stock outstanding.
(2) Information is derived from a Schedule 13D filed with the SEC on
December 11, 1997 and a Schedule 13D/A filed with the SEC (by Gladys J.
Jensen only) on July 10, 1998 (the "Schedule 13D's"). The Schedule
13D's note that, because each of these stockholders agreed to certain
restrictions contained in a Registration Rights and Lockup Agreement
dated as of December 1, 1997, 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 Schedule 13D's state that each of
such persons disclaims beneficial ownership of the shares held by any
other person.
(3) Includes 12,500 shares that may be acquired under options that were
exercisable within 60 days of March 24, 2000.
(4) 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 March
24, 2000. 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 March 24, 2000.
(6) Includes 189,376 shares that may be acquired under options that were
exercisable within 60 days of March 24, 2000.
ITEM 13. 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 in 1999, UICI's
marketing organizations sold certain long distance and Internet products of
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 in 1999. 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 in 1999
from UICI and its affiliates for such services. NetLojix
48
<PAGE>
also provides 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 in 1999 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.
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 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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The index to the financial statements and financial statement
schedules filed as part of this report is set forth immediately following the
signature page.
(b) During the quarter ending December 31, 1999, NetLojix filed the
following Current Reports on Form 8-K:
(i) On December 8, 1999, NetLojix filed a Form 8-K (Items 2, 5
and 7) reporting the closing of the sale of Matrix Telecom, certain issuances of
shares under the equity line agreement, the conversion of the Series B
Convertible Preferred Stock and the status of its possible delisting from The
Nasdaq SmallCap Market. The filing contained pro forma financial information
relating to the disposition of Matrix Telecom as well as certain pro forma
financial information demonstrating NetLojix's ability to meet the continued
listing criteria of The Nasdaq SmallCap Market.
49
<PAGE>
(ii) On December 21, 1999, NetLojix filed a Form 8-K (Items 5
and 7) reporting Nasdaq's decision not to delist NetLojix from The Nasdaq
SmallCap Market and containing a copy of NetLojix's press release to that
effect.
(c) The index to the exhibits filed as part of this report is set forth
immediately following the financial statements.
50
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on it behalf by the undersigned, thereunto duly
authorized.
NETLOJIX COMMUNICATIONS, INC.
Dated: March 27, 2000 By /S/ ANTHONY E. PAPA
---------------------------
Anthony E. Papa,
Chairman of the Board and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
this 27th day of March, 2000.
NETLOJIX COMMUNICATIONS, INC.
By /S/ ANTHONY E. PAPA
---------------------------
Anthony E. Papa,
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
By /S/ JAMES P. PISANI
---------------------------
James P. Pisani,
President and Chief Operating
Officer
By /S/ MICHAEL J. USSERY
---------------------------
Michael J. Ussery,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
By /S/ JOHN E. ALLEN
---------------------------
John E. Allen
Director
By /S/ JEFFREY J. JENSEN
---------------------------
Jeffrey J. Jensen
Director
By /S/ ANTHONY D. MARTIN
---------------------------
Anthony D. Martin
Director
<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 March 2, 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.
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>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
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
18, 1998, among the Registrant and the shareholders of Remote
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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).
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 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.
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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.,
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
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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.
10.16 Common Stock and Warrants Purchase Agreement dated as of March 2, 2000, between
between Registrant and AMRO International, S.A.
10.17 Registration Rights Agreement dated as of March 2, 2000, between Registrant and
AMRO International, S.A.
10.18 Stock Purchase Warrants granted by Registrant to AMRO International, S.A. as of
March 3, 2000.
10.19 Letter agreement between Registrant and Coast Business Credit regarding
restructuring of Loan and Security Agreement.
21 List of Subsidiaries
23 Consent of KPMG LLP
27.1 Financial Data Schedule - Year Ended December 31, 1999
27.2 Restated Financial Data Schedule - Year Ended December 31, 1998
27.3 Restated Financial Data Schedule - Year Ended December 31, 1997
</TABLE>
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EXHIBIT 10.4
1998 STOCK INCENTIVE PLAN OF
NETLOJIX COMMUNICATIONS, INC.
(AS AMENDED ON JANUARY 10, 2000)
ARTICLE 1. INTRODUCTION
The Plan was adopted by the Board on March 10, 1998, subject to
approval by the Company's stockholders. The purpose of the Plan is to promote
the long-term success of the Company and the creation of stockholder value by
(a) encouraging Employees, Outside Directors and Consultants to focus on
critical long-range objectives, (b) encouraging the attraction and retention of
Employees, Outside Directors and Consultants with exceptional qualifications and
(c) linking Employees, Outside Directors and Consultants directly to stockholder
interests through increased stock ownership. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares, Stock Units,
Options (which may constitute incentive stock options or nonstatutory stock
options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION
2.1 Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange
Commission may establish for administrators acting under plans intended to
qualify for exemption under Rule 16b-3 (or its successor) under the Exchange
Act; and
(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended to qualify for
exemption under section 162(m)(4)(C) of the Code.
The Board may also appoint one or more separate committees of the
Board, each composed of one or more directors of the Company who need not
satisfy the foregoing requirements, who may administer the Plan with respect to
Employees and Consultants who are not considered officers or directors of the
Company under section 16 of the Exchange Act, may grant Awards under the Plan to
such Employees and Consultants and may determine all terms of such Awards.
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2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the
Employees, Outside Directors and Consultants who are to receive Awards under the
Plan, (b) determine the type, number, vesting requirements and other features
and conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Restricted Shares, Stock Units, Options and SARs awarded under the Plan shall
not exceed 3,000,000. The limitation of this Section 3.1 shall be subject to
adjustment pursuant to Article 10.
3.2 ADDITIONAL SHARES. If Stock Units, Options or SARs are forfeited
or if Options or SARs terminate for any other reason before being exercised,
then the corresponding Common Shares shall again become available for Awards
under the Plan. If Stock Units are settled, then only the number of Common
Shares (if any) actually issued in settlement of such Stock Units shall reduce
the number available under Section 3.1 and the balance shall again become
available for Awards under the Plan. If SARs are exercised, then only the number
of Common Shares (if any) actually issued in settlement of such SARs shall
reduce the number available under Section 3.1 and the balance shall again become
available for Awards under the Plan. If Restricted Shares are forfeited, then
such Shares shall not become available for subsequent Awards under the Plan.
3.3 DIVIDEND EQUIVALENTS. Any dividend equivalents distributed under
the Plan shall not be applied against the number of Restricted Shares, Stock
Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY
4.1 GENERAL RULES. Only Employees, Outside Directors and Consultants
shall be eligible for designation as Participants by the Committee.
4.2 INCENTIVE STOCK OPTIONS. Only Employees shall be eligible for the
grant of ISOs. In addition, an Employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or any
of its Parents or Subsidiaries shall not be eligible for the grant of an ISO
unless the requirements set forth in section 422(c)(6) of the Code are
satisfied.
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ARTICLE 5. OPTIONS
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan. The
Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a cash payment
or in consideration of a reduction in the Optionee's other compensation.
5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Options granted to any
Optionee in a single calendar year shall in no event cover more than 500,000
Common Shares, subject to adjustment in accordance with Article 10.
5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than the par
value of the Common Shares subject to such NSO. In the case of an NSO, a Stock
Option Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the NSO is outstanding.
5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option; provided that
the term of an ISO shall in no event exceed 10 years from the date of grant. A
Stock Option Agreement may provide for accelerated exercisability in the event
of the Optionee's death, disability or retirement or other events and may
provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service. Options may be awarded in combination
with SARs, and such an Award may provide that the Options will not be
exercisable unless the related SARs are forfeited. NSOs may also be awarded in
combination with Restricted Shares or Stock Units, and such an Award may provide
that the NSOs will not be exercisable unless the related Restricted Shares or
Stock Units are forfeited.
5.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become fully
exercisable as to all Common Shares subject to such Option in the event that a
Change in Control occurs with respect to the Company.
5.6 MODIFICATION OR ASSUMPTION OF OPTIONS.. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different
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exercise price. The foregoing notwithstanding, no modification of an Option
shall, without the consent of the Optionee, alter or impair his or her rights or
obligations under such Option.
ARTICLE 6. PAYMENT FOR OPTION SHARES
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment
shall be made only pursuant to the express provisions of the applicable Stock
Option Agreement. The Stock Option Agreement may specify that payment may be
made in any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time
accept payment in any form(s) described in this Article 6.
6.2 EXERCISE/SALE. To the extent that this Section 6.2 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Common Shares and to deliver all or part of the sales proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.
6.3 EXERCISE/PLEDGE. To the extent that this Section 6.3 is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to pledge Common Shares to a securities
broker or lender approved by the Company, as security for a loan, and to deliver
all or part of the loan proceeds to the Company in payment of all or part of the
Exercise Price and any withholding taxes.
6.4 PROMISSORY NOTE. To the extent that this Section 6.4 is
applicable, payment may be made with a full-recourse promissory note; provided
that the par value of the Common Shares shall be paid in cash.
6.5 OTHER FORMS OF PAYMENT. To the extent that this Section 6.5 is
applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 SAR AGREEMENT. Each grant of an SAR under the Plan shall be
evidenced by an SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.
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7.2 NUMBER OF SHARES. Each SAR Agreement shall specify the number of
Common Shares to which the SAR pertains and shall provide for the adjustment of
such number in accordance with Article 10. SARs granted to any Optionee in a
single calendar year shall in no event pertain to more than 500,000 Common
Shares, subject to adjustment in accordance with Article 10.
7.3 EXERCISE PRICE. Each SAR Agreement shall specify the Exercise
Price. An SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.
7.4 EXERCISABILITY AND TERM. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may
also be awarded in combination with Options, Restricted Shares or Stock Units,
and such an Award may provide that the SARs will not be exercisable unless the
related Options, Restricted Shares or Stock Units are forfeited. An SAR may be
included in an ISO only at the time of grant but may be included in an NSO at
the time of grant or thereafter. An SAR granted under the Plan may provide that
it will be exercisable only in the event of a Change in Control.
7.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company.
7.6 EXERCISE OF SARS. If, on the date when an SAR expires, the
Exercise Price under such SAR is less than the Fair Market Value on such date
but any portion of such SAR has not been exercised or surrendered, then such SAR
shall automatically be deemed to be exercised as of such date with respect to
such portion. Upon exercise of an SAR, the Optionee (or any person having the
right to exercise the SAR after his or her death) shall receive from the Company
(a) Common Shares, (b) cash or (c) a combination of Common Shares and cash, as
the Committee shall determine. The amount of cash and/or the Fair Market Value
of Common Shares received upon exercise of SARs shall, in the aggregate, be
equal to the amount by which the Fair Market Value (on the date of surrender) of
the Common Shares subject to the SARs exceeds the Exercise Price.
7.7 MODIFICATION OR ASSUMPTION OF SARS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs (whether granted by the Company or by
another issuer) in return for the grant of new SARs for the same or a different
number of shares and at the same or a different exercise price. The foregoing
notwithstanding, no modification of an SAR shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under such SAR.
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ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS.
8.1 TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be
granted in the form of Restricted Shares, in the form of Stock Units, or in any
combination of both. Restricted Shares or Stock Units may also be awarded in
combination with NSOs or SARs, and such an Award may provide that the Restricted
Shares or Stock Units will be forfeited in the event that the related NSOs or
SARs are exercised.
8.2 PAYMENT FOR AWARDS. To the extent that an Award is granted in the
form of newly issued Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares. To the extent that an Award is
granted in the form of Restricted Shares from the Company's treasury or in the
form of Stock Units, no cash consideration shall be required of the Award
recipients.
8.3 VESTING CONDITIONS. Each Award of Restricted Shares or Stock Units
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. A Stock Award Agreement may
provide for accelerated vesting in the event of the Participant's death,
disability or retirement or other events. The Committee may determine, at the
time of making an Award or thereafter, that such Award shall become fully vested
in the event that a Change in Control occurs with respect to the Company.
8.4 FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of vested
Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any
combination of both, as determined by the Committee. The actual number of Stock
Units eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based
on the average Fair Market Value of Common Shares over a series of trading days.
Vested Stock Units may be settled in a lump sum or in installments. The
distribution may occur or commence when all vesting conditions applicable to the
Stock Units have been satisfied or have lapsed, or it may be deferred to any
later date. The amount of a deferred distribution may be increased by an
interest factor or by dividend equivalents. Until an Award of Stock Units is
settled, the number of such Stock Units shall be subject to adjustment pursuant
to Article 10.
8.5 DEATH OF RECIPIENT. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's beneficiary
or beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.
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8.6 CREDITORS' RIGHTS. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Award Agreement.
ARTICLE 9. VOTING AND DIVIDEND RIGHTS
9.1 RESTRICTED SHARES. The holders of Restricted Shares awarded under
the Plan shall have the same voting, dividend and other rights as the Company's
other stockholders. A Stock Award Agreement, however, may require that the
holders of Restricted Shares invest any cash dividends received in additional
Restricted Shares. Such additional Restricted Shares shall be subject to the
same conditions and restrictions as the Award with respect to which the
dividends were paid. Such additional Restricted Shares shall not reduce the
number of Common Shares available under Article 3.
9.2 STOCK UNITS. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan
may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units.
Settlement of dividend equivalents may be made in the form of cash, in the form
of Common Shares, or in a combination of both. Prior to distribution, any
dividend equivalents which are not paid shall be subject to the same conditions
and restrictions as the Stock Units to which they attach.
ARTICLE 10. PROTECTION AGAINST DILUTION.
10.1 ADJUSTMENTS. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a combination
or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off
or a similar occurrence, the Committee shall make such adjustments as it, in its
sole discretion, deems appropriate in one or more of (a) the number of Options,
SARs, Restricted Shares and Stock Units available for future Awards under
Article 3, (b) the limitations set forth in Section 3.1 (c) the number of Stock
Units included in any prior Award which has not yet been settled, (d) the number
of Common Shares covered by each outstanding Option and SAR or (e) the Exercise
Price under each outstanding Option and SAR. Except as provided in this Article
10, a Participant shall have no rights by reason of any issue by the Company of
stock of any class or securities convertible into stock of any class, any
subdivision or consolidation of shares of stock of any class, the payment of any
stock dividend or any other increase or decrease in the number of shares of
stock of any class.
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10.2 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, SARs, Restricted Shares and
Stock Units shall be subject to the agreement of merger or reorganization. Such
agreement may provide, without limitation, for the assumption of outstanding
Awards by the surviving corporation or its parent, for their continuation by the
Company (if the Company is a surviving corporation), for accelerated vesting and
accelerated expiration, or for settlement in cash.
ARTICLE 11. AWARDS UNDER OTHER PLANS
The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Common Shares issued under this Plan. Such Common
Shares shall be treated for all purposes under the Plan like Common Shares
issued in settlement of Stock Units and shall, when issued, reduce the number of
Common Shares available under Article 3.
ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
12.1 EFFECTIVE DATE. No provision of this Article 12 shall be
effective unless and until the Board has determined to implement such provision.
12.2 ELECTIONS TO RECEIVE NSOS, RESTRICTED SHARES OR STOCK UNITS. An
Outside Director may elect to receive his or her annual retainer payments and
meeting fees from the Company in the form of cash, NSOs, Restricted Shares,
Stock Units, or a combination thereof, as determined by the Board. Such NSOs,
Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Article 12 shall be filed with the Company on the prescribed form.
12.3 NUMBER AND TERMS OF NSOS, RESTRICTED SHARES OR STOCK UNITS. The
number of NSOs, Restricted Shares or Stock Units to be granted to Outside
Directors in lieu of annual retainers and meeting fees that would otherwise be
paid in cash shall be calculated in a manner determined by the Board. The terms
of such NSOs, Restricted Shares or Stock Units shall also be determined by the
Board.
ARTICLE 13. LIMITATION ON RIGHTS
13.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an Employee,
Outside Director or Consultant of the Company, a Parent or a Subsidiary. The
Company and its Parents and Subsidiaries reserve the right to terminate the
service of any Employee, Outside Director or Consultant at any time, with or
without cause, subject to applicable laws, the Company's certificate of
incorporation and by-laws and a written employment agreement (if any).
13.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend
rights, voting rights or other rights as a stockholder with respect to any
Common Shares covered by his or her Award prior to the time when a stock
certificate for such Common Shares is issued or, in the case of an
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Option, the time when he or she becomes entitled to receive such Common Shares
by filing a notice of exercise and paying the Exercise Price. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to such time, except as expressly provided in Articles 8, 9 and 10.
13.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 14. LIMITATION ON PAYMENTS
14.1 BASIC RULE. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer by
the Company under the Plan to or for the benefit of a Participant (a "Payment")
would be nondeductible by the Company for federal income tax purposes because of
the provisions concerning "excess parachute payments" in section 280G of the
Code, then the aggregate present value of all Payments shall be reduced (but not
below zero) to the Reduced Amount; provided that the Committee, at the time of
making an Award under this Plan or at any time thereafter, may specify in
writing that such Award shall not be so reduced and shall not be subject to this
Article 14. For purposes of this Article 14, the "Reduced Amount" shall be the
amount, expressed as a present value, which maximizes the aggregate present
value of the Payments without causing any Payment to be nondeductible by the
Company because of section 280G of the Code.
