-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L70vZK/v34WnIhl+2eLRT0Mqa0p4XFHrJeC2GPI++jVEAbqUrBnO/plbFh0a6QGx 2Bx4P132Dl9cy2BFO/Yf7g== 0000912057-00-014201.txt : 20000411 0000912057-00-014201.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014201 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETLOJIX COMMUNICATIONS INC CENTRAL INDEX KEY: 0001005974 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 870378021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27580 FILM NUMBER: 581855 BUSINESS ADDRESS: STREET 1: 501 BATH STREET CITY: SANTA BARBARA STATE: CA ZIP: 93101 BUSINESS PHONE: 8058846300 MAIL ADDRESS: STREET 1: 501 BATH STREET CITY: SANTA BARABARA STATE: CA ZIP: 93101 FORMER COMPANY: FORMER CONFORMED NAME: AVTEL COMMUNICATIONS INC/DE DATE OF NAME CHANGE: 19980930 FORMER COMPANY: FORMER CONFORMED NAME: AVTEL COMMUNICATIONS INC/UT DATE OF NAME CHANGE: 19970109 FORMER COMPANY: FORMER CONFORMED NAME: HI TIGER INTERNATIONAL INC DATE OF NAME CHANGE: 19960119 10-K 1 10-K 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. ----------------------------------- (Exact Name of Registrant in Its Charter) Delaware 87-0378021 ------------ -------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 501 Bath Street, Santa Barbara, CA 93101 ---------------------------------------------- ------- (Address of Principal Executive Offices) (Zip Code) (805) 884-6300 -------------------- (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 - ----------------------------- (Title of class) 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 ----- ----- 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. 2 TABLE OF CONTENTS
Item Number Page Number ----------- ----------- 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
1 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. 2 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 3 / / 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 4 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 5 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 6 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. 7 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. 8 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 9 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 10 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 11 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 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 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 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 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.
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) --------- --------- -------------- $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%
- ---------- (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. 16 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. 17 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. - -------------------------------------------------------------------------------
CURRENT MONTHLY LOCATION SQUARE FEET EXPIRATION DATE(2) RENT(1) 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
18
CURRENT MONTHLY LOCATION SQUARE FEET EXPIRATION DATE(2) RENT(1) 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
- --------------------- (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 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 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.
Year ending December 31, 1998 High Low ----------------------------- ---- --- First Quarter $8.63 $4.94 Second Quarter $15.88 $7.67 Third Quarter $8.00 $1.75 Fourth Quarter $31.00 $2.00 Year ending December 31, 1999 ----------------------------- First Quarter $12.50 $4.00 Second Quarter $8.75 $3.75 Third Quarter $4.88 $1.63 Fourth Quarter $8.50 $1.63
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 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 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,
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- 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: - -------------------- As of December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Working capital (deficit) $647,182 ($2,084,054) $5,570,657 $6,962,619 $206,071 23 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- 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
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 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. 25 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 26 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 27 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 28 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. 29 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. 30 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. 31 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 32 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 33 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. 34 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 35 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 36 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 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 Officer, each other executive officer of NetLojix whose total annual salary and bonus exceeded $100,000 for the fiscal year ended December 31, 1999 and one individual that ceased to be an executive officer during such fiscal year (the "Named Executive Officers"). Titles shown are those held by the Named Executive Officers at December 31, 1999, or, in the case of the individual that is no longer an executive officer, on the date he ceased to be an executive officer.
SUMMARY COMPENSATION TABLE - ----------------------------- ------------------------------------------------------- -------------------------- LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS - ----------------------------- ------------------------------------------------------- -------------------------- NAME AND PRINCIPAL FISCAL OTHER ANNUAL SECURITIES UNDERLYING POSITION YEAR SALARY BONUS COMPENSATION ($) 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) - ----------------------------- --------- ------------ ---------- --------------------- --------------------------
(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 OPTION GRANTS IN LAST FISCAL YEAR (Individual Grants)
- --------------------- --------------- --------------- ----------- ---------------- --------------------------------- POTENTIAL REALIZABLE VALUE AT NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM (1) OPTIONS EMPLOYEES IN EXERCISE ------ ------------ ------------- NAME GRANTED FISCAL YEAR PRICE EXPIRATION DATE 0% 5% 10% - --------------------- --------------- --------------- ----------- ---------------- ------ ------------ ------------- 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% -- -- -- -- -- - --------------------- --------------- --------------- ----------- ---------------- ------ ------------ -------------
(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
- ---------------------- ------------- -------------- ------------------------------- ------------------------------- 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 - ---------------------- ------------- -------------- --------------- --------------- --------------- --------------- Anthony E. Papa -- -- 15,625 115,625 $0 $0 - ---------------------- ------------- -------------- --------------- --------------- --------------- ---------------
40
- ------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES UNDERLYING UNEXCRISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999 (2) - ---------------------- ------------- -------------- --------------- --------------- --------------- --------------- 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 - ---------------------- ------------- -------------- --------------- --------------- --------------- ---------------
(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)
- ---------------------------------------- ------------------------------------- ------------------------------------- NAME NUMBER OF UNITS (1) PERIOD UNTIL PAYOUT - ---------------------------------------- ------------------------------------- ------------------------------------- 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 -- - ---------------------------------------- ------------------------------------- -------------------------------------
(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 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 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 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 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.
