SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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
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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 May 4, 2001, there were 14,318,423 shares of the Registrant's Common
Stock, par value $0.01 per share, issued and outstanding, excluding treasury
stock.
1
NETLOJIX COMMUNICATIONS, INC.
QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31,
2001 (Unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations for
the Three Month Periods Ended March 31, 2001 and
2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
Three Month Periods Ended March 31, 2001 and 2000
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
---------------------- ----------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 49,000 $ 184,000
Accounts receivable, net 2,469,000 2,289,000
Due from affiliates 599,000 832,000
Prepaid expenses and other current assets 256,000 381,000
---------------------- ----------------------
Total current assets 3,373,000 3,686,000
Property and equipment, net 1,454,000 1,502,000
Goodwill, net 4,500,000 4,585,000
Customer bases acquired and other intangibles, net 1,699,000 1,860,000
Other assets 179,000 86,000
---------------------- ----------------------
Total assets $ 11,205,000 $ 11,719,000
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other accrued expenses $ 2,211,000 $ 2,690,000
Accrued network services costs 1,016,000 668,000
Litigation settlement liability 808,000 940,000
Sales and excise tax payable 334,000 338,000
Unearned revenue 1,212,000 1,160,000
Revolving line of credit 1,333,000 1,178,000
Other current liabilities 507,000 542,000
---------------------- ----------------------
Total current liabilities 7,421,000 7,516,000
Long term obligations 48,000 54,000
---------------------- ----------------------
Total liabilities 7,469,000 7,570,000
---------------------- ----------------------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000 shares, $0.01 par value Series A
convertible preferred stock, designated 250,000 shares,
cumulative as to 8% dividends, 148,000 shares issued and
outstanding. (Liquidation preference of $752,000 at March 31, 2001
and $728,000 at December 31, 2000, including dividends in arrears.) 1,000 1,000
Common stock, authorized 40,000,000 shares, $0.01 par value, issued
14,482,000 shares at March 31, 2001 and
December 31, 2000. 145,000 145,000
Additional paid in capital 28,452,000 28,452,000
Accumulated deficit (24,860,000) (24,447,000)
Treasury stock, $0.01 par value, 163,000 at March 31, 2001 and
December 31, 2000. (2,000) (2,000)
---------------------- ----------------------
Total stockholders' equity 3,736,000 4,149,000
Total liabilities and stockholders' equity $ 11,205,000 $ 11,719,000
====================== ======================
See accompanying notes.
3
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS ENDED MARCH 31,
(unaudited)
2001 2000
---------------------- ---------------------
REVENUES $ 5,197,000 $ 5,304,000
COST OF REVENUES 3,026,000 3,132,000
---------------------- ---------------------
GROSS MARGIN 2,171,000 2,172,000
Operating expenses
Selling, general and administrative 2,171,000 3,428,000
Litigation settlement costs - 998,000
Depreciation and amortization 379,000 253,000
---------------------- ---------------------
Total operating expenses 2,550,000 4,679,000
---------------------- ---------------------
OPERATING LOSS (379,000) (2,507,000)
Interest expense (51,000) (1,000)
Other income (expense), net 17,000 (3,000)
---------------------- ---------------------
Loss from operations
before income taxes (413,000) (2,511,000)
Income tax benefit - -
---------------------- ---------------------
NET LOSS $ (413,000) $ (2,511,000)
====================== =====================
Net loss per common share - basic
and diluted $ (0.03) $ (0.20)
====================== =====================
Weighted average number of
common shares - basic and diluted 14,482,000 12,834,000
====================== =====================
See accompanying notes.