14.2 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment
would be nondeductible by the Company because of section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt
of notice. If no such election is made by the Participant within such 10-day
period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 14, present
value shall be determined in accordance with section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Article 14 shall be binding upon
the Company and the Participant and shall be made within 60 days of the date
when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts
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as are then due to him or her under the Plan and shall promptly pay or transfer
to or for the benefit of the Participant in the future such amounts as become
due to him or her under the Plan.
14.3 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code.
14.4 RELATED CORPORATIONS. For purposes of this Article 14, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 15. WITHHOLDING TAXES
15.1 GENERAL. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
15.2 SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy his or her statutory withholding requirements by having the Company
withhold all or a portion of any Common Shares that otherwise would be issued to
him or her or by surrendering all or a portion of any Common Shares that he or
she previously acquired. Such Common Shares shall be valued at their Fair Market
Value on the date when taxes otherwise would be withheld in cash.
ARTICLE 16. FUTURE OF THE PLAN.
16.1 TERM OF THE PLAN. The Plan, as set forth herein, was adopted on
March 10, 1998, and shall become effective on such date, subject to the approval
of the stockholders of the Company. The Plan shall remain in effect until it is
terminated under Section 16.2, except that no ISOs shall be granted after March
10, 2008.
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16.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the Plan
after the termination thereof. The termination of the Plan, or any amendment
thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 17. DEFINITIONS.
17.1 "AWARD" means any award of an Option, an SAR, a Restricted Share
or a Stock Unit under the Plan.
17.2 "BOARD" means the Company's Board of Directors, as constituted
from time to time.
17.3 "CHANGE IN CONTROL" shall mean the occurrence of any of the
following events:
(a) The consummation of a merger or consolidation of the
Company 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 the
Company immediately prior to such merger, consolidation or other reorganization;
(b) A change in the composition of the Board, as a result of
which fewer than one-half of the incumbent directors are directors who either:
(A) Had been directors of the Company 24 months
prior to such change; or
(B) Were elected, or nominated for election, to the
Board with the affirmative votes of at least a majority of the directors who had
been directors of the Company 24 months prior to such change and who were still
in office at the time of the election or nomination; or
(c) Any "person" (as such term is used in sections 13(d) and
14(d) of the Exchange Act) by the acquisition or aggregation of securities is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing 50% or more of the combined voting power of the Company's
then outstanding securities ordinarily (and apart from rights accruing under
special circumstances) having the right to vote at elections of directors (the
"Base Capital Stock"); except that any change in the relative beneficial
ownership of the Company's securities by any person resulting solely from a
reduction in the aggregate number of outstanding shares of Base Capital Stock,
and any decrease thereafter in such person's ownership of securities, shall be
disregarded until such person increases in any manner, directly or indirectly,
such person's beneficial ownership of any securities of the Company.
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The term "Change in Control" shall not include a transaction, the sole
purpose of which is to change the state of the Company's incorporation.
17.4 "CODE" means the Internal Revenue Code of 1986, as amended.
17.5 "COMMITTEE" means a committee of the Board, as described in
Article 2.
17.6 "COMMON SHARE" means one share of the common stock of the
Company.
17.7 "COMPANY" means NetLojix Communications, Inc., a Delaware
corporation.
17.8 "CONSULTANT" means a consultant or adviser who provides bona
fide services to the Company, a Parent or a Subsidiary as an independent
contractor. Service as a Consultant shall be considered employment for all
purposes of the Plan, except as provided in Section 4.2.
17.9 "EMPLOYEE" means a common-law employee of the Company, a
Parent or a Subsidiary.
17.10 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
17.11 "EXERCISE PRICE," in the case of an Option, means the amount
for which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
17.12 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee as follows:
(a) If the Common Shares were traded over-the-counter on the
date in question but were not traded on the Nasdaq system or the Nasdaq National
Market System, then the Fair Market Value shall be equal to the mean between the
last reported representative bid and asked prices quoted for such date by the
principal automated inter-dealer quotation system on which the Common Shares are
quoted or, if the Common Shares are not quoted on any such system, by the "Pink
Sheets" published by the National Quotation Bureau, Inc.;
(b) If the Common Shares were traded over-the-counter on the
date in question and were traded on the Nasdaq system or the Nasdaq National
Market System, then the Fair Market Value shall be equal to the last-transaction
price quoted for such date by the Nasdaq system or the Nasdaq National Market
System;
(c) If the Common Shares were traded on a stock exchange on
the date in question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite transactions report for such date;
and
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(d) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in the Western Edition of THE WALL STREET
JOURNAL. Such determination shall be conclusive and binding on all persons.
17.13 "ISO" means an incentive stock option described in section
422(b) of the Code.
17.14 "NSO" means a stock option not described in sections 422 or
423 of the Code.
17.15 "OPTION" means an ISO or NSO granted under the Plan and
entitling the holder to purchase one Common Share.
17.16 "OPTIONEE" means an individual or estate who holds an Option
or SAR.
17.17 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not
an Employee. Service as an Outside Director shall be considered employment for
all purposes of the Plan, except as provided in Section 4.2.
17.18 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent
on a date after the adoption of the Plan shall be considered a Parent
commencing as of such date.
17.19 "PARTICIPANT" means an individual or estate who holds an
Award.
17.20 "PLAN" means this 1998 Stock Incentive Plan of NetLojix
Communications, Inc., as amended from time to time.
17.21 "RESTRICTED SHARE" means a Common Share awarded under the
Plan.
17.22 "SAR" means a stock appreciation right granted under the Plan.
17.23 "SAR AGREEMENT" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to his
or her SAR.
17.24 "STOCK AWARD AGREEMENT" means the agreement between the
Company and the recipient of a Restricted Share or Stock Unit which contains the
terms, conditions and restrictions pertaining to such Restricted Share or Stock
Unit.
17.25 "STOCK OPTION AGREEMENT" means the agreement between the
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her Option.
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17.26 "STOCK UNIT" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
17.27 "SUBSIDIARY" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
ARTICLE 18. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused
its duly authorized officer to affix the corporate name and seal hereto.
NETLOJIX COMMUNICATIONS, INC.
By /s/ ANTHONY E. PAPA
--------------------------------------
Anthony E. Papa, Chairman
and Chief Executive Officer
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EXHIBIT 10.15
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES MAY NOT BE OFFERED OR
SOLD IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION FROM REGISTRATION UNDER
SUCH ACT.
THE TRANSFER OF THIS WARRANT IS
RESTRICTED AS DESCRIBED HEREIN.
NETLOJIX COMMUNICATIONS, INC.
Warrant for the Purchase of Shares of Common Stock,
par value $0.01 per Share
No. KB-1 100,000 Shares
THIS CERTIFIES that, for value received, KAUFMAN BROS., L.P.,
800 Third Avenue - 25th Floor, New York, New York 10022 (the "Holder"), is
entitled to subscribe for and purchase from NETLOJIX COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), upon the terms and conditions set forth
herein, at any time or from time to time after January 10, 2000, and before 5:00
P.M. on January 10, 2005, New York time (the "Exercise Period"), 100,000 shares
of the Company's Common Stock, par value $0.01 per share ("Common Stock"), at a
price of $3.2813 per share (the "Exercise Price"). As used herein the term "this
Warrant" shall mean and include this Warrant and any Common Stock or Warrants
hereafter issued as a consequence of the exercise or transfer of this Warrant in
whole or in part. This Warrant may not be sold, transferred, assigned or
hypothecated except that it may be transferred, in whole or in part, to (i) not
more that ten officers or partners of the Holder (or the officers or partners of
any such partner); (ii) a successor to the Holder, or the officers or partners
of such successor; (iii) a purchaser of substantially all of the assets of the
Holder; or (iv) by operation of law; and the term the "Holder" as used herein
shall include any transferee to whom this Warrant has been transferred in
accordance with the above.
The number of shares of Common Stock issuable upon exercise of
the Warrant (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period,
as to the whole or any lesser number of whole Warrant Shares, by the surrender
of this Warrant (with the election at the end hereof duly executed) to the
Company at its office at 501 Bath Street, Santa
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Barbara, California, 93101 or at such other place as is designated in writing by
the Company, together with a certified or bank cashier's check payable to the
order of the Company in an amount equal to the Exercise Price multiplied by the
number of Warrant Shares for which this Warrant is being exercised (the "Stock
Purchase Price").
2. (a) In lieu of the payment of the Stock Purchase Price, the
Holder shall have the right (but not the obligation), to require the
Company to convert this Warrant, in whole or in part, into shares of
Common Stock (the "Conversion Right") as provided for in this Section
2. Upon exercise of the Conversion Right, the Company shall deliver to
the Holder (without payment by the Holder of any of the Stock Purchase
Price) that number of shares of Common Stock (the "Conversion Shares")
equal to the quotient obtained by dividing (x) the value of this
Warrant (or portion thereof as to which the Conversion Right is being
exercised if the Conversion Right is being exercised in part) at the
time the Conversion Right is exercised (determined by subtracting the
aggregate Stock Purchase Price of the shares of Common Stock as to
which the Conversion Right is being exercised in effect immediately
prior to the exercise of the Conversion Right from the aggregate
Current Market Price (as defined in Section 6(d) hereof) of the shares
of Common Stock as to which the Conversion Right is being exercised) by
(y) the Current Market Price of one share of Common Stock immediately
prior to the exercise of the Conversion Right.
(b) The Conversion Right provided under this Section
2 may be exercised in whole or in part and at any time and from time to
time while this Warrant remains outstanding. In order to exercise the
Conversion Right, the Holder shall surrender to the Company, at its
offices, this Warrant with the Notice of Conversion at the end hereof
duly executed. The presentation and surrender shall be deemed a waiver
of the Holder's obligation to pay all or any portion of the aggregate
purchase price payable for the shares of Common Stock as to which such
Conversion Right is being exercised. This Warrant (or so much thereof
as shall have been surrendered for conversion) shall be deemed to have
been converted immediately prior to the close of business on the day of
surrender of such Warrant for conversion in accordance with the
foregoing provisions.
3. Upon each exercise of the Holder's rights to purchase
Warrant Shares or Conversion Shares, the Holder shall be deemed to be the holder
of record of the Warrant Shares or Conversion Shares issuable upon such exercise
or conversion, notwithstanding that the transfer books of the Company shall then
be closed or certificates representing such Warrant Shares or Conversion Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise or conversion of this Warrant, the Company
shall issue and deliver to the Holder a certificate or certificates for the
Warrant Shares or Conversion Shares issuable upon such exercise or conversion,
registered in the name of the Holder or its designee. If this Warrant should be
exercised or converted in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the
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Holder to purchase the balance of the Warrant Shares (or portions
thereof) subject to purchase hereunder.
4. Any Warrant issued upon the transfer or exercise or
conversion in part of this Warrant shall be numbered and shall be registered in
a Warrant Register as they are issued. The Company shall be entitled to treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes and shall not be bound to recognize any equitable
or other claim to or interest in such Warrant on the part of any other person,
and shall not be liable for any registration or transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or its authority shall be produced. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Warrant Shares (or portions thereof), upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with
applicable law, including without limitations, the provisions of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations thereunder
and any state securities laws or regulations.
5. The Company shall at all times reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
providing for the exercise of the rights to purchase all Warrant Shares and/or
Conversion Shares granted pursuant to this Warrant, such number of shares of
Common Stock as shall, from time to time, be sufficient therefor. The Company
covenants that all shares of Common Stock issuable upon exercise of this
Warrant, upon receipt by the Company of the full Exercise Price therefor, and
all shares of Common Stock issuable upon conversion of this Warrant, shall be
validly issued, fully paid, non-assessable, and free of preemptive rights.
6. (a) In case the Company shall at any time after the date
hereof (i) declare a dividend on the outstanding shares of Common Stock
payable solely in the shares of its capital stock, (ii) subdivide the
outstanding Common Stock, (iii) combine the outstanding Common Stock
into a smaller number of shares, or (iv) issue any shares of its
capital stock by reclassification of the Common Stock (including any
such reclassification in connection with a consolidation or merger in
which the Company is the continuing corporation), then, in each case,
the Exercise Price, and the number and kind of securities issuable upon
exercise or conversion of this Warrant, in effect at the time of
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the record date for such dividend or of the effective date of such
subdivision, combination, or reclassification, shall be proportionately
adjusted so that the Holder after such time shall be entitled to
receive the aggregate number and kind of shares which, if such Warrant
had been exercised or converted immediately prior to such time, he
would have owned upon such exercise or conversion and been entitled to
receive by virtue of such dividend, subdivision, combination, or
reclassification. Such adjustment shall be made successively whenever
any event listed above shall occur.
(b) In case the Company shall issue or fix a record
date for the issuance to all holders of Common Stock of rights,
options, or warrants to subscribe for or purchase Common Stock (or
securities convertible into or exchangeable for Common Stock) at a
price per share (or having a conversion or exchange price per share, if
a security convertible into or exchangeable for Common Stock) less than
the Current Market Price per share of Common Stock on such record date,
then, in each case, the Exercise Price shall be adjusted by multiplying
the Exercise Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the number of shares of
Common Stock outstanding on such record date plus the number of shares
of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so to be offered (or the aggregate initial
conversion or exchange price of the convertible or exchangeable
securities so to be offered) would purchase at such Current Market
Price and the denominator of which shall be the number of shares of
Common Stock outstanding on such record date plus the number of
additional shares of Common Stock to be offered for subscription or
purchase (or into which the convertible or exchangeable securities so
to be offered are initially convertible or exchangeable). Such
adjustment shall become effective at the close of business on such
record date; PROVIDED, HOWEVER, that, to the extent the shares of
Common Stock (or securities convertible into or exchangeable for shares
of Common Stock) are not delivered, the Exercise Price shall be
readjusted after the expiration of such rights, options, or warrants
(but only with respect to Warrants exercised after such expiration), to
the Exercise Price which would then be in effect had the adjustments
made upon the issuance of such rights, options, or warrants been made
upon the basis of delivery of only the number of shares of Common Stock
(or securities convertible into or exchangeable for shares of Common
Stock) actually issued. In case any subscription price may be paid in a
consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be as determined in good faith by
the board of directors of the Company, whose determination shall be
conclusive absent manifest error. Shares of Common Stock owned by or
held for the account of the Company or any majority-owned subsidiary
shall not be deemed outstanding for the purpose of any such
computation.
(c) In case the Company shall distribute to all
holders of Common Stock (including any such distribution made to the
stockholders of the Company in connection with a consolidation or
merger in which the Company is the continuing corporation) evidences of
its indebtedness or assets (other than cash dividends or distributions
and dividends payable in shares of Common Stock), or rights, options,
or
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warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for shares of Common Stock (excluding
those with respect to the issuance of which an adjustment of the
Exercise Price is provided pursuant to Section 6(b) hereof), then, in
each case, the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to the record date for the
determination of stockholders entitled to receive such distribution by
a fraction, the numerator of which shall be the Current Market Price
per share of Common Stock on such record date, less the fair market
value (as determined in good faith by the board of directors of the
Company, whose determination shall be conclusive absent manifest error)
of the portion of the evidences of indebtedness or assets so to be
distributed, or of such rights, options, or warrants or convertible or
exchangeable securities, applicable to one share, and the denominator
of which shall be such Current Market Price per share of Common Stock.
Such adjustment shall be made whenever any such distribution is made,
and shall become effective on the record date for the determination of
stockholders entitled to receive such distribution.
(d) For the purpose of any computation under this
Section 6, the Current Market Price per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices for
the 30 consecutive trading days immediately preceding the date in
question. The closing price for each day shall be the last reported
sales price regular way or, in case no such reported sale takes place
on such day, the closing bid price regular way, in either case on the
principal national securities exchange (including, for purposes hereof,
the NASDAQ SmallCap Market) on which the Common Stock is listed or
admitted to trading or, if the Common Stock is not listed or admitted
to trading on any national securities exchange, the highest reported
bid price for the Common Stock as furnished by the National Association
of Securities Dealers, Inc. through NASDAQ or a similar organization if
NASDAQ is no longer reporting such information. If on any such date the
Common Stock is not listed or admitted to trading on any national
securities exchange and is not quoted by NASDAQ or any similar
organization, the fair value of a share of Common Stock on such date,
as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error, shall be
used.
(e) No adjustment in the Exercise Price shall be
required if such adjustment is less than $.05; PROVIDED, HOWEVER, that
any adjustments which by reason of this Section 6 are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 6 shall be
made to the nearest cent or to the nearest one-thousandth of a share,
as the case may be.
(f) In any case in which this Section 6 shall require
that an adjustment in the Exercise Price be made effective as of a
record date for a specified event, the Company may elect to defer,
until the occurrence of such event, issuing to the Holder, if the
Holder exercised or converted this Warrant after such record date, the
shares of Common Stock, if any, issuable upon such exercise or
conversion over and above the
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shares of Common Stock, if any, issuable upon such exercise or
conversion on the basis of the Exercise Price in effect prior to such
adjustment; PROVIDED, HOWEVER, that the Company shall deliver to the
Holder a due bill or other appropriate instrument evidencing the
Holder's right to receive such additional shares upon the occurrence of
the event requiring such adjustment.
