U.S. SECURITIES ANDEXCHANGE COMMISSIONWASHINGTON, D.C.20549 

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FORM 10-QSB

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[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE         ACT OF 1934

FOR THE QUARTERLY PERIODENDED JUNE 30, 2002

OR

[__]  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES         EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIODFROM _______      TO ________

COMMISSION FILE NUMBER0-27580

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**NETLOJIXCOMMUNICATIONS, INC.**(EXACT NAME OF SMALL BUSINESSISSUER AS SPECIFIED IN ITS CHARTER)

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| **  DELAWARE**                  | **87-0378021**      |
|--------------------------------------|---------------------|
| (STATE OR OTHER JURISDICTION OF      | (I.R.S. EMPLOYER    |
|  INCORPORATION OR ORGANIZATION) | IDENTIFICATION NO.) |

**501 BATHSTREETSANTA BARBARA,CALIFORNIA 93101**(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

**(805) 884-6300**(ISSUER'S TELEPHONE NUMBER,INCLUDING AREA CODE)

As of Aug 12,2002, there were 14,463,149 shares of the Registrant's Common Stock, par value$0.01 per share, issued and outstanding, excluding treasury stock.

TransitionalSmall Business Disclosure Format (check one):

Yes  [__]        No  [X]

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NETLOJIX COMMUNICATIONS, INC.QUARTER ENDED June 30, 2002

  TABLE OF CONTENTS

 

|   |      PAGE          Part I.         FINANCIAL INFORMATION        Item 1.  Financial Statements                       Condensed Consolidated BalanceSheet as of June 30, 2002 3                         Condensed ConsolidatedStatements of Operations for                          the Three and Six MonthPeriods Ended June 30, 2002 and 20014                          Condensed ConsolidatedStatements of Cash Flows for                          the Six Month Periods EndedJune 30, 2002 and 20015                          Notes to Condensed Consolidated Financial Statements6             Item 2.  Management's Discussion and Analysis or Plan of    Operation13                      PART II.        OTHER    INFORMATION        Item 3.  Defaults upon    Senior Securities19          Item 6.  Exhibits and    Reports on Form 8-K19   Signature Page20 
 

2

 
    PART I.  FINANCIAL INFORMATION    ITEM 1.  FINANCIAL STATEMENTS     NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
June 30,
2002
AssetsCURRENT ASSETSCash$     191,000 Accounts receivable, net   1,181,000     Accounts receivable from related parties     677,000     Prepaid expenses and other current assets     370,000    Total current assets   2,419,000     Property and equipment, net     906,000 Customer bases aquired and other intangibles, net     315,000 Other assets      52,000    Total assets$   3,692,000    
Liabilities and Stockholders' EquityCURRENT LIABILITIESRevolving line of credit$   1,200,000     Accounts payable and other accrued expenses   1,408,000     Accrued payroll related liabilities     635,000 Accrued network services costs     399,000 Litigation settlement liability      73,000 Sales and excise tax payable      72,000 Unearned revenue     821,000     Accrued litigation & contingencies cost     465,000 Other current liabilities      52,000    Total current liabilities   5,125,000 Long term obligations      18,000    Total liabilities   5,143,000        Commitments and contingenciesSTOCKHOLDERS' 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, 147,700 shares issued and      outstanding. (Liquidation preference of $799,000 at June 30, 2002      including dividends in arrears.)       1,000     Common stock, authorized 40,000,000 shares, $0.01 par value,      issued 14,626,054 shares at June 30, 2002.     146,000     Deferred Compensation - restricted stock     (12,000)Additional paid in capital  28,469,000 Preferred dividends    (102,000)Accumulated deficit (29,951,000)     Treasury stock, $0.01 par value, 162,905 shares at June 30, 2002        (2,000)   Total stockholders' equity  (1,451,000)       Total liabilities and stockholders' equity
$   3,692,000        See accompanying notes.
 

3

 
      NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)Three monthsSix monthsEnded June 30,Ended June 30,    
   2002    
   2001    
   2002    
   2001    SERVICE REVENUESUnrelated parties$            2,684,000   3,946,000   5,573,000   8,250,000 Related parties - (note 6)            1,079,000   1,005,000   2,111,000   1,899,000            TOTAL SERVICE REVENUES            3,763,000   4,951,000   7,684,000  10,149,000       COST OF SERVICE REVENUES      (exclusive of depreciation - note 8)            2,251,000   2,979,000   4,541,000   6,006,000      GROSS MARGIN            1,512,000   1,972,000   3,143,000   4,143,000 OPERATING EXPENSES      Selling, general and administrative            1,413,000   1,954,000   3,010,000   4,124,000       Litigation settlement (recovery) costs                    -    (684,000)          -    (684,000)Depreciation and amortization              135,000     394,000     289,000     774,000                Total operating expenses            1,548,000   1,664,000   3,299,000   4,214,000          OPERATING (LOSS)              (36,000)    308,000    (156,000)    (71,000)Interest expense              (32,000)    (38,000)    (54,000)    (89,000)      Other income (expense), net              (69,000)     (8,000)    (81,000)      9,000            (Loss) from operationsbefore income taxes             (137,000)    262,000    (291,000)   (151,000)Income tax benefit                    -           -           -           -      NET (LOSS)$             (137,000)    262,000    (291,000)   (151,000)     Preferred dividends                    -           -           -           -       Loss applicable to common shareholders$             (137,000)    262,000    (291,000)   (151,000)           Net (loss) per common share - basic & diluted$                (0.01)       0.02       (0.02)      (0.01)           Weighted average number ofcommon shares - basic           14,630,046  14,481,328  14,643,114  14,481,328            Weighted average number ofcommon shares - diluted           14,630,046  15,063,752  14,643,114  14,481,328            See accompanying Notes
 

