-----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, JQgaAdNVCLOhA1j2Xj9rHSYyX3GDsMXrk223c9apj8rQfl3UDMlXRzEiZwRkr0VE kKLFLC0BGjwGx8+vxFnprg== /in/edgar/work/20000814/0000912057-00-037316/0000912057-00-037316.txt : 20000921 0000912057-00-037316.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-037316 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETLOJIX COMMUNICATIONS INC CENTRAL INDEX KEY: 0001005974 STANDARD INDUSTRIAL CLASSIFICATION: [7385 ] IRS NUMBER: 870378021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27580 FILM NUMBER: 699183 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-Q 1 a10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-Q --------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [_] TRANSITION REPORT PURSUANT TO 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 SPECIFIED 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, CALIFORNIA 93101 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (805) 884-6300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of August 4, 2000, there were 13,558,704 shares of the Registrant's Common Stock, par value $0.01 per share, issued and outstanding, excluding treasury stock. NETLOJIX COMMUNICATIONS, INC. QUARTER ENDED JUNE 30, 2000 TABLE OF CONTENTS PAGE ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999 3 Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2000 and 1999 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for Six Month Periods Ended June 30, 2000 and 1999 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II OTHER INFORMATION Item 1. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 6. Exhibits and Reports on Form 8-K 25 Signature Page 26
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 -------------- ---------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,275,448 1,134,625 Accounts receivable, net 3,708,062 2,471,941 Due from affiliates 405,099 715,457 Other current assets 1,555,351 982,387 -------------- ----------- Total current assets 6,943,960 5,304,410 Property and equipment, net 964,189 917,571 Goodwill, net 3,754,371 3,802,307 Other assets, net 877,455 932,133 -------------- ----------- Total assets $ 12,539,975 10,956,421 ============== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other accrued expenses $ 3,377,668 2,317,587 Accrued network services costs 993,067 874,830 Line of Credit - - Sales and excise tax payable 250,153 118,503 Unearned revenue 931,946 990,699 Other current liabilities 344,648 355,609 -------------- ----------- Total current liabilities 5,897,482 4,657,228 Long term debt 719,113 - -------------- ----------- Total liabilities 6,616,595 4,657,228 -------------- ----------- STOCKHOLDERS' EQUITY Preferred stock, authorized 750,000 shares, $0.01 par value - - Series A convertible preferred stock, authorized 250,000 shares, $0.01 par value, cumulative as to 8% dividends, 147,700 shares issued and outstanding. (Liquidation preference of $704,032 including dividends in arrears.) 1,477 1,477 Common stock, authorized 40,000,000 shares, $0.01 par value, issued 13,721,514 and 12,562,741 shares at June 30, 2000 and December 31, 1999 respectively. 137,202 125,627 Additional paid in capital 26,778,992 23,650,546 Accumulated deficit (20,992,662) (17,476,946) Treasury stock, $0.01 par value, 162,905 at June 30, 2000 and 151,075 at December 31, 1999. (1,629) (1,511) -------------- ----------- Total stockholders' equity 5,923,380 6,299,193 Commitments and contingencies - - -------------- ----------- Total liabilities and stockholders' equity $ 12,539,975 10,956,421 ============== ==========
See accompanying Notes to Condensed Consolidated Financial Statements. 3 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------------------- ------------------------------ 2000 1999 2000 1999 -------------- ---------- ---------- --------- REVENUES $ 5,295,158 4,167,989 10,599,034 7,869,409 COST OF REVENUES 3,121,675 2,214,527 6,253,310 4,460,095 -------------- ----------- ----------- ----------- GROSS MARGIN 2,173,483 1,953,462 4,345,724 3,409,314 Operating expenses Selling, general and administrative 2,867,772 2,752,146 6,295,717 5,456,722 Litigation settlement costs - - 998,121 - Depreciation and amortization 274,738 244,849 527,697 517,173 -------------- ----------- ----------- ----------- Total operating expenses 3,142,510 2,996,995 7,821,535 5,973,895 -------------- ----------- ----------- ----------- OPERATING LOSS (969,027) (1,043,533) (3,475,811) (2,564,581) Interest (expense) (11,781) (35,769) (13,364) (86,282) Other income (expense), net (10) 1,260 (2,909) 8,304 -------------- ----------- ----------- ----------- Loss from continuing operations before income taxes (980,818) (1,078,042) (3,492,084) (2,642,559) Income tax benefit - - - - -------------- ----------- ----------- ----------- Loss from continuing operations (980,818) (1,078,042) (3,492,084) (2,642,559) Loss from operations of discontinued residential long-distance business - (1,042,558) - (2,544,172) -------------- ----------- ----------- ----------- Loss from discontinued operations - (1,042,558) - (2,544,172) -------------- ----------- ----------- ----------- NET LOSS $ (980,818) (2,120,600) (3,492,084) (5,186,731) ============= ========== ========== ========== Loss from continuing operations per common share - basic and diluted $ (0.07) (0.12) (0.27) (0.28) Loss from discontinued operations per common share - basic and diluted - (0.10) - (0.24) -------------- ----------- ----------- ----------- Net loss per common share - basic and diluted $ (0.07) (0.22) (0.27) (0.52) ============= ========== ========== ========== Weighted average number of common shares - basic and diluted 13,616,925 10,549,170 13,229,868 10,512,523 ============= ========== ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements. 4 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS PERIODS ENDED JUNE 30, (unadudited)
2000 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss from continuing operations $ (3,492,084) (2,642,599) Adjustments to reconcile net loss from continuing operations to cash used by continuing operating activities: Depreciation and amortization 527,697 517,173 Issuance of warrants for professional services 215,712 - Provision for bad debts 200,106 250,152 Stock compensation earned 57,297 157,324 Changes in certain operating assets and liabilities: Accounts receivable (1,436,227) (215,605) Due from affiliates 310,358 299,209 Other current assets (563,380) (2,427) Accounts payable and accrued liabilities 1,285,655 (581,940) Due to affiliate - - ------------- ------------ Cash used by continuing operating activities (2,894,866) (2,218,713) Cash provided (used) by discontinued operating activities - (221,946) ------------- ------------ Cash provided (used) by operating activities (2,894,866) (2,440,659) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (261,287) (100,182) Additions to property and equipment - discontinued operations - (379,213) Payments received on loans to officers 30,015 - Cash received (paid) in acquisitions (25,000) - Proceeds from sale of property and equipment - discontinued operations - 7,650 ------------- ------------ Cash provided (used) by investing activities (256,272) (471,745) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital leases (45,401) (27,846) Cash proceeds from exercise of options 1,230,445 294,038 Issuance of Series B preferred stock - 1,407,325 Sale of common stock 1,471,549 - Preferred stock dividend payments (23,632) (23,632) Costs associated with issuance of common stock (22,566) - Borrowings on line of credit - countinuing operations 719,113 Borrowings on line of credit - discountinued operations - 17,525,162 Amounts paid on line of credit - discontinued operations - (16,411,433) Purchase of common stock for treasury (37,547) (77,400) ------------- ------------ Cash provided by financing activities 3,291,961 2,686,214 ------------- ------------ Net increase (decrease) in cash and cash equivalents 140,823 (226,190) Cash and cash equivalents at beginning of period for continuing and discontinued operations 1,134,625 911,179 ------------- ------------ Cash and cash equivalents at end of period for continuing and discontinued operations (see Note 3) $ 1,275,448 684,989 ============= ============ Cash paid (received) during the period: Interest - continuing operations $ 1,583 $ 152,885 ============= ============ Non cash investing and financing activities: Common stock issued for acquistion $ 195,000 $ - ============= ============
See accompanying Notes to Condensed Consolidated Financial Statements. 5 NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2000 and 1999 (1) BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of NetLojix Communications, Inc. and Subsidiaries (the "Company" or "NetLojix") as of June 30, 2000 and 1999 and for the three and six month periods then ended have been prepared in accordance with generally accepted accounting principles for interim financial reporting. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1999. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the interim financial information have been included. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year. On November 30, 1999 the Company sold its wholly-owned subsidiary, Matrix Telecom, Inc. Matrix Telecom represented all of the Company's residential long distance business. As a result of the Company's decision to exit the residential long distance business, the Company's June 30, 1999 condensed consolidated financial statements for the three and six month periods then ended have been restated to reflect the Company's residential long distance business as a discontinued operation. On September 15, 1999, the Company changed its name to NetLojix Communications, Inc. from AvTel Communications, Inc. This name change was effected by the short-form merger of a wholly-owned subsidiary with and into the Company. 6 (2) EARNINGS PER COMMON SHARE Earnings per common share for the three-month and six-month periods ended June 30, 2000 and 1999 are as follows:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ---------------------------- -------------------------- 2000 1999 2000 1999 ------------- ----------- ----------- ----------- LOSS ON CONTINUING OPERATIONS PER SHARE - Numerator: Net loss $ (980,818) (1,078,042) (3,492,084) (2,642,559) Preferred dividends -- 234,197 23,632 246,013 ------------- ----------- ----------- ----------- Loss applicable to common stockholders $ (980,818) (1,312,239) (3,515,716) (2,888,572) ============= =========== =========== =========== Denominator: Weighted average number of common shares used in basic and diluted loss per common share 13,616,925 10,549,170 13,229,868 10,512,523 ============= =========== =========== =========== Basic and diluted loss per common share $ (0.07) (0.12) (0.27) (0.28) ============= =========== =========== =========== LOSS FROM DISCONTINUED OPERATIONS PER SHARE - Numerator: Net loss -- (1,042,558) -- (2,544,172) ============= =========== =========== =========== Denominator: Weighted average number of common shares used in basic and diluted loss per common share -- 10,549,170 -- 10,512,523 ============= =========== =========== =========== Basic and diluted loss per common share $ -- (0.10) -- (0.24) ============= =========== =========== =========== NET LOSS PER SHARE - Numerator: Net loss $ (980,818) (2,120,600) (3,492,084) (5,186,731) Preferred dividends -- 234,197 23,632 246,013 ------------- ----------- ----------- ----------- Loss applicable to common stockholders $ (980,818) (2,354,797) (3,515,716) (5,432,744) ============= =========== =========== =========== Denominator: Weighted average number of common shares used in basic and diluted loss per common share 13,616,925 10,549,170 13,229,868 10,512,523 ============= =========== =========== =========== Basic and diluted loss per common share $ (0.07) (0.22) (0.27) (0.52) ============= =========== =========== ===========
As of June 30, 2000, there are 302,706 potential common shares excluded from the diluted per common share calculation because the effect is determined to be antidilutive. (3) LITIGATION SETTLEMENT 7 On April 19, 2000, the Company reached an agreement in principle to settle all outstanding claims under the class action lawsuit pending against NetLojix and certain of its officers. The agreement is subject to finalization and execution of a definitive settlement agreement, passage of a class member notification period and final approval by the court. Under the terms of the settlement, the Company will issue 232,000 shares of common stock and warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $8.00 per share with a term of 2 years. In addition, the Company will be required to pay $150,000 in administrative costs and other expenses. While the Company continues to believe it has strong defenses against the lawsuit, considering the ongoing costs of defending the lawsuit in terms of management time and legal fees as well as the uncertainty associated with a jury trial, the Company believes the settlement is fair and equitable. During the three month period ended March 31, 2000, the Company recorded a charge against earnings of $998,000 and a liability relating to the expected settlement. As of August 10, 2000, a definitive settlement agreement has not been finalized or executed. (4) STOCKHOLDERS' EQUITY COMMON STOCK TRANSACTIONS On March 3, 2000 the Company raised net proceeds of $1,471,549 through a private placement of 375,000 shares of common stock at $4.00 per share. The purchaser was AMRO International, S.A., an entity organized under the laws of Panama. In connection with the placement, the Company also granted AMRO warrants to purchase up to 75,000 shares of common stock at a price of $5.25 per share. The Company filed a registration statement to register the public resale of these shares by AMRO on May 25, 2000 as required by the placement agreement. This registration statement was declared effective by the Securities and Exchange Commission on June 7, 2000. During January 2000, the Company purchased 11,830 shares of its common stock for $37,547 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. Under the New Best Connections, Inc. Amended and Restated 1997 Option Plan, in 1997 the Company issued stock options to purchase 1,292,000 shares of common stock at $1.50 per share to certain distributors and agents of Matrix Telecom, Inc. The options were originally granted to facilitate the marketing of residential long distance services. Pursuant to the terms of the option grant, the options became fully vested upon the sale of Matrix Telecom, Inc. in November 1999 and expired on May 22, 2000. The Company recorded commission expense over the vesting period of the option grant totaling $762,000 prior to December 31, 1999. As a consequence of the May 22, 2000 expiration date, 740,253 options were exercised during the six month period ended June 30, 2000. The Company realized proceeds from the option exercises of $1.1 million. As of June 30, 2000 all vested options have been exercised or cancelled. 8 On March 24, 2000, the Company acquired substantially all the assets of a privately-held Santa Barbara web and internet development and consulting company. NetLojix issued 30,000 shares of common stock and paid $25,000 for the assets, including accounts receivable, work-in-process and customer lists. On May 25, 2000, the Company held its annual meeting of stockholders. At that meeting the stockholders approved an amendment to the certificate of incorporation increasing the number of authorized shares of common stock from 20,000,000 shares to 40,000,000 shares. ISSUANCE OF COMMON STOCK WARRANTS In January, 2000, the Company retained Kaufman Bros., L.P. to act as the Company's financial advisor and investment banker. As compensation for investment banking services provided the Company paid $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. Using the Black-Scholes pricing model, the fair value of the warrants was estimated to be $215,712 which was recorded as an expense during the six month period ended June 30,, 2000. PREFERRED STOCK DIVIDENDS On January 31, 2000 the Company declared and paid in cash semi-annual dividends of $23,632 to the holders of the Company's Series A convertible preferred stock. On July 31, 2000 the Company declared and paid in cash semi-annual dividends of $23,632 to the holders of the Company's Series A convertible preferred stock. STOCK OPTION GRANTS In January 2000, the Company granted an additional 840,500 options at an exercise price of $3.28 pursuant to the NetLojix 1998 Stock Incentive Plan. At the annual meeting on May 25, 2000, the stockholders approved an amendment to the 1998 Stock Incentive Plan increasing the number of shares authorized for issuance under the plan by 1,500,000 shares. (5) AMENDMENT TO SECURED CREDIT FACILITY In May 2000, the Company signed an amendment to its secured credit facility with Coast Business Credit. Under the amended 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% (11.5% at June 30, 2000). Borrowings under the credit facility are secured by substantially all of the Company's assets. As of June 30, 2000 $719,000 is outstanding under the credit facility. (6) DISCONTINUED OPERATIONS On November 30, 1999 the Company sold its wholly-owned subsidiary, 9 Matrix Telecom, Inc. Matrix Telecom represented all of the Company's residential long distance business. As a result of the Company's decision to exit the residential long distance business, the Company's June 30, 1999 condensed consolidated financial statements for the three-month and six-month periods then ended have been restated to reflect the Company's residential long distance business as a discontinued operation. Selected financial information for the residential long distance business discontinued operations are as follows:
Three months ended Six months ended June 30, 1999 June 30, 1999 ------------------ ---------------- Sales $ 5,160,372 10,781,366 Expenses (6,202,930) (13,325,538) ------------- ------------ Loss before income tax benefit (1,042,558) (2,544,172) Tax benefit Loss from discontinued operations $ (1,042,558) (2,544,172) ============= ===========
(7) 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 wide area network connections for internet, data or voice 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 and dedicated long distance, frame relay, ATM, 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 flat-fee maintenance contracts, prepaid time block retainers, help desk management contracts, LAN installations, time and materials, warranty repairs and a small amount of hardware sales. The applications development and web hosting services segment includes, designing, developing, managing and hosting applications. The Company's primary focus is on web-centric applications, however, the Company also develops stand alone applications from time to time. 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 10 an alternative to net income or cash flows from operations, as a measure of performance. The results for the three months and six months ended June 30, 2000 and 1999 are as follows:
THREE MONTHS ENDED JUNE 30, 2000 -------------------------------------------------------------------- APPLICATIONS NETWORK TECHNICAL DEVELOPMENT CONNECTIVITY SUPPORT AND WEB SERVICES SERVICE HOSTING TOTAL ------------- ---------- ------------ ---------- Revenues $3,101,973 1,521,039 672,146 5,295,158 Gross margin 1,160,336 550,300 462,847 2,173,483 Selling, general & administration 1,697,152 924,314 246,306 2,867,772 Depreciation & amortization 103,763 139,937 31,038 274,738 Interest expense 6,496 3,742 1,543 11,781 Other (income) expense 894 (477) (407) 10 Loss from continuing operations before corporate litigation settlement $ (647,969) (517,216) 184,367 (980,818) ========== ========== ========= ========= Discontinued operations -- Corporate litigation settlement -- Net loss $ (980,818) ========= EBITDA $ (537,710) (373,537) 216,948 (694,299) ========= ========= ========= ========= Total assets $6,285,818 5,515,159 738,998 12,539,975 ========== ========= ========= ==========
THREE MONTHS ENDED JUNE 30, 1999 -------------------------------------------------------------------- APPLICATIONS NETWORK TECHNICAL DEVELOPMENT CONNECTIVITY SUPPORT AND WEB SERVICES SERVICE HOSTING TOTAL ------------- ---------- ------------ ---------- Revenues $2,336,303 1,386,255 445,431 4,167,989 Gross margin 1,122,314 545,254 285,894 1,953,462 Selling, general & administration 1,430,953 1,010,854 310,339 2,752,146 Depreciation & amortization 136,623 92,804 15,422 244,849 Interest expense 12,729 20,545 2,495 35,769 Other (income) expense (1,230) - (30) (1,260) Loss from continuing operations $ (456,761) (578,949) (42,332) (1,078,042) ========== ========== ======== =========== Discontinued operations $ (1,042,558) ----------- Net loss (2,120,600) =========== EBITDA (307,409) (465,600) (24,415) (797,424) ========= ========== ======== ==========