4
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED MARCH 31,
(unadudited)
2001 2000
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (413,000) $ (2,511,000)
Adjustments to reconcile net loss from continuing operations
to cash used by continuing operating activities:
Depreciation and amortization 379,000 253,000
Issuance of warrants for professional services - 216,000
Provision for bad debts 143,000 34,000
Stock compensation earned - 45,000
Changes in certain operating assets and liabilities:
Accounts receivable (323,000) (683,000)
Due from affiliates 233,000 192,000
Other current assets 23,000 (105,000)
Litigation settlement liability 133,000 -
Accounts payable and accrued liabilities (384,000) 605,000
-------------------- --------------------
Cash used by operating activities (209,000) (1,954,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (75,000) (177,000)
Payments received on loans to officers - 30,000
Cash received (paid) in acquisitions - (25,000)
-------------------- --------------------
Cash used by investing activities (75,000) (172,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases (5,000) (45,000)
Cash proceeds from exercise of options - 861,000
Sale of common stock - 1,472,000
Preferred stock dividend payments - (24,000)
Borrowings on line of credit 3,771,000 -
Amounts paid on line of credit (3,616,000) -
Amounts paid on long term borrowings (1,000) -
Costs associated with issuance of common stock - (16,000)
Purchase of common stock for treasury - (38,000)
-------------------- --------------------
Cash provided by financing activities 149,000 2,210,000
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents (135,000) 84,000
Cash and cash equivalents at beginning of period 184,000 1,135,000
-------------------- --------------------
Cash and cash equivalents at end of period $ 49,000 $ 1,219,000
==================== ====================
Cash paid during the period:
Interest $ 51,000 $ 2,000
==================== ====================
Non cash investing and financing activities:
Common stock issued for acquisition $ - $ 195,000
==================== ====================
See accompanying notes.
5
NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2001 and 2000
(1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of NetLojix
Communications, Inc. and Subsidiaries (the "Company") as of March 31, 2001 and
2000 and for the three 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,
2000. 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.
(2) ACQUISITIONS
Effective August and September 2000, the Company acquired all the
outstanding shares of Smith Technology Solutions, Inc. (STS) and CW Electronic
Enterprises, Inc. (CWE(2)), respectively. These enterprises provide local and
wide area network design, integration and support, and web-site design and
management for businesses. The Company paid cash of $60,000 and $150,000 and
issued 250,000 and 500,000 shares of its common stock valued at approximately
$484,417 and $1,214,000 in exchange for all the outstanding shares of STS and
CWE(2), respectively. The Company also paid $90,000 for a consulting agreement
with an officer of STS. In addition, the Company incurred acquisition related
expenses totaling approximately $233,000. These acquisitions were accounted for
using the purchase method of accounting
Unaudited pro forma results of operations of the Company as if the
acquisitions of STS and CWE(2) had occurred as of the beginning of the quarter
ended March 31, 2000:
QUARTER ENDED MARCH 31,
-----------------------
2000
----
Revenues $ 6,233,000
Operating loss (2,556,000)
Net loss (2,560,000)
Pro forma net loss per common share $ (.19)
The pro forma financial information has been prepared for comparative
purposes only and does not purport to indicate the results of operations that
would have occurred had the acquisition been made at the beginning of the
periods indicated, or which may occur in the future.
6
(3) LOSS PER COMMON SHARE
Loss per common share for the three-month periods ended March 31, 2001
and 2000 are as follows:
2001 2000
---------------- ----------------
Numerator:
Net loss $ (413,000) (2,511,000)
Preferred dividends 0 24,000
---------------- ----------------
Loss applicable to common shareholders $ (413,000) (2,535,000)
================ ================
Denominator:
Weighted average number of common shares used in
basic and diluted loss per common share 14,482,000 12,834,000
================ ================
Basic and diluted loss per common share $ (0.03) (0.20)
================ ================
There are 2,538,000 and 1,756,000 potential common shares that are
excluded from the diluted per common share calculation for 2000 and 2001,
respectively, because their inclusion is antidilutive.