4

 
      NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unadudited)
Six months
Ended June 30,
   2002    
   2001          CASH FLOWS FROM OPERATING ACTIVITIES:      Net loss from continuing operations$   (291,000) $    (151,000)      Adjustments to reconcile net loss from continuing operations        to cash provided by (used by) continuing operating activities:Depreciation and amortization    289,000     774,000 Provision for bad debts     96,000     207,000       Litigation settlement (recovery)   (684,000)Stock compensation earned      3,000       1,000       Changes in certain operating assets and liabilities:Accounts receivable    602,000     192,000 Due from affiliates   (116,000)     35,000 Other current assets    (75,000)   (169,000)Litigation settlement liability          -    (183,000)      Accounts payable and accrued liabilities (1,119,000)    229,000            Cash provided by (used by) operating activities   (611,000)    251,000       CASH FLOWS FROM INVESTING ACTIVITIES:      Additions to property and equipment    (31,000)   (154,000)           Cash used by investing activities    (31,000)   (154,000)      CASH FLOWS FROM FINANCING ACTIVITIES:      Principal payments on capital leases     (7,000)    (10,000)      Amount borrowed (paid) on line of credit, net    773,000    (225,000)      Amounts paid on long term borrowings     (5,000)     (2,000)           Cash provided by (used by) financing activities    761,000    (237,000)           Net increase (decrease) in cash and cash equivalents    119,000    (140,000)      Cash at beginning of period     72,000     184,000            Cash at end of period$    191,000  $      44,000            Cash paid during the period:Interest$     54,000 $     89,000            Non cash investing and financing activities:None$          - $          -                                       See accompanying notes.
 

5

NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIESNOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

June 30, 2002 and 2001

(1)  Basis of Presentation

        The unaudited condensed consolidated financial statements ofNetLojix Communications, Inc. and Subsidiaries (the "Company" or"NetLojix") as of June 30, 2002 and 2001 and for the three and six monthperiods then ended have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial reporting.Accordingly, they do not include all of the disclosures required by accountingprinciples generally accepted in the United States for complete financialstatements and should be read in conjunction with the audited consolidatedfinancial statements and notes thereto included in NetLojix's Form 10-K for theyear ended December 31, 2001. All significant intercompany balances andtransactions have been eliminated in consolidation. In the opinion ofmanagement, all adjustments (consisting only of normal recurring adjustments)considered necessary for a fair presentation of the interim financial informationhave been included.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations for the entire year.

(2)  Acquisitions and Dispositions

        On September 30, 2001 wesold a portion of our New York technical support services business (consistingof our New York City customer list and related customer contracts) to anunrelated third party. We retained all of our help desk customers andcontracts. The purchaser assumed responsibility for unused customer retainersand remaining terms on service agreements. We recorded a gain (net of costs) of$203,000 in connection with this sale. In addition, if the purchaser is able torenew retainers, service agreements or provide any additional services to thecustomers that were transferred, then it will pay us 5% of any such cashreceived prior to September 30, 2002. We have recorded $3,918 in suchadditional payments as of August 12, 2002.
 
6

(3)  Net Loss Per Common Share

Net Loss per common share for the three and six month periodsended June 30, 2002 and 2001 are as follows:

 

 

Three MonthsEnded June 30,

Six MonthsEnded June 30,

Net income (loss) per share -

 

 2002

 2001

 2002

 2001

 

 

 

 

 

 

Numerator:

 

 

 

 

 

   Net income (loss)

$

(137,000)

   262,000

 (291,000)

  (151,000) 

   Preferred  dividends

 

              -

                 -

                  -

                -

   Net Income (loss)  applicable    to common stockholders

$

(137,000)

262,000 

(291,000)

(151,000) 

 

 

=======

=======

=======

=======

Denominator:

 

 

 

 

 

   Weighted average  number of     common shares used in  basic     Net Income (loss) per  common share

 

14,630,046

14,481,328

14,643,114

14,481,328
                  
Shares issuable upon  conversion of preferred stock,  exercise of dilutive option,  and effect of restricted stock

 

               -

   582,424

              -  

              -
                  
   Weighted average  number of      common shares used in  diluted    Net Income (loss) per  common share

 

14,630,046

 15,063,752

 14,643,114

 14,481,328

 

 

=======

=======

=======

=======
                  
Basic Net Income (loss) per common share

$

 (0.01)

     0.02

 (0.02)

    (0.01)

 

 

=======

=======

=======

=======
                  
Diluted Net Income (loss) per  common share

$

 (0.01)

      0.02

 (0.02)

    (0.01)

 

 

=======

=======

=======

=======
                  
 

        As of June 30, 2002 and2001, common stock equivalent shares such as employee stock options have beenexcluded from the computation of diluted weighted average shares, as the effectwould be antidilutive.  Comprehensiveloss for the periods ended June 30, 2002 and 2001 is equal to net loss reportedfor such periods.