(g) Upon each adjustment of the Exercise Price as a
result of the calculations made in Sections 6(b) or 6(c) hereof, this
Warrant shall thereafter evidence the right to purchase, at the
adjusted Exercise Price, that number of shares (calculated to the
nearest thousandth) obtained by dividing (i) the product obtained by
multiplying the number of shares purchasable upon exercise of this
Warrant prior to adjustment of the number of shares by the Exercise
Price in effect prior to adjustment of the Exercise Price, by (ii) the
Exercise Price in effect after such adjustment of the Exercise Price.
(h) Whenever there shall be an adjustment as provided
in this Section 6, the Company shall promptly cause written notice
thereof to be sent by registered mail, postage prepaid, to the Holder,
at its address as it shall appear in the Warrant Register, which notice
shall be accompanied by an officer's certificate setting forth the
number of Warrant Shares purchasable upon the exercise of this Warrant
and the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment and the computation
thereof, which officer's certificate shall be conclusive evidence of
the correctness of any such adjustment absent manifest error.
(j) The Company shall not be required to issue
fractions of shares of Common Stock or other capital stock of the
Company upon the exercise or conversion of this Warrant. If any
fraction of a share would be issuable on the exercise or conversion of
this Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction
of the Current Market Price of such share of Common Stock on the date
of exercise or conversion of this Warrant.
7. (a) In case of any consolidation with or merger of the
Company with or into another corporation (other than a merger or
consolidation in which the Company is the surviving or continuing
corporation), or in case of any sale, lease, or conveyance to another
corporation of the property and assets of any nature of the Company as
an entirety or substantially as an entirety, such successor, leasing,
or purchasing corporation, as the case may be, shall (i) execute with
the Holder an agreement providing that the Holder shall have the right
thereafter to receive upon exercise or conversion of this Warrant
solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such
consolidation, merger, sale, lease, or conveyance by a holder of the
number of shares of Common Stock for which this Warrant might have been
exercised or converted immediately prior to such consolidation, merger,
sale, lease, or conveyance, and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall
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provide for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 6.
(b) In case of any reclassification or change of the
shares of Common Stock issuable upon exercise or conversion of this
Warrant (other than a change in par value or from no par value to a
specified par value, or as a result of a subdivision or combination,
but including any change in the shares into two or more classes or
series of shares), or in case of any consolidation or merger of another
corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of
the shares of Common Stock (other than a change in par value, or from
no par value to a specified par value, or as a result of a subdivision
or combination, but including any change in the shares into two or more
classes or series of shares), the Holder shall have the right
thereafter to receive upon exercise or conversion of this Warrant
solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the
number of shares of Common Stock for which this Warrant might have been
exercised or converted immediately prior to such reclassification,
change, consolidation, or merger. Thereafter, appropriate provision
shall be made for adjustments which shall be as nearly equivalent as
practicable to the adjustments in Section 6.
(c) The above provisions of this Section 7 shall
similarly apply to successive reclassifications and changes of shares
of Common Stock and to successive consolidations, mergers, sales,
leases, or conveyances.
8. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on
shares of Common Stock in shares of Common Stock or make any other
distribution (other than regularly scheduled cash dividends which are
not in a greater amount per share than the most recent such cash
dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities
to all holders of Common Stock entitling them to purchase any
additional shares of Common Stock or any other rights, warrants, or
other securities; or
(c) to effect any reclassification or change of
outstanding shares of Common Stock, or any consolidation, merger, sale,
lease, or conveyance of property, described in Section 7; or
(d) to effect any liquidation, dissolution, or
winding-up of the Company; or
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(e) to take any other action which would cause an
adjustment to the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
9. The issuance of any shares or other securities upon the
exercise or conversion of this Warrant, and the delivery of certificates or
other instruments representing such shares or other securities, shall be made
without charge to the Holder for any tax or other charge in respect of such
issuance. The Company shall not, however, be required to pay any tax which may
be payable in respect of any transfer involved in the issue and delivery of any
certificate in a name other than that of the Holder and the Company shall not be
required to issue or deliver any such certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
10. (a) If, at any time prior to January 10, 2005, while any
Warrant or Warrant Shares are outstanding, the Company shall file a
registration statement with the Securities and Exchange Commission (the
"Commission") to register the sale any of its equity securities for its
own account (and not for the account of a security holder or holders)
for cash, other than (w) a registration relating to employee benefit
plans, (x) a registration relating to a corporate reorganization or
other transaction under Rule 145, (y) a registration relating to the
Company's equity line of credit with Cambois Finance, Inc., or (z) a
registration on any registration form that does not permit secondary
sales, the Company shall give the Holder at least 15 days prior written
notice of the filing of such registration statement. If requested by
the Holder in writing within 10 days after receipt of any such notice,
the Company shall, at the Company's sole expense (other than the fees
and disbursements of counsel for the Holder and the underwriting
discounts, if any, payable in respect of the Warrant Shares sold by the
Holder), register or qualify all or, at the Holders' option, any
portion of the Warrant Shares of the Holder concurrently with the
registration of such other securities, all to the extent requisite to
permit the public offering and sale of the Warrant Shares through the
facilities of all appropriate securities exchanges and the
over-the-counter market. As a condition to the registration of any
Warrant Shares in an underwritten public offering, the Holder shall
(together with the
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Company and the other holders of securities of the Company with
registration rights to participate therein distributing their
securities through such underwriting) enter into an underwriting
agreement in customary form with the representative of the underwriter
or underwriters selected by the Company. Notwithstanding the foregoing,
if the representative of the underwriter or underwriters of any such
offering shall advise the Company in writing that, in its opinion, the
distribution of all or a portion of the Warrant Shares requested to be
included in the registration concurrently with the securities being
registered by the Company would adversely affect the distribution of
such securities by the Company for its own account, the number of
shares that may be included in such registration in such offering shall
be allocated as follows: (i) first, the Company shall be permitted to
include all shares of capital stock to be registered thereby and (ii)
second, the Holder shall be allowed to include such additional amount
as the lead managing underwriter deems appropriate, such amount to be
allocated among such Holder and any other selling stockholders on a pro
rata basis based on the total number of shares of capital stock held
thereby. As used herein, "Warrant Shares" shall mean the Warrant Shares
and the Conversion Shares which, in each case, have not been previously
sold pursuant to a registration statement or Rule 144 promulgated under
the Act.
(b) In the event of a registration pursuant to the
provisions of this Section 10, the Company shall use its best efforts
to cause the Warrant Shares so registered to be registered or qualified
for sale under the securities or blue sky laws of such jurisdictions as
the Holder may reasonably request; PROVIDED, HOWEVER, that the Company
shall not be required to qualify to do business in any state by reason
of this Section 10(b) in which it is not otherwise required to qualify
to do business.
(c) The Company shall keep effective any registration
or qualification contemplated by this Section 10 and shall from time to
time amend or supplement each applicable registration statement,
preliminary prospectus, final prospectus, application, document, and
communication for such period of time as shall be required to permit
the Holder to complete the offer and sale of the Warrant Shares covered
thereby. The Company shall in no event be required to keep any such
registration or qualification in effect for a period in excess of 90
days from the date on which the Holder is first free to sell such
Warrant Shares; PROVIDED, HOWEVER, that, if the Company is required to
keep any such registration or qualification in effect with respect to
securities other than the Warrant Shares beyond such period, the
Company shall keep such registration or qualification in effect as it
relates to the Warrant Shares for so long as such registration or
qualification remains or is required to remain in effect in respect of
such other securities.
(d) In the event of a registration pursuant to the
provisions of this Section 10, the Company shall furnish to the Holder
such number of copies of the registration statement and of each
amendment and supplement thereto (in each case, including all
exhibits), such reasonable number of copies of each prospectus
contained in such registration statement and each supplement or
amendment thereto (including each preliminary prospectus), all of which
shall conform to the requirements of the Act and the
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rules and regulations thereunder, and such other documents, as the
Holder may reasonably request to facilitate the disposition of the
Warrant Shares included in such registration.
(e) In the event of a registration pursuant to the
provisions of this Section 10, the Company shall furnish the Holder so
registered with an opinion of its counsel covering such matters as are
customarily the subject of opinions of issuer's counsel provided to
underwriters in underwritten public offerings.
(f) The Company agrees that until the Warrant has
expired or all of the Warrant Shares have been sold under a
registration statement or pursuant to Rule 144 under the Act, it shall
keep current in filing all reports, statements and other materials
required to be filed with the Commission to permit the Holder to sell
the Warrant Shares under Rule 144.
11. (a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Holder, its officers,
directors, partners, employees, agents, and counsel, and each person,
if any, who controls any such person within the meaning of Section 15
of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), from and against any and all loss,
liability, charge, claim, damage, and expense whatsoever (which shall
include, for all purposes of this Section 11, but not be limited to,
attorneys' fees and any and all reasonable expense whatsoever incurred
in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), as and when
incurred, arising out of, based upon, or in connection with (i) any
untrue statement or alleged untrue statement of a material fact
contained (A) in any registration statement, preliminary prospectus, or
final prospectus (as from time to time amended and supplemented), or
any amendment or supplement thereto, relating to the sale of the
Warrant Shares, or (B) in any application or other document or
communication (in this Section 11 collectively called an "application")
executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to register or qualify any of the Warrant Shares
under the securities or blue sky laws thereof or filed with the
Commission or any securities exchange; or any omission or alleged
omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon and in conformity with
written information furnished to the Company with respect to the Holder
by or on behalf of the Holder expressly for inclusion in any
registration statement, preliminary prospectus, or final prospectus, or
any amendment or supplement thereto, or in any application, as the case
may be, or (ii) any breach of any representation, warranty, covenant,
or agreement of the Company contained in this Warrant. The foregoing
agreement to indemnify shall be in addition to any liability the
Company may otherwise have, including liabilities arising under this
Warrant.
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If any action is brought against the Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any
controlling persons of such person (an "indemnified party") in respect
of which indemnity may be sought against the Company pursuant to the
foregoing paragraph, such indemnified party or parties shall promptly
notify the Company in writing of the institution of such action (but
the failure so to notify shall not relieve the Company from any
liability pursuant to this Section 11(a) except to the extent that such
failure shall result in prejudice to the Company) and the Company shall
promptly assume the defense of such action, including the employment of
counsel (reasonably satisfactory to such indemnified party or parties)
and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless the employment of such counsel
shall have been authorized in writing by the Company in connection with
the defense of such action or the Company shall not have promptly
employed counsel reasonably satisfactory to such indemnified party or
parties to have charge of the defense of such action or such
indemnified party or parties shall have reasonably concluded that there
may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those
available to the Company, in any of which events such fees and expenses
shall be borne by the Company and the Company shall not have the right
to direct the defense of such action on behalf of the indemnified party
or parties. The Company shall not be obligated to pay the fees and
expenses of more than one such separate counsel for any one such action
or proceeding in any one jurisdiction. Anything in this Section 11 to
the contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written
consent, which shall not be unreasonably withheld. The Company shall
not, without the prior written consent of each indemnified party that
is not released as described in this sentence, settle or compromise any
action, or permit a default or consent to the entry of judgment in or
otherwise seek to terminate any pending or threatened action, in
respect of which indemnity may be sought hereunder (whether or not any
indemnified party is a party thereto), unless such settlement,
compromise, consent, or termination includes an unconditional release
of each indemnified party from all liability in respect of such action.
The Company agrees promptly to notify the Holder of the commencement of
any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of any Warrant Shares
or any preliminary prospectus, prospectus, registration statement, or
amendment or supplement thereto, or any application relating to any
sale of any Warrant Shares.
(b) The Holder agrees to indemnify and hold harmless
the Company, each director of the Company, each officer of the Company
who shall have signed any registration statement covering Warrant
Shares held by the Holder, each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act, and its or their respective counsel, to the same
extent as the foregoing indemnity from the Company to the Holder in
Section 11(a), but only with respect to statements or omissions, if
any, made in any registration statement, preliminary
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<PAGE>
prospectus, or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or in any
application, in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Holder
expressly for inclusion in any such registration statement, preliminary
prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be. If any action shall
be brought against the Company or any other person so indemnified based
on any such registration statement, preliminary prospectus, or final
prospectus, or any amendment or supplement thereto, or in any
application, and in respect of which indemnity may be sought against
the Holder pursuant to this Section 11(b), the Holder shall have the
rights and duties given to the Company, and the Company and each other
person so indemnified shall have the rights and duties given to the
indemnified parties, by the provisions of Section 11(a).
(c) To provide for just and equitable contribution,
if (i) an indemnified party makes a claim for indemnification pursuant
to Section 11(a) or 11(b) (subject to the limitations thereof) but it
is found in a final judicial determination, not subject to further
appeal, that such indemnification may not be enforced in such case,
even though this Agreement expressly provides for indemnification in
such case, or (ii) any indemnified or indemnifying party seeks
contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on
behalf of any director of the Company, any officer of the Company who
signed any such registration statement, any controlling person of the
Company, and its or their respective counsel), as one entity, and the
Holder (including for this purpose any contribution by or on behalf of
an indemnified party), as a second entity, shall contribute to the
losses, liabilities, claims, damages, and expenses whatsoever to which
any of them may be subject, on the basis of relevant equitable
considerations such as the relative fault of the Company and such
Holder in connection with the facts which resulted in such losses,
liabilities, claims, damages, and expenses. The relative fault, in the
case of an untrue statement, alleged untrue statement, omission, or
alleged omission, shall be determined by, among other things, whether
such statement, alleged statement, omission, or alleged omission
relates to information supplied by the Company or by such Holder, and
the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement, alleged statement,
omission, or alleged omission. The Company and the Holder agree that it
would be unjust and inequitable if the respective obligations of the
Company and the Holder for contribution were determined by pro rata or
per capita allocation of the aggregate losses, liabilities, claims,
damages, and expenses (even if the Holder and the other indemnified
parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations
referred to in this Section 11(c). In no case shall the Holder be
responsible for a portion of the contribution obligation imposed on it
in excess of its pro rata share based on the number of shares of Common
Stock owned (or which would be owned upon exercise of all Warrant or
Warrant Shares) by it and included in such registration as compared to
the total number of shares of Common Stock included in such
registration. No person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be
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entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 11(c), each
person, if any, who controls the Holder within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act and each officer,
director, partner, employee, agent, and counsel of each such Holder or
control person shall have the same rights to contribution as such
Holder or control person and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act, each officer of the Company who shall have signed any
such registration statement, each director of the Company, and its or
their respective counsel shall have the same rights to contribution as
the Company, subject in each case to the provisions of this Section
11(c). Anything in this Section 11(c) to the contrary notwithstanding,
no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent.
This Section 11(c) is intended to supersede any right to contribution
under the Act, the Exchange Act or otherwise.
12. Unless registered pursuant to the provisions of Section 10
hereof, the Warrant Shares or Conversion Shares issued upon exercise or
conversion of the Warrants shall be subject to a stop transfer order and the
certificate or certificates evidencing such Warrant Shares shall bear the
following legend:
"THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. THESE
SECURITIES CANNOT BE SOLD OR TRANSFERRED WITHOUT SUCH REGISTRATION AND
QUALIFICATION UNLESS AN EXEMPTION FROM SUCH REGISTRATION AND
QUALIFICATION IS AVAILABLE AND THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY TO THAT EFFECT."
13. Upon receipt of evidence satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant (and upon surrender
of this Warrant if mutilated), and upon reimbursement of the Company's
reasonable incidental expenses, the Company shall execute and deliver to the
Holder thereof a new Warrant of like date, tenor, and denomination.
14. The Holder shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
15. This Warrant shall be construed in accordance with the
laws of the State of New York applicable to contracts made and performed within
such State, without regard to principles of conflicts of law.
16. The Company irrevocably consents to the jurisdiction of
the courts of the federal courts located in the City of New York in connection
with any action or proceeding
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arising out of or relating to this Warrant, any document or instrument delivered
pursuant to, in connection with or simultaneously with this Warrant, or a breach
of this Warrant or any such document or instrument. In any such action or
proceeding, the Company waives personal service of any summons, complaint or
other process and agrees that service thereof may be made by registered mail,
return receipt requested. Within 30 days after such service, or such other time
as may be mutually agreed upon in writing by the attorneys for the parties to
such action or proceeding, the Company shall appear to answer such summons,
complaint or other process. Should the Company so served fail to appear or
answer within such 30-day period or such extended period, as the case may be,
the Company shall be deemed in default and judgment may be entered against the
Company for the amount as demanded in any summons, complaint or other process so
served. The Company and Holder (by Holder's acceptance of this Warrant) agree
that if any action or proceeding is brought to construe or enforce the terms and
conditions of this Warrant or the rights of the parties hereunder, the losing
party shall pay to the prevailing party all court costs and reasonable
attorneys' fees and costs (at the prevailing party's attorneys then-current
rates) incurred in such action or proceeding. A party that voluntarily dismisses
an action or proceeding shall be considered a losing party for purposes of this
provision.