11 Total assets of continuing operations $6,381,891 3,274,734 363,859 10,020,484 ========= ========= ======= ========== Total assets of discontinued operations $ 4,410,264 ========= Total assets $ 14,430,748 ==========
SIX MONTHS ENDED JUNE 30, 2000 -------------------------------------------------------------------- APPLICATIONS NETWORK TECHNICAL DEVELOPMENT CONNECTIVITY SUPPORT AND WEB SERVICES SERVICE HOSTING TOTAL ------------- ---------- ------------ ---------- Revenues 6,224,691 2,939,730 1,434,613 10,599,034 Gross margin 2,232,022 1,132,050 981,652 4,345,724 Selling, general & administration 3,735,499 1,890,015 670,203 6,295,717 Depreciation & amortization 259,627 228,711 39,359 527,697 Interest expense 7,884 3,742 1,738 13,364 Other (income) expense 2,414 495 - 2,909 Loss from continuing operations $(1,773,402) (990,913) 270,352 (2,493,963) =========== ========== ======= =========== Discontinued operations $ - - Corporate litigation settlement (998,121) Net loss (3,492,084) =========== EBITDA (1,505,891) (758,460) 311,449 (1,952,902) =========== ========== ========= ============
SIX MONTHS ENDED JUNE 30, 1999 -------------------------------------------------------------------- APPLICATIONS NETWORK TECHNICAL DEVELOPMENT CONNECTIVITY SUPPORT AND WEB SERVICES SERVICE HOSTING TOTAL ------------- ---------- ------------ ---------- Revenues $ 4,538,553 2,594,533 736,323 7,869,409 Gross margin 2,051,763 918,666 438,885 3,409,314 Selling, general & administration 2,903,248 2,010,894 542,580 5,456,722 Depreciation & amortization 273,619 215,404 28,150 517,173 Interest expense 21,152 61,357 3,773 86,282 Other (income) expense 5,076 (10,000) (3,380) (8,304) Loss from continuing operations $ (1,151,332) (1,358,989) (132,238) (2,642,559) ============= ============ ========= =========== Discontinued operations $ (2,544,172) -----------
12 Net loss (5,186,731) ============ EBITDA $(856,561) (1,082,228) (100,315) (2,039,104) ========= ============ ========= ============
(8) Commitments and Contingencies On March 15, 2000 the Company entered into an agreement for switching and transmission facilities. Under the terms of the agreement, the Company is committed to monthly minimum usage of $250,000 per month commencing July, 2000 through March, 2002 or an aggregate minimum usage of $5,250,000 for the life of the contract. In connection with the sale of Matrix Telecom, the amount of the purchase price received by the Company is subject to reduction based upon a comparison of Matrix Telecom's adjusted stockholders' equity on August 31, 1999, to an amount set forth in the sale agreement. The purchaser has indicated that it materially disagrees with NetLojix's calculation of the reduction. If the parties are unable to resolve the matter, the sale agreement provides that the calculation will be submitted to an independent firm of accountants, to be chosen by the parties, for final resolution. To date, the purchaser has been unwilling to submit the matter to an independent firm of accountants. If the dispute is ultimately determined in the purchaser's favor the amount of the long distance credits received by the Company in connection with the transaction would be reduced below the amount calculated by the Company. If the amount exceeds the total of the unused amount of long distance credit, then the Company could be required to pay the purchaser such excess in cash. In January 2000, the Company retained Kaufman Bros., L.P. to act as the Company's financial advisor and investment banker. 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 stockholders 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 Kaufman Bros., L.P. Either the Company or the investment banking firm can terminate this relationship on 90 days written notice. As previously reported, NetLojix is a defendant in a class action under the federal securities laws (IN RE AVTEL SECURITIES LITIGATION, Case No. 98-9236) currently pending in the United States District Court for the Central District of California. On April 19, 2000, NetLojix reached an agreement in principle to settle all outstanding claims under the class action lawsuit with counsel for the plaintiff class. This agreement is subject to finalization and execution of a definitive settlement agreement, passage of a class member notification period and final approval by the court. NetLojix recorded a charge against earnings in the first quarter of 2000 of $998,000 relating to the expected settlement. 13 As of August 10, 2000, a definitive settlement agreement has not been finalized or executed. The Company filed suit on April 5, 2000 in the Santa Barbara County Superior Court against Netlogic, Inc., a Delaware corporation having a principal place of business in New York. The action has been removed to the United States District Court for the Central District of California. The Company filed this action after its receipt of a cease and desist letter from Netlogic demanding that the Company cease all usage of the trademark NETLOJIX. The district court action seeks a declaration of non-infringement and cancellation of the trademark registration for NETLOGIC, which the defendant allegedly obtained from the U.S. Patent and Trademark Office. The defendant has filed a motion to dismiss on the grounds of an alleged lack of personal jurisdiction in the State of California. That motion is set for hearing on September 11, 2000. Subsequently, Netlogic filed suit against the Company and certain of its subsidiaries in the United States District Court for the Southern District of New York alleging trademark infringement. The complaint seeks an injunction against the use of the trademark NETLOJIX, and various unspecified damages relating to the use of that trademark. This action has been temporarily stayed pending a decision by the district court in California of the motion to dismiss the Company's complaint filed in that court. The Company believes the claims lack merit. The Company intends to aggressively pursue its claims in the actions with Netlogic; however, it is not possible to predict with any certainty the outcome of the litigation. On July 25, 2000, DNS Communications, Inc. was served with a Complaint filed in the state court for Harris County, Texas, entitled, Transnational Telesis, Inc. v. DNS Communications, Inc f/k/a Direct Network Services, Inc., Matrix Telecom, Inc. and Group Long Distance, Inc., Case No. 2000 29488. DNS was formerly a subsidiary of Matrix Telecom and is currently a subsidiary of the Company. Matrix Telecom was formerly a subsidiary of the Company. The complaint alleges that DNS entered into a marketing agreement with Transnational Telesis pursuant to which DNS was to pay certain commissions to Transnational based on the telephone usage of customers obtained for DNS by Transnational. The complaint further alleges that DNS failed to make commission payments that were due. The complaint alleges causes of action for breach of contract, unjust enrichment, punitive damages and attorneys fees, based on the alleged failure to pay commissions, and seeks unspecified damages in excess of $10,000. The Company intends to vigorously defend against the action. (9) SUBSEQUENT EVENTS On July 28, 2000, the Company announced that it had entered into a letter of intent to acquire Smith Technology Solutions, Inc. (STS), a privately-held systems integration and technical support company that provides local and wide area network design, integration and support. Unaudited revenues for STS for the year ended June 30, 2000, were approximately $1 million. The letter of intent contemplates that NetLojix would acquire all of the outstanding common stock of STS for 250,000 shares of NetLojix common stock and $150,000 in cash. The closing of the transaction is subject to the execution of a definitive agreement between the parties, approval by the Board of Directors and by the board of STS, the satisfactory completion of due diligence, and other conditions. The transaction is expected to close in the 14 third quarter of 2000. (10) EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance for revenue recognition under various circumstances. The accounting and disclosures prescribed by SAB 101 will be effective for the fourth quarter of the Company's fiscal year ending December 31, 2000. The effect of adopting SAB 101 is currently being evaluated, however, the Company does not believe the effects of adoption will be material to its financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS DOCUMENT THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL EVENTS AND OUTCOMES COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THOSE DESCRIBED HEREIN AND THOSE SET FORTH IN THE RISK FACTORS DESCRIBED IN ITEM 1 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999. The following discussion and analysis should be read in connection with the unaudited condensed consolidated financial statements for the three month and six month periods ended June 30, 2000 and 1999 of the Company and related notes included elsewhere in this report and the consolidated financial statements and related management discussion and analysis included in the Company's Annual Report on Form 10-K, for the year ended December 31, 1999. On September 15, 1999, the Company changed its name to NetLojix Communications, Inc. from AvTel Communications, Inc. This name change was effected by the short-form merger of a wholly-owned subsidiary with and into the Company. OVERVIEW We are a provider of network infrastructure, hosting, web application development and technical support to the mid-size business market. We are a single-source provider of enterprise-wide solutions integrating our complete portfolio of broadband connectivity, hosting, co-location, web application development, system integration, maintenance and voice connectivity. Our network infrastructure and Internet hosting platform employ proprietary as well as existing technologies that enable our customers to outsource their eBusiness initiatives including hosting, co-location, transaction management, bandwidth, data storage, and security. Our offices and support teams provide design, implementation and management of wide area networks (WANs), local area networks (LANs) and 15 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) as well as traditional voice products and Internet access. We offer these services on a stand-alone basis or bundled as part of a total, enterprise-wide solution. We believe that businesses will continue to outsource more of their network infrastructure, systems, server management and system support to companies like NetLojix. Our strategy is to establish NetLojix as an industry leader of hosting and total network management for the mid-size business market by providing a complete, enterprise-wide solution and positioning the Company as our customers' "Technology Partner". We believe that our strategy will facilitate the migration of our customer's servers and eBusiness applications off-site and into the NetLojix network. HOSTING AND MANAGEMENT We maintain a platform of proprietary management tools integrated with industry leading applications that allow us to offer our customers the most advanced 24 x 7 environment for their eBusiness initiatives. Recently we formed a Research and Development team dedicated to producing advanced software technologies that will further enhance our hosting platform. We believe that our developments will dramatically improve our customer's eBusiness presence, and continue to increase server management and hosting reliability. NETWORK INFRASTRUCTURE We own and operate a network of multi-protocol, points-of-presence (mPOP), which enables high-speed Internet services, data center operation and network interfaces with multiple broadband carriers. The company's mPOPs include multi-service routing technology based on Cisco's new 7206 VXR/300 platform. We are employing a "Smart Build" network strategy utilizing national transport providers for IP-based ATM backbone services and co-location facilities. By combining our network core facilities in combination with those of our transport partners, we believe that we offer our customers greater network reliability, increased efficiencies and a higher level of customer care. We maintain mPOPs in New York City, San Francisco, Santa Barbara and Los Angeles. We will continue to expand our network by opening new mPOPs in Chicago, Dallas and other markets as we open new sales and service offices in the future. DESCRIPTION OF REVENUE SEGMENTS The Company's operations are divided into three segments: network connectivity, technical support and application development and hosting. The segmentation of the 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. FINANCIAL INFORMATION PRESENTATION 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 16 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. 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 THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999. Revenues Revenues from continuing operations for the three months ended June 30, 2000 were $5.3 million, an increase of 27.0% or $1.1 million from $4.2 million for the three months ended June 30, 1999. Network connectivity services revenues, increased $0.8 million to $3.1 million for the three months ended June 30, 2000 from $2.3 million for the three months ended June 30, 1999. Within the network connectivity services segment, data and voice services accounted for $0.5 million of the increase with the balance of the increase attributable to internet services. Data and voice services revenues increased 34.5% from the comparable quarter in 1999 as the Company significantly expanded its sales of dedicated connectivity services during 2000. Billable revenue minutes for switched traffic increased to 22.8 million from 17.8 million, an increase of 28.1%. Also within the network connectivity segment, Internet connectivity services revenues increased 40.3% to $1.1 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. 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 revenues were $1.5 million for the three months ended June 30, 2000, an increase of 9.7% over the comparable quarter in 1999. During the current quarter, the company realized increased revenues from its help desk solution offerings and the cross marketing of technical support services to network connectivity customers. IT support services include systems integration, service contract, retainer contracts and help desk outsourcing. The Company has recently integrated the technical support service offerings into total enterprise wide solution in each of its operating 17 regions nationally. Application development and hosting services revenues increased to $0.7 million for the three months ended June 30, 2000 from $0.4 million for the comparable quarter in 1999, a 50.9% increase. The increase is primarily attributable to the application development group. During the current quarter, the Company realized several revenue recognition milestones on two large application development projects. Gross Margin Gross margin on continuing operations as a percentage of revenues decreased to 41.1% for the three months ended June 30, 2000 from 46.9% for the three months ended June 30, 1999. Gross margin from continuing operations increased $0.2 million to $2.2 million for the three months ended June 30, 2000 from $2.0 million for the three months ended June 30, 1999. Network connectivity services gross margin as a percent of revenue decreased to 37.4% for the three months ended June 30, 2000 from 48.0% for the three months ended June 30, 1999. Within the network connectivity services segment, data and voice gross margins averaged 17.2% vs. 29.1% in the comparable quarter in 1999. The decline in gross margins was primarily due to the renegotiation of certain large customer contracts reducing their long distance rates in response to competitive pressures. Gross margins for Internet services continues to be strong averaging 78.5% during the three months ended June 30, 2000 vs. 85.9% for the comparable 1999 quarter. The decrease from 1999 is primarily attributable to increased network costs relating to high-speed connectivity. We have increased capacity for these services and are currently able to increase customers with minimal additional network costs. Technical support services gross margins averaged 36.2% during the quarter ended June 30, 2000 compared to 39.3% for the comparable quarter in 1999. Gross margins in the technical service segment declined due to an increase in sales of lower margin retainer contracts and a large national installation project. In addition, salary expense for high demand technicians continues to increase and put downward pressure on margins. While we may be able to increase retail pricing to offset salary increases, competitive pressures may require us to absorb some of the additional costs in the future. Application development and web hosting gross margins were 68.9% during 2000 compared to 64.2% for the comparable quarter in 1999. The increase in gross margin is due primarily to several high margin contracts reaching revenue milestones in the quarter. Gross margins for applications development projects are negotiated on a project-by-project basis and tend to fluctuate for each project depending on the total dollar amount, deadline commitments and specialized expertise that may be required for a particular project. Selling, General, and Administrative Costs Selling, general, and administrative costs from continuing operations increased only $0.1 million to $2.9 million for the three months ended June 30, 2000 from $2.8 million for the three months ended June 30, 1999. As a percentage of revenues, selling, general and administrative costs decreased to 54.2% for the three months ended June 30, 2000 from 66.0% for the three months ended June 30, 1999. 