(4) Litigation and Contingencies

        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) initiated in December1998 in the United States District Court for the Central District ofCalifornia.

        OnOctober 4, 2000, NetLojix finalized an agreement with counsel for the plaintiffclass to settle all outstanding claims under the class action lawsuit. Thisagreement received the preliminary approval of the court on November 8, 2000,and NetLojix thereafter paid $150,000 for administrative costs and othersettlement implementation expenses. On May 29, 2001, the court entered itsfinal order of dismissal and approval of the settlement.  We expect to issue a total of 232,000 sharesof common stock and warrants to purchase 200,000 shares of common stock at anexercise price of $8.00 per share during the third quarter of 2002 fordistribution to the claimant class members, and payment of the plaintiffsattorneys' fees and litigation expenses. 

 

7

        Inconnection with the sale in November 1999 of Matrix Telecom (a formersubsidiary of NetLojix) to Platinum Equity Holdings LLC, the amount of thefinal purchase price is subject to adjustment based on finalization of abalance sheet for Matrix Telecom as of August 31, 1999 and agreement by bothparties. We completed the balance sheet as required. We were subsequentlynotified by Platinum that it materially disagreed with the closing balancesheet that we prepared.  We attempted tonegotiate a settlement of the balance sheet items in disagreement, but wereunsuccessful.  To date, the buyer hasresisted submitting the matter to an independent firm of accountants chosen bythe parties for final resolution, as required by the contract. At this time, webelieve that the ultimate resolution of the items in dispute will notmaterially affect the recorded gain. 

      NetLojix presently has other contingentliabilities relating to the conduct of our business.  On the basis of information furnished by counsel and others,management believes that the resolution of these contingencies will notmaterially affect the financial condition or results of operations of theCompany.

(5)  Stockholders' Equity

      During December 2001, we repurchased25,000 shares of our common stock from the NetLojix Communications, Inc.Employees' Savings Plan and Trust (the "401(k) Plan") at a price of $0.16 pershare.  These were unallocated sharesthat had been part of the employer contribution to the 401(k) Plan and wererepurchased as a result of our decision to remove stock ownership as an optionunder the 401(k) Plan. These 25,000 shares were retired on March 20, 2002.

      During April 2002, we retired 30,274shares of our common stock out of the 100,000 shares held in escrow from thepurchase of CWElectronic Enterprises, Inc. ("CWE2") in 2000. These shares were returned to Netlojix due to discrepancies in CWE2'sbalance sheet at the time of purchase. The remaining 69,726 shares were released from escrow to the formerowner of CWE2.  

(6)  Related Party Transactions

        We have had transactions inthe normal course of business with various companies who are related to ourshareholders.  We provide long distanceand data network service to a number of such related companies. Balancesrelated to operating activities are settled monthly.  The relationships that generate the revenues are effectively thesame as all other customer relationships held by the Company. The agreementsare standard term agreements.  Weneither receive nor provide any benefit outside of a standard customer-supplierrelationship.

        On January 31, 2002, NetLojix'ssecured credit facility with Coast Business Credit expired, and NetLojixentered into a new secured credit facility with DTL One, LLC ("DTL").  DTL is owned and controlled by directorJeffrey J. Jensen. Under the DTL line of credit, NetLojix may borrow up to 80%of eligible receivables (as defined) up to a total amount of $2.0 million.  Borrowings under the line of credit bearinterest, payable monthly, based upon the prime rate of Bank of America NT& SA plus 2% with a minimum interest rate of 10%. Borrowings under thecredit facility are secured by substantially all assets of NetLojix. The creditfacility also prohibits the payment of dividends and limits the size ofbusiness acquisitions that we may make without the prior consent of DTL.NetLojix believes that the terms of the DTL line of credit are more favorableto NetLojix than those of any other credit facility available to NetLojix toreplace the expiring Coast agreement.

 

8

        Since 1998, NetLojix hasfrom time to time loaned or advanced Craig R. Clark, its former Vice Presidentof Business Development, a total of $86,000, including interest.  All of these loans and obligations areunsecured.  On January 15, 2002, NetLojixentered into a separation agreement with Craig R. Clark.  As a result of the agreement, Mr. Clarkresigned from all positions with NetLojix, effective March 31, 2002.  With all obligations of the separationagreement preformed, NetLojix has notified Mr. Clark that his loan is now due.  With no response, we have chosen to reservefor the total amount advanced as of June 30, 2002.

(7)  Revenue Recognition

      Revenues for long distance, frame relay,Internet, applications development and web hosting services are recognized asservice is provided. Amounts paid in advance are recorded as unearned revenueand recognized as services are provided. Within the Technical Support Services segment, we sell services underhourly service contracts (whether prepaid or billed in arrears), flat feeservice contracts or prepaid maintenance contracts.  For prepaid maintenance contracts, we recognize revenue ratablyover the service period.  A small numberof our applications development contracts contain customer acceptance provisions.  In accordance with SAB 101, we recognizerevenue on such contracts only after a customer has indicated acceptance or thecustomer acceptance period has lapsed. For all other services, revenues are recognized when the services arerendered. 