Dated: January 10 2000
NETLOJIX COMMUNICATIONS, INC.
By: /s/ ANTHONY E. PAPA
----------------------------------------
Anthony E. Papa, Chief Executive Officer
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<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder is permitted to transfer
the attached Warrant.)
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto
__________________ a Warrant to purchase __________ shares of Common Stock, par
value $.01 per share, of NetLojix Communications, Inc. (the "Company"), together
with all right, title, and interest therein, and does hereby irrevocably
constitute and appoint attorney to transfer such Warrant on the books of the
Company, with full power of substitution.
Dated:__________________
By:___________________
Signature
The signature on the foregoing Assignment must correspond to the name
as written upon the face of this Warrant in every particular, without alteration
or enlargement or any change whatsoever.
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To: NetLojix Communications, Inc.
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase _______
Warrant Shares covered by the within Warrant and tenders payment herewith in the
amount of $_________ in accordance with the terms thereof, and requests that
certificates for such securities be issued in the name of, and delivered to:
_________________________________
_________________________________
_________________________________
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated:_______________
By:_____________________
Print Name
________________________
Signature
Address:
_____________________________________
_____________________________________
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To: NetLojix Communications, Inc.
CASHLESS EXERCISE FORM
(To be executed upon conversion of the attached Warrant)
The undersigned hereby irrevocably elects to surrender its Warrant for
the number of shares of Common Stock as shall be issuable pursuant to the
cashless exercise provisions of the within Warrant, in respect of __________
shares of Common Stock underlying the within Warrant, and requests that
certificates for such securities be issued in the name of and delivered to:
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of, and
delivered to, the undersigned at the addressed stated below.
Dated: _________________________ Name _____________________________
(Print)
Address: _____________________________________________________________
----------------------------------
(Signature)
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EXHIBIT 10.16
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT
BETWEEN
NETLOJIX COMMUNICATIONS, INC.
AND
AMRO INTERNATIONAL, S.A.
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT dated as of March 2, 2000
(the "Agreement"), between AMRO International, S.A. (the "Investor"), and
NetLojix Communications, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
and the Investor shall purchase (i) 375,000 shares of Common Stock (as defined
below) at a price of $4.00 per share and (ii) Warrants (as defined below) to
purchase up to 75,000 shares of the Common Stock (as defined below) at $5.25 per
share.
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2)") and/or Section 4(6) ("Section 4(6)") of the
United States Securities Act and/or Regulation D ("Regulation D") and the other
rules and regulations promulgated thereunder (the "Securities Act"), and/or upon
such other exemption from the registration requirements of the Securities Act as
may be available with respect to any or all of the investments in securities to
be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. "CAPITAL SHARES" shall mean the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
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Section 1.2. "CAPITAL SHARES EQUIVALENTS" shall mean any securities, rights, or
obligations that are convertible into or exchangeable for or give any right to
subscribe for any Capital Shares of the Company or any Warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
Section 1.3. "CLOSING" shall mean the closing of the purchase and sale of the
Common Stock and Warrants pursuant to Section 2.1.
Section 1.4. "CLOSING DATE" shall mean the date on which all conditions to the
Closing have been satisfied (as defined in Section 2.1 (b) hereto) and the
Closing shall have occurred.
Section 1.5. "COMMON STOCK" shall mean the Company's common stock, par value
$0.01.
Section 1.6. "DAMAGES" shall mean any loss, claim, damage, judgment, penalty,
deficiency, liability, costs and expenses (including, without limitation,
reasonable attorney's fees and disbursements and reasonable costs and expenses
of expert witnesses and investigation).
Section 1.7. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
Section 1.8. "LEGEND" shall mean the legend set forth in Section 9.1.
Section 1.9. "MATERIAL ADVERSE EFFECT" shall mean any effect on the business,
operations, properties, prospects or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole, and/or any condition, circumstance, or situation that would prohibit
or otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under this Agreement, the Registration Rights Agreement
or the Warrants in any material respect.
Section 1.10. "OUTSTANDING" when used with reference to shares of Common Stock
or Capital Shares, shall mean, at any date as of which the number of such shares
is to be determined, all issued and outstanding shares, and shall include all
such shares issuable in respect of outstanding scrip or any certificates
representing fractional interests in such shares; PROVIDED, HOWEVER, that
"Outstanding" shall not mean any such shares then directly or indirectly owned
or held by or for the account of the Company.
Section 1.11. "PERSON" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
Section 1.12. "PRINCIPAL MARKET" shall mean the American Stock Exchange, the New
York Stock Exchange, the NASDAQ National or SmallCap Markets or the OTC Bulletin
Board whichever is at the time the principal trading exchange or market for the
Common Stock, based upon share volume.
Section 1.13. "PURCHASE PRICE" shall mean $4.00 per share of Common Stock,
adjusted for any splits, reverse splits or Common Stock dividends declared by
the Company after the execution hereof and prior to the Closing.
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Section 1.14. "REGISTRABLE SECURITIES" shall mean the Shares and the Warrant
Shares until (i) the Registration Statement has been declared effective by the
SEC, and all Shares and Warrant Shares have been disposed of pursuant to the
Registration Statement, (ii) all Shares and Warrant Shares have been sold under
circumstances under which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") are met,
(iii) all Shares and Warrant Shares have been otherwise transferred to holders
who may trade such shares without restriction under the Securities Act, and the
Company has delivered a new certificate or other evidence of ownership for such
securities not bearing a restrictive legend or (iv) such time as, in the opinion
of counsel to the Company, all Shares and Warrant Shares may be sold without any
time, volume or manner limitations pursuant to Rule 144(k) (or any similar
provision then in effect) under the Securities Act.
Section 1.15. "REGISTRATION RIGHTS AGREEMENT" shall mean the agreement regarding
the filing of the Registration Statement for the resale of the Registrable
Securities, entered into between the Company and the Investor as of the Closing
Date in the form annexed hereto as EXHIBIT A.
Section 1.16. "REGISTRATION STATEMENT" shall mean a registration statement on
Form S-3 (or on such other form promulgated by the SEC for which the Company
then qualifies and which counsel for the Company shall deem appropriate, and
which form shall be available for the resale by the Investors of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement, the Registration Rights Agreement and in accordance with the intended
method of distribution of such securities), for the registration of the resale
by the Investor of the Registrable Securities under the Securities Act.
Section 1.17. "REGULATION D" shall have the meaning set forth in the recitals of
this Agreement.
Section 1.18. "SEC" shall mean the Securities and Exchange Commission.
Section 1.19. "SECTION 4(2)" AND "SECTION 4(6)" shall have the meanings set
forth in the recitals of this Agreement.
Section 1.20. "SECURITIES ACT" shall have the meaning set forth in the recitals
of this Agreement.
Section 1.21. "SEC DOCUMENTS" shall mean the Company's latest Form 10, Form 10-K
as of the time in question, all Forms 10-Q and 8-K filed thereafter, and the
Proxy Statement for its latest fiscal year as of the time in question until such
time as the Company no longer has an obligation to maintain the effectiveness of
a Registration Statement as set forth in the Registration Rights Agreement.
Section 1.22. "SHARES" shall mean the shares of Common Stock purchased pursuant
to this Agreement.
Section 1.23. "TRADING DAY" shall mean any day during which the Principal Market
shall be open for business.
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Section 1.24. "WARRANTS" shall mean the Warrants substantially in the form of
EXHIBIT B to be issued to the Investor hereunder.
Section 1.25. "WARRANT SHARES" shall mean all shares of Common Stock or other
securities issued or issuable pursuant to exercise of the Warrants.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK AND WARRANTS
Section 2.1. INVESTMENT.
(a) Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investor agrees to purchase the Shares together
with the Warrants as follows:
Upon satisfaction by the Company of the Closing conditions
set forth in Section 2.1(b), the Investor shall purchase
375,000 shares of Common Stock at the Purchase Price
($1,500,000 in the aggregate). The Investor shall deliver
to the Company immediately available funds in the amount
of the Purchase Price and the Company shall deliver the
Common Stock certificates representing the shares of Common
Stock so purchased and the Warrants to the Investor.
(b) The Closing is subject to the satisfaction or waiver by the party
sought to be benefited thereby of the following conditions:
(i) acceptance and execution by the Company and by the
Investor, of this Agreement and all Exhibits hereto;
(ii) all representations and warranties of the Investor
contained herein shall remain true and correct as of the
Closing Date (as a condition to the Company's
obligations);
(iii) all representations and warranties of the Company
contained herein shall remain true and correct as of the
Closing Date (as a condition to the Investor's
obligations);
(iv) the Company shall have obtained all permits and
qualifications required by any state for the offer and
sale of the Common Stock and Warrants, or shall have the
availability of exemptions therefrom;
(v) the sale and issuance of the Common Stock and Warrants
hereunder, and the proposed issuance by the Company to the
Investor of the Common Stock underlying the Warrants upon
the exercise thereof shall be legally permitted by all
laws and regulations to which the Investor and the Company
are subject and there shall be no ruling, judgment or writ
of any court prohibiting the transactions contemplated by
this Agreement;
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(vi) delivery of the applicable original fully executed Common
Stock certificates and, the Warrant certificates to the
Investor;
(vii) delivery to the Investor of an opinion of Seed Mackall &
Cole LLP, counsel to the Company, in form and substance
reasonably satisfactory to the Investor; and
(viii) delivery to the Investor of the Registration Rights
Agreement.
Section 2.2. LIQUIDATED DAMAGES. The parties hereto acknowledge and agree that
the sums that may become payable pursuant to Section 3(e) the Registration
Rights Agreement shall constitute liquidated damages and not penalties. The
parties further acknowledge that (a) the amount of loss or damages likely to be
incurred is incapable or is difficult to precisely estimate, (b) the amounts
specified in such Sections bear a reasonable proportion and are not plainly or
grossly disproportionate to the probable loss likely to be incurred by the
Investor in connection with the failure by the Company to timely cause the
registration of the Registrable Securities and (c) the parties are sophisticated
business parties and have been represented by sophisticated and able legal and
financial counsel and negotiated this Agreement at arm's length.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor represents and warrants to the Company that:
Section 3.1. INTENT. The Investor is entering into this Agreement for its own
account and not with a view to or for sale in connection with any distribution
of the Common Stock. The Investor has no present arrangement (whether or not
legally binding) at any time to sell the Shares, the Warrants or the Warrant
Shares to or through any person or entity; provided, however, that by making the
representations herein, the Investor does not agree to hold such securities for
any minimum or other specific term and reserves the right to dispose of the
Shares and Warrant Shares at any time in accordance with federal and state
securities laws applicable to such disposition.
Section 3.2. SOPHISTICATED INVESTOR. The Investor is a sophisticated investor
(as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor
(as defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it has the capacity to protect its own
interests in connection with this transaction and is capable of evaluating the
merits and risks of an investment in the Common Stock and Warrants. The Investor
acknowledges that an investment in the Common Stock is speculative and involves
a high degree of risk.
Section 3.3. AUTHORITY. This Agreement and each agreement attached as an Exhibit
hereto which is required to be executed by Investor has been duly authorized and
validly executed and
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delivered by the Investor and is a valid and binding agreement of the Investor
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application.
Section 3.4. NOT AN AFFILIATE. The Investor is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 3.5. ABSENCE OF CONFLICTS. The execution and delivery of this Agreement
and each agreement which is attached as an Exhibit hereto and executed by the
Investor in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, and compliance with the requirements hereof and
thereof by the Investor, will not violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on Investor or (a) violate
any provision of any indenture, instrument or agreement to which Investor is a
party or is subject, or by which Investor or any of its assets is bound; (b)
conflict with or constitute a material default thereunder; (c) result in the
creation or imposition of any lien pursuant to the terms of any such indenture,
instrument or agreement, or constitute a breach of any fiduciary duty owed by
Investor to any third party; or (d) require the approval of any third-party
(which has not been obtained) pursuant to any material contract, agreement,
instrument, relationship or legal obligation to which Investor is subject or to
which any of its assets, operations or management may be subject.
Section 3.6. DISCLOSURE; ACCESS TO INFORMATION. The Investor has received all
documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed copies of all SEC Documents deemed relevant
by Investor.
Section 3.7. MANNER OF SALE. At no time was Investor presented with or solicited
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investors that, except as set forth
in the SEC Documents or the Disclosure Schedule prepared by the Company and
attached hereto:
Section 4.1. ORGANIZATION OF THE COMPANY. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of
Delaware and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted. The Company does not have any
subsidiaries and does not own more that fifty percent (50%) of or control any
other business entity. The Company is duly qualified and is in good standing as
a foreign corporation to do business in every jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary, other than those in which the failure so to qualify would not have a
Material Adverse Effect.
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Section 4.2. AUTHORITY. (i) The Company has the requisite corporate power and
corporate authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement and the Warrants and to issue the
Shares, the Warrants and the Warrant Shares pursuant to their respective terms,
(ii) the execution, issuance and delivery of this Agreement, the Registration
Rights Agreement, the Common Stock certificates and the Warrants by the Company
and the consummation by it of the transactions contemplated hereby have been
duly authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required, and (iii) this Agreement, the Registration Rights Agreement, the
Common Stock certificates representing the Shares and the Warrants have been
duly executed and delivered by the Company and at the Closing shall constitute
valid and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application. The Company has duly and validly
authorized and reserved for issuance shares of Common Stock sufficient in number
for exercise of the Warrants.
Section 4.3. CAPITALIZATION. The capitalization of the Company is as set forth
in the Disclosure Schedule. Except for (i) outstanding options and warrants as
set forth in the SEC Documents or the Disclosure Schedule, and (ii) as set forth
in the Disclosure Schedule, there are no outstanding Capital Shares Equivalents
nor any agreements or understandings pursuant to which any Capital Shares
Equivalents may become outstanding. The Company is not a party to any agreement
granting registration or anti-dilution rights to any person with respect to any
of its equity or debt securities. All of the outstanding shares of Common Stock
of the Company have been duly and validly authorized and issued and are fully
paid and non-assessable.
Section 4.4. COMMON STOCK. The Company has registered its Common Stock pursuant
to Section 12(b) or (g) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and the Company is in compliance
with all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on, the Principal
Market. As of the date hereof, the Principal Market is the Nasdaq SmallCap
Market and the Company has not received any notice regarding, and to its
knowledge there is no threat, of the termination or discontinuance of the
eligibility of the Common Stock for such listing.
Section 4.5. SEC DOCUMENTS. The Company has made available to the Investors true
and complete copies of the SEC Documents. The Company has not provided to the
Investors any information that, according to applicable law, rule or regulation,
should have been disclosed publicly prior to the date hereof by the Company, but
which has not been so disclosed. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Exchange Act, and
rules and regulations of the SEC promulgated thereunder and the SEC Documents
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents complied in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto at the time of such
inclusion. Such
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financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited interim statements, to normal year-end
audit adjustments). Neither the Company nor any of its subsidiaries has any
material indebtedness, obligations or liabilities of any kind (whether accrued,
absolute, contingent or otherwise, and whether due or to become due) that would
have been required to be reflected in, reserved against or otherwise described
in the financial statements or in the notes thereto in accordance with GAAP,
which was not fully reflected in, reserved against or otherwise described in the
financial statements or the notes thereto included in the SEC Documents or was
not incurred in the ordinary course of business consistent with the Company's
past practices since the last date of such financial statements.
Section 4.6. EXEMPTION FROM REGISTRATION; VALID ISSUANCES. Subject to the
accuracy of the Investor's representations in Article III, the sale of the
Shares, the Warrants and the Warrant Shares will not require registration under
the Securities Act and/or any applicable state securities law. When issued and
paid for in accordance with the Warrants, the Warrant Shares will be duly and
validly issued, fully paid, and non assessable. Neither the sales of the Shares,
the Warrants or the Warrant Shares pursuant to, nor the Company's performance of
its obligations under, this Agreement, the Registration Rights Agreement or the
Warrants will (i) result in the creation or imposition by the Company of any
liens, charges, claims or other encumbrances upon the Shares, the Warrants or
the Warrant Shares or, except as contemplated herein, any of the assets of the
Company, or (ii) entitle the holders of Outstanding Capital Shares to preemptive
or other rights to subscribe for or acquire the Capital Shares or other
securities of the Company. The Shares, the Warrants and the Warrant Shares shall
not subject the Investors to personal liability to the Company or its creditors
by reason of the possession thereof.
Section 4.7. NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS
TRANSACTION. Neither the Company nor any of its affiliates nor, to the knowledge
of the Company, any person acting on its or their behalf (i) has conducted or
will conduct any general solicitation (as that term is used in Rule 502(c) of
Regulation D) or general advertising with respect to the sale of the Shares or
the Warrants, or (ii) made any offers or sales of any security or solicited any
offers to buy any security under any circumstances that would require
registration of the Shares, the Warrants or the Warrant Shares under the
Securities Act.