(4) LITIGATION
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. On October 4, 2000, the Company
finalized the agreement with counsel for the plaintiff class to settle all
outstanding claims under the class action lawsuit. This agreement received
the preliminary approval of the court on November 8, 2000, and the Company
thereafter paid $150,000 (including $30,000 in 2000 and $120,000 in the first
quarter of 2001) for administrative costs and other settlement implementation
expenses. Notice of the settlement was sent to potential class members on
March 19, 2001. The court held a hearing, on May 14, 2001, to consider the
entry of a final order of dismissal and approval of the settlement. If so
approved, the Company will then issue for distribution to the claimant class
members, and for payment of any plaintiffs attorneys' fees and litigation
expenses as the court may award, a total of 232,000 shares of common stock
and warrants to purchase 200,000 shares of NetLojix's common stock at an
exercise price of $8.00 per share with a term of 2 years.
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. This
charge will be adjusted to the current market value of the securities to be
issued as part of the settlement on the date that the settlement becomes
effective.
7
In connection with the sale in November, 1999 of Matrix Telecom (a
former subsidiary of NetLojix), the final amount of the purchase price is
subject to adjustment based on finalization of a balance sheet for Matrix
Telecom as of August 31, 1999 and agreement by both parties. The Company has
been notified by the purchaser that it materially disagrees with the balance
sheet of Matrix Telecom prepared by the Company. To date, the Company has
attempted to resolve the matter, but the purchaser has resisted submitting the
matter to an independent firm of accountants chosen by the parties for final
resolution, as required by the contract. Any adjustments in the purchase price
would affect the purchase price and the recorded gain. If the dispute is
determined in the purchaser's favor, the Company could be required to repay some
of the purchase price to the purchaser in cash. At this time, the Company does
not believe that the ultimate resolution of the items in dispute will materially
affect the recorded gain.
The Company presently has other contingent liabilities relating to various
lawsuits and other matters related to the conduct of its business. On the basis
of information furnished by counsel and others, management believes that the
resolution of these contingencies will not materially affect the financial
condition or results of operations of the Company.
(5) 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 long distance, frame
relay, ASM, calling cards, and "1-800" services. Internet product offerings
within the network connectivity segment include dial-up access, DSL, dedicated
access and cable access. This segment includes the Internet connectivity portion
of the Company's Southern California based Internet service provider business.
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, warranty repairs and a small amount of
hardware sales.
The applications development and hosting services segment includes
producing, designing, and programming creative multimedia applications that can
be produced as a web application or a stand alone application as well as web
hosting services.
The Company measures its performance based on revenues, gross margin,
net income or loss and earnings before interest, taxes, depreciation and
amortization ("EBITDA"). EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to net income or cash flows from operations, as a measure of
performance.
8
The results for the three months ended March 31, 2001 and 2000 are as
follows:
THREE MONTHS ENDED MARCH 31, 2001
NETWORK TECHNICAL APPLICATIONS
CONNECTIVITY SUPPORT DEVELOPMENT
SERVICES SERVICES AND HOSTING TOTAL
------------ ---------- ------------ ----------
Revenues $ 2,646,000 2,042,000 509,000 5,197,000
Gross margin 1,120,000 787,000 264,000 2,171,000
Selling, general & administrative costs 1,016,000 1,091,000 64,000 2,171,000
Depreciation & amortization 138,000 226,000 15,000 379,000
Interest expense (31,000) (20,000) - (51,000)
Other income (expense) 25,000 (6,000) (2,000) 17,000
Net income (loss) $ (40,000) (556,000) 183,000 (413,000)
=========== =========== =========== ===========
EBITDA $ 129,000 (310,000) 198,000 17,000
=========== =========== =========== ===========
Total assets $ 3,297,000 7,471,000 437,000 11,205,000
=========== =========== =========== ===========
THREE MONTHS ENDED MARCH 31, 2000
NETWORK TECHNICAL APPLICATIONS
CONNECTIVITY SUPPORT DEVELOPMENT
SERVICES SERVICES AND HOSTING TOTAL
------------ ---------- ------------ ----------
Revenues $ 3,123,000 1,419,000 762,000 5,304,000
Gross margin 1,072,000 582,000 518,000 2,172,000
Selling, general & administrative costs 2,038,000 966,000 424,000 3,428,000
Depreciation & amortization 156,000 89,000 8,000 253,000
Interest expense (1,000) - - (1,000)
Other income (expense) (2,000) (1,000) - (3,000)
Income (loss) from operations before corporate
litigation settlement $(1,125,000) (474,000) 86,000 (1,513,000)
=========== =========== ===========
Corporate litigation settlement - - - (998,000)
-----------
Net loss $(1,125,000) (474,000) 86,000 (2,511,000)
=========== =========== =========== ===========
EBITDA $ (968,000) (385,000) 94,000 (1,447,605)
=========== =========== =========== ===========
Total assets $ 6,174,000 4,659,000 913,000 11,746,000
=========== =========== =========== ===========
9
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, 2000.