(8)  Depreciation Excluded from Cost of Sales

      Wehave also excluded depreciation from Cost of Sales in the amount of $25,000 and$25,000 for the three month periods ended and $51,000 and $50,000 for the sixmonth periods ended June 30, 2002 and 2001 respectively. Such amounts areincluded in depreciation in the operating expense section of the Statement ofOperations and represents depreciation of equipment used in our data center.

(9)  Intangible Assets

      Intangible assets consist of thefollowing:

June 30, 2002

 Gross     

 

 Net     

 Weighted 

 Intangible 

 Accumulated 

 Intangible 

 Ave. Life 

 Assets     

 Amortization 

 Assets    

 (Years) 

Customer  Base

$

     1,583,000 

     1,293,000 

       290,000 

0.42

Non  - Compete

        200,000 

        175,000 

         25,000 

0.25

Total

$

     1,783,000 

     1,468,000 

       315,000 
        =======  =======  =======   
December 31, 2001

 Gross    

 

 Net     

 Weighted 

 Intangible

 Accumulated

 Intangible

 Ave. Life 

 Assets     

 Amortization

 Assets    

 (Years)

Customer  Base

$

     1,583,000 

     1,293,000 

       290,000 

0.92

Non  - Compete

        200,000 

        150,000 

         50,000 

0.75

Total

$

     1,783,000 

     1,443,000 

       340,000 
        =======  =======  =======                     
      The Company adopted SFAS 142 on January 1,2002 and has ceased amortization of assets, which are deemed to have indefinitelives. Under the new rules, the Company is no longer permitted to amortizeintangible assets with indefinite lives; instead they will be subject toperiodic tests for impairment.

 

9

      SFAS142 supercedes APB Opinion #17, Intangible Assets. In accordance with SFAS 142the Company also performed an impairment test of its remaining customer baseand determined that no write-down was necessary.

      Below is a reconciliation of previouslyreported net income and earnings per share to the amounts adjusted for theexclusion of amortization expense for goodwill and the customer base, net ofincome tax.

 Six Months 

 Ended June 30, 

2002

2001

 Net income (loss)

$

    (291,000)

   (151,000)

   Goodwill and Customer base amortization

                  -   

        444,000 

Adjusted  net income (loss)

$

    (291,000)

    293,000 
  =======  =======
Reported  diluted earnings (loss) per share

$

       (0.02)

      (0.01)

   Goodwill and Customer base     Amortization per share

                     - 

               0.03 

Adjusted  diluted earnings (loss)   per share

$

       (0.02)

       0.02 
  =======  =======            
      Estimated amortization expense for each ofthe next five years ended June 30, is as follows:
2002(12 Months)$  25,0002003 02004 02005 02006      0  Total$  25,000
(10)Segment Reporting

        NetLojix's primarybusiness segments are Network Connectivity, Technical Support Services andApplication Development and Hosting. Parent company costs are allocated to each segment based on revenue.

        The Network Connectivitysegment includes services for the transfer of data or voice traffic.  We provide traditional long distanceservices, calling card, dedicated voice and data access and numerous Internetservice options.  Telecommunicationsproduct offerings include dedicated or leased lines, switched long distance,frame relay, calling cards, and "1-800" services.  Internet product offerings within the network connectivitysegment include dial-up access, DSL, ISDN and dedicated access.  This segment includes the Internetconnectivity portion of our Southern California based ISP. 

        The Technical SupportServices segment encompasses a broad array of technical support services andsolutions including system integration, desktop and network support, assetmanagement and help desk solutions. Services include flat-fee maintenancecontracts, prepaid time block retainers, help desk management contracts, LANinstallations, warranty repairs and a small amount of hardware sales. 

 

10

        The ApplicationsDevelopment and Hosting services segment includes producing, designing andprogramming creative multimedia applications that can be produced as a webapplication or a stand alone application, and hosting, including shared,dedicated, co-location and managed services. 

        We measure our performance based on revenues, gross margin, netincome or loss and earnings before interest, taxes, depreciation andamortization ("EBITDA").  EBITDA is nota measure of financial performance under generally accepted accountingprinciples and should not be considered as an alternative to net income or cashflows from operations, as a measure of performance.

The results for the three months ended June 30, 2002 and 2001are as follows:

 
      
Three Months Ended June 30, 2002

 

Network  ConnectivityServices

Technical  Support  Services

Applications  Development  and  Web Hosting

Total

Revenues

 $

2,026,000

1,331,000

406,000

3,763,000

Gross  margin

 

644,000

544,000

324,000

1,512,000

Selling,  general & administration

 

647,000

561,000

205,000

1,413,000

Depreciation  & amortization

 

59,000

51,000

25,000

135,000

Interest  expense

 

16,000

13,000

3,000

32,000

Other  expense

 

      31,000

      31,000

      7,000

      69,000

Net  income (loss) 

$

(109,000)

(112,000)

84,000

(137,000)
      
========
========
========
========
EBITDA

$

(34,000)

(48,000)

112,000

30,000
      
========
========
========
========
Total assets

$

1,868,000

1,310,000

514,000

3,692,000
      
========
========
========
========                  
 
      
Three Months Ended June 30, 2001

 

Network  Connectivity Services

Technical  Support Service

Applications  Development  and  Web Hosting

Total

Revenues

 $

2,381,000

2,201,000

369,000

4,951,000

Gross  margin

 