- ---------------- -------------------------------- ------------------------------- ---------------------------------- NETLOJIX NASDAQ TELECOMMUNICATIONS COMMUNICATIONS, INC. INDEX NASDAQ COMPOSITE INDEX - ---------------- -------------------------------- ------------------------------- ---------------------------------- 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 - ---------------- -------------------------------- ------------------------------- ---------------------------------- 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 - ---------------- -------------------------------- ------------------------------- ----------------------------------
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.
- ---------------------------------------------- ---------------------------------- ---------------------------------- Amount Name and Beneficially Percent Address Owned Of Class (1) - ---------------------------------------------- ---------------------------------- ---------------------------------- 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 - ---------------------------------------------- ---------------------------------- ---------------------------------- 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% - ---------------------------------------------- ---------------------------------- ----------------------------------
* Represents less than 1%. 47 (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 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 (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 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 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- 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
F-1 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 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES (Formerly AvTel Communications, Inc.) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
1999 1998 ---- ---- 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 ====================== =======================
See accompanying Notes to Consolidated Financial Statements. F-3 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES (Formerly AvTel Communications, Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- 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 ======================= ======================== =======================
See accompanying Notes to Consolidated Financial Statements. F-4 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES (Formerly AvTel Communications, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
Additional Preferred Stock Common Stock Paid-In Shares Amount Shares Amount Capital ------ ------ ------ ------ ------- 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 =========== ========= ============ ============== ============= Retained Earnings / (Accumulated Treasury Stock Deficit) Shares Amount Total --------- ------ ----- ----- 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 =============== =========== ============= ============
See accompanying Notes to Consolidated Financial Statements. F-5 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES (Formerly AvTel Communications, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---- ---- ---- 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 - - =============== ============== ==============
See accompanying Notes to Consolidated Financial Statements. F-6 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 (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 (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. Society Generale $ 623,880 Mattel Media 372,000 Infosys Technologies Limited 201,290 US Search.com 102,816 ---------- $1,299,986 ==========
(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 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 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 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:
Year Ended December 31 ----------- 1998 1997 ---- ---- 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)
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:
1998 --------------------------------------------------------- DMI RLI Total --- --- ----- 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) ============ ========== ==========
1997 --------------------------------------------------------- Matrix Telecom Best Total -------------- ---- ----- Current assets other than cash $ 258,041 -- 258,041 Property and equipment 577,836 15,137 592,973
F-12 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 ============ =========== ============
(3) DISCONTINUED OPERATIONS Selected financial information for the residential long distance business discontinued operations is as follows:
1999 1998 1997 ---- ---- ---- 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) =============== ============ ============
December 31, 1998 ----- 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 ---------------
(4) PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
December 31, Estimated ------------ useful life 1999 1998 ----------- ---- ---- 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 =========== ===========
F-13 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.
Shares Amount ------ ------ 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 -- $ -- ======== =========
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 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 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 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:
1999 1998 1997 ---- ---- ---- 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)
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 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:
Weighted Average ---------------- Exercise Grant-date Options Price Fair Value ------- -------- ---------- 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 =========
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.