18 Approximately $0.2 million of the increase is due to increased professional service fees, primarily due to legal fees associated with various legal matters and regulatory registration. This increase was partially offset by a reduction in salary and wage expenses due to the relocation of the accounting and finance function to Santa Barbara and the subsequent downsizing of the staff. SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999. Revenues Revenues from continuing operations for the six months ended June 30, 2000 were $10.6 million, an increase of 34.7% or $2.7 million from $7.9 million for the six months ended June 30, 1999. Network connectivity services revenues, increased $1.7 million to $6.2 million for the six months ended June 30, 2000 from $4.5 million for the six months ended June 30, 1999. Within the network connectivity services 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 revenues increased 40.2% from the comparable period in 1999 as the Company significantly expanded its sales of dedicated connectivity services during 2000. Billable revenue minutes for switched traffic increased to 41.9 million from 33.1 million, an increase of 26.6%. Internet connectivity services revenues increased 31.3% to $2.0 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. Technical support services revenues were $2.9 million for the six months ended June 30, 2000, an increase of 13.3% over the comparable quarter in 1999. During the current period, the company realized increased revenues from its help desk solution offerings and the cross marketing of technical support services to network connectivity customers. Application development and hosting services revenues increased to $1.4 million for the six months ended June 30, 2000 from $0.7 million for the comparable period in 1999, a 94.83% increase. The increase is primarily attributable to the application development group. During the current period, the Company realized several revenue recognition milestones on two large application development projects. Gross Margin Gross margin on continuing operations as a percentage of revenues decreased to 41.0% for the six months ended June 30, 2000 from 43.3% for the six months ended June 30, 1999. Gross margin from continuing operations increased $0.9 million to $4.3 million for the six months ended June 30, 2000 from $3.4 million for the six months ended June 30, 1999. Network connectivity services gross margin as a percent of revenue decreased to 35.9% for the six months ended June 30, 2000 from 44.8% for the six months ended June 30, 1999. Within the network connectivity services segment, data and voice gross margins averaged 16.4% vs. 25.4% in the 19 comparable period in 1999. The decline in gross margins was primarily due to the renegotiation of certain large customer contracts reducing their long distance rates in response to competitive pressures. Gross margins for Internet services continues to be strong averaging 76.0% during the six months ended June 30, 2000 vs. 83.5% for the comparable 1999 period. The decrease from 1999 is primarily attributable to increased network costs relating to high-speed connectivity. We have increased capacity for these services and are currently able to increase customers with minimal additional network costs. Technical support services gross margins averaged 38.5% during the six months ended June 30, 2000 compared to 35.4% for the comparable period in 1999. Gross margins in the technical service segment were improved as our management of technical resource allocation and productivity increased. We were also able to raise certain retail pricing as demand for IT professional services increased. However, salary expense for high demand technicians will likely continue to increase and put downward pressure on margins. While we may be able to increase retail pricing to offset salary increases, competitive pressures may require us to absorb some of the additional costs. Application development and web hosting gross margins were 68.4% during 2000 compared to 59.6% for the comparable quarter in 1999. The increase in gross margin is due primarily to several high margin contracts reaching revenue milestones in the quarter. Selling, General, and Administrative Costs Selling, general, and administrative costs from continuing operations increased $0.8 million to $6.3 million for the six months ended June 30, 2000 from $5.5 million for the six months ended June 30, 1999. As a percentage of revenues, selling, general and administrative costs decreased to 59.4% for the six months ended June 30, 2000 from 69.3% for the six months ended June 30, 1999. Of the increase in selling, general and administrative expenses, $0.2 million is attributable to the non-cash expense associated with warrants issued the Company's investment banker for advisory services. Approximately $0.1 million of the increase is attributable to severance costs. In January 2000, the Company relocated its finance and accounting function to Santa Barbara and paid severance to employees that declined to relocate. Approximately $0.2 million of the increase is due to increased professional service fees, primarily due to legal fees associated with the class action lawsuit and regulatory registration. The remaining increase in cost was associated with expanded sales force and related expenses including general office expense, rent, utilities and travel expenditures. Settlement Costs On April 19, 2000, the Company reached an agreement in principle to settle all outstanding claims under the class action lawsuit pending against NetLojix and certain of its officers. The agreement is subject to finalization and execution of a definitive settlement agreement, passage of a class member notification period and final approval by the court. Under the terms of the settlement, the Company will issue 232,000 shares of common stock and warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $8.00 per share with a term of 2 years. In addition, the Company would be 20 required to pay $150,000 in administrative costs and other expenses. While the Company continues to believe it has strong defenses against the lawsuit, considering the ongoing costs of defending the lawsuit in terms of management time and legal fees as well as the uncertainty associated with a jury trial, the Company believes the settlement is fair and equitable. During the three month period ended March 31, 2000, the Company recorded a charge against earnings of $998,000 and a liability relating to the expected settlement. Interest Expense The Company currently has $0.7 million outstanding under its secured line of credit. During the six month period ended June 30, 1999 the Company averaged approximately $0.2 million in outstanding borrowings. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, the company had cash and cash equivalents of $1.3 million. The Company has an outstanding indebtedness on its line of credit of $719,000 as of June 30, 2000. For the six months ended June 30, 2000, the Company reported a net loss from continuing operations of $3.5 million and net cash used in operations of $2.9 million. 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 the purchaser that it materially disagrees with the balance sheet that we prepared. The stock purchase agreement provides that, if the parties are unable to resolve the matter, the calculation of the adjustment amount will be submitted to an independent firm of accountants, to be chosen by the parties, for final resolution. To date, the purchaser has been unwilling to submit the matter to an independent firm of accountants. If the dispute is ultimately determined in the purchaser's favor the amount of the long distance credits received by the Company in connection with the transaction would be reduced below the amount calculated by the Company. If the amount exceeds the total of the unused amount of long distance credit, then the Company could be required to pay the purchaser such excess in cash. Any material adjustments to the balance sheet we prepared, whether determined by the independent accountants or a court, 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. Through June 30, 2000 we used $425,000 of the long distance credit received in the sale of Matrix Telecom, Inc. In accordance with the sale agreement, the amount of the long distance credit used may not exceed $100,000 per month. In March, 2000 we discontinued utilizing the long distance credits pending resolution of our outstanding differences. Effective May 11, 2000 we completed the process of moving our communications traffic from Matrix Telecom to an alternative carrier. During 1999 and into the first quarter of 2000, a subsidiary of the Company commenced the process of registering with state telecommunications regulatory agencies to become licensed as a telecommunications provider separate and apart from Matrix Telecom. As of June 30, 2000, this registration 21 process was essentially complete. The Company has accrued for certain regulatory taxes and assessments approximating $0.3 million to be paid upon completion of all appropriate tax filings. All filings should be completed by the end of the third quarter of this year. In May 2000, we amended our secured credit facility with Coast Business Credit. Under the amended line of credit, we may borrow up to 75% of eligible receivables (as defined) up to a total amount of $3.0 million. The percentage may be increased to 80% of eligible receivables if we reach certain operational targets. In addition, the line of credit may be used to provide a facility for issuing letters of credit. Borrowings under the line of credit bear interest, payable monthly, based upon the prime rate of Bank of America NT & SA plus 2% (11.5% at August 10, 2000). Borrowings under the credit facility are secured by substantially all of our assets. As of August 4, 2000, $760,000] is outstanding under the credit facility, and $758,000 is available to be borrowed under the formula described above. On April 23, 1999, we entered into an equity line agreement with Cambois Finance, Inc. 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. Our stock must have a minimum bid price of $2.26 per share in order for us to require Cambois Finance to purchase stock, unless Cambois Finance otherwise agrees. To date, we have sold a total of 1,066,725 shares of common stock to Cambois Finance for total proceeds of $2,000,000. 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. We also issued the private investor warrants to purchase up to 75,000 shares of common stock at a price of $5.25 per share. The warrants are exercisable beginning September 1, 2000 and ending March 1, 2003. During the six month period ended June 30, 2000, the Company received proceeds of $1.2 million relating to stock option exercises. The option exercises were primarily attributable to stock options granted by the Company in 1997 under the New Best Connections, Inc. Amended and Restated 1997 Option Plan. Under the plan, the Company issued stock options to purchase 1,292,000 shares of common stock at $1.50 per share to certain distributors and agents of Matrix Telecom, Inc. The options were originally granted to facilitate the marketing of residential long distance services. Pursuant to the terms of the option grant, the options became fully vested upon the sale of Matrix Telecom, Inc. and expired on May 22, 2000. The Company recorded commission expense over the vesting period of the option grant totaling $762,000. As a consequence of the May 22, 2000 expiration date, 703,860 options were exercised during the six month period ended June 30, 2000. 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. 22 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. On April 4, 2000, the Company announced that it had entered into a letter of intent to acquire Twisted Pair/BT Services, Inc., a privately-held telecommunications interconnect company that provides computer and integrated PBX network design, integration and service for mid-size businesses in Northern California (principally in the San Francisco Bay area). The letter of intent has expired without a definitive agreement having been signed by the parties. However, the Company intends to continue discussions with Twisted Pair in the near term. On July 28, 2000, the Company announced that it had entered into a letter of intent to acquire Smith Technology Solutions, Inc. (STS), a privately-held systems integration and technical support company that provides local and wide area network design, integration and support and Web site design and management. Unaudited revenues for STS for the year ended June 30, 2000, were approximately $1 million. The letter of intent contemplates that NetLojix would acquire all of the outstanding common stock of STS for 250,000 shares of NetLojix common stock and $150,000 in cash. The closing of the transaction is subject to the execution of a definitive agreement between the parties, approval by the Board of Directors and by the board of STS, the satisfactory completion of due diligence, and other conditions. The transaction is expected to close in the third quarter of 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is not exposed to material future earnings or cash flow fluctuations, from changes in interest rates on its long-term debt at June 30, 2000. A hypothetical increase of 115 basis points in interest rate (ten percent of the Company's overall borrowing rate) would not result in a material fluctuation in future earnings or cash flow. The Company had not entered into any derivative financial instruments to manage interest rate risk or for speculative purposes and is currently not evaluating the future use of such financial instruments. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously reported, NetLojix is a defendant in a class action under the federal securities laws (IN RE AVTEL SECURITIES LITIGATION, Case No. 98-9236) currently pending in the United States District Court for the Central District of California. On April 19, 2000, NetLojix reached an agreement in principle to settle all outstanding claims under the class action lawsuit with counsel for the plaintiff class. This agreement is subject to finalization and execution of a definitive settlement agreement, passage of a class member notification period and final approval by the court. NetLojix recorded a charge against earnings 23 in the first quarter of 2000 of $998,000 relating to the expected settlement. As of August 10, 2000, a definitive settlement agreement has not been finalized or executed. The Company filed suit on April 5, 2000 in the Santa Barbara County Superior Court against Netlogic, Inc., a Delaware corporation having a principal place of business in New York. The action has been removed to the United States District Court for the Central District of California. The Company filed this action after its receipt of a cease and desist letter from Netlogic demanding that the Company cease all usage of the trademark NETLOJIX. The district court action seeks a declaration of non-infringement and cancellation of the trademark registration for NETLOGIC, which the defendant allegedly obtained from the U.S. Patent and Trademark Office. The defendant has filed a motion to dismiss on the grounds of an alleged lack of personal jurisdiction in the State of California. That motion is set for hearing on September 11, 2000. Subsequently, Netlogic filed suit against the Company and certain of its subsidiaries in the United States District Court for the Southern District of New York alleging trademark infringement. The complaint seeks an injunction against the use of the trademark NETLOJIX, and various unspecified damages relating to the use of that trademark. This action has been temporarily stayed pending a decision by the district court in California of the motion to dismiss the Company's complaint filed in that court. The Company believes the claims lack merit. The Company intends to aggressively pursue its claims in the actions with Netlogic; however, it is not possible to predict with any certainty the outcome of the litigation. On July 25, 2000, DNS Communications, Inc. was served with a Complaint filed in the state court for Harris County, Texas, entitled, Transnational Telesis, Inc. v. DNS Communications, Inc f/k/a Direct Network Services, Inc., Matrix Telecom, Inc. and Group Long Distance, Inc., Case No. 2000 29488. DNS was formerly a subsidiary of Matrix Telecom and is currently a subsidiary of the Company. Matrix Telecom was formerly a subsidiary of the Company. The complaint alleges that DNS entered into a marketing agreement with Transnational Telesis pursuant to which DNS was to pay certain commissions to Transnational based on the telephone usage of customers obtained for DNS by Transnational. The complaint further alleges that DNS failed to make commission payments that were due. The complaint alleges causes of action for breach of contract, unjust enrichment, punitive damages and attorneys fees, based on the alleged failure to pay commissions, and seeks unspecified damages in excess of $10,000. The Company intends to vigorously defend against the action. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Netlojix held its annual meeting of stockholders on May 25, 2000 (b) The following individuals were elected as all of the directors of Netlojix: Anthony E. Papa, James P. Pisani, John E. Allen, Jeffrey J. Jensen and Anthony D. Martin (c) The following matters were presented to the stockholders for approval: 1. Election of directors. The voting for the election of directors was as follows 24
DIRECTORS FOR AGAINST ABSTAIN TOTAL --------- --------- ------- ------- --------- Anthony E. Papa 9,458,917 19,044 0 9,477,961 James P. Pisani 9,455,217 22,744 0 9,477,961 John E. Allen 9,460,597 17,364 0 9,477,961 Jeffrey J. Jensen 9,459,274 18,687 0 9,477,961 Anthony D. Martin 9,460,697 17,264 0 9,477,961
There were no broker non-votes. 2. Approval of Amendment to Certificate of Incorporation. The stockholders approved an amendment to Netlojix's Certificate of Incorporation increasing the number of authorized shares of Common Stock from 20,000,000 shares to 40,000,000 shares. The voting for the amendment was as follows:
FOR AGAINST ABSTAIN TOTAL --- ------- ------- --------- 9,384,160 61,970 31,831 9,477,961
There were no broker non-votes. 3. Approval of Amendment to 1998 Stock Incentive Plan. The stockholders approved an amendment to the Netlojix 1998 Stock Incentive Plan increasing the number of shares of Common Stock reserved for issuances thereunder by 1,500,000 shares. The voting for the amendment was as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES TOTAL --------- ------- ------- ---------------- --------- 5,910,947 92,137 13,493 3,461,384 9,477,961
4. Ratification of Auditors. The stockholders ratified the appointment of KPMG, LLP as the Company's independent auditors for 2000. The voting was as follows:
FOR AGAINST ABSTAIN TOTAL --------- ------- ------- --------- 9,455,144 10,143 12,674 9,477,961
There were no broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Incorporation of NetLojix Communications, Inc., as amended. 10.1 Amended Loan and Security Agreement dated as of May 30, 2000, among NetLojix Communications, Inc, Remote Lojix/PCSI, Inc., NetLojix Telecom, Inc. and Coast Business Credit. 27.1 Financial Data Schedule - Six Months Ended June 30, 2000 27.2 Restated Financial Data Schedule - Six Months Ended June 30, 1999 (b) Reports on Form 8-K The Registrant filed a Current Report on Form 8-K on June 23, 2000 with respect to the dismissal of KPMG, LLP, and the engagement of Ernst & Young LLP, as its independent auditor for 2000. The Registrant also announced that it had terminated discussions to acquire privately-held onShore, Inc. Netlojix previously announced that it had entered into a non-binding letter of intent with 25 onShore in April 2000. The Registrant filed no other reports on Form 8-K during the quarter ended June 30, 2000. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETLOJIX COMMUNICATIONS, INC., a Delaware corporation By: /s/ MICHAEL J. USSERY ------------------------------------ Michael J. Ussery CHIEF FINANCIAL OFFICER (Duly Authorized Officer and Principal Financial Officer) August 11, 2000 26 Exhibit Index
Exhibit Number Exhibit Description - ------- ------------------- 3.1 Certificate of Incorporation of NetLojix Communications, Inc., as amended. 10.1 Amended Loan and Security Agreement dated as of May 30, 2000, among NetLojix Communications, Inc, Remote Lojix/PCSI, Inc., NetLojix Telecom, Inc. and Coast Business Credit. 27.1 Financial Data Schedule -Six Months Ended June 30, 2000 27.2 Restated Financial Data Schedule - Six Months Ended June 30, 1999