686,000

986,000

300,000

1,972,000

Selling,  general & administration

 

882,000

974,000

98,000

1,954,000

Depreciation  & amortization

 

148,000

226,000

20,000

394,000

Interest  expense

 

 19,000

19,000

    -

  38,000

Other  expense (income)

 

-

8,000

-

8,000

Corporate  litigation settlement recovery

 

                 -

               -

             -

     684,000

Net  income (loss)

$

(363,000) 

(241,000)

182,000

262,000
      
========
========
========
========
EBITDA

$

(195,000)

4,000

202,000

694,000 
      
========
========
========
========
Total  assets

$

3,334,000

6,975,000

388,000

10,697,000
      
========
========
========
========                  
 

 

11
      
Six Months Ended June 30, 2002

 

Network  ConnectivityServices

Technical  Support Services

Applications  Development  and  Web Hosting

Total

Revenues

 $

4,052,000

2,817,000

815,000

7,684,000

Gross  margin

 

1,310,000

1,209,000

624,000

3,143,000

Selling,  general & administration

 

1,376,000

1,215,000

419,000

3,010,000

Depreciation  & amortization

 

120,000

119,000

50,000

289,000

Interest  expense

 

27,000

23,000

4,000

54,000

Other  expense

 

      35,000

      37,000

       9,000

       81,000

Net  income (loss) 

$

(248,000)

(185,000)

142,000

(291,000)
      
========
========
========
========
EBITDA

$

(101,000)

(43,000)

196,000

52,000
      
========
========
========
========                  
 

 
      
Six Months Ended June 30, 2001

 

Network  Connectivity Services

Technical  Support Service

Applications  Development  and  Web Hosting

Total

Revenues                       

 $

5,027,000

4,244,000

878,000

10,149,000

Gross  margin

 

1,806,000

1,716,000

621,000

4,143,000

Selling,  general & administration

 

1,896,000

2,065,000

163,000

4,124,000

Depreciation  & amortization

 

286,000

453,000

35,000

774,000

Interest  expense

 

 50,000

39,000

    -

  89,000

Other  expense (income)

 

(25,000)

14,000

2,000

 (9,000)

Other  expense (income)

 

                 -

               -

               -

     684,000

Net  income (loss)

$

(401,000) 

(855,000)

421,000

(151,000)
      
========
========
========
========
EBITDA                         

$

(65,000)

(363,000)

456,000

712,000 
      
========
========
========
========                  
 

 

12

 

        Within thethree business segments there are multiple types of revenue which are statedseparately below:

Three months

Six months

Ended June 30,

Ended June 30,

2002

2001

2002

2001

Network  Connectivity Services

  

   Data & Voice Services

$

 1,416,000 

 1,649,000 

 2,791,000 

  3,537,000 

   Internet Services 

 

   610,000 

   731,000 

 1,261,000 

  1,490,000 

 

Technical  Support Services

 

  

  

   Technical Support

 

   479,000 

   993,000 

   993,000 

  1,889,000 

   Help Desk Services

 

   814,000 

 1,131,000 

 1,757,000 

  2,220,000 

   Hardware

 

    39,000 

    77,000 

    67,000 

    134,000 

Applications  Development and Web Hosting

  

  

   Applications Development

   113,000 

    98,000 

   245,000 

    314,000 

   Web Hosting

     292,000 

     272,000 

     570,000 

       565,000 

$

 3,763,000 

 4,951,000 

 7,684,000 

 10,149,000 
        ========  ========     ========  ========
 

(11)Recent Accounting Pronouncements

      InAugust 2001, the FASB issued SFAS No. 143, "Accounting for Asset RetirementObligations."  SFAS 143 establishesaccounting standards for recognition and measurement of a liability for thecosts of asset retirement obligations. Under SFAS 143, the costs of retiring an asset will be recorded as aliability when the retirement obligation arises, and will be amortized toexpense over the life of the asset. We do not expect any effect on ourfinancial position or results of operations from the adoption of thisstatement.

     In October 2001, the FASB issued SFAS No. 144, "Accounting forthe Impairment or Disposal of Long-Lived Assets."  SFAS 144 addresses financial accounting and reporting for theimpairment or disposal of long-lived assets and discontinued operations. We donot expect any effect on our financial position or results of operations fromthe adoption of this statement.

 

ITEM2.  MANAGEMENT'S DISCUSSION AND ANALYSISOR PLAN OF OPERATION

THIS QUARTERLY REPORT ON FORM10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVERISKS AND UNCERTAINTIES.  THE STATEMENTSCONTAINED IN THIS DOCUMENT THATARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGOF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIESEXCHANGE ACT OF 1934, INCLUDING WITHOUT LIMITATION STATEMENTS REGARDINGTHE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDINGTHE FUTURE.  ALL FORWARD-LOOKINGSTATEMENTS INCLUDED IN THIS QUARTERLYREPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATEHEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKINGSTATEMENTS.  ACTUAL EVENTS AND OUTCOMESCOULD DIFFER MATERIALLYFROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS ASA RESULT OF MANY FACTORS, INCLUDING THOSE DESCRIBED HEREIN AND THOSE SETFORTH IN THE RISK FACTORS DESCRIBED IN ITEM 1 OF THE COMPANY'S ANNUAL REPORTON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001.