Options Outstanding Options Exercisable ----------------------------------------------- ---------------------------------
F-18
Weighted Average Weighted Weighted Remaining Average Number of Average Range of Number of Contractual Exercise Options Exercise Exercise Prices Options Life Price Exercisable Price --------------- ------- ---- ----- ----------- ----- $ 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 ========= =========
(6) FEDERAL AND STATE INCOME TAXES The provision for income taxes allocated to continuing operations consisted of the following:
1999 1998 1997 ---- ---- ---- 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) ===== =========== =========
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:
1999 1998 1997 ---- ---- ---- 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) ========== ========== ===========
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:
December 31 -----------
F-19
1999 1998 ---- ---- 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 $ - - =========== ==========
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
1999 1998 ---- ---- 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 ========== =======
Significant services and transactions incurred in the normal course of operations with affiliated companies are summarized as follows:
1999 1998 1997 ---- ---- ---- 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 =========== ========= ==========
F-21 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 -
1999 1998 1997 ---- ---- ---- 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) ========== ========== ==========
Discontinued operations Loss from operations per share -
1999 1998 1997 ---- ---- ---- Numerator: Net loss $ (3,030,575) (2,531,321) (979,199) ========== ========== ========== Denominator:
F-22
1999 1998 1997 ---- ---- ---- 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) ========== ========== ==========
Gain on disposition per share -
1999 1998 1997 ---- ---- ---- 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 -- -- ========== ========== ==========
Income (loss) from discontinued operations per share -
1999 1998 1997 ---- ---- ---- 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) ========== ========== ==========
Net loss per share -
1999 1998 1997 ---- ---- ---- 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:
F-23 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES (FORMERLY AVTEL COMMUNICATIONS, INC) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 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) ========== ========= =========
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 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:
1999 ---- Application Network IT Support Development Connectivity Services and Hosting Overhead Total ------------ -------- ----------- -------- ----- 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 1998 ---- Application Network IT Support Development Connectivity Services and Hosting Overhead Total ------------ -------- ----------- -------- ----- 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)
F-25 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES (FORMERLY AVTEL COMMUNICATIONS, INC) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 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
1997 ---- Application Network IT Support Development Connectivity Services and Hosting Overhead Total ------------ -------- ----------- -------- ----- 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
(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 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 NETLOJIX COMMUNICATIONS, INC., AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Balance at Balance beginning of At end period Additions Deductions of period ------ --------- ---------- --------- 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 ========= ========= ======= =========
(a) Charged to selling, general and administration expense. (b) Amounts written off. (c) Recognized as a component of deferred tax assets. S-1 INDEX TO EXHIBITS
Number Exhibit - ------ ------- 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 E-1 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. E-2 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 E-3 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
E-4 EX-10.4 2 EXHIBIT 10.4 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. E-5 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. E-6 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 E-7 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. E-8 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. E-9 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. E-10 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. E-11 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 E-12 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 E-13 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. E-14 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. E-15 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 E-16 (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. E-17 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 E-18 EX-10.15 3 EXHIBIT 10.15 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 E-19 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 E-20 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 E-22 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 E-22 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 E-23 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 E-24 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 E-25 (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 E-26 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 E-27 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. E-28 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 E-29 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 E-30 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 E-31 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 E-32 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. E-33 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: _____________________________________ _____________________________________ E-34 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) E-35 EX-10.16 4 EXHIBIT 10.16 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. E-36 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. E-37 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. E-38 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; E-39 (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 E-40 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. E-41 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 E-42 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, E-43 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. E-44 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 E-45 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 E-46 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. E-47 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. E-48 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 E-49 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. E-50 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 E-51 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 E-52 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 E-53 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: E-54 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. E-55 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. E-56 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 E-57 EX-10.17 5 EXHIBIT 10.17 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. E-58 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"). E-59 (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 E-60 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 E-61 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 E-62 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 E-63 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, E-64 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 E-65 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. E-66 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) E-67 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 E-68 EX-10.18 6 EXHIBIT 10.18 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. E-69 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 E-70 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 (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 (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 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 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 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 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 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 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 EX-10.19 7 EXHIBIT 10.19 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"):
- ---------------------------- ------------------------- ---------------------------------------- EXISTING COAST DEAL PROPOSAL TO NETLOJX @ 3-01-00 WITH AVTEL/MATRIX - ---------------------------- ------------------------- ---------------------------------------- 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. - ---------------------------- ------------------------- ----------------------------------------
E-80 - ---------------------------- ------------------------- ---------------------------------------- $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 - ---------------------------- ------------------------- ----------------------------------------
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 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 EX-21 8 EXHIBIT 21 EXHIBIT 21 List of Subsidiaries
NAME JURISDICTION OF INCORPORATION - ---- ----------------------------- 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
E-83 EX-23 9 EXHIBIT 23 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 EX-27.1 10 EXHIBIT 27.1
5 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. 1,000 YEAR DEC-31-2000 JAN-01-1999 DEC-31-1999 1,135 0 2,472 0 0 5,304 918 0 10,956 4,657 0 0 1 126 6,172 10,956 0 16,864 0 9,383 12,371 0 81 (4,947) 0 (4,947) 2,750 0 0 (2,198) (0.23) (0.23)
EX-27.2 11 EXHIBIT 27.2
5 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. 1,000 YEAR DEC-31-2000 JAN-01-1998 DEC-31-1998 222 0 1,295 0 0 3,956 1,039 0 10,725 6,040 0 0 1 103 4,406 10,725 0 9,888 0 5,669 7,686 0 31 (3,406) (135) (3,271) (2,531) 0 0 (5,802) (0.61) (0.61)
EX-27.3 12 EXHIBIT 27.3
5 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. 1,000 YEAR DEC-31-2000 JAN-01-1997 DEC-31-1997 354 0 318 0 0 4,736 800 0 10,971 2,034 0 0 1 111 7,696 10,971 0 6,435 0 4,862 10,848 0 3 (9,241) (29) (9,213) (979) 0 0 (10,192) (1.23) (1.23)
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