27 EX-3.1 2 ex-3_1.txt EXHIBIT 3.1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF AVTEL COMMUNICATIONS, INC.. ARTICLE I. The name of the Corporation is AVTEL COMMUNICATIONS, INC. ARTICLE II. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of Newcastle, Delaware 19805. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. ARTICLE IV. The Corporation is authorized to issue two classes of stock, designated common and preferred, respectively. The total number of shares of all classes of stock which the Corporation has authority to issue is 21,000,000, consisting of 20,000,000 shares of common stock, par value $0.01, and 1,000,000 shares of preferred stock, par value $0.01. As to the preferred stock of the Corporation, 250,000 shares shall be designated as "Series A Convertible Preferred Stock" with the preferences, limitations and rights set forth hereunder. The Board of Directors may amend these Articles of Incorporation to do any of the following: a. designate in whole or in part, the preferences, limitations and relative rights, within the limits set forth in the Delaware General Corporation Law, of any class of shares, before the issuance of any shares of that class; b. create one or more series within a class of shares, fix the number of shares of each such series, and designate, in whole or part the preferences, limitations and relative rights of the series within the limits set forth in the Delaware General Corporation Law, all before the issuance of any shares of that series; c. alter or revoke the preferences, limitations and relative rights granted to or imposed upon any wholly unissued class of shares or any wholly unissued series of any class of shares; or d. increase or decrease the number of shares constituting any series, the number of shares of which was originally fixed by the Board either before or after the issuance of shares of the series, provided that the number may not be decreased below the number of shares of the series then outstanding, or increased above the total number of authorized shares of the applicable class of shares available for designation as part of the series. Designation of First Series of Preferred Stock The first series of preferred stock is hereby designated AvTel Communications, Inc. Series A Convertible Preferred Stock ("Series A Convertible Preferred Stock"). The number of shares constituting Series A Convertible Preferred Stock shall be 250,000. 1. General Definitions. For purposes of designating the preferences, privileges, restrictions and rights of the Series A Convertible Preferred Stock, the following definitions shall apply: 1.1 "Board of Directors" shall mean the Board of Directors of the Corporation. 1.2 "Business Day" shall mean any day other than Saturdays, Sundays or other days on which commercial banks are authorized or required to close in the State of Delaware. 1.3 "Common Stock" shall refer to the Common Stock of the Corporation. 1.4 "Distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, or the purchase or redemption of shares of this Corporation for cash or property, including any such transfer, purchase or redemption by a Subsidiary of this Corporation. 1.5 "Issuance Date" shall mean July 31, 1996. 1.6 "Junior Shares" shall mean all Common Stock and any other shares of this Corporation other than the Series A Convertible Preferred Stock. 1.7 "Person" means a corporation, an association, a trust, a partnership, a joint venture, an organization, a business, an individual, a government or political subdivision thereof or a governmental body. 1.8 "Public Offering" with respect to any securities means the registration of such securities under the Securities Act, under a firm commitment underwriting, for sale to the public. 1.9 "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as may be in effect from time to time. 1.10 "Subsidiary" shall mean any corporation at least 50% of whose outstanding voting shares shall at the time be owned by the Corporation or by one or more of such subsidiaries. 2. Dividend Rights of Preferred Stock. The holders of the Series A Convertible Preferred Stock shall be entitled to receive, out of any funds legally available therefor, cumulative dividends, on each outstanding share of Series A Convertible Preferred Stock, at the rate of eight percent (8.0%) of the Liquidation Preference (as defined below, prior to any increase for declared but unpaid dividends) of the Series A Convertible Preferred Stock per annum per share, on each outstanding share of Series A Convertible Preferred Stock, and no more, payable prior and in preference to any payment of any dividend on, or other distribution with respect to, Junior Shares and payable semi-annually, commencing one hundred eighty (180) days from the Issuance Date, from funds legally available therefor. Such dividends shall accrue from the date of issuance whether or not earned so that no dividends (other than those payable solely in Common Stock) shall be made with respect to Junior Shares until cumulative dividends on the Series A Convertible Preferred Stock for all past dividend periods and for the then current six-month dividend period shall have been declared and paid or set apart. Such dividends shall be payable to holders of record of shares of Series A Convertible Preferred Stock as of a record date, determined by the Board of Directors, which shall be not more than thirty (30) days prior to the dividend payment date. Other than with respect to the dividends paid on the Series A Convertible Preferred Stock which represent payment of cumulative dividends thereon for all past dividend periods and for the then current six-month dividend period, no dividend shall be declared, paid on or set apart for the outstanding shares of Series A Convertible Preferred Stock. The holders of at least 50% of the Series A Convertible Preferred Stock may at any time by written consent waive payment of any accumulated but unpaid dividends with respect to such Series A Convertible Preferred Stock or eliminate any requirement to declare, pay, set apart or accumulate any dividends with respect to such Series A Convertible Preferred Stock. 3. Restriction on Dividend Rights of Junior Shares. No dividend or other Distribution (other than those payable solely in Common Stock) shall be declared or paid with respect to Junior Shares while any shares of Series A Convertible Preferred Stock are outstanding without the vote or written consent by the holders of at least 50% of the outstanding shares of Series A Convertible Preferred Stock. 4. Liquidation Rights of Series A Convertible Preferred Stock. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Series A Convertible Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Junior Shares by reason of their ownership of such stock, an amount (the "Liquidation Preference") equal to the sum of $4.00 for each share of Series A Convertible Preferred Stock then held by them and, in addition, an amount equal to all declared but unpaid dividends, if any, on the Series A Convertible Preferred Stock. If the assets and funds thus distributed among the holders of the Series A Convertible Preferred Stock shall be insufficient to permit the payment to such holders of the aggregate Liquidation Preference payable to such holders, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series A Convertible Preferred Stock, pro rata among the holders of such Series A Convertible Preferred Stock according to the number of shares held by each such holder. After payment to the holders of Series A Convertible Preferred Stock of the Liquidation Preference as aforesaid, the entire assets and funds of the Corporation legally available for distribution, if any, shall be distributed among the holders of the Junior Shares. 5. Redemption. The Corporation may, from funds legally available therefore, redeem all or any part of the outstanding Series A Convertible Preferred Stock as follows: 5.1 Redemption After Second Anniversary. After the second anniversary of the Issuance Date, the Corporation may redeem, at any time, and from time to time, after the second anniversary of the Issuance Date, all or any part, but if less than all, not less than 25%, of the Series A Convertible Preferred Stock outstanding. Any redemption effected pursuant to this Section 5 shall be made on a pro-rata basis among the holders of Series A Convertible Preferred Stock in proportion to the Shares of Series A Convertible Preferred Stock then held by them. 5.2 Redemption Price. The Corporation may redeem shares of Series A Convertible Preferred Stock pursuant to Section 5.1 above by paying in cash therefore an amount (the "Redemption Price") equal to the Liquidation Preference per share of Series A Convertible Preferred Stock. 5.3 Redemption Notice. In order to effect a redemption pursuant to Section 5.1 above, the Corporation shall, by written notice (herein the "Redemption Notice"), mailed first class postage prepaid, to each holder of record (at the close of business on the Business Day immediately preceding the day on which notice is given) of a Series A Convertible Preferred Stock to be redeemed, at the address shown on the records of the Corporation for such holder, notify such holder of the redemption to be effected. Such Redemption Notice shall specify the number of shares of Series A Convertible Preferred Stock to be redeemed from such holder, the Redemption Price, the place at which payment may be obtained and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, and a date (herein the "Delivery Date") which shall not be less than forty-five (45) days nor more than sixty (60) days following the date of such Redemption Notice, his certificate or certificates representing the shares to be redeemed. On or before the Delivery Date, each holder of Series A Convertible Preferred Stock to be redeemed shall surrender to the Corporation a certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the Person whose name appears on such certificate or certificates as the owner thereof, any surrendered certificate shall be canceled. In the event that less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. 5.4 Continuing Rights of Series A Convertible Preferred Stock Following Redemption. From and after the Delivery Date, unless there shall have been a defaulted payment of the Redemption Price, all rights of the holders of shares of Series A Convertible Preferred Stock designated for redemption and the Redemption Notice as holders of Series A Convertible Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation are legally available for redemption of shares of Series A Convertible Preferred Stock on the Delivery Date and are not sufficient to redeem the total number of shares of Series A Convertible Preferred Stock deemed redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares, ratably from the holders of such shares to be redeemed, based upon their holdings of Series A Convertible Preferred Stock. The shares of Series A Convertible Preferred Stock not redeemed shall remain outstanding and entitled to the rights and preferences provided herein and shall no longer be considered as having been designated for redemption in the relevant Redemption Notice. 5.5 Deposit of Redemption Price. On or prior to each Delivery Date, the Corporation shall deposit the Redemption Price of all shares of Series A Convertible Preferred Stock designated for redemption in the Redemption Notice and not yet redeemed with a bank or trust corporation having aggregate capital and surplus in excess of $10,000,000 as a trust fund for the benefit of the respective holders in shares designated for redemption and not yet redeemed, with irrevocable instructions and authority to the bank or trust corporation to pay the redemption price for such shares to the respective holders on or after the Delivery Date on receipt of notification from the Corporation that such holder has surrendered his or her share certificates to the Corporation pursuant to Subsection 5.3 above. As of the Delivery Date, the deposit shall constitute full payment of the shares to their holders, and from and after the Delivery Date shares so called for redemption shall be redeemed and shall be deemed to be no longer outstanding, and holders thereof shall cease to be stockholders with respect to such shares and shall have no rights with respect thereto, except for rights to receive a bank or trust corporation payment of the Redemption Price of the shares, without interest, upon surrender of their certificates therefore. Such instructions shall also provide that any monies deposited by the Corporation pursuant to this Subsection 5.5 for the redemption of shares thereafter converted into shares of Common Stock pursuant to Section 6 hereof, prior to the Delivery Date, shall be returned to the Corporation forthwith upon such conversion. The balance of any monies deposited by the Corporation pursuant to this Subsection 5.5 remaining unclaimed at the expiration of one (1) year following the Delivery Date shall thereupon be returned to the Corporation upon its request as expressed in the resolution adopted by its Board of Directors. 6. Conversion Rights of Series A Convertible Preferred Stock. The holders of the Series A Convertible Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): 6.1 Right to Convert. Subject to the terms and conditions hereof, each share of Series A Convertible Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the first anniversary of the Issuance Date, into such number of fully paid and nonassessable shares of Common Stock, as determined by dividing $4.00 by the Conversion Price applicable to such share, determined as hereinafter provided, in effect on the date the certificate is surrendered for conversion. The price at which shares of Common Stock shall be deliverable upon conversion of shares of the Series A Convertible Preferred Stock (the "Conversion Price") shall initially be $4.00 per share of Common Stock. The Conversion Price shall be subject to adjustment as hereinafter provided in Section 6.4. 6.2 Automatic Conversion on Public Offering. Each share of Series A Convertible Preferred Stock shall automatically be converted into the number of fully paid and nonassessable shares of Common Stock upon the closing of a Public Offering pursuant to an effective Registration Statement under the Securities Act, covering the offer and sale of Common Stock to the public at a public offering price (prior to underwriters' discounts and expenses) equal to or exceeding $10.00 per share of Common Stock (as adjusted for stock dividends, combinations or splits with respect to such shares) and the proceeds to the Corporation of not less than $15 million (net only of underwriters' commissions and expenses relating to the issuance, including without limitation expenses of the Corporation's counsel). In the event of a Public Offering, the person(s) entitled to receive the Common Stock issuable upon such conversion of Series A Convertible Preferred Stock shall not be deemed to have converted such Series A Convertible Preferred Stock until the date of the closing of such sale of Common Stock. The Conversion Price of shares of Series A Convertible Preferred Stock which are converted pursuant to this Section 6.2 shall be the lower of $4.00 per share or a price determined by multiplying .80 times the price per share of the Common Stock issued in such Public Offering. 6.3 Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Series A Convertible Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by a fair and reasonable conversion price to be determined by the Board of Directors solely for calculating payments due for fractional shares. No shares of Common Stock will be issued in respect of accrued or declared and unpaid dividends on the Series A Convertible Preferred Stock; however, except in the case of an Automatic Conversion on Public Offering as set forth in subparagraph 6.2 above, the Corporation shall remain liable after conversion of any Series A Convertible Preferred Stock for cumulative unpaid dividends accrued on such Series A Convertible Preferred Stock prior to the time of conversion. Before any holder of Series A Convertible Preferred Stock shall be entitled to convert the same into full shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation and, except for the automatic conversion pursuant to subparagraph 6.2 above, shall give written notice (the "Conversion Notice") to the Corporation, at such office that he elects to convert the same. The Corporation shall, as soon as practicable thereafter issue and deliver or cause to be issued and delivered to such holder of Series A Convertible Preferred Stock, at such office or at such other place as the holder shall specify in the Conversion Notice, a certificate or certificates for the number of shares of Common Stock, to which he shall be entitled as aforesaid, registered in the name of such holder or in such other name as the holder shall specify in the aforementioned written notice. Except as set forth in subparagraph 6.2 above, such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Convertible Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. 6.4 Adjustments for Diluting Issues. (a) Adjustment for Stock Splits and Combinations. If the Corporation at any time or from time to time after the Issuance Date effects a subdivision of the outstanding Common Stock (meaning to increase the number of shares of Common Stock into which each share of Series A Convertible Preferred Stock is convertible), the Conversion Price then in effect immediately before that subdivision shall be proportionately decreased, and conversely, if the Corporation at any time or from time to time after the Issuance Date combines the outstanding shares of Common Stock (meaning to decrease the number of shares of Common Stock into which each share of Series A Convertible Preferred Stock is convertible), the Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this subparagraph (a) shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Adjustment for Certain Dividends and Disbursements. In the event the Corporation at any time, or from time to time, after the Issuance Date, makes or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, then and in each such event, the Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (a) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date (but excluding shares of Common Stock previously issued by the Corporation upon conversion of Series A Convertible Preferred Stock), and (b) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date (but excluding shares of Common Stock previously issued by the Corporation upon conversion of Series A Convertible Preferred Stock) plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed thereof, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted such that the number of shares of Common Stock into which each share of Series A Convertible Preferred Stock is convertible pursuant to this subsection as of the time of actual payment of such dividends or distributions. (c) Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then in each such event a provision shall be made so that the holders of Series A Convertible Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation which they would have received had their Series A Convertible Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 6 with respect to the rights of the holders of the Series A Convertible Preferred Stock. (d) Adjustment for Reclassification, Exchange and Substitution. If the Common Stock issuable upon the conversion of the Series A Convertible Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets, provided for elsewhere in this Section 6) then and in any such event each holder of Series A Convertible Preferred Stock shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series A Convertible Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (e) Reorganizations, Mergers, Consolidations or Sales of Assets. If at any time or from time to time there is a capital reorganization of the Common Stock (other than either a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 6) or a merger or consolidation of the Corporation with or into another corporation, or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Series A Convertible Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Convertible Preferred Stock, the number of shares of stock or other securities or property of the Corporation, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 6 with respect to the rights of the holders of the Series A Convertible Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this Section 6 (including adjustment of the Conversion Price then in effect) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable. 6.5 No Impairment. The Corporation will not, by amendment of 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 or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 7 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Convertible Preferred Stock against dilution or other impairment. 6.6 Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is the same as cash dividends paid in previous quarters) or other distribution, the Corporation shall mail to each holder of Series A Convertible Preferred Stock at least twenty (20) days prior to the date specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. 7. Voting. The shares of Series A Convertible Preferred Stock shall not have any voting power, either general or special. ARTICLE V. The name and mailing address of the Incorporator is: Janis St. Marie 1332 Anacapa Street, Suite 200 Santa Barbara, California 93101 ARTICLE VI. The number of directors which constitute the whole Board of Directors of the Corporation shall be determined as set forth in the Bylaws of the Corporation. Subject to the rights of the holders of any series of Preferred Stock, no director shall be removed without cause. Subject to any limitations imposed by law, the Board of Directors or any individual director may be removed from office at any time with cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the Corporation entitled to vote at an election of directors. The election of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE VII. In furtherance and not in limitation of the powers confirmed by statute, the Board of Directors of the Corporation is expressly authorized to make, alter, repeal, amend and rescind any or all of the Bylaws of the Corporation; to fix the amount to be reserved as working capital, and to authorize and cause to be executed, mortgages and liens without limit as to the amount, upon the property and franchise of this Corporation. The Bylaws shall determine whether and to what extent the accounts and books of this Corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholders shall have any right of inspecting any account, or book, or document of this Corporation, except as conferred by the law or the Bylaws, or by resolution of the stockholders. The stockholders and directors shall have power to hold their meetings and keep the books, documents and papers of the Corporation outside of the State of Delaware, at such places as may be from time to time designated by the Bylaws or by resolution of the stockholders or directors, except as otherwise required by the laws of Delaware. ARTICLE VIII. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after the filing of this Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so amended. No amendment to the Delaware General Corporation Law that further limits the acts or omissions for which elimination of liability is permitted shall affect the liability of a director for any act or omission which occurs prior to the effective date of the amendment. Any repeal or modification of the foregoing provisions of this Article VIII by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE IX. The Corporation reserves the right to repeal, alter or amend this Certificate of Incorporation in the manner prescribed herein or now or hereafter prescribed by statute. No repeal, alteration or amendment of this Certificate of Incorporation shall be made unless the same is first approved by the Board of Directors of the Corporation pursuant to a resolution adopted by the directors then in office in accordance with the By-laws and applicable law and thereafter approved by the stockholders. IN WITNESS WHEREOF, I have hereunto set my hand on this 31st day of August, 1997. /s/ JANIS ST. MARIE ---------------------------- Janis St. Marie, Incorporator CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION NETLOJIX COMMUNICATIONS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation") certifies that: 1. The Board of Directors of the Corporation at a meeting duly held on February 8, 2000, adopted resolutions setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring such amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: NOW, THEREFORE, BE IT RESOLVED: That, subject to the approval of a majority of the stockholders of the Corporation, the first two sentences of ARTICLE IV. of the Corporation's Certificate of Incorporation shall be amended so that, as amended, such sentences shall read as follows: "The Corporation is authorized to issue two classes of shares designated common and preferred, respectively. The total number of shares of all classes of stock which the Corporation has authority to issue is 41,000,000, consisting of 40,000,000 shares of common stock, par value $0.01, and 1,000,000 shares of preferred stock, par value $0.01." 2. Thereafter, pursuant to resolution of its Board of Directors and upon notice in accordance with Section 222 of the Delaware General Corporation Law, the annual meeting the stockholders of the Corporation was held on May 25, 2000, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. 3. That the foregoing amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporations Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by Anthony E. Papa, its Chief Executive Officer, and James P. Pisani, its Secretary, this 8th day of August 2000. /s/ ANTHONY E. PAPA ---------------------------------------- Anthony E. Papa, Chief Executive Officer ATTEST: /s/ JAMES P. PISANI - -------------------------- James P. Pisani, Secretary EX-10.1 3 ex-10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT among NETLOJIX COMMUNICATIONS, INC. (f/k/a AVTEL COMMUNICATIONS, INC.), a Delaware corporation and REMOTE LOJIX/PCSI, INC., a New York corporation (a wholly owned subsidiary of Netlojix) and NETLOJIX TELECOM, INC., a Delaware corporation (a wholly owned subsidiary of NetLojix) and COAST BUSINESS CREDIT, a division of Southern Pacific Bank, a California corporation Dated as of May 30, 2000 TABLE OF CONTENTS 1. DEFINITIONS....................................................................2 Account Debtor..........................................................2 Affiliate...............................................................2 Audit...................................................................2 Availability............................................................2 Billed Receivable Loans.................................................2 Billed Receivables......................................................2 Borrower ..................................................2 Borrower's Address ..................................................2 Business Day ..................................................2 Change of Control ..................................................2 Closing Date ..................................................2 Coast ..................................................2 Code ..................................................2 Collateral ..................................................2 Credit Limit ..................................................2 Default ..................................................2 Deposit Account ..................................................2 Dilution Percentage ..................................................3 Dollars or $ ..................................................3 Early Termination Fee ..................................................3 EBIT ..................................................3 EBITDA ..................................................3 Eligible Receivables ..................................................3 Equipment ..................................................4 Event of Default ..................................................4 GAAP ..................................................4 General Intangibles ..................................................4 Inventory ..................................................4 Investment Property ..................................................5 Letter of Credit ..................................................5 Letter of Credit Sublimit...............................................5 Loan Documents ..................................................5 Loans ..................................................5 Material Adverse Effect.................................................5 Maturity Date ..................................................5 Maximum Dollar Amount ..................................................5 Minimum Monthly Interest................................................5 NetLojix ..................................................5 Net Worth ..................................................5 Obligations ..................................................5 Permitted Liens ..................................................5 Person ..................................................6 Prime Rate ..................................................6 Receivables ..................................................6 Remote ..................................................6 Renewal Date ..................................................6 Renewal Fee ..................................................6 Solvent ..................................................6 Telecom ..................................................6 Unbilled Receivables ..................................................6 Unbilled Receivable Loans...............................................6 Year or Yearly ..................................................6 Other Terms ..................................................6 2. CREDIT FACILITIES..............................................................7 2.1 Loans..........................................................7 2.2 Letters of Credit..............................................7 3. INTEREST AND FEES..............................................................7 3.1 Interest.......................................................7 i
3.2 Fees...........................................................7 4. SECURITY INTEREST..............................................................7 5. CONDITIONS PRECEDENT...........................................................7 5.1 Status of Accounts at Closing..................................8 5.2 Minimum Availability...........................................8 5.3 Landlord Waiver................................................8 5.4 Executed Agreement.............................................8 5.4 Opinion of Borrower's Counsel..................................8 5.5 Priority of Coast's Liens......................................8 5.6 Insurance......................................................8 5.7 Borrower's Existence...........................................8 5.8 Organizational Documents.......................................8 5.9 Taxes..........................................................8 5.10 Intentionally Deleted..........................................8 5.11 Due Diligence..................................................8 5.12 Lockbox/Triparty/Blocked Account Agreements....................8 5.13 Net Worth......................................................8 5.14 Other Documents and Agreements.................................8 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER......................9 6.1 Existence and Authority........................................9 6.2 Name; Trade Names and Styles...................................9 6.3 Place of Business; Location of Collateral......................9 6.4 Title to Collateral; Permitted Liens...........................9 6.5 Maintenance of Collateral......................................9 6.6 Books and Records..............................................9 6.7 Financial Condition, Statements and Reports...................10 6.8 Tax Returns and Payments; Pension Contributions...............10 6.9 Compliance with Law...........................................10 6.10 Litigation....................................................10 6.11 Use of Proceeds...............................................10 6.12 [Intentionally omitted].......................................10 7. RECEIVABLES...................................................................10 7.1 Representations Relating to Receivables.......................10 7.2 Representations Relating to Documents and Legal Compliance....10 7.3 Schedules and Documents relating to Receivables...............11 7.4 Collection of Receivables.....................................11 7.5 Disputes......................................................11 7.6 Returns.......................................................11 7.7 Verification..................................................11 7.8 No Liability..................................................11 8. ADDITIONAL DUTIES OF THE BORROWER.............................................12 8.1 Financial and Other Covenants.................................12 8.2 Insurance.....................................................12 8.3 Reports.......................................................12 8.4 Access to Collateral, Books and Records.......................12 8.5 Negative Covenants............................................12 8.6 Remittance of Proceeds........................................13 8.7 Litigation Cooperation........................................13 8.8 Further Assurances............................................13 9. TERM..........................................................................13 9.1 Maturity Date.................................................13 9.2 Early Termination.............................................13 9.3 Payment of Obligations........................................14 10. EVENTS OF DEFAULT AND REMEDIES................................................14 10.1 Events of Default.............................................14 10.2 Remedies......................................................15
ii 10.3 Standards for Determining Commercial Reasonableness...........16 10.4 Power of Attorney.............................................16 10.5 Application of Proceeds.......................................18 10.6 Remedies Cumulative...........................................18 11. GENERAL PROVISIONS.....................................................18 11.1 Interest Computation..........................................18 11.2 Application of Payments.......................................18 11.3 Charges to Accounts...........................................18 11.4 Monthly Accountings...........................................18 11.5 Notices.......................................................18 11.6 Severability..................................................19 11.7 Integration...................................................19 11.8 Waivers.......................................................19 11.9 No Liability for Ordinary Negligence..........................19 11.10 Amendment.....................................................19 11.11 Time of Essence...............................................19 11.12 Attorneys Fees, Costs and Charges.............................19 11.13 Benefit of Agreement..........................................20 11.14 Publicity.....................................................20 11.15 Paragraph Headings; Construction..............................20 11.16 Governing Law; Jurisdiction; Venue............................20 11.17 Mutual Waiver of Jury Trial...................................20 11.18 Confidentiality...............................................20
iii Amended and Restated Loan and Security Agreement Borrower: NETLOJIX COMMUNICATIONS, INC. (f/k/a AVTEL COMMUNICATIONS, INC.), a Delaware corporation Address: 501 Bath Street Santa Barbara, California 93101 Borrower: REMOTE LOJIX/PCSI, INC., a New York corporation Address: 501 Bath Street Santa Barbara, California 93101 Borrower: NETLOJIX TELECOM, INC., a Delaware corporation Address: 501 Bath Street Santa Barbara, California 93101 Date: May 30, 2000 WHEREAS, Avtel Communications, Inc., a Delaware corporation ("Avtel") and its wholly owned subsidiary Matrix Telecom, Inc., a Texas corporation ("Matrix")were joint and several borrowers under that certain Loans and Security Agreement, dated as of September 30, 1998 (the "Prior Loan Agreement"); and WHEREAS, Remote Lojix/PCSI, Inc., a New York corporation ("Remote") was subsequent to the date of the Prior Loan Agreement added as an additional Borrower thereunder; and WHEREAS, Avtel has changed its name to NetLojix Communications, Inc., a Delaware corporation ("NetLojix") and has sold Matrix; and WHEREAS, NetLojix and Remote desire to amend and restate the Prior Loan Agreement in its entirety to, among other things, sever the liability of NetLojix and Remote under the Prior Loan Agreement from that of Matrix thereunder; to restate and amend the terms of the existing obligations of NetLojix and Remote under the Prior Loan Agreement; and, to add, as an additional Borrower, NetLojix Telecom, Inc., a Delaware corporation (a wholly owned subsidiary of NetLojix) ("Telecom"); and WHEREAS, Coast acknowledges that no Default or Event of Default by NetLojix or Remote under the Prior Loan Agreement has occurred; and NOW THEREFORE, NetLojix, Remote and Telecom whose chief executive offices are located at the addresses referenced above ("Borrower's Address") are jointly and severally entering into this Amended and Restated Loan and Security Agreement, dated as of May 30, 2000 with Coast Business Credit, a division of Southern Pacific Bank, a California corporation, whose address is 12121 Wilshire Boulevard, Suite 1400, Los Angeles, California 90025 on the terms contained herein. This Agreement amends, restates and supercedes in its entirety the Prior Loan Agreement. The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 1 below.) 1 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "ACCOUNT DEBTOR" means the obligor on a Receivable or General Intangible. "AFFILIATE" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "AUDIT" means to inspect, audit and copy Borrower's books and records and the Collateral. "AVAILABILITY" means the amount of Eligible Receivables multiplied by the advance percentage described in the Schedule NET of Borrower's outstanding Obligations. "BILLED RECEIVABLE LOANS" means the Loans described in Section 2.1(a) of the Schedule. "BILLED RECEIVABLES" means Receivables that have been invoiced and sent to an Account Debtor for payment, by Borrower, by a local exchange carrier (including, Bell Atlantic, SBC Communications, Ameritech and US West), or by a third party billing company (including, OAN and GTE Choicebilling). "BORROWER" means, jointly and severally, NetLojix, Remote and Telecom. "BORROWER'S ADDRESS" has the meaning set forth in the introduction to this Agreement. "BUSINESS DAY" means a day on which Coast is open for business. "CHANGE OF CONTROL" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) (other than the current holders of the ownership interests in any Borrower) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, as a result of any single transaction, of more than twenty-five percent (25%) of the total voting power of all classes of stock or other ownership interests then outstanding of any Borrower normally entitled to vote in the election of directors or analogous governing body. "CLOSING DATE" means the date of this Agreement indicated on page 1 hereof. "COAST" has the meaning set forth in the introduction to this Agreement. "CODE" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "COLLATERAL" has the meaning set forth in Section 4 hereof. "CREDIT LIMIT" means the maximum amount of Loans that Coast may make to Borrower pursuant to the amounts and percentages shown on the Schedule. "DEFAULT" means any event which with notice or passage of time or both, would constitute an Event of Default. "DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the Code. "DILUTION PERCENTAGE" shall mean the total amount of chargebacks, discounts and other items reducing the outstanding amounts of Receivables, calculated as a percentage of the total amount of outstanding Receivables. 2 "DOLLARS OR $" means United States dollars. "EARLY TERMINATION FEE" means the amount set forth on the Schedule that Borrower must pay Coast if this Agreement is terminated by Borrower or Coast pursuant to Section 9.2 hereof. "EBIT" means, in any fiscal period, Borrower's consolidated net income (other than extraordinary or non-recurring items of Borrower for such period), PLUS (i) the amount of all interest expense and income tax expense of Borrower for such period, on a consolidated basis, and PLUS OR MINUS (as the case may be) (ii) any other non-cash charges which have been added or subtracted, as the case may be, in calculating Borrower's consolidated net income for such period. "EBITDA" means, in any fiscal period, Borrower's consolidated net income (other than extraordinary or non-recurring items of Borrower for such period), PLUS (i) the amount of all interest expense, income tax expense, depreciation expense, and amortization expense of Borrower for such period, on a consolidated basis, and PLUS OR MINUS (as the case may be) (ii) any other non-cash charges (including non-cash expenses for the amortization of stock options) which have been added or subtracted, as the case may be, in calculating Borrower's consolidated net income for such period. "ELIGIBLE RECEIVABLES" means Billed Receivables and Unbilled Receivables arising in the ordinary course of Borrower's business from the sale of goods or rendition of services, which Coast, in its sole reasonable credit judgment, shall deem eligible for borrowing, based on such considerations as Coast may from time to time deem appropriate. Eligible Receivables shall not include the following: (a) Billed Receivables that the Account Debtor has failed to pay within 90 days of invoice date or Accounts with selling terms of more than 30 days; (b) Unbilled Receivables that have not been invoiced and sent to an Account Debtor for payment within 45 days of Account Debtor's incurring of the obligation to be invoiced; (c) Receivables owed by an Account Debtor or its Affiliates where twenty-five percent (25%) or more of all Receivables owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above; (d) Receivables with respect to which the Account Debtor is an employee, or agent of Borrower; (e) Receivables with respect to an Account Debtor who is an Affiliate of Borrower whose total obligations owing to Borrower exceed ten percent (10%) of all Eligible Receivables, to the extent of the obligation owing by such Account Debtor in excess of such percentage. (f) Receivables with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional; (g) Receivables that are not payable in Dollars or with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof; (h) Receivables with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which Borrower has complied, to the satisfaction of Coast, with the Assignment of Claims Act, 31 U.S.C. 3727), 3 or (ii) any State of the United States (exclusive, however, of Receivables owed by any State that does not have a statutory counterpart to the Assignment of Claims Act); (i) Receivables with respect to which the Account Debtor is a creditor of Borrower: (1) who has a right of setoff or who has asserted a right of setoff, but only to the extent of the setoff, or (2) who has disputed its liability, or has made any claim with respect to the Receivables, provided, however, that Coast, on a case-by-case basis and in its sole discretion, may limit this provision to the extent of the obligations in dispute; (j) Receivables with respect to an Account Debtor whose total obligations owing to Borrower exceed twenty percent (20%) of all Eligible Receivables, to the extent of the obligations owing by such Account Debtor in excess of such percentage; (k) Receivables with respect to which the Account Debtor is subject to any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation proceeding, or becomes insolvent, or goes out of business; (l) Receivables the collection of which Coast, in its reasonable credit judgment, believes to be uncollectible by reason of the Account Debtor's financial condition; (m) Receivables with respect to which the goods giving rise to such Receivable have not been shipped and billed to the Account Debtor, the services giving rise to such Receivable have not been performed and accepted by the Account Debtor, or the Receivable otherwise does not represent a final sale except for those Receivables in which the Account Debtor has entered into an agreement with Borrower, in form and substance acceptable to Coast, whereby Borrower is contractually bound to pay the Receivables and/or estopped from contesting the Receivables; (n) Receivables with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; and (o) Receivables that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services except for those Receivables in which the Account Debtor has entered into an agreement with Borrower in form and substance acceptable to Coast, whereby Borrower is contractually bound to pay the Receivables and/or estopped from contesting the Receivables. "EQUIPMENT" means all of Borrower's present and hereafter acquired machinery, molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and other goods (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "EVENT OF DEFAULT" means any of the events set forth in Section 10.1 of this Agreement. 