 

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        The following discussion and analysis should be read inconnection with the unaudited condensed consolidated financial statements forthe three and six month periods ended June 30, 2002 and 2001 of the Company andrelated notes included elsewhere in this report and the consolidated financialstatements and related management discussion and analysis included inNetLojix's Annual Report on Form 10-K, for the year ended December 31, 2001.

DESCRIPTION OF REVENUE SEGMENTS

        We classify our businessinto three segments: Network Connectivity, Technical Support Services andApplication Development and Hosting. The segmentation of our company is how we manage the day-to-dayoperations of our business and is based on the types of services we provide.

NetworkConnectivity 

        The network connectivitysegment includes services for the transfer of data or voice traffic.  We provide numerous Internet serviceoptions, data and voice access and traditional long distance services. OurInternet product offerings within the network connectivity segment includedial-up access, DSL, dedicated access and cable access.  Our telecommunications product offeringsinclude dedicated or leased lines, switched long distance, frame relay, ATM,calling cards, and "1-800" services. This segment includes the Internetconnectivity portion of our Internet service provider business.  Within this segment, our networking andcommunications professionals will design, build and maintain a flexible,cost-effective package of data networking and voice communication services tomeet our customers' needs.

TechnicalSupport Services

        Technical supportservices encompasses a broad array of solutions including system integration,desktop and network support, asset management and help desk solutions aimed atkeeping our customers' IT systems operational and their networks runningsmoothly. The IT support team is certified by over 40 hardware and softwaremanufacturers.  Service options withinthis segment include systems and network installations, flat-fee maintenancecontracts, prepaid time block retainers, help desk management contracts,warranty repairs and a small amount of hardware sales. 

ApplicationDevelopment and Hosting 

      The applicationsdevelopment and hosting services segment includes producing, designing and programmingcreative multimedia and commerce applications that can be produced as a webapplication or a stand alone application. Once a web site has been designed we can also provide site maintenanceservices, host the web site on our own web servers or provide co-location spacewithin one of our data centers.

Critical Accounting Policies

      Our discussion and analysis of ourfinancial condition and results of operations are based upon our consolidatedstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses.  In consultation with our Board of Directorsand Audit Committee, we have identified three accounting policies that webelieve are key to an understanding of our financial statements. These areimportant accounting policies that require management's most difficult,subjective judgments. 

      The first critical accounting policyrelates to revenue recognition.  In mostcases, we recognize revenue when the services are rendered.  For prepaid maintenance contracts, werecognize revenue ratably over the service period.  For contracts that contain customer acceptance provisions, werecognize revenue only after a customer has indicated acceptance. 

 

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      The second critical accounting policyrelates to accounts receivable. We establish an allowance for doubtful accountsbased upon factors surrounding the credit risk of our customers, historicaltrends and other information.  

        The third critical accounting policy relates to depreciation offixed assets. The purchase of equipment is capitalized based on its cost. Weprovide depreciation of fixed assets using the straight-line method over theequipment's estimated useful life. We have also excluded $25,000 and $25,000for the three month periods ended and $51,000 and $50,000 for the six monthperiods ended June 30, 2002 and 2001 respectively in depreciation from Cost ofSales.

RESULTSOF OPERATIONS

THREEMONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001.

Revenues

        Revenues from operations for the three months ended June 30,2002 were $3.8 million, a decrease of 24.5% or $1.2 million from $5.0 millionfor the three months ended June 30, 2001. 

        Network connectivity services revenues, decreased $.4 millionto $2.0 million for the three months ended June 30, 2002 from $2.4 million forthe three months ended June 30, 2001. Within the network connectivity servicessegment, data and voice services accounted for $.3 million of the decrease withthe balance of the decrease attributable to Internet services.  Data and voice services decreased 14.1% fromthe comparable quarter in 2001 primarily due to the loss of a large customer asa result of the sale of that customer by its parent company. Internet servicesrevenues decreased $.1 million or 16.6% to $.61 million. The decrease isprimarily due to a decrease in dial up connectivity accounts due to thecompetitiveness of the industry.

       Technical support services revenues were$1.3 million for the three months ended June 30, 2002, a decrease of $.9million or 39.5%, over the comparable quarter in 2001. The decrease was primarilydue to the reduction of revenue from the sale of a portion of the New Yorktechnical support services business (consisting of the New York City customerlist and related customer contracts).

        Application development and hosting services revenues increasedto $.41 million for the three months ended June 30, 2002 from $.4 million forthe comparable quarter in 2001, a 9.8% increase.  We have made a strategic decision to focus our applicationsdevelopment efforts on e-commerce, web centric applications and managed webhosting.  Generally, these are highermargin services.  For the three monthsended June 30, 2002 revenues from hosting services increased 7.6% over thethree months ended June 30, 2001.

GrossMargin

        Gross margin from operations as a percentage of revenuesremained stable at 40.0% for the three months ended June 30, 2002 and for thethree months ended June 30, 2001. Gross margin from operations decreased $.5million to $1.5 million for the three months ended June 30, 2002 from $2.0 millionfor the three months ended June 30, 2001.