Section 4.8. NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the Shares,
the Warrants and the Warrant Shares, do not and will not (i) result in a
violation of the Company's Articles of Incorporation or By-Laws or (ii) conflict
with, or constitute a material default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material agreement,
indenture or instrument, or any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company is a party, or (iii)
result in a violation of any federal, state or local law, rule, regulation,
order,
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judgment or decree (including federal and state securities laws and regulations)
applicable to the Company or by which any material property or asset of the
Company is bound or affected, nor is the Company otherwise in violation of,
conflict with or default under any of the foregoing (except in each case for
such conflicts, defaults, terminations, amendments, accelerations, cancellations
and violations as would not have, individually or in the aggregate, a Material
Adverse Effect). The business of the Company is not being conducted in violation
of any law, ordinance or regulation of any governmental entity, except for
possible violations that either singly or in the aggregate would not have a
Material Adverse Effect. The Company is not required under any Federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Shares or the Warrants in accordance with the
terms hereof (other than any SEC or state securities filings that may be
required to be made by the Company subsequent to the Closing, any registration
statement that may be filed pursuant hereto, and any additional listing
application or other filing with Nasdaq); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investors
herein.
Section 4.9. NO MATERIAL ADVERSE CHANGE. Since September 30, 1999, no Material
Adverse Effect has occurred or exists with respect to the Company, except as
disclosed in the SEC Documents.
Section 4.10. NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since September 30, 1999,
no event or circumstance has occurred or exists with respect to the Company or
its businesses, properties, prospects, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
Section 4.11. NO INTEGRATED OFFERING. Other than pursuant to an effective
registration statement under the Securities Act, or pursuant to the issuance or
exercise of employee stock options, or pursuant to its discussion with the
Investors in connection with the transactions contemplated hereby, the Company
has not issued, offered or sold its Common Stock, or any securities convertible
into or exchangeable or exercisable for Common Stock within the six-month period
next preceding the date hereof, and the Company shall not permit any of its
directors, officers or affiliates directly or indirectly to take, any action
(including, without limitation, any offering or sale to any Person of the Shares
or Warrants), so as to make unavailable the exemption from Securities Act
registration being relied upon by the Company for the offer and sale to
Investors of the Shares or the Warrants (and the Warrant Shares) as contemplated
by this Agreement.
Section 4.12. LITIGATION AND OTHER PROCEEDINGS. There are no lawsuits or
proceedings pending or, to the knowledge of the Company, threatened, against the
Company or any subsidiary, nor has the Company received any written or oral
notice of any such action, suit, proceeding or investigation, which could
reasonably be expected to have a Material Adverse Effect. No judgment, order,
writ, injunction or decree or award has been issued by or, to the knowledge of
the Company, requested of any court, arbitrator or governmental agency which
could result in a Material Adverse Effect.
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Section 4.13. NO MISLEADING OR UNTRUE COMMUNICATION. The Company and, to the
knowledge of the Company, any person representing the Company, or any other
person selling or offering to sell the Shares or the Warrants in connection with
the transaction contemplated by this Agreement, have not made, at any time, any
oral communication in connection with the offer or sale of the same which
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.14. MATERIAL NON-PUBLIC INFORMATION. The Company has not disclosed to
the Investor any material non-public information that (i) if disclosed, would
reasonably be expected to have a material effect on the price of the Common
Stock or (ii) according to applicable law, rule or regulation, should have been
disclosed publicly by the Company prior to the date hereof but which has not
been so disclosed.
Section 4.15. INSURANCE. The Company and each subsidiary maintains property and
casualty, general liability, workers' compensation, environmental hazard,
personal injury and other similar types of insurance with financially sound and
reputable insurers that is adequate, consistent with industry standards and the
Company's historical claims experience. The Company has not received notice
from, and has no knowledge of any threat by, any insurer (that has issued any
insurance policy to the Company) that such insurer intends to deny coverage
under or cancel, discontinue or not renew any insurance policy presently in
force.
Section 4.16. TAX MATTERS.
(a) The Company and each subsidiary has filed all Tax Returns which it
is required to file under applicable laws; all such Tax Returns are true and
accurate and has been prepared in compliance with all applicable laws; the
Company has paid all Taxes due and owing by it or any subsidiary (whether or not
such Taxes are required to be shown on a Tax Return) and have withheld and paid
over to the appropriate taxing authorities all Taxes which it is required to
withhold from amounts paid or owing to any employee, stockholder, creditor or
other third parties; and since December 31, 1998, the charges, accruals and
reserves for Taxes with respect to the Company (including any provisions for
deferred income taxes) reflected on the books of the Company are adequate to
cover any Tax liabilities of the Company if its current tax year were treated as
ending on the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction
where the Company does not file tax returns that the Company or any subsidiary
is or may be subject to taxation by that jurisdiction. There are no foreign,
federal, state or local tax audits or administrative or judicial proceedings
pending or being conducted with respect to the Company or any subsidiary; no
information related to Tax matters has been requested by any foreign, federal,
state or local taxing authority; and, except as disclosed above, no written
notice indicating an intent to open an audit or other review has been received
by the Company or any subsidiary from any foreign, federal, state or local
taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (A) has not executed or
entered into a closing agreement pursuant to Section 7121 of the Internal
Revenue Code or any predecessor provision thereof or any similar provision of
state, local or foreign law; or (B) has not agreed to or is required to make
any adjustments pursuant to Section 481 (a) of the Internal Revenue Code or
any
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similar provision of state, local or foreign law by reason of a change in
accounting method initiated by the Company or any of its subsidiaries or has
any knowledge that the IRS has proposed any such adjustment or change in
accounting method, or has any application pending with any taxing authority
requesting permission for any changes in accounting methods that relate to
the business or operations of the Company. The Company has not been a United
States real property holding corporation within the meaning of Section
897(c)(2) of the Internal Revenue Code during the applicable period specified
in Section 897(c)(1)(A)(ii) of the Internal Revenue Code.
(c) The Company has not made an election under Section 341(f) of the
Internal Revenue Code. The Company is not liable for the Taxes of another
person that is not a subsidiary of the Company under (A) Treas. Reg. Section
1.1502-6 (or comparable provisions of state, local or foreign law), (B) as a
transferee or successor, (C) by contract or indemnity or (D) otherwise. The
Company is not a party to any tax sharing agreement. The Company has not made
any payments, is obligated to make payments or is a party to an agreement
that could obligate it to make any payments that would not be deductible
under Section 280G of the Internal Revenue Code.
(d) For purposes of this Section 4.16:
"IRS" means the United States Internal Revenue Service.
"TAX" or "TAXES" means federal, state, county, local, foreign,
or other income, gross receipts, ad valorem, franchise,
profits, sales or use, transfer, registration, excise,
utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other
withholding, employment, social security, severance, stamp,
occupation, alternative or add-on minimum, estimated and other
taxes of any kind whatsoever (including, without limitation,
deficiencies, penalties, additions to tax, and interest
attributable thereto) whether disputed or not.
"TAX RETURN" means any return, information report or filing
with respect to Taxes, including any schedules attached
thereto and including any amendment thereof.
Section 4.17. PROPERTY. Neither the Company nor any of its subsidiaries owns any
real property. Each of the Company and its subsidiaries has good and marketable
title to all personal property owned by it, free and clear of all liens,
encumbrances and defects except such as do not materially affect the value of
such property and do not materially interfere with the use made and proposed to
be made of such property by the Company; and to the Company's knowledge any real
property, mineral or water rights, and buildings held under lease by the Company
as tenant are held by it under valid, subsisting and enforceable leases with
such exceptions as are not material and do not interfere with the use made and
intended to be made of such property, mineral or water rights, and buildings by
the Company.
Section 4.18. INTELLECTUAL PROPERTY. Each of the Company and its subsidiaries
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being
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conducted. To the Company's knowledge, neither the Company nor any of its
subsidiaries is infringing upon or in conflict with any right of any other
person with respect to any Intangibles. No adverse claims have been asserted
by any person to the ownership or use of any Intangibles and the Company has
no knowledge of any basis for such claim.
Section 4.19. INTERNAL CONTROLS AND PROCEDURES. The Company maintains books and
records and internal accounting controls which provide reasonable assurance that
(i) all transactions to which the Company or any subsidiary is a party or by
which its properties are bound are executed with management's authorization;
(ii) the recorded accounting of the Company's consolidated assets is compared
with existing assets at regular intervals; (iii) access to the Company's
consolidated assets is permitted only in accordance with management's
authorization; and (iv) all transactions to which the Company or any subsidiary
is a party or by which its properties are bound are recorded as necessary to
permit preparation of the financial statements of the Company in accordance with
U.S. generally accepted accounting principles.
Section 4.20. PAYMENTS AND CONTRIBUTIONS. Neither the Company, any subsidiary,
nor any of its directors, officers or, to its knowledge, other employees has (i)
used any Company funds for any unlawful contribution, endorsement, gift,
entertainment or other unlawful expense relating to political activity; (ii)
made any direct or indirect unlawful payment of Company funds to any foreign or
domestic government official or employee; (iii) violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv)
made any bribe, rebate, payoff, influence payment, kickback or other similar
payment to any person with respect to Company matters.
Section 4.21. NO MISREPRESENTATION. The representations and warranties of the
Company contained in this Agreement, any schedule, annex or exhibit hereto and
any agreement, instrument or certificate furnished by the Company to the
Investor pursuant to this Agreement, do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
ARTICLE V
COVENANT OF THE INVESTOR
Investor covenants with the Company that the Investor's trading
activities with respect to shares of the Company's Common Stock will be in
compliance with all applicable state and federal securities laws, rules and
regulations and rules and regulations of the Principal Market on which the
Company's Common Stock is listed.
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ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. REGISTRATION RIGHTS. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof and shall use best efforts to
timely prepare and file the Registration Statement.
Section 6.2. RESERVATION OF COMMON STOCK. As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to issue Warrant Shares pursuant to any exercise of the
Warrants.
Section 6.3. LISTING OF COMMON STOCK. The Company hereby agrees to maintain the
listing of the Common Stock on a Principal Market, and as soon as reasonably
practicable following the Closing to list the Shares and the Warrant Shares on
the Principal Market. The Company further agrees, if the Company applies to have
the Common Stock traded on any other Principal Market, it will include in such
application the Shares and the Warrant Shares, and will take such other action
as is necessary or desirable in the opinion of the Investor to cause the Shares
and Warrant Shares to be listed on such other Principal Market as promptly as
possible. The Company will take all action to continue the listing and trading
of its Common Stock on a Principal Market (including, without limitation,
maintaining sufficient net tangible assets) and will comply in all respects with
the Company's reporting, filing and other obligations under the bylaws or rules
of the Principal Market and shall provide Investors with copies of any
correspondence to or from such Principal Market which questions or threatens
delisting of the Common Stock, within three (3) Trading Days of the Company's
receipt thereof, until the Investor has disposed of all of its Registrable
Securities.
Section 6.4. EXCHANGE ACT REGISTRATION. The Company will cause its Common Stock
to continue to be registered under Section 12(b) or (g) of the Exchange Act,
will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act until the Investor has
disposed of all of its Registrable Securities.
Section 6.5. LEGENDS. The certificates evidencing the Registrable Securities
shall be free of legends, except as set forth in Article IX.
Section 6.6. CORPORATE EXISTENCE; CONFLICTING AGREEMENTS. The Company will take
all steps necessary to preserve and continue the corporate existence of the
Company. The Company shall not enter into any agreement, the terms of which
agreement would conflict with the right or ability of the Company to perform any
of its obligations under this Agreement or any of the other agreements attached
as exhibits hereto.
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Section 6.7. CONSOLIDATION; MERGER. The Company shall not, at any time after
the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all of the assets of the Company
to, another entity (a "Consolidation Event") unless the resulting successor
or acquiring entity (if not the Company) assumes by written instrument or by
operation of law the obligation to deliver to the Investor such shares of
stock and/or securities as the Investor is entitled to receive pursuant to
this Agreement and the Warrants.
Section 6.8. ISSUANCE OF COMMON STOCK AND WARRANT SHARES. The sale of the Shares
and the Warrants and the issuance of the Warrant Shares pursuant to exercise of
the Warrants shall be made in accordance with the provisions and requirements of
Section 4(2), 4(6) or Regulation D and any applicable state securities law. The
Company shall make any necessary SEC and "blue sky" filings required to be made
by the Company in connection with the sale of the Securities to the Investor as
required by all applicable laws, and shall provide a copy thereof to the
Investor promptly after such filing.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. SURVIVAL. The representations, warranties and covenants made by
each of the Company and each Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive the Closing
and the consummation of the transactions contemplated hereby. In the event of a
breach or violation of any of such representations, warranties or covenants, the
party to whom such representations, warranties or covenants have been made shall
have all rights and remedies for such breach or violation available to it under
the provisions of this Agreement, irrespective of any investigation made by or
on behalf of such party on or prior to the Closing Date.
Section 7.2. INDEMNITY. (a) The Company hereby agrees to indemnify and hold
harmless the Investor, its Affiliates and their respective officers, directors,
partners and members (collectively, the "Investor Indemnitees"), from and
against any and all Damages, and agrees to reimburse the Investor Indemnitees
for all reasonable out-of-pocket expenses (including the reasonable fees and
expenses of legal counsel), in each case promptly as incurred by the Investor
Indemnitees and to the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any
of the Company's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Company
pursuant to this Agreement; or
(ii) any failure by the Company to perform in any material
respect any of its covenants, agreements, undertakings or obligations
set forth in this Agreement, the
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annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this
Agreement.
(b) Investor hereby agrees to indemnify and hold harmless the Company,
its Affiliates and their respective officers, directors, partners and members
(collectively, the "Company Indemnitees"), from and against any and all Damages,
and agrees to reimburse the Company Indemnitees for reasonable all out-of-pocket
expenses (including the reasonable fees and expenses of legal counsel), in each
case promptly as incurred by the Company Indemnitees and to the extent arising
out of or in connection with:
(i) any misrepresentation, omission of fact or breach of any
of the Investor's representations or warranties contained in this
Agreement, the annexes, schedules or exhibits hereto or any instrument,
agreement or certificate entered into or delivered by the Investor
pursuant to this Agreement; or
(ii) any failure by the Investor to perform in any material
respect any of its covenants, agreements, undertakings or obligations
set forth in this Agreement, the annexes, schedules or exhibits hereto
or any instrument, agreement or certificate entered into or delivered
by the Investor pursuant to this Agreement.
Section 7.3. NOTICE. Promptly after receipt by either party hereto seeking
indemnification pursuant to Section 7.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party from whom indemnification pursuant to Section
7.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is actually prejudiced by such omission or
delay. In connection with any Claim as to which both the Indemnifying Party and
the Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees,
out-of-pocket costs and expenses, (y) the Indemnified Party and the Indemnifying
Party reasonably shall have concluded that representation of the Indemnified
Party and the Indemnifying Party by the same legal counsel would not be
appropriate due to actual or, as reasonably determined by legal counsel to the
Indemnified Party, potentially differing interests between such parties in the
conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Indemnifying Party, or (z) the Indemnifying Party shall
have failed to employ legal counsel reasonably satisfactory to the Indemnified
Party within a reasonable period of time after notice of the commencement of
such Claim. If the Indemnified Party employs separate legal counsel in
circumstances other than as described in clauses (x), (y) or (z) above, the
fees, costs and expenses of such legal counsel shall be borne exclusively by the
Indemnified Party.
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Except as provided above, the Indemnifying Party shall not, in connection with
any Claim in the same jurisdiction, be liable for the fees and expenses of more
than one firm of legal counsel for the Indemnified Party (together with
appropriate local counsel). The Indemnifying Party shall not, without the prior
written consent of the Indemnified Party (which consent shall not unreasonably
be withheld), settle or compromise any Claim or consent to the entry of any
judgment that does not include an unconditional release of the Indemnified Party
from all liabilities with respect to such Claim or judgment.
Section 7.4. DIRECT CLAIMS. In the event one party hereunder should have a claim
for indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association as set forth in
Article X. Judgment upon any award rendered by any arbitrators may be entered in
any court having competent jurisdiction thereof.
ARTICLE VIII
DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
Section 8.1. DUE DILIGENCE REVIEW. Subject to Section 8.2, the Company shall
make available for inspection and review by the Investor, advisors to and
representatives of the Investor (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, Principal Market or other
filing, all SEC Documents and other filings with the SEC, and all other publicly
available corporate documents and properties of the Company as may be reasonably
necessary for the purpose of such review, and cause the Company's officers,
directors and employees to supply all such publicly available information
reasonably requested by the Investor or any such representative, advisor or
underwriter in connection with such Registration Statement (including, without
limitation, in response to all questions and other inquiries reasonably made or
submitted by any of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of enabling the
Investor and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.
Section 8.2. NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
(a) The Company shall not disclose material non-public information to
the Investor, advisors to or representatives of the Investor unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. Other than disclosure of any comment letters
received from the
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SEC staff with respect to the Registration Statement, the Company may, as a
condition to disclosing any non-public information hereunder, require the
Investor's advisors and representatives to enter into a confidentiality
agreement in form and content reasonably satisfactory to the Company and the
Investor.