The following discussion and analysis should be read in connection with
the unaudited condensed consolidated financial statements for the three month
periods ended March 31, 2001 and 2000 of the Registrant and related notes
included elsewhere in this report and the consolidated financial statements and
related management discussion and analysis included in the Registrant's Annual
Report on Form 10-K, for the year ended December 31, 2000.
DESCRIPTION OF REVENUE SEGMENTS
We classify our business into three segments: network connectivity,
technical support and application development and hosting. The segmentation of
our company is how we manage the day-to-day operations of our business and is
based on the types of services we provide. All of our services are targeted
toward small to mid-sized businesses.
Network Connectivity
The network connectivity segment includes services provided to our
customers that are connections for the transfer of data or voice traffic. We
provide numerous Internet service options, data and voice access and traditional
long distance services. Our Internet product offerings within the network
connectivity segment includes dial-up access, DSL, dedicated access and cable
access. Our telecommunications product offerings include dedicated or leased
lines, switched long distance, frame relay, ATM, calling cards, and "1-800"
services. This segment includes the Internet connectivity portion of our
Internet service provider business. Within this segment, our networking and
communications professionals will design, build and maintain a flexible,
cost-effective package of data networking and voice communication services to
meet our customer's needs.
Technical Support
Technical support services encompasses a broad array of solutions
including system integration, desktop and network support, asset management and
help desk solutions aimed at keeping our customers' IT systems operational and
their networks running smoothly. The IT support team is certified by over 40
hardware and software manufacturers. Service options within this segment include
systems and network installations, flat-fee maintenance contracts, prepaid time
block retainers, help desk management contracts, warranty repairs and a small
amount of hardware sales.
10
Application Development and Hosting
The applications development and hosting services segment includes
producing, designing, and programming creative multimedia and commerce
applications that can be produced as a web application or a stand alone
application. Once a web site has been designed we can also provide site
maintenance services, host the web site on our own web servers or provide
co-location space within one of our data centers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2000.
Revenues
Revenues for the three months ended March 31, 2001 were $5.2 million, a
decrease of 2.0% or $.1 million from $5.3 million for the three months ended
March 31, 2000.
Network connectivity services revenues, decreased $.5 million to $2.6
million for the three months ended March 31, 2001 from $3.1 million for the
three months ended March 31, 2000. Within the network connectivity services
segment, data and voice services accounted for $.2 million of the decrease with
the balance of the decrease attributable to Internet services. Data and voice
services decreased 3.7% from the comparable quarter in 2000 primarily due to the
decrease in per minute rates attributable to continued competitive pricing
pressures within the telecommunications industry. Internet services revenues
decreased $.3 million or 24.5% to $.76 million. The decrease is primarily due to
a decrease in dial up connectivity accounts due to the competitiveness of the
industry. We believe that while demand for dial up connectivity is decreasing,
broadband Internet access products will continue to be strong, however they will
also experience downward competitive pricing. 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 $2.0 million for the three
months ended March 31, 2001, an increase of $.6 million or 44.0%, over the
comparable quarter in 2000. Approximately $.5 million of the increase was due to
the acquisition of CWE(2) and STS late in the third quarter of 2000. The balance
of the increase was due to increased revenues from the cross marketing of
technical support services to network connectivity customers and increased sales
of our help desk solution.