        Network connectivity services gross margin as a percent ofrevenue increased to 31.8% for the three months ended June 30, 2002 from 28.8%for the three months ended June 30, 2001. Within the network connectivity services segment, data and voice grossmargins averaged 18.8% vs. 17.6% in the comparable quarter in 2001. Theincrease in gross margins was primarily due to the re-provisioning of certaincustomers to alternate carriers for optimal pricing.  

 

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        Gross margins for Internet services increased to 62.0% duringthe three months ended June 30, 2002 compared to 54.1% for the comparable 2001quarter. The increase from 2001 is primarily attributable to lower network costsas compared to 2001 when we were in the process of opening the New York, San Francisco, and Los Angelesmultiple points of presence ("MPOPs") along withthe reduction of network infrastructure costs, better utilization of bandwidthand a focus on higher margin services.

        Technical support services gross margins averaged 40.9% duringthe quarter ended June 30, 2002 compared to 42.2% for the comparable quarter in2001.  Gross margins in the technicalservice segment decreased due to an increased use of subcontractors for specialprojects during the second quarter of 2002.

        Application development and web hosting gross margins were79.8% during 2002 compared to 81.9% for the comparable quarter in 2001.  The decrease in gross margin is dueprimarily to a one-time adjustment following the resolution of a warrantyliability for an application development project increasing the gross margin inthe second quarter of 2001. 

Selling,General, and Administrative Costs

        Selling, general, and administrative costs decreased $.6million to $1.4 million for the three months ended June 30, 2002 from $2.0million for the three months ended June 30, 2001.  As a percentage of revenues, selling, general and administrativecosts decreased to 37.6% for the three months ended June 30, 2002 from 39.5%for the three months ended June 30, 2001. Of the decrease in selling, general and administrative expenses, $0.25million is attributable to the sale of a portion of the New York technicalsupport services business (consisting of the New York City customer list andrelated customer contracts). Approximately $0.2 million is due to decreased salary expense. Theremainder is due to decreased professional service fees, primarily due to thechange in auditors and the decline of legal fees associated with the classaction lawsuit.

SIXMONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001.

Revenues

        Revenues from continuing operations for the six months endedJune 30, 2002 were $7.7 million, a decrease of 24.3% or $2.5 million from $10.2million for the six months ended June 30, 2001.  

        Network connectivity services revenues, decreased $0.9 millionto $4.1 million for the six months ended June 30, 2002 from $5.0 million forthe six months ended June 30, 2001. Within the network connectivity servicessegment, data and voice services accounted for $0.7 million of the decreasewith the balance of the decrease attributable to Internet services.  Data and voice services decreased 21.1% fromthe comparable period in 2001 primarily due to the loss of a large customer asa result of the sale of that customer by its parent company.  Internet services revenues decreased $.2million or 15.4% to $1.3 million.  Thedecrease is primarily due to a decrease in dial up connectivity accounts due tothe competitiveness of the industry.

        Technical support services revenues were $2.8 million for thesix months ended June 30, 2002, a decrease of 33.6% or $1.4 million over thecomparable period in 2001. Approximately $1.0 million of the decrease was due to the reduction ofrevenue from the sale of a portion of the New York technical support servicesbusiness (consisting of the New York City customer list and related customercontracts).  The remaining decrease inrevenue was associated with a large customer's decision to decrease spending inthis area.  

 

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        Application development and hosting services revenues decreasedto $0.8 million for the six months ended June 30, 2002 from $0.9 million forthe comparable period in 2001, a 7.2% decrease.  The decrease is primarily attributable to the downsizing of theapplication development group.  We havemade a strategic decision to focus our applications development efforts one-commerce, web centric applications and managed web hosting.  Generally, these are higher margin services.For the six months ended June 30, 2002 revenues from hosting services increased1.0% over the six months ended June 30, 2001.

GrossMargin

        Gross margin from operations as a percentage of revenuesremained unchanged at 41.0% for the six months ended June 30, 2002 and for thesix months ended June 30, 2001. Gross margin from operations decreased $1.0million to $3.1 million for the six months ended June 30, 2002 from $4.1million for the six months ended June 30, 2001. 

        Network connectivity services gross margin as a percent ofrevenue decreased to 32.3% for the six months ended June 30, 2002 from 35.9%for the six months ended June 30, 2001. Within the network connectivity services segment, data and voice grossmargins averaged 18.4% vs. 26.8% in the comparable period in 2001. The decreasein gross margins was primarily due to a one-time adjustment to cost of goodssold due to resolution of the amount of Universal Service Fund liability in thefirst quarter of 2001.

        Gross margins for Internet services increased to 63.2% duringthe six months ended June 30, 2002 vs. 58.0% for the comparable period in 2001.The increase from 2001 is primarily attributable to increased costs relating tothe opening of the New York, San Francisco, and Los Angeles MPOPs along withthe reduction of network infrastructure costs, better utilization of bandwidthand a focus on higher margin services.

        Technical support services gross margins averaged 42.9% duringthe six months ended June 30, 2002 compared to 40.4% for the comparable periodin 2001.  Gross margins in the technicalservice segment increased due to the sale of a lower margin portion of the NewYork technical support services business (consisting of the New York Citycustomer list and related customer contracts) along with a change of focus toour higher margin help desk solution.