4 "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "GENERAL INTANGIBLES" means all general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, investment property, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Coast, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation life insurance, key man insurance, credit insurance, liability insurance, property insurance and other insurance), tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "INVENTORY" means all of Borrower's now owned and hereafter acquired goods, merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease (including without limitation all raw materials, work in process, finished goods and goods in transit, and including without limitation all farm products), and all materials and supplies of every kind, nature and description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all warehouse receipts, documents of title and other documents representing any of the foregoing. "INVESTMENT PROPERTY" has the meaning set forth in Section 9115 of the Code as in effect as of the date hereof. "LETTER OF CREDIT" has the meaning set forth in Section 2.2 hereof. "LETTER OF CREDIT SUBLIMIT" has the meaning set forth in Section 2.2 hereof. "LOAN DOCUMENTS" means this Agreement, the agreements and documents listed on Section 5 of the Schedule, and any other agreement, instrument or document executed in connection herewith or therewith. "LOANS" has the meaning set forth in Section 2.1 hereof. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the business, assets, financial condition or results of operations of Borrower or any subsidiary of Borrower or any guarantor of any of the Obligations, (ii) the ability of Borrower or any guarantor of any of the Obligations to perform its obligations under this Agreement (including, without limitation, repayment of the Obligations as they come due) or (iii) the validity or enforceability of this Agreement or any other agreement or document entered into by any party in connection herewith, or the rights or remedies of Coast hereunder or thereunder. "MATURITY DATE" means the date that this Agreement shall cease to be effective, as set forth on the Schedule, subject to the provisions of Section 9.1 and 9.2 hereof. "MAXIMUM DOLLAR AMOUNT" has the meaning set forth in Section 2 of the Schedule. 5 "MINIMUM MONTHLY INTEREST" has the meaning set forth in Section 3 of the Schedule. "NETLOJIX" means NetLojix Communications, Inc., a California corporation. "NET WORTH" means consolidated shareholders's equity of a Person at any date determined in accordance with GAAP, plus subordinated debt. "OBLIGATIONS" means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower (and not Matrix) to Coast, whether evidenced by this Agreement, the Prior Loan Agreement (but only to the extent of Obligations arising under the Prior Loan Agreement prior to the date hereof) or any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Coast in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorneys' fees (including attorneys' fees and expenses incurred in bankruptcy), expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other present or future instrument or agreement between Borrower and Coast. "PERMITTED LIENS" means the following: (1) purchase money security interests in specific items of Equipment; (2) leases of specific items of Equipment; (3) liens for taxes not yet payable; (4) additional security interests and liens consented to in writing by Coast, which consent shall not be unreasonably withheld; (5) security interests being terminated substantially concurrently with this Agreement; (6) liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent; (7) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (1) or (2) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; or (8) liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation of goods. Coast will have the right to require, as a condition to its consent under subparagraph (4) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Coast's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Coast, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest, subject to any applicable notice and cure period applicable thereto, shall also constitute an Event of Default under this Agreement. 6 "PERSON" means any individual, sole proprietorship, general partnership, limited partnership, limited liability partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "PRIME RATE" means the actual "Reference Rate" or the substitute therefor of the Bank of America NT & SA, or its successor, whether or not that rate is the lowest interest rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall mean the highest of the prime rates published in the Wall Street Journal on the first business day of the applicable month, as the base rate on corporate loans at large U.S. money center commercial banks. "RECEIVABLES" means all of Borrower's now owned and hereafter acquired accounts (whether or not earned by performance), letters of credit, contract rights, chattel paper, instruments, securities, documents, securities accounts, security entitlements, commodity contracts, commodity accounts, investment property and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid vendor, lienor or secured party. "REMOTE" means Remote Lojix/PCSI, Inc., a New York corporation. "RENEWAL DATE" shall mean the Maturity Date if this Agreement is renewed pursuant to Section 9.1 hereof, and each anniversary thereafter that this Agreement is renewed pursuant to Section 9.1 hereof. "RENEWAL FEE" means the fee that Borrower must pay Coast upon renewal of this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the Schedule. "SOLVENT" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "TELECOM" means NetLojix Telecom, Inc., a Delaware corporation. "UNBILLED RECEIVABLES" means Receivables where the services have already been provided and performed but have not yet been invoiced and sent to an Account Debtor for payment. "UNBILLED RECEIVABLE LOANS" means the Loans described in Section 2.1(b) of the Schedule. "YEAR OR YEARLY" shall mean a calendar year unless as otherwise set forth. 7 "OTHER TERMS." All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 2. CREDIT FACILITIES. 2.1 Loans. Coast will make loans to Borrower (the "Loans"), in amounts and in percentages to be determined by Coast in its good faith discretion, up to the Credit Limit, provided no Default or Event of Default has occurred and is continuing. In addition, Coast may create reserves against or reduce its advance rates based upon Eligible Receivables without declaring a Default or an Event of Default if it determines that there has occurred a Material Adverse Effect. 2.2 Letters of Credit. At the request of Borrower, Coast may, in its sole discretion, arrange for the issuance of letters of credit for the account of Borrower (collectively, "Letters of Credit"), by issuing guarantees to the issuer of the letter of credit or by other means. All Letters of Credit shall be in form and substance satisfactory to Coast in its sole discretion. The aggregate face amount of all outstanding Letters of Credit from time to time shall not exceed the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be reserved against Loans which would otherwise be available hereunder. Borrower shall pay all bank charges for the issuance of Letters of Credit. Any payment by Coast under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty (30) days prior to the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Coast harmless from any loss, cost, expense, or liability, including payments made by Coast, expenses, and reasonable attorneys' fees incurred by Coast arising out of or in connection with any Letters of Credit. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Coast and opened for Borrower's account or by Coast's interpretations of any Letter of Credit issued by Coast for Borrower's account, and Borrower understands and agrees that Coast shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto. Borrower understands that Letters of Credit may require Coast to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Coast harmless with respect to any loss, cost, expense, or liability incurred by Coast under any Letter of Credit as a result of Coast's indemnification of any such issuing bank. The provisions of this Agreement, as it pertains to Letters of Credit, and any other present or future documents or agreements between Borrower and Coast relating to Letters of Credit are cumulative. 3. INTEREST AND FEES. 3.1 Interest. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Coast's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Regardless of the amount of Obligations that may be outstanding from time to time, Borrower shall pay Coast Minimum Monthly Interest during the term of this Agreement with respect to the Loans in the amount set forth on the Schedule. 3.2 Fees. Borrower shall pay Coast the fee(s) shown on the Schedule, which are in addition to all interest and other sums payable to Coast under the Loan Documents and are deemed fully earned and are nonrefundable. 8 4. SECURITY INTEREST. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to Coast a security interest in all of Borrower's interest in the following, whether now owned or hereafter acquired, and wherever located: All Receivables, Inventory, Equipment, Investment Property, and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, and all money, and all property now or at any time in the future in Coast's possession (including claims and credit balances), and all proceeds of any of the foregoing (including proceeds of any insurance policies, proceeds of proceeds, and claims against third parties), all products of any of the foregoing, and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which Coast may now or in the future be granted a lien or security interest, is referred to herein, collectively, as the "Collateral") 5. CONDITIONS PRECEDENT. The obligation of Coast to make the Loans is subject to the satisfaction, in the sole discretion of Coast, at or prior to the first advance of funds hereunder, of each, every and all of the following conditions: 5.1 Status of Accounts at Closing. No accounts payable shall be due and unpaid sixty (60) days past its due date except for such accounts payable being contested in good faith in appropriate proceedings and for which adequate reserves have been provided. 5.2 Minimum Availability. Borrower shall have minimum Availability immediately following the initial funding in the amount set forth on the Schedule. 5.3 Landlord Waiver. Coast shall have received duly executed landlord waivers and access agreements in form and substance satisfactory to Coast, in Coast's sole and absolute discretion, and, when deemed appropriate by Coast, in form for recording in the appropriate recording office, with respect to all leased locations where Borrower maintains any inventory or equipment. 5.4 Executed Agreement. Coast shall have received this Agreement duly executed and in form and substance satisfactory to Coast in its sole and absolute discretion. 5.4 Opinion of Borrower's Counsel. Coast shall have received an opinion of Borrower's counsel, in form and substance satisfactory to Coast in its sole and absolute discretion. 5.5 Priority of Coast's Liens. Coast shall have received the results of "of record" searches satisfactory to Coast in its sole and absolute discretion, reflecting its Uniform Commercial Code filings against Borrower indicating that Coast has a perfected, first priority lien in and upon all of the Collateral, subject only to Permitted Liens. 5.6 Insurance. Coast shall have received copies of the insurance binders or certificates evidencing Borrower's compliance with Section 8.2 hereof, including lender's loss payee endorsements. 5.7 Borrower's Existence. Coast shall have received copies of Borrower's articles or certificate of incorporation and all amendments thereto, and a Certificate of Good Standing, each certified by the Secretary of State of the state of Borrower's organization, and dated a recent date prior to the Closing Date, and Coast shall have received Certificates of Foreign Qualification for Borrower from the Secretary of State of each state wherein the failure to be so qualified could have a Material Adverse Effect. 9 5.8 Organizational Documents. Coast shall have received copies of Borrower's By-laws and all amendments thereto, and Coast shall have received copies of the resolutions of the board of directors of Borrower, authorizing the execution and delivery of this Agreement and the other documents contemplated hereby, and authorizing the transactions contemplated hereunder and thereunder, and authorizing specific officers of Borrower to execute the same on behalf of Borrower, in each case certified by the Secretary or other acceptable officer of Borrower as of the Closing Date. 5.9 Taxes. Coast shall have received evidence from Borrower that Borrower has complied with all tax withholding and Internal Revenue Service regulations and that Borrower has paid and is current on all taxes, whether federal, state or other applicable taxing body, in form and substance satisfactory to Coast in its sole and absolute discretion. 5.10 Intentionally Deleted. 5.11 Due Diligence. Coast shall have completed its due diligence with respect to Borrower including but not limited to (i) an audit by Coast of Borrower and (ii) acceptance by Coast, in its sole and absolute discretion of Borrower's projections for the next two years. 5.12 Lockbox/Triparty/Blocked Account Agreements. Coast shall have received evidence that all cash remittances of Borrower shall be collected pursuant to one or more lockbox/triparty agreements or blocked account agreements, in form and substance acceptable to Coast. The agreements shall provide, without limitation, that remittances resulting from Borrower's invoicing of Receivables are to be remitted through a lockbox and remittances resulting from the invoicing of Receivables by a local exchange carrier or a third party billing company are to be remitted by wire transfer. 5.13 Net Worth. Coast shall have received evidence satisfactory to Coast in its sole and absolute discretion that Borrower's Net Worth is equal to or greater than Three Million Dollars ($3,000,000). 5.14 Other Documents and Agreements. Coast shall have received such other agreements, instruments and documents as Coast may require in connection with the transactions contemplated hereby, all in form and substance satisfactory to Coast in Coast's sole and absolute discretion, and in form for filing in the appropriate filing office, including, but not limited to, those documents listed in Section 5 of the Schedule. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. In order to induce Coast to enter into this Agreement and to make Loans, Borrower represents and warrants to Coast as follows, and Borrower covenants that the following representations will continue to be true during the term hereof, and that Borrower will at all times during the term hereof comply with all of the following covenants: 6.1 Existence and Authority. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a Material Adverse Effect. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (a) have been duly and validly authorized, (b) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (c) do not violate Borrower's articles or certificate of incorporation or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (d) do not constitute grounds for acceleration of any material indebtedness 10 or obligation under any material agreement or instrument which is binding upon Borrower or its property. 6.2 Name; Trade Names and Styles. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Coast thirty (30) days' prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 6.3 Place of Business; Location of Collateral. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Coast at least thirty (30) days' prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth on the Schedule. 6.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased by Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Coast now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Coast and the Collateral against all claims of others. None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever requested by Coast, use its best efforts to cause such third party to execute and deliver to Coast, in form acceptable to Coast, such waivers and subordinations as Coast shall reasonably specify, so as to ensure that Coast's rights in the Collateral are, and will continue to be, superior to the rights of any such third party. Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now or in the future may be located. Coast agrees that its default rights resulting from Borrower's noncompliance with this paragraph are subject to the existence of a Material Adverse Effect. 6.5 Maintenance of Collateral. Borrower will maintain the Inventory and Equipment in good working condition, and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Coast in writing of any material loss or damage to the Collateral. 6.6 Books and Records. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with GAAP. 6.7 Financial Condition, Statements and Reports. All financial statements now or in the future delivered to Coast have been, and will be, prepared in conformity with GAAP (except, in the case of unaudited financial statements, for the absence of footnotes and subject to normal year-end adjustments) and now and in the future will fairly reflect the financial condition of Borrower in all material respects, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Coast and the date hereof, there has been no Material Adverse Effect. Borrower is now and will continue to be Solvent. 11 6.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Coast in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. As of the date hereof, Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. Borrower shall, at all times, utilize the services of an outside payroll service providing for the automatic deposit of all payroll taxes payable by Borrower. 6.9 Compliance with Law. Borrower has complied, and will comply, in all material respects, with all provisions of all material foreign, federal, state and local laws and regulations relating to Borrower, including, but not limited to, the Fair Labor Standards Act, and those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and environmental matters. 6.10 Litigation. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened by or against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which may result, either separately or in the aggregate, in a Material Adverse Effect. Borrower will promptly inform Coast in writing, upon discovery by Borrower, of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving an amount set forth on the Schedule. 6.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 6.12 [Intentionally omitted] 7. RECEIVABLES. 