Application development and hosting services revenues decreased to $.5
million for the three months ended March 31, 2001 from $.8 million for the
comparable quarter in 2000, a 33.3% decrease. The decrease is primarily
attributable to the downsizing of the application development group. During the
first quarter of 2000, the Company realized several revenue recognition
milestones on two large application development projects. Subsequent to March
31, 2000, one of the projects was terminated prior to completion. The Company
has made a strategic decision to focus our applications development efforts on
e-commerce, web centric applications and managed web hosting. Generally, these
are higher margin services. For the three months ended March 31, 2001 hosting
services increased 28.7% over the three months ended March 31, 2000. We expect
to increase our focus on web centric applications and an expanded portfolio of
managed hosting services. In the fourth quarter of 2000, the Company initiated
the expansion of its Santa Barbara data center to support its increased service
offerings.
11
Gross Margin
Gross margin on operations as a percentage of revenues increased to
42.0% for the three months ended March 31, 2001 from 41.0% for the three months
ended March 31, 2000.
Network connectivity services gross margin as a percent of revenue
increased to 42.4% for the three months ended March 31, 2001 from 34.3% for the
three months ended March 31, 2000. Within the network connectivity services
segment, data and voice gross margins averaged 34.8% vs. 17.7% in the comparable
quarter in 2000. The increase in gross margins was primarily due to a one time
adjustment to cost of goods sold due to resolution of the amount of Universal
Service Fund liability.
Gross margins for Internet services continues to be strong averaging
61.1% during the three months ended March 31, 2001 vs. 73.5% for the comparable
2000 quarter. The decrease from 2000 is primarily attributable to the lower
revenue with fixed connectivity costs.
Technical support services gross margins averaged 38.5% during the
quarter ended March 31, 2001 compared to 41.0% for the comparable quarter in
2000. 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 hosting gross margins were 51.8% during
2001 compared to 68.0% for the comparable quarter in 2000. The decrease in gross
margin is due primarily to several high margin contracts reaching revenue
milestones in the first quarter of 2000. 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 decreased $1.2 million to
$2.2 million for the three months ended March 31, 2001 from $3.4 million for the
three months ended March 31, 2000. As a percentage of revenues, selling, general
and administrative costs decreased to 41.7% for the three months ended March 31,
2001 from 64.6% for the three months ended March 31, 2000. These decreases are
primarily due to a cost reduction plan which began in November of 2000 and will
be fully implemented early in the second quarter of 2001.
Of the decrease in selling, general and administrative expenses, $0.8
million is attributable to salary expense, which was the main focus of the cost
reduction plan. Approximately $0.1 million of the decrease is attributable to
bringing the billing for telecommunications in house in the third quarter of
2000. Approximately $0.2 million of the decrease is due to decreased
professional service fees, primarily due to the decline of legal fees associated
with the class action lawsuit and regulatory registration. The remaining
decrease in cost was associated with the consolidation of office space and a
streamlining of the Company's business.
12
LITIGATION
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. On October 4, 2000, the Company
finalized the agreement with counsel for the plaintiff class to settle all
outstanding claims under the class action lawsuit. This agreement received
the preliminary approval of the court on November 8, 2000, and the Company
thereafter paid $150,000 (including $30,000 in 2000 and $120,000 in the first
quarter of 2001) for administrative costs and other settlement implementation
expenses. Notice of the settlement was sent to potential class members on
March 19, 2001. The court held a hearing, on May 14, 2001, to consider the
entry of a final order of dismissal and approval of the settlement. If so
approved, the Company will then issue for distribution to the claimant class
members, and for payment of any plaintiffs attorneys' fees and litigation
expenses as the court may award, a total of 232,000 shares of common stock
and warrants to purchase 200,000 shares of NetLojix's common stock at an
exercise price of $8.00 per share with a term of 2 years.