        Application development and web hosting gross margins were76.5% during the six months ended 2002 compared to 70.8% for the six monthsended in 2001.  The increase isattributable to staff reductions in the application development area andfocusing our applications development efforts on e-commerce, web centricapplications and managed web hosting which are generally higher marginservices.

Selling,General, and Administrative Costs

        Selling, general, and administrative costs decreased $1.1million to $3.0 million for the six months ended June 30, 2002 from $4.1million for the six months ended June 30, 2001.  As a percentage of revenues, selling, general and administrativecosts decreased to 39.2% for the six months ended June 30, 2002 from 40.6% forthe six months ended June 30, 2001.  Ofthe decrease in selling, general and administrative expenses, $0.53 million isattributable to the sale of a portion of the New York technical support servicesbusiness (consisting of the New York City customer list and related customercontracts).  Approximately $0.25 millionis due to decreased salary expense. The remainder is due to decreasedprofessional service fees, primarily due to the change in auditors and thedecline of legal fees associated with the class action lawsuit.

 

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InterestExpense

        At June 30, 2002, we had approximately $1.2 million inborrowings outstanding under our secured line of credit.  During the six months ended June 30, 2002 weaveraged approximately $0.9 million in outstanding borrowings.  Interest expense decreased to $54,000 forthe six months ended June 30, 2002 from $89,000 for the six months ended June30, 2001, as a result of the lower level of average borrowings outstanding inthe first quarter of 2002.

LIQUIDITYAND CAPITAL RESOURCES

        For the six months endedJune 30, 2002, we reported a net loss from continuing operations of $0.2million and used net cash in operations of $0.6 million.  As of June 30, 2002, we had cash and cashequivalents of $0.2 million and outstanding indebtedness on our line of creditof $1.2 million. At that date, we had a working capital deficit of $2.7million.

        On January 31, 2002, werepaid our secured credit facility with Coast Business Credit and entered intoa new secured credit facility with DTL One, LLC ("DTL"), a newly formed entityaffiliated with director Jeffrey J. Jensen. Under the DTL line of credit, we may borrow up to 80% of eligible receivables(as defined) up to a total amount of $2.0 million.  Borrowings under the line of credit bear interest, payablemonthly, based upon the prime rate of Bank of America NT & SA plus 2%, witha minimum interest rate of 10%. Borrowings under the credit facility aresecured by substantially all of our assets. The credit facility will mature on January 31, 2004.  After January 31, 2003, DTL may terminatethe line of credit without cause, upon six months notice.  As of August 12, 2002, approximately $1.1million was outstanding under the credit facility, and approximately $0.3million was available to be borrowed under the formula described above.

        In July 2002, UICI (apublic company affiliated with a director and certain stockholders of NetLojix)terminated NetLojix as its long distance services provider.  For the six months ended June 30, 2002, UICIaccounted for approximately $1,200,000 of NetLojix's revenues.  However, because of the low marginsassociated with the UICI contract, we do not believe that the termination willhave a material adverse effect on NetLojix's net income.  Also in July 2002, ABN AMRO Inc. terminatedNetLojix as its technical services provider. For the six months ended June 30, 2002, ABN AMRO accounted forapproximately $424,000 of NetLojix's revenues and approximately $289,000 ingross margin.  These terminations couldnegatively affect our cash flow from operations. 

        Historically, our cashflow from operations, our secured borrowings, and occasional private placementsof both common and preferred stock have been sufficient to meet working capitaland capital expenditure requirements. However, as noted above, our cash flowfrom operations has been decreasing in recent years.

        We believe that currentmarket conditions are not conducive to raising additional equity capital atthis time.  We continue to take steps toconserve cash and reduce operating expenses. As a result of these cost control measures, we expect that operatingcash flows coupled with the remaining availability under our secured line ofcredit facility should be sufficient to meet our minimum working capitalrequirements into the foreseeable future. However, our current low stock price and delisting from The NasdaqSmallCap Market present substantial obstacles to a private placement.

 

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        Additionally, an important component of our past growth hasbeen to develop our business through acquisitions. In appropriatecircumstances, we may use our capital stock for additional acquisitions inaddition to debt and equity financing. However, our current low stock price anddelisting from The Nasdaq SmallCap Market again present substantial obstaclesto such acquisitions.

PART II. OTHERINFORMATION

ITEM3.  DEFAULTS UPON SENIOR SECURITIES.

(b)  NetLojixhas outstanding 147,700 shares of its Series A Convertible Preferred Stock (the"Series A Preferred").  The Series APreferred ranks prior to NetLojix's common stock.  As of August 12, 2002, dividend in arrears on the Series APreferred totaled $231,392.

ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits.

                     99.1      Certificationof Chief Executive Officer Pursuant to 18 U.S.C. 1350

                     99.2  Certificationof Chief Financial Officer Pursuant to 18 U.S.C. 1350

(b)      Reports on Form 8-K.  NetLojix did not file any reports on Form8-K during the quarter ended June 30, 2002.
 
 

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SIGNATURE

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

NETLOJIXCOMMUNICATIONS, INC.,aDelaware corporation

By:   /S/ GREGORY J. WILSON      ------------------------      GregoryJ. Wilson      Treasurer and Controller      (DulyAuthorized Officer and Principal Financial Officer and Principal AccountingOfficer)  

Dated:August 14, 2002
 
 

 

 

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