(b) Nothing herein shall require the Company to disclose material
non-public information to the Investor or its advisors or representatives, and
the Company represents that it does not disseminate material non-public
information to any investors who purchase stock in the Company in a public
offering, to money managers, provided, however, that notwithstanding anything
herein to the contrary, the Company will, as hereinabove provided, promptly
notify the advisors and representatives of the Investor and, if any,
underwriters, of any event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of which it becomes
aware, constituting material non-public information (whether or not requested of
the Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements, therein in light of the circumstances in which they were
made, not misleading. Nothing contained in this Section 8.2 shall be construed
to mean that such persons or entities other than the Investor (without the
written consent of the Investor prior to disclosure of such information as set
forth in Section 8.2(a)) may not obtain non-public information in the course of
conducting due diligence in accordance with the terms of this Agreement and
nothing herein shall prevent any such persons or entities from notifying the
Company of their opinion that based on such due diligence by such persons or
entities, that the Registration Statement contains an untrue statement of a
material fact or omits a material fact required to be stated in the Registration
Statement or necessary to make the statements contained therein, in light of the
circumstances in which they were made, not misleading.
ARTICLE IX
LEGENDS; TRANSFER AGENT INSTRUCTIONS
Section 9.1. LEGENDS. Unless otherwise provided below, each certificate
representing Registrable Securities will bear the following legend or equivalent
(the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE
STATE SECURITIES LAWS, IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR IN A TRANSACTION
WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND
ANY APPLICABLE STATE LAWS, AND IN THE CASE OF AN EXEMPTION, ONLY IF THE COMPANY
HAS
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RECEIVED AN OPINION OF COUNSEL THAT SUCH TRANSACTION DOES NOT REQUIRE
REGISTRATION OF THE WARRANT OR SUCH SHARES, WHICH OPINION AND WHICH COUNSEL
SHALL BE SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION.
Section 9.2. TRANSFER AGENT INSTRUCTIONS. Upon the Closing, the Company will
issue to the transfer agent for its Common Stock (and to any substitute or
replacement transfer agent for its Common Stock upon the Company's appointment
of any such substitute or replacement transfer agent) instructions substantially
in the form of EXHIBIT C hereto. Such instructions shall be irrevocable by the
Company from and after the date thereof or from and after the issuance thereof
to any such substitute or replacement transfer agent, as the case may be.
Section 9.3. NO OTHER LEGEND OR STOCK TRANSFER RESTRICTIONS. No legend other
than the one specified in Section 9.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," "stock transfer restrictions," or other restrictions
have been or shall be given to the Company's transfer agent with respect thereto
other than as expressly set forth in this Article IX.
Section 9.4. INVESTOR'S COMPLIANCE. Nothing in this Article shall affect in any
way Investor's obligations to comply with all applicable securities laws upon
resale of the Common Stock.
ARTICLE X
CHOICE OF LAW; ARBITRATION
Section 10.1. GOVERNING LAW/ARBITRATION. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made in New York by persons domiciled in New York City and without
regard to its principles of conflicts of laws. Any dispute under this Agreement
shall be submitted to arbitration under the American Arbitration Association
(the "AAA") in New York City, New York, and shall be finally and conclusively
determined by the decision of a board of arbitration consisting of three (3)
members (hereinafter referred to as the "Board of Arbitration") selected
according to the rules governing the AAA. The Board of Arbitration shall meet on
consecutive business days in New York City, New York, and shall reach and render
a decision in writing (concurred in by a majority of the members of the Board of
Arbitration) with respect to the amount, if any, which the losing party is
required to pay to the other party in respect of a claim filed. In connection
with rendering its decisions, the Board of Arbitration shall adopt and follow
the laws of the State of New York unless the matter at issue is the corporation
law of the Company's state of incorporation, in which event the corporation law
of such jurisdiction shall govern such issue. To the extent practical, decisions
of the Board of Arbitration shall be rendered no more than thirty (30) calendar
days following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all parties
involved in the dispute. Any decision made by the Board of Arbitration (either
prior to or after the expiration of such thirty (30) calendar day period) shall
be final, binding and conclusive on the parties to the dispute, and entitled to
be enforced to the fullest extent permitted by law and
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entered in any court of competent jurisdiction. The Board of Arbitration shall
be authorized and is hereby directed to enter a default judgment against any
party failing to participate in any proceeding hereunder within the time periods
set forth in the AAA rules. The prevailing party shall be awarded its costs,
including attorneys' fees, from the non-prevailing party as part of the
arbitration award. Any party shall have the right to seek injunctive relief from
any court of competent jurisdiction in any case where such relief is available.
The prevailing party in such injunctive action shall be awarded its costs,
including attorney's fees, from the non-prevailing party.
ARTICLE XI
ASSIGNMENT
Section 11.1. ASSIGNMENT. Neither this Agreement nor any rights of the Investor
or the Company hereunder may be assigned by either party to any other person.
Notwithstanding the foregoing, the provisions of this Agreement shall inure to
the benefit of, and be enforceable by, any permitted transferee of any of the
Shares or Warrants purchased or acquired by the Investor hereunder with respect
to the Shares or Warrants held by such person.
ARTICLE XII
NOTICES
Section 12.1. NOTICES. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) hand delivered, (ii) deposited
in the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by facsimile, addressed as set forth below or to such other address
as such party shall have specified most recently by written notice. Any notice
or other communication required or permitted to be given hereunder shall be
deemed effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the first business day
following the date of sending by reputable courier service, fully prepaid,
addressed to such address, or (c) upon actual receipt of such mailing, if
mailed. The addresses for such communications shall be:
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If to the Company:
NetLojix Communications, Inc.
501 Bath Street
Santa Barbara, CA 93101
Attention: Anthony E. Papa
Telephone: (805) 884-6300
Facsimile: (805) 884-6311
with a copy to (shall not constitute notice)
Seed Mackall & Cole LLP
1332 Anacapa Street
Suite 200
Santa Barbara, CA 93101
Attention: Thomas N. Harding
Telephone: (805) 963-0669
Facsimile: (805) 435-1498
if to the Investor: As set forth on the signature
pages hereto
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Facsimile: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 12.1.
ARTICLE XIII
MISCELLANEOUS
Section 13.1. COUNTERPARTS/ FACSIMILE/ AMENDMENTS. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
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Section 13.2. ENTIRE AGREEMENT. This Agreement, the agreements attached as
Exhibits hereto, which, include but are not limited to the Warrants and the
Registration Rights Agreement, set forth the entire agreement and understanding
of the parties relating to the subject matter hereof and supersedes all prior
and contemporaneous agreements, negotiations and understandings between the
parties, both oral and written relating to the subject matter hereof. The terms
and conditions of all Exhibits to this Agreement are incorporated herein by this
reference and shall constitute part of this Agreement as is fully set forth
herein.
Section 13.3. SEVERABILITY. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.
Section 13.4. HEADINGS. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 13.5. REPLACEMENT OF CERTIFICATES. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Shares or Warrants or any Warrant
Shares and (ii) in the case of any such loss, theft or destruction of such
certificate, upon delivery of an indemnity agreement or security reasonably
satisfactory in form to the Company or (iii) in the case of any such mutilation,
on surrender and cancellation of such certificate, the Company at its expense
will execute and deliver, in lieu thereof, a new certificate of like tenor.
Section 13.6. FEES AND EXPENSES. Each of the Company and the Investor agrees to
pay its own expenses incident to the performance of its obligations hereunder,
except that the Company shall reimburse the Investor for the fees, expenses and
disbursements of Epstein Becker & Green, P.C., counsel to the Investor, in an
amount not to exceed $5,000.
Section 13.7. BROKERAGE. Each of the parties hereto represents that it has had
no dealings in connection with this transaction with any finder or broker who
will demand payment of any fee or commission from the other party. The Company
on the one hand, and the Investor, on the other hand, agree to indemnify the
other against and hold the other harmless from any and all liabilities to any
person claiming brokerage commissions or finder's fees on account of services
purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby.
Section 13.8. PUBLICITY. The Company agrees that it will not issue any further
press release or other public announcement of the transactions contemplated by
this Agreement without the prior consent of the Investor, which shall not be
unreasonably withheld nor delayed by more than two (2) Trading Days from its
receipt of such proposed release. No release shall name the Investor without its
express consent. The foregoing shall not restrict the Company from making any
disclosures required by applicable securities laws.
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IN WITNESS WHEREOF, the parties hereto have caused this Purchase
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
NETLOJIX COMMUNICATIONS, INC.
By: /s/ MICHAEL J. USSERY
------------------------------------------
Michael J. Ussery, Chief Financial Officer
INVESTOR:
AMRO International, S.A.
By: /s/ H. U. BACHOFEN
------------------------------------------
H. U. Bachofen, Director
c/o Ultra Finanz AG
Grossmuensterplatz 6
Zurich CH-8022 Switzerland
Fax: 011-411-262-5515
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EXHIBIT 10.17
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 2, 2000
between AMRO International, S.A. ("Investor"), and NetLojix Communications,
Inc., a Delaware corporation (the "Company").
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Investor is committing to purchasing from the Company,
pursuant to a Common Stock and Warrants Purchase Agreement dated the date hereof
(the "Purchase Agreement"), 375,000 shares of Common Stock and 75,000 Warrants
(terms not defined herein shall have the meanings ascribed to them in the
Purchase Agreement); and
WHEREAS, the Company desires to grant to the Investor the
registration rights set forth herein with respect to the Shares purchased
pursuant to the Purchase Agreement and shares of Common Stock issuable upon
exercise of the Warrants (hereinafter referred to as the "Stock" or "Securities"
of the Company).
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. REGISTRABLE SECURITIES. As used herein the term
"Registrable Security" means the Securities until (i) the Registration Statement
has been declared effective by the Commission, and all Securities have been
disposed of pursuant to the Registration Statement, (ii) all Securities have
been sold under circumstances under which all of the applicable conditions of
Rule 144 (or any similar provision then in force) under the Securities Act
("Rule 144") are met, (iii) all Securities have been otherwise transferred to
holders who may trade such Securities without restriction under the Securities
Act, and the Company has delivered a new certificate or other evidence of
ownership for such Securities not bearing a restrictive legend or (iv) such time
as, in the opinion of counsel to the Company, all Securities may be sold without
any time, volume or manner limitations pursuant to Rule 144(k) (or any similar
provision then in effect) under the Securities Act. The term "Registrable
Securities" means any and/or all of the securities falling within the foregoing
definition of a "Registrable Security." In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be deemed to be made
in the definition of "Registrable Security" as is appropriate in order to
prevent any dilution or enlargement of the rights granted pursuant to this
Agreement.
Section 2. RESTRICTIONS ON TRANSFER. Investor acknowledges and
understands that prior to the registration of the Securities as provided herein,
the Securities are "restricted securities" as defined in Rule 144 promulgated
under the Act. The Investor understands that no disposition or transfer of the
Securities may be made by Investor in the absence of (i) an opinion of counsel
to the Investor, in form and substance reasonably satisfactory to the Company,
that such transfer may be made without registration under the Securities Act,
pursuant to Regulation D or another exemption, or (ii) such registration.
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With a view to making available to the Investor the benefits
of Rule 144 the Company agrees to:
(a) comply with the provisions of paragraph (c)(1) of Rule
144; and
(b) file with the Commission in a timely manner all reports
and other documents required to be filed with the Commission pursuant to Section
13 or 15(d) under the Exchange Act by companies subject to either of such
sections, irrespective of whether the Company is then subject to such reporting
requirements.
Section 3. REGISTRATION RIGHTS WITH RESPECT TO THE SECURITIES.
(a) The Company agrees that it will prepare and file with the
SEC, within sixty (60) days of the filing of the Company's Form 10-K for the
fiscal year ended December 31, 1999, a registration statement (on Form S-3, S-1
or other appropriate form of registration statement) under the Securities Act
(the "Registration Statement"), at the sole expense of the Company (except as
provided in Section 3(c) hereof), so as to permit a public offering and resale
of the Securities under the Securities Act by the Investor.
The Company shall use its best efforts to cause such
Registration Statement to become effective within ninety (90) days from the date
of filing the Registration Statement, or, if earlier, within five (5) days of
SEC clearance to request acceleration of effectiveness. The Registration
Statement shall include appropriate language regarding reliance upon Rule 416 to
the extent permitted by the Commission. The Company will notify Investor of the
effectiveness of the Registration Statement within one (1) Trading Day of such
event. In the event that the number of shares so registered shall for any reason
prove to be insufficient to register the resale of all of the Securities, then
the Company shall be obligated to file, within thirty (30) days of notice from
Investor, a further Registration Statement registering such remaining shares and
shall use diligent best efforts to prosecute such additional Registration
Statement to effectiveness within ninety (90) days of the date of such notice.
(b) The Company will maintain the Registration Statement or
post-effective amendment filed under this Section 3 effective under the
Securities Act until the earlier of (i) the date that none of the Securities
covered by such Registration Statement are or may become issued and outstanding,
(ii) the date that all of the Securities have been sold pursuant to such
Registration Statement, (iii) the date the Investor receives an opinion of
counsel to the Company, which counsel shall be reasonably acceptable to the
Investor, that the Securities may be sold under the provisions of Rule 144
without limitation as to volume, (iv) all Securities have been otherwise
transferred to persons who may trade such shares without restriction under the
Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend, (v)
three (3) years from the Effective Date, or (vi) all Securities may be sold
without any time, volume or manner limitations pursuant to Rule 144(k) or any
similar provision then in effect under the Securities Act in the opinion of
counsel to the Company, which counsel shall be reasonably acceptable to the
Investor (the "Effectiveness Period").
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(c) All fees, disbursements and out-of-pocket expenses and
costs incurred by the Company in connection with the preparation and filing of
the Registration Statement under subparagraph 3(a) and in complying with
applicable securities and Blue Sky laws (including, without limitation, all
attorneys' fees of the Company) shall be borne by the Company. The Investor
shall bear the cost of underwriting and/or brokerage discounts, fees and
commissions, if any, applicable to the Securities being registered and the fees
and expenses of its counsel. The Investor and its counsel shall have a
reasonable period, not to exceed five (5) Trading Days, to review the proposed
Registration Statement or any amendment thereto, prior to filing with the
Commission, and the Company shall provide Investor with copies of any comment
letters received from the Commission with respect thereto within two (2) Trading
Days of receipt thereof. The Company shall qualify any of the securities for
sale in such states as Investor reasonably designates and shall furnish
indemnification in the manner provided in Section 6 hereof. However, the Company
shall not be required to qualify in any state which will require an escrow or
other restriction relating to the Company and/or the sellers, or which will
require the Company to qualify to do business in such state or require the
Company to file therein any general consent to service of process. The Company
at its expense will supply the Investor with copies of the applicable
Registration Statement and the prospectus included therein and other related
documents in such quantities as may be reasonably requested by the Investor.
(d) The Company shall not be required by this Section 3 to
include an Investor's Securities in any Registration Statement which is to be
filed if, in the opinion of counsel for both the Investor and the Company (or,
should they not agree, in the opinion of another counsel experienced in
securities law matters acceptable to counsel for the Investor and the Company)
the proposed offering or other transfer as to which such registration is
requested is exempt from applicable federal and state securities laws and would
result in all purchasers or transferees obtaining securities which are not
"restricted securities", as defined in Rule 144 under the Securities Act.
(e) In the event that (i) the Registration Statement to be
filed by the Company pursuant to Section 3(a) above is not filed with the SEC
within sixty (60) days from the filing of the Company's Form 10-K, (ii) such
Registration Statement is not declared effective by the Commission within the
earlier of ninety (90) days from the filing date or five (5) days of clearance
by the Commission to request effectiveness, (iii) such Registration Statement is
not maintained as effective by the Company for the period set forth in Section
3(b) above or (iv) the additional Registration Statement referred to in Section
3(a) is not filed within thirty (30) days or declared effective within ninety
(90) days as set forth therein (each a "Registration Default") then the Company
will pay Investor (pro rated on a daily basis), as liquidated damages for such
failure and not as a penalty one percent (1%) of the purchase price of the
shares of Common Stock purchased from the Company under the Purchase Agreement
and actually held by the Investor for each month from the date of such
Registration Default until such Registration Statement has been filed, and in
the event of late effectiveness (in case of clause (ii) above) or lapsed
effectiveness (in the case of clause (iii) above), one percent (1%) of the
purchase price of the shares of Common Stock purchased from the Company under
the Purchase Agreement and actually held by the Investor for each month
(regardless of whether one or more such Registration Defaults are then in
existence) until such Registration Statement has been declared
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effective. Such payment of the liquidated damages shall be made to the Investor
in cash or in shares of Common Stock, as elected by the Company in its
discretion, within five (5) calendar days of demand, provided, however, that the
payment of such liquidated damages shall not relieve the Company from its
obligations to register the Securities pursuant to this Section. Notwithstanding
anything to the contrary contained herein, a failure to maintain the
effectiveness of a filed Registration Statement or the ability of an Investor to
use an otherwise effective Registration Statement to effect resales of
Securities during the period after 45 days and within 90 days from the end of
the Company's fiscal year resulting solely from the need to update the Company's
financial statements contained or incorporated by reference in such Registration
Statement shall not constitute a Registration Default and shall not trigger the
accrual of liquidated damages hereunder.