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. This
charge will be adjusted to the current market value of the securities to be
issued as part of the settlement on the date that the settlement becomes
effective.
In connection with the sale in November, 1999 of Matrix Telecom (a
former subsidiary of NetLojix), the final amount of the purchase price is
subject to adjustment based on finalization of a balance sheet for Matrix
Telecom as of August 31, 1999 and agreement by both parties. The Company has
been notified by the purchaser that it materially disagrees with the balance
sheet of Matrix Telecom prepared by the Company. To date, the Company has
attempted to resolve the matter, but the purchaser has resisted submitting the
matter to an independent firm of accountants chosen by the parties for final
resolution, as required by the contract. Any adjustments in the purchase price
would affect the purchase price and the recorded gain. If the dispute is
determined in the purchaser's favor, the Company could be required to repay some
of the purchase price to the purchaser in cash. At this time, the Company does
not believe that the ultimate resolution of the items in dispute will materially
affect the recorded gain.
The Company presently has other contingent liabilities relating to various
lawsuits and other matters related to the conduct of its business. On the basis
of information furnished by counsel and others, management believes that the
resolution of these contingencies will not materially affect the financial
condition or results of operations of the Company.
Interest Expense
The Company currently has $1.3 million outstanding under its secured
line of credit. For the three months ended March 31, 2001, the Company averaged
approximately $1.2 million in outstanding borrowings compared to $.05 million in
2000. Accordingly, interest expense increased to $51,000 for the three months
ended March 31, 2001 from $1,000 for the three months ended March 31, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2001, we reported a net loss from
continuing operations of $.4 million and used net cash in operations of $.2
million. As of March 31, 2001, we had cash and cash equivalents of $.05 million
and outstanding indebtedness on our line of credit of $1.3 million. At that
date, we had a working capital deficit of $4 million. In their report on
NetLojix's December 31, 2000 consolidated financial statements, our independent
auditors included an explanatory paragraph indicating that NetLojix's recurring
operating losses and working capital deficit at December 31, 2000 raise doubts
in their minds about NetLojix's ability to continue as a going concern. As
described in more detail below, we initiated a cost reduction plan, which began
in November of 2000 and will be fully implemented early in the second quarter of
2001 to improve our cash flow from operations. This plan included a reduction in
staff, closure of offices and a refocusing of our marketing and sales activities
on more profitable lines of business.
Under our secured credit facility with Coast Business Credit, we may
borrow up to 75% of eligible billed receivables (as defined) up to a total
amount of $3.0 million. The percentage may be increased to 80% of eligible
billed receivables if we reach certain operational targets. Additionally we may
borrow up to 50% of certain telecommunication unbilled receivables. Effective
April 6, 2001, Coast Business Credit notified the Company that it will be
reducing this unbilled advance rate by 5% per week. In addition, the line of
credit may be used to provide a facility for issuing letters of credit.
Borrowings under the line of credit bear interest, payable monthly, based upon
the prime rate of Bank of America NT & SA plus 2% (10.0% at March 28, 2001 and
9.5% at May 15, 2001). Borrowings under the credit facility are secured by
substantially all of our assets. As of May 15, 2001, approximately $ 1 million
is outstanding under the credit facility, and approximately $.1 million 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. Among other requirements, 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.
Because our current trading price is below this level, we are unable to utilize
the equity line without Cambois' agreement. We have not sold any shares of
common stock to Cambois under the equity line agreement since December 1999.
On February 21, 2001, we paid $120,000 in connection with the
settlement agreement entered into in November 2000 with respect to NetLojix's
outstanding class action lawsuit.