7.1 Representations Relating to Receivables. Borrower represents and warrants to Coast as follows: Each Receivable with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, represent an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery and acceptance of goods or the rendition of services in the ordinary course of Borrower's business. 7.2 Representations Relating to Documents and Legal Compliance. Borrower represents and warrants to Coast as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Receivables are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be. All sales and 12 other transactions underlying or giving rise to each Receivable shall fully comply with all applicable laws and governmental rules and regulations. All signatures and indorsements on all documents, instruments, and agreements relating to all Receivables are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally). 7.3 Schedules and Documents relating to Receivables. Borrower shall deliver to Coast via facsimile, unless otherwise directed by Coast, at such locations and at such intervals as Coast may request, transaction reports and loan requests, schedules of Receivables, and schedules of collections, all on Coast's standard forms; PROVIDED, HOWEVER, that Borrower's failure to execute and deliver the same shall not affect or limit Coast's security interest and other rights in all of Borrower's Receivables, nor shall Coast's failure to advance or lend against a specific Receivable affect or limit Coast's security interest and other rights therein. Loan requests received after 10:30 A.M. Los Angeles, California time, will not be considered by Coast until the next Business Day. Together with each such schedule, or later if requested by Coast, Borrower shall furnish Coast with copies (or, at Coast's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Receivables, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Coast an aged accounts receivable trial balance in such form and at such intervals as Coast shall request. In addition, Borrower shall deliver to Coast the originals, as and when requested by Coast, of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Receivables, upon receipt thereof and in the same form as received, with all necessary indorsements, all of which shall be with recourse. Borrower shall also provide Coast with copies of all credit memos as and when requested by Coast. 7.4 Collection of Receivables. Borrower shall have the right to collect all Receivables, unless and until an Event of Default has occurred. Borrower shall hold all payments on, and proceeds of, Receivables in trust for Coast, and Borrower shall deliver all such payments and proceeds to Coast within one (1) Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Coast may, in its discretion, require that all proceeds of Collateral be deposited by Borrower into a lockbox account, or such other "blocked account" as Coast may specify, pursuant to a blocked account agreement in such form as Coast may specify. Coast or its designee may, at any time, notify Account Debtors that Coast has been granted a security interest in the Receivables. 7.5 Disputes. Borrower shall notify Coast promptly of all disputes or claims relating to Receivables. Borrower shall not forgive (completely or partially), compromise or settle any Receivable for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (a) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Coast on the regular reports provided to Coast; (b) no Default or Event of Default has occurred and is continuing; and (c) taking into account all such discounts settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. Coast may, at any time after the occurrence of an Event of Default, settle or adjust disputes or claims directly with Account Debtors for amounts and upon terms which Coast considers advisable in its reasonable credit judgment and, in all cases, Coast shall credit Borrower's Loan account with only the net amounts received by Coast in payment of any Receivables. 7.6 Returns. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and 13 promptly issue a credit memorandum to the Account Debtor in the appropriate amount. In the event any attempted return occurs after the occurrence of any Event of Default, Borrower shall (a) hold the returned Inventory in trust for Coast, (b) segregate all returned Inventory from all of Borrower's other property, (c) conspicuously label the returned Inventory as subject to Coast's security interest, and (d) immediately notify Coast of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on Coast's request deliver such returned Inventory to Coast. 7.7 Verification. Coast may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Receivables, by means of mail, telephone or otherwise, either in the name of Borrower or Coast or such other name as Coast may choose. 7.8 No Liability. Coast shall not under any circumstances be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to a Receivable, or for any error, act, omission or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Receivable, or for settling any Receivable in good faith for less than the full amount thereof, nor shall Coast be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to a Receivable. Nothing herein shall, however, relieve Coast from liability for the gross negligence or willful misconduct of Coast, or its directors, officers, employees, agents or contractors. 8. ADDITIONAL DUTIES OF THE BORROWER. 8.1 Financial and Other Covenants. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 8.2 Insurance. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Coast, in such form and amounts as Coast may reasonably require, and Borrower shall provide evidence of such insurance to Coast, so that Coast is satisfied that such insurance is, at all times, in full force and effect. All liability insurance policies of Borrower shall name Coast as an additional insured, and all property casualty and related insurance policies of Borrower shall name Coast as a loss payee thereon and Borrower shall cause a lender's loss payee endorsement in form reasonably acceptable to Coast. Upon receipt of the proceeds of any such insurance, Coast shall apply such proceeds in reduction of the Obligations as Coast shall determine in its sole discretion, except that, provided no Default or Event of Default has occurred and is continuing, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than the amount set forth in Section 8 of the Schedule, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Coast may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Coast may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Coast copies of all reports made to insurance companies. 8.3 Reports. Borrower, at its expense, shall provide Coast with the written reports set forth in Section 8 of the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Coast shall from time to time reasonably specify. 8.4 Access to Collateral, Books and Records. At reasonable times but not less frequently than quarterly and on one (1) Business Day's notice, Coast, or its agents, shall have the right to perform Audits. Coast shall take reasonable steps to keep confidential all confidential information obtained in any Audit, 14 but Coast shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The Audits shall be at Borrower's expense and the charge for the Audits shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher amount as shall represent Coast's then current standard charge for the same), plus reasonable out-of-pocket expenses. Borrower will not enter into any agreement with any accounting firm, service bureau or third party to store Borrower's books or records at any location other than Borrower's Address, without first notifying Coast of the same and obtaining the written agreement from such accounting firm, service bureau or other third party to give Coast the same rights with respect to access to books and records and related rights as Coast has under this Loan Agreement. 8.5 Negative Covenants. Borrower shall not, without Coast's prior written consent, do any of the following: (a) merge or consolidate with another entity, except in a transaction in which (i) the owners of the Borrower hold at least fifty percent (50%) of the ownership interest in the surviving entity immediately after such merger or consolidation, and (ii) the Borrower is the surviving entity; (b) acquire any assets, except (i) in the ordinary course of business, or (ii) in a transaction or a series of transactions not involving the payment of an aggregate amount in excess of the amount set forth in Section 8 of the Schedule; (c) enter into any other transaction outside the ordinary course of business; (d) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business; (e) store any Inventory or other Collateral with any warehouseman or other third party; (f) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (g) make any loans of any money or other assets, except (i) advances to customers or suppliers in the ordinary course of business, (ii) travel advances, employee relocation loans and other employee loans and advances in the ordinary course of business, and (iii) loans to employees, officers and directors for the purpose of purchasing equity securities of the Borrower; (h) incur any debts, outside the ordinary course of business, which would have a Material Adverse Effect; (i) guarantee or otherwise become liable with respect to the obligations of another party or entity; (j) pay or declare any dividends or distributions on the ownership interests in Borrower (except for dividends or distributions payable solely in stock form of ownership interests in Borrower); (k) make any change in Borrower's capital structure which would have a Material Adverse Effect; (l) transfer or sidestream any funds to any Affiliate other than transfers between Borrowers and the repayment to Affiliates of any amounts advanced by such Affiliate to Borrower (but then only in an amount not to exceed the amounts so advanced); or 15 (m) change the nature of Borrower's business; PROVIDED, HOWEVER, NetLojix may, once it has obtained all necessary licenses begin providing telecommunications services and terminate its relationship with Matrix, its current provider of telecommunications services; or (n) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted in the ordinary course of business as indicated and if no Default or Event of Default is continuing or would occur as a result of such transaction. 8.6 Remittance of Proceeds. All proceeds of any Collateral shall be delivered to Coast within one (1) Business Day after receipt by Borrower, in their original form, duly endorsed to Coast, to be applied to the Obligations in such order as Coast shall determine. Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Coast. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 8.7 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or against Coast with respect to any Collateral or relating to Borrower, Borrower shall, without expense to Coast, make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Coast may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 8.8 Further Assurances. Borrower agrees, at its expense, on request by Coast, to execute all documents and take all actions, as Coast, may deem reasonably necessary or useful in order to perfect and maintain Coast's perfected security interest in the Collateral, and in order to fully consummate the transactions contemplated by this Agreement. 9. TERM. 9.1 Maturity Date. This Agreement shall continue in effect until the Maturity Date; provided that the Maturity Date shall automatically be extended, and this Agreement shall automatically and continuously renew, for successive additional terms of one year each, unless one party gives written notice to the other, not less than one hundred twenty (120) days prior to the Maturity Date or the next Renewal Date, that such party elects to terminate this Agreement effective on the Maturity Date or such next Renewal Date. If this Agreement is renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and payable on the Renewal Date and thereafter shall bear interest at a rate equal to the rate applicable to the Loans. 9.2 Early Termination. This Agreement may be terminated prior to the Maturity Date as follows: (a) by Borrower, effective on the last Business Day of the first full month following the calendar month in which written notice of termination is given to Coast; or (b) by Coast at any time after the occurrence of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by Coast under this Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount shown in Section 3 of the Schedule. The Early Termination Fee shall be due and payable on the effective date of termination and thereafter shall bear interest until paid at a rate equal to the rate applicable to the Loans. 9.3 Payment of Obligations. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Maturity Date, the 16 Renewal Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit issued by Coast or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Coast, then on such date Borrower shall provide to Coast cash collateral in an amount equal to the face amount of all such Letters of Credit plus all interest, fees and costs due or to become due in connection therewith, to secure all of the Obligations relating to said Letters of Credit, pursuant to Coast's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Coast's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the discretion of Coast, Coast may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Coast, nor shall any such termination relieve Borrower of any Obligation to Coast, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Coast shall promptly deliver to Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate Coast's security interests. 10. EVENTS OF DEFAULT AND REMEDIES. 10.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Coast immediate written notice thereof: (a) any warranty, representation, statement, report or certificate made or delivered to Coast by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading and results in a Material Adverse Effect; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time shall exceed the Credit Limit; or (d) Borrower shall fail to deliver the proceeds of Collateral to Coast as provided in Sections 7.4 and 8.6 above, or shall fail to give Coast access to its books and records or Collateral as provided in Section 8.4 above, or shall breach any negative covenant set forth in Section 8.5 above; or (e) Borrower shall fail to comply with the financial covenants (if any) set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (f) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within ten (10) days after the date due; or (g) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within ten (10) days after the occurrence of the same; or (h) any default or event of default occurs under any obligation secured by a Permitted Lien that results in a Material Adverse Effect, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (i) Borrower breaches any material contract or obligation, which has or may reasonably be expected to have a Material Adverse Effect; or 17 (j) dissolution, termination of existence, insolvency or business failure of Borrower or any guarantor of any of the Obligations; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (k) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is (i) not timely controverted, or (ii) not cured by the dismissal thereof within thirty (30) days after the date commenced; or (l) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (m) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (n) Borrower or any guarantor of any of the Obligations makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations, other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (o) except as permitted under Section 8.5(a), Borrower shall suffer or experience any Change of Control without Coast's prior written consent, which consent shall be in the discretion of Coast in the exercise of its reasonable business judgment; or (p) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (q) there shall be any Material Adverse Effect. Coast may cease making any Loans or extending any credit hereunder during any of the above cure periods. 10.2 Remedies. Upon the occurrence, and during the continuance, of any Event of Default, Coast, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; 18 (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Coast without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Coast deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; PROVIDED, HOWEVER, that should Coast seek to take possession of any of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Coast retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Coast at places designated by Coast which are reasonably convenient to Coast and Borrower, and to remove the Collateral to such locations as Coast may reasonably deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Coast shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge. Coast is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Coast's benefit; (f) Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time Coast obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Coast shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Coast deems reasonable, or on Coast's premises, or elsewhere and the Collateral need not be located at the place of disposition. Coast may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Receivables and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Coast to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Coast's reasonable discretion, to grant extensions of time to pay, compromise claims and settle Receivables and the like for less than face value; and (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. 19 All attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast (including attorneys' fees and expenses incurred in connection with bankruptcy) with respect to the foregoing shall be due from the Borrower to Coast on demand. Coast may charge the same to Borrower's loan account, and the same shall thereafter bear interest at the same rate as is applicable to the Loans. Without limiting any of Coast's rights and remedies, from and after the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional three percent per annum. 10.3 Standards for Determining Commercial Reasonableness. Borrower and Coast agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (a) Notice of the sale is given to Borrower at least seven (7) days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven (7) days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (b) Notice of the sale describes the collateral in general, non-specific terms; (c) The sale is conducted at a place designated by Coast, with or without the Collateral being present; (d) The sale commences at any time between 8:00 a.m. and 6:00 p.m Los Angeles, California time; (e) Payment of the purchase price in cash or by cashier's check or wire transfer is required; and (f) With respect to any sale of any of the Collateral, Coast may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Coast shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 10.4 Power of Attorney. Borrower grants to Coast an irrevocable power of attorney coupled with an interest, authorizing and permitting Coast (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Coast agrees to exercise the following powers in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Coast may, in its sole discretion, deem advisable in order to perfect and maintain Coast's security interest in the Collateral, or in order to exercise a right of Borrower or Coast, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements relating to the Obligations; (b) After the occurrence of an Event of Default, execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Coast's Collateral or in which Coast has an interest; (c) After the occurrence of an Event of Default, execute on behalf of Borrower, any invoices relating to any Receivable, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, 20 any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Coast's possession; (e) Endorse all checks and other forms of remittances received by Coast; (f) After the occurrence of an Event of Default, pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (g) After the occurrence of an Event of Default, grant extensions of time to pay, compromise claims and settle Receivables and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (h) After the occurrence of an Event of Default, pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (i) After the occurrence of an Event of Default, settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to give Coast the same rights of access and other rights with respect thereto as Coast has under this Agreement; and (k) After the occurrence of an Event of Default, take any action or pay any sum required of Borrower pursuant to this Agreement and any other present or future agreements. Any and all sums paid and any and all costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast (including attorneys' fees and expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be added to and become part of the Obligations, and shall be payable on demand. Coast may charge the foregoing to Borrower's loan account and the foregoing shall thereafter bear interest at the same rate applicable to the Loans. In no event shall Coast's rights under the foregoing power of attorney or any of Coast's other rights under this Agreement be deemed to indicate that Coast is in control of the business, management or properties of Borrower. Borrower shall pay, indemnify, defend, and hold Coast and each of its officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person hereunder with respect to any Indemnified Liability resulting from the gross negligence or willful misconduct of any Indemnified 21 Person or any contractor of any Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 10.5 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by Coast first to the costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Coast shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Coast for any deficiency. If, Coast, in its sole discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Coast shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Coast of the cash therefor. 