If the Company does not remit the payment to the Investor as
set forth above, the Company will pay the Investor reasonable costs of
collection, including attorneys' fees, in addition to the liquidated damages.
The registration of the Securities pursuant to this provision shall not affect
or limit the Investor's other rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company
from selling securities pursuant to any Registration Statement in which it is
required to include Securities pursuant to this Section 3.
(g) If at any time or from time to time after the effective
date of any Registration Statement, the Company notifies the Investor in writing
of the existence of a Potential Material Event (as defined in Section 3(h)
below), the Investor shall not offer or sell any Securities or engage in any
other transaction involving or relating to Securities, from the time of the
giving of notice with respect to a Potential Material Event until the Investor
receives written notice from the Company that such Potential Material Event
either has been disclosed to the public or no longer constitutes a Potential
Material Event; provided, however, that the Company may not so suspend the right
to such holders of Securities for more than thirty (30) days in the aggregate
during any twelve month period, during the period the Registration Statement is
required to be in effect, and if such period is exceeded, such event shall be a
Registration Default. If a Potential Material Event shall occur prior to the
date a Registration Statement is required to be filed, then the Company's
obligation to file such Registration Statement shall be delayed without penalty
for not more than thirty (30) days, and such delay or delays shall not
constitute a Registration Default. The Company must, if lawful, give the
Investor notice in writing at least two (2) Trading Days prior to the first day
of the blackout period.
(h) "Potential Material Event" means any of the following: (a)
the possession by the Company of material information not ripe for disclosure in
a registration statement, as determined in good faith by the Chief Executive
Officer or the Board of Directors of the Company that disclosure of such
information in a Registration Statement would be detrimental to the business and
affairs of the Company; or (b) any material engagement or activity by the
Company which would, in the good faith determination of the Chief Executive
Officer or the Board of Directors of the Company, be adversely affected by
disclosure in a registration statement at such time, which determination shall
be accompanied by a good faith
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determination by the Chief Executive Officer or the Board of Directors of the
Company that the applicable Registration Statement would be materially
misleading absent the inclusion of such information.
Section 4. COOPERATION WITH COMPANY. The Investor will
cooperate with the Company in all respects in connection with this Agreement,
including timely supplying all information reasonably requested by the Company
(which shall include all information regarding the Investor and proposed manner
of sale of the Registrable Securities required to be disclosed in any
Registration Statement) and executing and returning all documents reasonably
requested in connection with the registration and sale of the Registrable
Securities and entering into and performing their obligations under any
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering. Nothing in this Agreement shall obligate Investor to
consent to be named as an underwriter in any Registration Statement. The
obligation of the Company to register the Registrable Securities shall be
absolute and unconditional as to those Securities which the Commission will
permit to be registered without naming the Investor as underwriter. Any delay or
delays caused by the Investor by failure to cooperate as required hereunder
shall not constitute a Registration Default.
Section 5. REGISTRATION PROCEDURES. If and whenever the
Company is required by any of the provisions of this Agreement to effect the
registration of any of the Registrable Securities under the Act, the Company
shall (except as otherwise provided in this Agreement), as expeditiously as
possible, subject to the Investor's assistance and cooperation as reasonably
required with respect to each Registration Statement:
(a)(i) prepare and file with the Commission such amendments
and supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary to keep such Registration Statement
effective and to comply with the provisions of the Act with respect to the sale
or other disposition of all securities covered by such registration statement
whenever the Investor shall desire to sell or otherwise dispose of the same
(including prospectus supplements with respect to the sales of securities from
time to time in connection with a registration statement pursuant to Rule 415
promulgated under the Act) and (ii) take all lawful action such that each of (A)
the Registration Statement and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (B) the prospectus forming part of the Registration Statement,
and any amendment or supplement thereto, does not at any time during the
Registration Period include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(b)(i) prior to the filing with the Commission of any
Registration Statement (including any amendments thereto) and the distribution
or delivery of any prospectus (including any supplements thereto), provide draft
copies thereof to the Investor as required by Section 3(c) and reflect in such
documents all such comments as the Investor (and their counsel) reasonably may
propose and (ii) furnish to Investor such numbers of copies of a prospectus
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including a preliminary prospectus or any amendment or supplement to any
prospectus, as applicable, in conformity with the requirements of the Act, and
such other documents, as Investor may reasonably request in order to facilitate
the public sale or other disposition of the securities owned by Investor;
(c) register and qualify the Registrable Securities covered by
the Registration Statement under such other securities or blue sky laws of such
jurisdictions as the Investor shall reasonably request (subject to the
limitations set forth in Section 3(C) above), and do any and all other acts and
things which may be necessary or advisable to enable Investor to consummate the
public sale or other disposition in such jurisdiction of the securities owned by
Investor;
(d) list such Registrable Securities on the Principal Market,
if the listing of such Registrable Securities is then permitted under the rules
of such Principal Market;
(e) notify Investor at any time when a prospectus relating
thereto covered by the Registration Statement is required to be delivered under
the Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing, and the Company
shall prepare and file a curative amendment under Section 5(a) as quickly as
commercially possible;
(f) as promptly as practicable after becoming aware of such
event, notify Investor (or, in the event of an underwritten offering, the
managing underwriters) of the issuance by the Commission of any stop order or
other suspension of the effectiveness of the Registration Statement at the
earliest possible time and take all lawful action to effect the withdrawal,
recession or removal of such stop order or other suspension;
(g) cooperate with the Investor to facilitate the timely
preparation and delivery of certificates for the Registrable Securities to be
offered pursuant to the Registration Statement and enable such certificates for
the Registrable Securities to be in such denominations or amounts, as the case
may be, as the Investor reasonably may request and registered in such names as
the Investor may request; and, within three (3) Trading Days after a
Registration Statement which includes Registrable Securities is declared
effective by the Commission, deliver and cause legal counsel selected by the
Company to deliver to the transfer agent for the Registrable Securities (with
copies to the Investor) an appropriate instruction and, to the extent necessary,
an opinion of such counsel;
(h) take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Investor of their Registrable
Securities in accordance with the intended methods therefor provided in the
prospectus which are customary for issuers to perform under the circumstances;
(i) in the event of an underwritten offering, promptly include
or incorporate in a prospectus supplement or post-effective amendment to the
Registration
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Statement such information as the managers reasonably agree should be included
therein and to which the Company does not reasonably object and make all
required filings of such prospectus supplement or post-effective amendment as
soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment; and
(j) maintain a transfer agent and registrar for its Common
Stock.
Section 6. INDEMNIFICATION.
(a) To the maximum extent permitted by law, the Company agrees
to indemnify and hold harmless the Investor and each person, if any, who
controls an Investor within the meaning of the Securities Act (each a
"Distributing Investor") against any losses, claims, damages or liabilities,
joint or several (which shall, for all purposes of this Agreement, include, but
not be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees and expenses), to which the Distributing Investor may
become subject, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, or any related final prospectus or
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the Company will not be liable in any such case to the extent, and
only to the extent, that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such Registration Statement, preliminary prospectus,
final prospectus or amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by the
Distributing Investor, its counsel, affiliates or any underwriter, specifically
for use in the preparation thereof. This Section 6(a) shall not inure to the
benefit of any Distributing Investor with respect to any person asserting such
loss, claim, damage or liability who purchased the Registrable Securities which
are the subject thereof if the Distributing Investor failed to send or give (in
violation of the Securities Act or the rules and regulations promulgated
thereunder) a copy of the prospectus contained in such Registration Statement to
such person at or prior to the written confirmation to such person of the sale
of such Registrable Securities, where the Distributing Investor was obligated to
do so under the Securities Act or the rules and regulations promulgated
thereunder. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) To the maximum extent permitted by law, each Distributing
Investor agrees that it will indemnify and hold harmless the Company, and each
officer and director of the Company or person, if any, who controls the Company
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities (which shall, for all purposes of this Agreement, include, but not
be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees and expenses) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any Registration
Statement, or any related final prospectus or amendment or supplement thereto,
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or arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in such Registration Statement, final prospectus or amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by such Distributing Investor, its counsel, affiliates or any
underwriter, specifically for use in the preparation thereof. This indemnity
agreement will be in addition to any liability which the Distributing Investor
may otherwise have. Notwithstanding the foregoing, the liability of the Investor
hereunder shall not exceed the net proceeds to the Investor from the sale of the
Securities.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action against such indemnified
party, such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 6, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve the indemnifying party from any liability
which it may have to any indemnified party except to the extent the failure of
the indemnified party to provide such written notification actually prejudices
the ability of the indemnifying party to defend such action. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, assume the defense thereof,
subject to the provisions herein stated and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this Section 6 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless the indemnifying party shall not
pursue the action to its final conclusion. The indemnified parties as a group
shall have the right to employ one separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party unless (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party and the indemnified party shall
have been advised by its counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the indemnified party or any other
indemnified party (in which case the indemnifying party shall not have the right
to assume the defense of such action on behalf of such indemnified party, it
being understood, however, that the indemnifying party shall, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable only for the reasonable fees and expenses of one
separate firm of attorneys for the indemnified party, which firm shall be
designated in writing by the indemnified party). No settlement of any action
against an indemnified party shall be made without the prior written consent of
the indemnified party, which consent shall not be unreasonably withheld so long
as such settlement includes a full release of claims against the indemnified
party. The indemnifying party shall advance the expenses of the indemnified
party
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upon 10 days' prior written notice, upon an undertaking by the indemnified party
to repay such advances if the indemnified party is ultimately determined by a
court of competent jurisdiction to not be entitled to such indemnification.
Section 7. CONTRIBUTION. In order to provide for just and
equitable contribution under the Securities Act in any case in which (i) the
indemnified party makes a claim for indemnification pursuant to Section 6 hereof
but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that the express provisions of
Section 6 hereof provide for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any indemnified party,
then the Company and the applicable Distributing Investor shall contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees and expenses), in either such case (after contribution from
others) on the basis of relative fault as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the applicable
Distributing Investor on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Distributing Investor agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in this
Section 7. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this Section 7 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
Notwithstanding any other provision of this Section 7, in no event shall any (i)
Investor be required to undertake liability to any person under this Section 7
for any amounts in excess of the dollar amount of the proceeds received by such
Investor from the sale of such Investor's Registrable Securities (after
deducting any fees, discounts and commissions applicable thereto) pursuant to
any Registration Statement under which such Registrable Securities are
registered under the Securities Act and (ii) underwriter be required to
undertake liability to any person hereunder for any amounts in excess of the
aggregate discount, commission or other compensation payable to such underwriter
with respect to the Registrable Securities underwritten by it and distributed
pursuant to such Registration Statement.
Section 8. NOTICES. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and shall be delivered as set forth in the Purchase Agreement.
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Section 9. ASSIGNMENT. This Agreement is binding upon and
inures to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns. The rights granted the Investor under this
Agreement may be assigned to any purchaser of substantially all of the
Registrable Securities (or the rights thereto) from an Investor, as otherwise
permitted by the Purchase Agreement.
Section 10. ADDITIONAL COVENANTS OF THE COMPANY. The Company
agrees that at such time as it otherwise meets the requirements for the use of
Securities Act Registration Statement on Form S-3 for the purpose of registering
the Registrable Securities, it shall file all reports and information required
to be filed by it with the Commission in a timely manner and take all such other
action so as to maintain such eligibility for the use of such form.
Section 11. COUNTERPARTS/FACSIMILE. This Agreement may be
executed in two or more counterparts, each of which shall constitute an
original, but all of which, when together shall constitute but one and the same
instrument, and shall become effective when one or more counterparts have been
signed by each party hereto and delivered to the other parties. In lieu of the
original, a facsimile transmission or copy of the original shall be as effective
and enforceable as the original.
Section 12. REMEDIES. The remedies provided in this Agreement
are cumulative and not exclusive of any remedies provided by law. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction.
Section 13. CONFLICTING AGREEMENTS. The Company shall not
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the holders of Registrable Securities in this
Agreement or otherwise prevents the Company from complying with all of its
obligations hereunder.
Section 14. HEADINGS. The headings in this Agreement
are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
Section 15. GOVERNING LAW, ARBITRATION. This Agreement shall
be governed by and construed in accordance with the laws of the State of New
York applicable to contracts made in New York by persons domiciled in New York
City and without regard to its principles of conflicts of laws. Any dispute
under this Agreement shall be submitted to arbitration under the American
Arbitration Association (the "AAA") in New York City, New York, and shall be
finally and conclusively determined by the decision of a board of arbitration
consisting of three (3)
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members (hereinafter referred to as the "Board of Arbitration") selected as
according to the rules governing the AAA. The Board of Arbitration shall meet on
consecutive business days in New York City, New York, and shall reach and render
a decision in writing (concurred in by a majority of the members of the Board of
Arbitration) with respect to the amount, if any, which the losing party is
required to pay to the other party in respect of a claim filed. In connection
with rendering its decisions, the Board of Arbitration shall adopt and follow
the laws of the State of New York. To the extent practical, decisions of the
Board of Arbitration shall be rendered no more than thirty (30) calendar days
following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all parties
involved in the dispute. Any decision made by the Board of Arbitration (either
prior to or after the expiration of such thirty (30) calendar day period) shall
be final, binding and conclusive on the parties to the dispute, and entitled to
be enforced to the fullest extent permitted by law and entered in any court of
competent jurisdiction. The Board of Arbitration shall be authorized and is
hereby directed to enter a default judgment against any party failing to
participate in any proceeding hereunder within the time periods set forth in the
AAA rules. The prevailing party shall be awarded its costs, including attorneys'
fees, from the non-prevailing party as part of the arbitration award. Any party
shall have the right to seek injunctive relief from any court of competent
jurisdiction in any case where such relief is available. The prevailing party in
such injunctive action shall be awarded its costs, including attorney's fees,
from the non-prevailing party.
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be duly executed, on the day and year first
above written.
NetLojix Communications, Inc.
By: MICHAEL J. USSERY
--------------------
Michael J. Ussery, Chief Financial Officer
INVESTOR:
AMRO International, S.A.
By: H. U. BACHOFEN
--------------------
H. U. Bachofen, Director
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EXHIBIT 10.18
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR ANY OTHER APPLICABLE STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PURSUANT TO REGULATION D AND
SUCH OTHER SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON
EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE
PROVISIONS OF THE SECURITIES ACT AND ANY APPLICABLE STATE LAWS, AND IN THE CASE
OF AN EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT
SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF THE WARRANT OR SUCH SHARES,
WHICH OPINION AND WHICH COUNSEL SHALL BE SATISFACTORY TO THE COMPANY IN ITS SOLE
DISCRETION.
STOCK PURCHASE WARRANT
To Purchase 75,000 Shares of Common Stock of
NetLojix Communications, Inc.
THIS CERTIFIES that, for value received, AMRO International, S.A. (the
"Holder"), is entitled, upon the terms and subject to the limitations on
exercise and the conditions hereinafter set forth, at any time on or after
September 1, 2000 (the "Initial Exercise Date") and on or prior to the close
of business on March 1, 2003 (the "Termination Date") but not thereafter, to
subscribe for and purchase from NetLojix Communications, Inc., a corporation
incorporated in the State of Delaware (the "Company"), up to seventy-five
thousand (75,000) shares (the "Warrant Shares") of Common Stock, $.01 par
value, of the Company (the "Common Stock"). The purchase price of one share
of Common Stock (the "Exercise Price") under this Warrant shall be $5.25. The
Exercise Price and the number of shares for which the Warrant is exercisable
shall be subject to adjustment as provided herein. In the event of any
conflict between the terms of this Warrant and the Common Stock and Warrant
Purchase Agreement dated as of March 2, 2000 pursuant to which this Warrant
has been issued (the "Purchase Agreement"), the Purchase Agreement shall
control. Capitalized terms used and not otherwise defined herein shall have
the meanings set forth for such terms in the Purchase Agreement.
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1. TITLE TO WARRANT. Prior to the Termination Date and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. AUTHORIZATION OF SHARES. The Company covenants that all shares
of Common Stock which may be issued upon the exercise of rights represented by
this Warrant will, upon exercise of the rights represented by this Warrant, be
duly authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. EXERCISE OF WARRANT.
(a) Except as provided in Section 4 herein, exercise of the
purchase rights represented by this Warrant may be made at any time or
times on or after the Initial Exercise Date, and before the close of
business on the Termination Date by the surrender of this Warrant and
the Notice of Exercise Form annexed hereto duly executed, at the office
of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the
address of such holder appearing on the books of the Company) and upon
payment of the Exercise Price of the shares thereby purchased by wire
transfer or cashier's check drawn on a United States bank, the holder
of this Warrant shall be entitled to receive a certificate for the
number of shares of Common Stock so purchased. Certificates for shares
purchased hereunder shall be delivered to the holder hereof within
three (3) Trading Days after the date on which this Warrant shall have
been exercised as aforesaid. This Warrant shall be deemed to have been
exercised and such certificate or certificates shall be deemed to have
been issued, and Holder or any other person so designated to be named
therein shall be deemed to have become a holder of record of such
shares for all purposes, as of the date the Warrant has been exercised
by payment to the Company of the Exercise Price and all taxes required
to be paid by Holder, if any, pursuant to Section 5 prior to the
issuance of such shares, have been paid.