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. However, as noted above, we
currently cannot utilize the equity line without the agreement of Cambois.
We believe that current public market conditions are not conducive to
raising large amounts of additional capital at this time. Therefore, we have
taken several steps to conserve cash and reduce operating expenses. These steps
include the termination of 30 employees, which was effected on November 9, 2000
and an additional reduction of 12 employees in February 2001. After giving
effect to the cost control measures, we expect that operating cash flows coupled
with the remaining availability under our secured line of credit facility should
be sufficient to meet our minimum working capital requirements into the
foreseeable future. While we believe the cost control measures will
significantly reduce our monthly cash requirements, we are also exploring other
possible sources of cash including the possibility of a private equity
placement. However, our current low
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stock price and possible delisting from The Nasdaq SmallCap Market present
substantial obstacles to additional private placements.
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 March 31,
2001. A hypothetical increase of 100 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 was a defendant in a class action
under the federal securities laws (IN RE AVTEL SECURITIES LITIGATION, Case No.
98-9236) in the United States District Court for the Central District of
California.
On October 4, 2000, NetLojix finalized an agreement with counsel for
the plaintiff class to settle all outstanding claims under the class action
lawsuit. During the last quarter of 2000 and the first quarter of 2001, NetLojix
paid a total of $150,000 for administrative costs and other settlement
implementation expenses. Notice of the settlement was distributed to potential
class members on March 19, 2001.
On May 14, 2001, the court held a hearing to consider the entry of a
final order of dismissal and approval of the settlement. If approved, the appeal
period for this final approval will end thirty days after the date of approval.
Unless the final settlement is properly appealed, which NetLojix does not
expect, NetLojix will then issue for distribution to the claimant class members,
and payment of the plaintiffs attorneys' fees and litigation expenses as awarded
by the court, a total of 232,000 shares of common stock and warrants to purchase
200,000 shares of NetLojix's common stock at an exercise price of $8.00 per
share with a term of 2 years.
As previously reported, NetLojix, Matrix Telecom, Inc. (a former
subsidiary of NetLojix), Ronald L. Jensen and United Group Association, Inc. (an
entity affiliated with Mr. Jensen) were defendants in an action filed in the
District Court of Dallas County, Texas, in May, 1999, by E. Craig Sanders. Mr.
Sanders was an executive of Matrix Telecom from late 1994 until he was
terminated by Matrix Telecom in May 1995. In addition to his claims against Mr.
Jensen, Mr. Sanders sought 171,548 shares of NetLojix's common stock, or its
monetary equivalent, from NetLojix. On April 12, 2001, the court granted summary
judgment in favor of NetLojix and Matrix Telecom in this matter.
As previously reported, NetLojix and Netlogic, Inc. were parties to an
action in federal court in New York. The suit related to NetLojix's use of the
trademark "NETLOJIX," which Netlogic, Inc. claimed was an infringement of its
registered trademark "NETLOGIC". On April 26, 2001, the parties entered into a
settlement agreement and the legal proceedings were dismissed.
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ITEM 5. OTHER INFORMATION
On May 11, 2001, a Nasdaq Qualifications Hearing Panel met to
consider the delisting of NetLojix's stock from The Nasdaq SmallCap Market.
As previously reported, NetLojix had received a Nasdaq staff determination
indicating that the company fails to comply with the net tangible assets and
minimum bid price requirements for continued listing on The Nasdaq SmallCap
Market. As of May 11, 2001, NetLojix had not regained compliance with these
requirements. Accordingly, NetLojix's stock may be delisted from The Nasdaq
SmallCap Market in the near future. If NetLojix's stock is delisted, it will
be eligible for quotation on the OTC Bulletin Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter ended
March 31, 2001.
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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/ GREGORY J. WILSON
------------------------
Gregory J. Wilson
Treasurer and Controller
(Duly Authorized Officer
and Principal Financial
Officer and Principal
Accounting Officer)
Dated: May 15, 2001
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