10.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, Coast shall have all the other rights and remedies accorded a secured party in equity, under the Code, and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Coast and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Coast of one or more of its rights or remedies shall not be deemed an election, nor bar Coast from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Coast to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been indefeasibly paid and performed. 11. GENERAL PROVISIONS. 11.1 Interest Computation. In computing interest on the Obligations, all checks, wire transfers and other items of payment received by Coast (including proceeds of Receivables and payment of the Obligations in full) shall be deemed applied by Coast on account of the Obligations two (2) Business Days after receipt by Coast of immediately available funds, and, for purposes of the foregoing, any such funds received after 10:30 AM Los Angeles, California time, on any day shall be deemed received on the next Business Day. Coast shall be entitled to charge Borrower's account for such two (2) Business Days of "clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on all checks, wire transfers and other items received by Coast, regardless of whether such two (2) Business Days of "clearance" or "float" actually occur, and shall be deemed to be the equivalent of charging two (2) Business Days of interest on such collections. This across-the-board two (2) Business Day clearance or float charge on all collections is acknowledged by the parties to constitute an integral aspect of the pricing of Coast's financing of Borrower. Coast shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Coast in its reasonable credit judgment, and Coast may charge Borrower's loan account for the amount of any item of payment which is returned to Coast unpaid only if Coast previously shall have applied such item of payment. 11.2 Application of Payments. Subject to Section 10.5 hereof, all payments with respect to the Obligations may be applied, and in Coast's sole discretion reversed and re-applied, to the Obligations, in such order and manner as Coast shall determine in its sole discretion. 11.3 Charges to Accounts. Coast may, in its discretion, require that Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's Loan account, in which event they will bear interest from the date due to the date paid at the same rate applicable to the Loans. 22 11.4 Monthly Accountings. Coast shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Coast), unless Borrower notifies Coast in writing to the contrary within thirty (30) days after each account is rendered, describing the nature of any alleged errors or omissions. 11.5 Notices. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, facsimile or certified mail return receipt requested, addressed to Coast or Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Coast shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, faxed (at time of confirmation of transmission), or at the expiration of one (1) Business Day following delivery to the private delivery service, or two (2) Business Days following the deposit thereof in the United States mail, with postage prepaid. 11.6 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 11.7 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Coast and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. THERE ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS SIGNED BY THE PARTIES IN CONNECTION HEREWITH. 11.8 Waivers. The failure of Coast at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between Borrower and Coast shall not waive or diminish any right of Coast later to demand and receive strict compliance therewith. Any waiver of any Default shall not waive or affect any other Default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other agreement now or in the future executed by Borrower and delivered to Coast shall be deemed to have been waived by any act or knowledge of Coast or its agents or employees, but only by a specific written waiver signed by an authorized officer of Coast and delivered to Borrower. Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Coast on which Borrower is or may in any way be liable, and notice of any action taken by Coast, unless expressly required by this Agreement. 11.9 No Liability for Ordinary Negligence. Neither Coast, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Coast, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Coast, but nothing herein shall relieve Coast from liability for the gross negligence or willful misconduct of Coast or its directors, officers, employees, agents or contractors. 23 11.10 Amendment. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by a duly authorized officer of Borrower and a duly authorized officer of Coast. 11.11 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 11.12 Attorneys Fees, Costs and Charges. Borrower shall reimburse Coast for all attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy) and all filing, recording, search, title insurance, appraisal, audit, and other costs incurred by Coast, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any attorneys' fees and costs (including attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's security interest in, the Collateral; and otherwise represent Coast in any litigation relating to Borrower. If either Coast or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its costs and attorneys' fees (including attorneys' fees and expenses incurred pursuant to bankruptcy), including (but not limited to) attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. Borrower shall also pay Coast's standard charges for returned checks and for wire transfers, in effect from time to time. All attorneys' fees, costs and charges (including attorneys' fees and expenses incurred pursuant to bankruptcy) and other fees, costs and charges to which Coast may be entitled pursuant to this Agreement may be charged by Coast to Borrower's loan account and shall thereafter bear interest at the same rate as the Loans. 11.13 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Coast; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Coast, and any prohibited assignment shall be void. No consent by Coast to any assignment shall release Borrower from its liability for the Obligations. Coast may assign its rights and delegate its duties hereunder without the consent of Borrower and, so long as Coast remains the Agent under this Agreement, Coast may assign and delegate its duties hereunder without notice to Borrower. Coast reserves the right to syndicate all or a portion of the transaction created herein or sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in Coast's rights and benefits hereunder. In connection with any such syndication, assignment or participation, Coast may, subject to the confidentiality provisions of Section 11.18 disclose all documents and information which Coast now or hereafter may have relating to Borrower or Borrower's business. To the extent that Coast assigns its rights and obligations hereunder to a third Person, Coast thereafter shall be released from such assigned obligations to Borrower to the extent arising after the date of the assignment, provided that the third Person assumes Coast's obligations hereunder. 11.14 Publicity. Coast is hereby authorized, at its expense, to issue appropriate press releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. 11.15 Paragraph Headings; Construction. Paragraph headings are only used in this Agreement for convenience. Borrower and Coast acknowledge that the headings 24 may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. The term Aincluding", whenever used in this Agreement, shall mean "including (but not limited to)". This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Coast or Borrower under any rule of construction or otherwise. 11.16 Governing Law; Jurisdiction; Venue. This Agreement and all acts and transactions hereunder and all rights and obligations of Coast and Borrower shall be governed by the internal laws of the State of California, without regard to its conflicts of law principles. As a material part of the consideration to Coast to enter into this Agreement, Borrower (a) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Coast's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Los Angeles County; (b) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (c) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 11.17 Mutual Waiver of Jury Trial. BORROWER AND COAST EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. 11.18 Confidentiality. Coast will maintain the confidentiality of any non public information marked as confidential and relating to the business operations and methodology of Borrower and financial performance of Borrower ("Borrower Information") provided to Coast solely by the Borrower as required under the terms of this Agreement, and will not disclose Borrower Information to any person, other than employees, agents, attorneys or accountants of Coast. Coast will not disclose Borrower information to any other party unless, prior to such disclosure, Coast obtains an executed acknowledgment binding such party to maintain the confidentiality of the information, prohibiting its disclosure except for the purposes permitted under this Agreement, and agreeing that the information may not be used to compete with the Borrower in any way. In the event Coast receives a subpoena or other process for any Borrower Information, it will immediately give notice in writing of the subpoena or other process, including a copy thereof, to Borrower. BORROWER: NETLOJIX COMMUNICATIONS, INC. (f/k/a AVTEL COMMUNICATIONS, INC.), a Delaware corporation By /s/ ANTHONY E. PAPA ------------------------- Chief Executive Officer By /s/ JAMES P. PISANI -------------------------- Secretary REMOTE LOJIX/PCSI, INC., a New York corporation By /s/ ANTHONY E. PAPA 25 Chief Executive Officer By /s/ JAMES P. PISANI --------------------------- Secretary NETLOJIX TELECOM, INC., a Delaware corporation By /s/ ANTHONY E. PAPA ---------------------------- Chief Executive Officer By /s/ JAMES P. PISANI ----------------------------- Secretary COAST: COAST BUSINESS CREDIT, a division of Southern Pacific Bank, a California corporation By /s/ R. BRITTON TERRELL -------------------------- Title: Vice President 26 Schedule to Amended and Restated Loan and Security Agreement Borrower: NETLOJIX COMMUNICATIONS, INC. (f/k/a AVTEL COMMUNICATIONS, INC.), a Delaware corporation Address: 501 Bath Street Santa Barbara, California 93101 Borrower: REMOTE LOJIX/PCSI, INC., a New York corporation Address: 501 Bath Street Santa Barbara, California 93101 Borrower: NETLOJIX TELECOM, INC., a California corporation Address: 501 Bath Street Santa Barbara, California 93101 Date: May 30, 2000 This Schedule forms an integral part of the Amended and Restated Loan and Security Agreement between Coast Business Credit, a division of Southern Pacific Bank, a California corporation ("Coast") and the above-borrowers of even date. SECTION 2 - CREDIT FACILITIES Section 2.1 - Credit Limit: Loans in a total amount at any time outstanding not to exceed the lesser of a total of Three Million Dollars ($3,000,000) at any one time outstanding (the "Maximum Dollar Amount"), or the sum of (a) and (b) below: (a) Billed Receivable Loans in an amount not to exceed 75% of the amount of Borrower's Eligible Receivables consisting of Billed Receivables (as defined in Section 1 of the Agreement), plus (b) Unbilled Receivable Loans in an amount not to exceed the lesser of: (i) up to 75% of the amount of Borrower's Eligible Receivables consisting of Unbilled Receivables (as defined in Section 1 of the Agreement), and (ii) Seven Hundred Fifty Thousand Dollars ($750,000).
27 PROVIDED, HOWEVER, Remote shall have access to Unbilled Receivable advances only after NetLojix, as a consolidated entity achieves and maintains a ratio of EBITDA to Interest Coverage of 1.15:1.0 or greater for three consecutive months. Upon (i) Borrower's Dilution Percentage being less than 10% and (ii) Borrower maintaining a minimum EBITDA to Interest Coverage Ratio of at least 1.1:1.0, Coast may in its sole and absolute discretion increase the advance rates (subject to any applicable sub-limits) in Sections 2.1(a) and (b) above to an amount not to exceed 80% of Borrowers Eligible Receivables consisting of Billed Receivables and Unbilled Receivables. Section 2.2 - Letter of Credit Sublimit: One Million Dollars ($1,000,000) for Standby Letters of Credit. SECTION 3 - INTEREST AND FEES Section 3.1 - Interest Rate: A rate equal to the Prime Rate plus 2% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed. The interest rate applicable to all Loans shall be adjusted monthly as of the first day of each month, and the interest to be charged for each month shall be based on the highest Prime Rate in effect during the prior month, but in no event shall the rate of interest charged on any Loans in any month be less than 9% per annum. Section 3.1 - Minimum Monthly Interest: Based on a minimum daily outstanding balance of Seven Hundred Fifty Thousand Dollars ($750,000) for the first six (6) months of the term of this Agreement, and One Million Dollars ($1,000,000) at all times thereafter. Section 3.2 - Loan Fee: One percent (1.0%) of the Maximum Dollar Amount, such amount being fully earned and payable on the Closing Date. Section 3.2 - Facility Fee: $1,500, per quarter, payable on the Closing Date (prorated for any partial quarter at the beginning of the term of this Agreement).
28 Section 3.2 - Letter of Credit Fees: Two percent (2%) guarantee fee for all outstanding Letters of Credit per calendar month, plus bank charges and fees. Section 9.1 - Renewal Fee: .50% of the Maximum Dollar Amount per year. Section 9.2 - Early Termination Fee: An amount equal to two percent (2%) of the Maximum Dollar Amount (as defined in the Schedule), if termination occurs on or before the first anniversary of the Closing Date; and one percent (1%) of the Maximum Dollar Amount, if termination occurs after the first anniversary of the Closing Date and before the Maturity Date. SECTION 5 - CONDITIONS PRECEDENT Section 5.2 - Minimum Availability: $250,000 Section 5.13 - Other Documents and Agreements: 1. Joint and Several Borrower Rider; 2. UCC-1 financing statements, fixture filings and termination statements; 3. Intellectual Property Security Agreement for Remote; 4. Landlord Waivers; and 5. Lockbox Agreements. SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS Section 6.2 - Prior Names of Borrower: Avtel Communications, Inc. Section 6.2 - Prior Trade Names of Borrower: AvTel AvTel Communications Section 6.2 - Existing Trade Names of Borrower: NetLojix NetLojix Communications NetLojix Telecom Remote Remote Lojix Remote Lojix/PCSI Section 6.3 - Other Locations and Addresses: Schedule 6.3 (attached hereto) Section 6.10 - Material Adverse Litigation: Schedule 6.10 (attached hereto)
29 Section 6.10 - Future Claims and Litigation: Borrower will promptly inform Coast in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against Borrower involving any single claim of Fifty Thousand Dollars ($50,000) or more, or involving One Hundred Thousand Dollars ($100,000) or more in the aggregate. SECTION 8 - ADDITIONAL DUTIES OF BORROWER Section 8.1 - Other Provisions: 1. Borrower shall at all times maintain a minimum Net Worth equal to or greater than Three Million Dollars ($3,000,000). 2. Each carrier accounts payable of Borrower shall be kept current during the term of this Agreement. 3. Borrower shall retain 80% of actual net income. Section 8.2 - Insurance: Subject to the limitations set forth in Section 8.2 of the Agreement, Coast shall release to Borrower insurance proceeds with respect to Equipment totaling less than One Hundred Thousand Dollars ($100,000) in a single transaction subject to a yearly limitation of Two Hundred and Fifty Thousand Dollars ($250,000). Section 8.3 - Reporting: Borrower shall provide Coast with the following: 2. Monthly Receivable agings, aged by invoice date, within ten (10) days after the end of each month. 3. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers within ten (10) days after the end of each month. 4. Monthly internally prepared financial statements, on a consolidating to consolidated basis, as soon as available, and in any event within thirty (30) days after the end of each month. 5. Quarterly internally prepared financial statements, as soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of Borrower.
30 6. Quarterly customer lists, including customer name, address, and phone number. 7. Annual financial statements, as soon as available, and in any event within ninety (90) days following the end of Borrower's fiscal year, containing the unqualified opinion of, and certified by, (a) an independent certified public accountant from a "Big Six" accounting firm or (b) an independent certified public accountant reasonably acceptable to Coast. 8. Monthly collateral/reserves roll forward with General Ledger reconciliation, in form and substance satisfactory to Coast, within ten (10) days after the end of each month. 9. Reports for Unbilled Receivables as frequently as Coast shall require, in form and substance satisfactory to Coast. 10. Annual projections, on a month-to-month basis, in form and substance satisfactory to Coast, are to be provided to Coast before each anniversary date of the effective date of this Agreement. 11. Weekly Borrowing Base reporting which includes sales, collections and credits, in form and substance satisfactory to Coast, within three (3) business days after the end of each week. Section 8.5 - Negative Covenants (Acquired Assets): One Million Dollars ($1,000,000) in the aggregate for all acquisitions during a calendar year, or a proportionate amount for a partial year, but in no event will any single acquisition amount to over One Hundred Thousand Dollars ($100,000). SECTION 9 - TERM Section 9.1 - Maturity Date: January 31, 2002, subject to automatic renewal as provided in Section 9.1 of the Agreement, and early termination as provided in Section 9.2 of the Agreement.
31 EX-27.1 4 ex-27_1.txt EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF NETLOJIX COMMUNICATIONS INC. AND SUBSIDIARIES AS OF JUNE 20, 2000 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATION FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1,275 0 3,708 0 0 6,943 964 0 12,540 5,897 0 0 1 137 5,785 12,540 0 10,599 0 6,253 7,822 0 13 (3,492) 0 (3,492) 0 0 0 (3,492) (.27) (.27)
EX-27.2 5 ex-27_2.txt EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES AS OF JUNE 30, 1999 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATION FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001005974 NETLOJIX COMMUNICATIONS, INC. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 337 0 1,260 0 0 3,846 816 0 10,020 4,041 0 0 1 105 5,599 10,020 0 7,869 0 4,460 5,974 0 86 (2,643) 0 (2,643) (2,544) 0 0 (5,187) (.52) (.52)
-----END PRIVACY-ENHANCED MESSAGE-----