(b) If this Warrant shall have been exercised in part, the
Company shall, at the time of delivery of the certificate or
certificates representing Warrant Shares, deliver to Holder a new
Warrant evidencing the rights of Holder to purchase the unpurchased
shares of Common Stock called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant.
(c) If no registration statement is effective permitting the
resale of the shares of Common Stock issued upon exercise of this
Warrant at any time commencing one year after the issuance date hereof,
then this Warrant shall also be exercisable by means of a "cashless
exercise" in which the holder shall be entitled to receive a
certificate for the number of shares equal to the quotient obtained by
dividing [(A-B) (X)] by (A), where:
(A) = the average of the high and low trading prices per share of Common Stock
on the Trading Day preceding the date of such election on the Nasdaq Stock
Market, or if the Common Stock is
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not traded on the Nasdaq Stock Market, then the principal market in terms of
volume, and converted into US Dollars;
(B) = the Exercise Price of the Warrants; and
(X) = the number of shares issuable upon exercise of the Warrants in accordance
with the terms of this Warrant.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the Exercise Price.
5. CHARGES, TAXES AND EXPENSES. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and the Company may require, as a condition
thereto, the payment of a sum sufficient to reimburse it for any transfer tax
incidental thereto.
6. CLOSING OF BOOKS. The Company will not close its shareholder
books or records in any manner which prevents the timely exercise of this
Warrant.
7. TRANSFER, DIVISION AND COMBINATION. (a) Subject to compliance
with any applicable securities laws, transfer of this Warrant and all rights
hereunder, in whole or in part, shall be registered on the books of the Company
to be maintained for such purpose, upon surrender of this Warrant at the
principal office of the Company, together with a written assignment of this
Warrant substantially in the form attached hereto duly executed by Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer. Upon such surrender and, if required, such payment,
the Company shall execute and deliver a new Warrant or Warrants in the name of
the assignee or assignees and in the denomination or denominations specified in
such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised by a
new holder for the purchase of shares of Common Stock without having a new
Warrant issued.
(b) This Warrant may be divided or combined with other
Warrants upon presentation hereof at the aforesaid office of the Company,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued, signed by Holder or its agent or attorney.
Subject to compliance with Section 7(a), as to any transfer which may be
involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided
or combined in accordance with such notice.
E-71
<PAGE>
(c) The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 7.
(d) The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the Warrants.
8. NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise hereof. Upon the surrender of this Warrant
and the payment of the aggregate Exercise Price, the Warrant Shares so purchased
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the later of the date of such surrender or
payment.
9. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant certificate
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it
(which shall not include the posting of any bond), and upon surrender and
cancellation of such Warrant or stock certificate, if mutilated, the Company
will make and deliver a new Warrant or stock certificate of like tenor and dated
as of such cancellation, in lieu of such Warrant or stock certificate.
10. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed
day for the taking of any action or the expiration of any right required or
granted herein shall be a Saturday, Sunday or a legal holiday, then such action
may be taken or such right may be exercised on the next succeeding day not a
Saturday, Sunday or legal holiday.
11. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.
(a) STOCK SPLITS, ETC. The number and kind of securities purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
from time to time upon the happening of any of the following. In case the
Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the kind
and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment made pursuant to
this paragraph shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
E-72
<PAGE>
(b) REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS. In case the Company shall reorganize its
capital, reclassify its capital stock, consolidate or merge with or
into another corporation (where the Company is not the surviving
corporation or where there is a change in or distribution with respect
to the Common Stock of the Company), or sell, transfer or otherwise
dispose of all or substantially all its property, assets or business to
another corporation and, pursuant to the terms of such reorganization,
reclassification, merger, consolidation or disposition of assets,
shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase
rights) in addition to or in lieu of common stock of the successor or
acquiring corporation ("Other Property"), are to be received by or
distributed to the holders of Common Stock of the Company, then Holder
shall have the right thereafter to receive, upon exercise of this
Warrant, the number of shares of common stock of the successor or
acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition
of assets by a holder of the number of shares of Common Stock for which
this Warrant is exercisable immediately prior to such event. In case of
any such reorganization, reclassification, merger, consolidation or
disposition of assets, the successor or acquiring corporation (if other
than the Company) shall expressly assume the due and punctual
observance and performance of each and every covenant and condition of
this Warrant to be performed and observed by the Company and all the
obligations and liabilities hereunder, subject to such modifications as
may be deemed appropriate (as determined in good faith by resolution of
the Board of Directors of the Company) in order to provide for
adjustments of shares of Common Stock for which this Warrant is
exercisable which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section 11. For purposes of this
Section 11, "common stock of the successor or acquiring corporation"
shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of
such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for any such
stock, either immediately or upon the arrival of a specified date or
the happening of a specified event and any warrants or other rights to
subscribe for or purchase any such stock. The foregoing provisions of
this Section 11 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
12. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may at any
time during the term of this Warrant, reduce the then current Exercise Price to
any amount and for any period of time deemed appropriate by the Board of
Directors of the Company.
13. NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares (and other securities or property) after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was
E-73
<PAGE>
made. Such notice, in the absence of manifest error, shall be conclusive
evidence of the correctness of such adjustment.
14. NOTICE OF CORPORATE ACTION. If at any time:
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; then, in any one or more of such
cases, the Company shall give to Holder (i) at least 30 days' prior written
notice of the date on which a record date shall be selected for such dividend,
distribution or right or for determining rights to vote in respect of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, liquidation or winding up, and (ii) in the case of any such
reorganization, reclassification, merger, consolidation, sale, transfer,
disposition, dissolution, liquidation or winding up, at least 30 days' prior
written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause also shall specify (i) the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, the date on which the holders of Common Stock shall be entitled to any
such dividend, distribution or right, and the amount and character thereof, and
(ii) the date on which any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up is to take place and the time, if any such time is to be fixed, as of which
the holders of Common Stock shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such disposition,
dissolution, liquidation or winding up. Each such written notice shall be
sufficiently given if addressed to Holder at the last address of Holder
appearing on the books of the Company and delivered in accordance with Section
16(d).
15. AUTHORIZED SHARES. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any purchase rights under this
Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure
that such Warrant Shares may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of the Principal Market
upon which the Common Stock may be listed.
The Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid
E-74
<PAGE>
or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder against impairment. Without limiting
the generality of the foregoing, the Company will (a) not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above
the amount payable therefor upon such exercise immediately prior to such
increase in par value, (b) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of this Warrant, and
(c) use its best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment
in the number of shares of Common Stock for which this Warrant is exercisable or
in the Exercise Price, the Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
16. Miscellaneous.
(a) JURISDICTION. This Warrant shall be binding upon any
successors or assigns of the Company. This Warrant shall constitute a contract
under the laws of New York, without regard to its conflict of law, principles or
rules, and be subject to arbitration pursuant to the terms set forth in the
Purchase Agreement.
(b) RESTRICTIONS. The holder hereof acknowledges that the
Warrant Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal securities laws.
(c) NONWAIVER AND EXPENSES. No course of dealing or any delay
or failure to exercise any right hereunder on the part of Holder shall operate
as a waiver of such right or otherwise prejudice Holder's rights, powers or
remedies, notwithstanding all rights hereunder terminate on the Termination
Date. If the Company fails to comply with any provision of this Warrant, the
Company shall pay to Holder such amounts as shall be sufficient to cover any
costs and expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by Holder in collecting any
amounts due pursuant hereto or in otherwise enforcing any of its rights, powers
or remedies hereunder.
(d) NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof by the Company shall be
delivered in accordance with the notice provisions of the Purchase Agreement.
(e) LIMITATION OF LIABILITY. No provision hereof, in the
absence of affirmative action by Holder to purchase shares of Common Stock, and
no enumeration herein of the
E-75
<PAGE>
rights or privileges of Holder hereof, shall give rise to any liability of
Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
(f) REMEDIES. Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Warrant. The
Company agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of the provisions of this
Warrant and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate.
(g) SUCCESSORS AND ASSIGNS. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
successors and permitted assigns of Holder. The provisions of this Warrant are
intended to be for the benefit of all Holders from time to time of this Warrant
and shall be enforceable by any such Holder or holder of Warrant Shares.
(h) INDEMNIFICATION. The Company agrees to indemnify and hold
harmless Holder from and against any liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses
and disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; PROVIDED,
HOWEVER, that the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
(i) AMENDMENT. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and the Holder.
(j) SEVERABILITY. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.
(k) HEADINGS. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
E-76
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated: March 2, 2000
NETLOJIX COMMUNICATIONS, INC.
By: /s/ MICHAEL J. USSERY
---------------------
Michael J. Ussery, Chief Financial Officer
E-77
<PAGE>
NOTICE OF EXERCISE
To: NetLojix Communications, Inc.
(1) The undersigned hereby elects to purchase ________ shares
of Common Stock (the "Common Stock"), of NetLojix Communications, Inc.
pursuant to the terms of the attached Warrant, and tenders herewith payment
of the exercise price in full, together with all applicable transfer taxes,
if any.
(2) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other
name as is specified below:
----------------------------------------
(Name)
----------------------------------------
(Address)
----------------------------------------
Dated:
------------------------------
Signature
E-78
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_________________________________________________________________
_________________________________________________________________
Dated: ______________, _______
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
E-79
<PAGE>
EXHIBIT 10.19
March 1, 2000
Tony Papa, CEO
Michael Ussery, CFO
NetLojix Communications, Inc./
Remote Lojix, PCSI, Inc.
501 Bath St.
Santa Barbara, Ca. 93101
VIA FACSIMILE
Gentlemen:
The following outlines the parameters of the Coast Business Credit ("Coast")
proposed financing for NetLojix Communications, Inc. ("NetLojix"):
<TABLE>
<CAPTION>
- ---------------------------- ------------------------- ----------------------------------------
EXISTING COAST DEAL PROPOSAL TO NETLOJX @ 3-01-00
WITH AVTEL/MATRIX
- ---------------------------- ------------------------- ----------------------------------------
<S> <C> <C>
Borrower 1: Matrix Telecom NetLojix
(secured) (secured)
- ---------------------------- ------------------------- ----------------------------------------
Borrower 2: Avtel(NetLojix) Remote Lojix/PCSI Inc. (secured)
(secured)
- ---------------------------- ------------------------- ----------------------------------------
Borrower 3: Remote Lojix (secured)
- ---------------------------- ------------------------- ----------------------------------------
Credit Limit $7,500M $3,000M
- ---------------------------- ------------------------- ----------------------------------------
AR formula 75% advance rate 75% Advance Rate. At Coast's
discretion, increase advance rate to
80% upon Dilution less than 10% &
EBITDA/Interest Coverage of at least
1.1:1; if future audited FS report
material negative differences, 75%
advance rate will be reinstated.
- ---------------------------- ------------------------- ----------------------------------------
Unbilled Receivables Yes Immediately available on Business
Markets Group Receivables at a 75%
advance rate of eligible unbilled AR.
Available with Remote Lojix upon
NetLojix (parent) achieving &
maintaining EBITDA/Interest
Coverage Ratio of 1.15:1 for 3
consecutive months.
- ---------------------------- ------------------------- ----------------------------------------
</TABLE>
E-80
<PAGE>
<TABLE>
<S> <C> <C>
- ---------------------------- ------------------------- ----------------------------------------
$750,000. Sublimit
- ---------------------------- ------------------------- ----------------------------------------
Unbilled Reserves $500M on Matrix AR NA
availability
- ---------------------------- ------------------------- ----------------------------------------
90 day AR eligibility Yes Yes
- ---------------------------- ------------------------- ----------------------------------------
Min. Interest Based on $1,500M in Based on $750M for 6 months;
borrowings $1,000M thereafter.
- ---------------------------- ------------------------- ----------------------------------------
Interest Rate P+2% P+2%
- ---------------------------- ------------------------- ----------------------------------------
Loan Fee $75M (Paid) $30M (restructure fee)
- ---------------------------- ------------------------- ----------------------------------------
Float 2 business days 2 bus days
- ---------------------------- ------------------------- ----------------------------------------
CAPEX facility Yes NO
- ---------------------------- ------------------------- ----------------------------------------
LC facility Yes YES
- ---------------------------- ------------------------- ----------------------------------------
Facility Fee $1,500/Qrt $1,500M/Quarter
- ---------------------------- ------------------------- ----------------------------------------
Early Termination fee 2% in Yr 1, 1% in Yr 2 2% Yr. 1, 1% in Yr. 2
- ---------------------------- ------------------------- ----------------------------------------
Maturity Date 9-30-2000 1-31-2002
- ---------------------------- ------------------------- ----------------------------------------
</TABLE>
CONDITIONS PRECEDENT:
- - Coast audit of NetLojix & Remote Lojix/PCSI Inc.
- - 2-year Projections approved by Coast.
- - NetLojix (parent) must maintain a minimum Net Worth of $3,000,000 measured
on a monthly basis (subject to change with any Balance Sheet adjustment
from Matrix sale). Net Worth less than $3,000,000 will be an event of
default
- - Company must retain 80% of Actual Net Income
- - All taxes to be current at funding and ongoing.
- - Availability at funding of $250,000
- - Addictive Media & Westnet Communications (currently non-borrowing
subsidiaries) may be added as co-borrowers & AR Collateral considered in
the borrowing base only upon future satisfactory Coast audit &
Documentation
- - First security interest in all tangible and intangible assets of NetLojix
Communications, Inc., and subsidiaries
- - No up-streaming, down-streaming, side-streaming of any funds to affiliates
- - Collections to be remitted via lockbox
The purpose of this letter is to express Credit Committee's Approval only and it
should not be viewed as a commitment to fund. Any funding would require
satisfactory performance of conditions precedent and items customary to asset
based lending, including documentation acceptable to Coast and to our attorneys.
If the forgoing correctly sets forth the general terms of the desired
transaction, please sign below & return to Coast by the close of business on
03-02-00 to proceed with documentation, otherwise we'll make arrangements to
terminate the present lending arrangement.
E-81
<PAGE>
We look forward to your approval.
Sincerely,
COAST BUSINESS CREDIT
/s/ R. BRITTON TERRELL
R. Britton Terrell
Vice President
AGREED & ACKNOWLEDGED:
NETLOJIX COMMUNICATIONS, INC. REMOTE LOJIX/PCSI, INC.
BY: /s/ ANTHONY E. PAPA BY: /s/ ANTHONY E. PAPA
---------------------------- ---------------------------
TITLE: CHIEF EXECUTIVE OFFICER TITLE: CHIEF EXECUTIVE OFFICER
E-82
<PAGE>
EXHIBIT 21
List of Subsidiaries
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
<S> <C>
AvTel Holdings, Inc. California
Digital Media International, Inc. Pennsylvania
DNS Communications, Inc. Texas
NetLojix Telecom, Inc. Delaware
Remote Lojix/PCSI, Inc. New York
Remote Lojix of Connecticut, Inc. Connecticut
Remote Lojix Technology Partners, Inc. New York
Westnet Communications, Inc. California
</TABLE>
E-83
<PAGE>
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
NetLojix Communications, Inc.:
We consent to incorporation by reference in the Registration Statements (No.
333-78963) on Form S-3 and (Nos. 333-30725, 333-53435, and 333-64769) on Form
S-8 of NetLojix Communications, Inc. (formerly AvTel Communications, Inc.) of
our report dated February 18, 2000, except as to Note 13, which is as of March
2, 2000, relating to the consolidated balance sheets of NetLojix Communications,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows and
related schedule, for each of the years in the three-year period ended December
31, 1999, which report appears in the December 31, 1999 annual report on Form
10-K of NetLojix Communications, Inc.
KPMG LLP
Dallas, Texas
March 27, 2000
E-84
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,135
<SECURITIES> 0
<RECEIVABLES> 2,472
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,304
<PP&E> 918
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,956
<CURRENT-LIABILITIES> 4,657
<BONDS> 0
0
1
<COMMON> 126
<OTHER-SE> 6,172
<TOTAL-LIABILITY-AND-EQUITY> 10,956
<SALES> 0
<TOTAL-REVENUES> 16,864
<CGS> 0
<TOTAL-COSTS> 9,383
<OTHER-EXPENSES> 12,371
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> (4,947)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,947)
<DISCONTINUED> 2,750
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,198)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
<FN>
<F1>
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1999.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 222
<SECURITIES> 0
<RECEIVABLES> 1,295
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,956
<PP&E> 1,039
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,725
<CURRENT-LIABILITIES> 6,040
<BONDS> 0
0
1
<COMMON> 103
<OTHER-SE> 4,406
<TOTAL-LIABILITY-AND-EQUITY> 10,725
<SALES> 0
<TOTAL-REVENUES> 9,888
<CGS> 0
<TOTAL-COSTS> 5,669
<OTHER-EXPENSES> 7,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> (3,406)
<INCOME-TAX> (135)
<INCOME-CONTINUING> (3,271)
<DISCONTINUED> (2,531)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,802)
<EPS-BASIC> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1999.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 354
<SECURITIES> 0
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0
1
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</TABLE>
