[As adopted in Release No. 34-322131, April 28, 1993, 58 F.R. 26509]
Form 10-Q SB
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to _________
Commission File No. 0-27580
AVTEL COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
A Utah Corporation 87-0378021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 Cremona Drive, Suite C, Santa Barbara, California 93117
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 685-0355
(No Change)
Former name, former address and former fiscal year, if changed since last
report.
Check mark whether the issuer (1) 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 ninety days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date:
7,135,807 Shares of Common Stock - August 10, 1997
Transitional Small Business Disclosure Forms Yes No X
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Unaudited
September 30, 1996 and June 30, 1997
ASSETS
June 30, 1997 September 30, 1996
Current Assets
Cash $ 431,405 $ 985,237
Other Current Assets 18,869 -
Notes Receivable - Related Parties 86,000 -
Accounts Receivable (Net of Allowance
for Doubtful Accounts of ($-0-) 206,87 8,785
Total Current Assets 743,145 994,022
Fixed Assets
Equipment 575,468 -
Furniture and Fixtures 22,479 -
Less Accumulated Depreciation (74,142) -
Net Fixed Assets 523,805 -
Intangible Assets
Goodwill 575,087 -
Organization Costs 6,709 6,698
Less Accumulated Amortization (8,683) -
Total Intangible Assets 573,113 -
Total Assets $ 1,840,063 $ 1,000,720
The accompanying notes are an integral part of these consolidated financial
statements.
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Unaudited
September 30, 1996 and June 30, 1997
LIABILITIES AND STOCKHOLDERS EQUITY
June 30,1997 September 30, 1996
Current Liabilities
Accounts Payable - Trade $ 198,397 $ 31,945
Accounts Payable - Officers 49,041 40,683
Accrued Liabilities 3,037 6,024
Deferred Revenue 123,013 -
Line of Credit - -
Notes Payable- Matrix 500,000 -
Notes Payable - WestNet Acquisition 128,099 -
Notes Payable - Employee 150,000 -
Lease Obligations-Current Portion 32,368 -
Total Current Liabilities 1,183,955 78,652
Long Term Liabilities
Lease Obligation 77,889 -
Total Long Term Liabilities 1,261,844 -
Total Liabilities $ 1,261,844 $ 78,652
Stockholders Equity
Preferred Stock (Par Value $1.00,
Series A Convertible) 1,000,000 1,000,000
5,000,000 shares authorized
Common Stock (Par Value $.001) 7,136 3,000
50,000,000 shares authorized
7,135,807 and 2,513,299 shares issued and
outstanding 06/30/97 and 09/30/96.
Paid in Capital in Excess of Par Value 135,475 -
Retained Earnings/(Deficit) (564,219) (80,932)
Total Stockholders Equity 578,219 922,068
Total Liabilities and
Stockholders Equity $ 1,840,063 $ 1,000,720
The accompanying notes are an integral part of these consolidated financial
statements.
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Three Months and Six Months Ending June 30, 1997 and 1996 - (Unaudited)
Predecessor Company
For The Three For The Nine For The Three For The Nine
Months Ended Months Ended Months Ended Months Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
REVENUES
Sales $ 734,567 $ 1,600,439 $ 84,104 $ 216,645
Cost of Sales 173,725 401,044 16,099 48,977
Gross Margin 560,842 1,199,395 68,005 167,688
EXPENSES
General and Admin. 666,384 1,722,940 60,104 194,623
Bad Debt Expense - 2,235 2,576 4,362
Total Operating Exp. 666,384 1,725,175 62,680 198,985
Income (Loss) from Oper.(105,542) (525,780) 5,325 (31,317)
Other Income/(Expense)
Interest Income 526 13,975 - 1,196
Miscellaneous Income 25,633 32,907 - 867
Interest Expense (694) (4,426) (773) (4,510)
Net Other Income (Exp) 25,465 42,456 (773) (2,447)
Income/(Loss)
Before Taxes (80,077) (483,324) 4,552 (33,764)
Income Taxes - - - -
Minority Interest - (137) (4,611) (2,847)
Net Income (Loss) (80,077) (483,461) (59) (36,611)
Weighted Average
Shares Outstanding 7,135,807 6,719,124 2,333,300 2,312,800
Earnings / (Loss)
Per Common Share $ (0.01) $ (0.07) $ (0.00) $ (0.02)
The accompanying notes are an integral part of these consolidated financial
statements.
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Six Months Ending June 30, 1997 and 1996 - Unaudited
Predecessor
Company
For The Nine For The Nine
Months Ended Months Ended
June 30, 1997 June 30, 1996
Cash Flows From Operating Activities:
Net Loss $ (483,461) $ (36,611)
Adjustments to reconcile net loss to net cash:
Minority Interest - 2,847
Depreciation Expense 74,142 31,658
Amortization Expense 8,683 -
Forgiveness of Debts (40,900) -
(Increase)/decrease in:
Accounts Receivable (88,081) (3,837)
Other Assets - -
Interest Receivable - 9,309
Increase/(Decrease) in:
Accounts Payable (58,068) 24,518
Accounts Payable - Officers 8,358 -
Accrued Expenses (56,927) -
Deferred Income 36,288 -
Interest Payable - (41,892)
Net Cash Used in Operating Activities: (580,171) (14,008)
Cash Flows From Investing Activities
Cash Received from acquisition of subsidiaries 57,094 -
Purchase of fixed assets (85,142) (18,776)
Purchase of intangible assets (177,500) -
Net Cash Provided (Used) By Investing Activities (205,548) (18,776)
Cash Flows From Financing Activities:
Cash paid for short term loan receivable (86,000) -
Cash paid on capital lease (39,991) (3,200)
Borrowing on notes payable 500,000 46,000
Cash payments on notes payable (142,122) (26,900)
Issuance of common stock - 24,500
Net Cash Provided (Used) By Financing Activities 231,887 40,400
Increase/(Decrease) in cash and cash equivalents (553,832) 7,616
Cash and Cash Equivalents at Beginning of Period 985,237 17,267
Cash and Cash Equivalents at End of Period $ 431,405 $ 24,883
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Six Months Ending June 30, 1997 and 1996 - Unaudited
(Continued)
Predecessor
Company
For The Nine For The Nine
Months Ended Months Ended
June 30, 1997 June 30, 1996
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest expense $ 6,199 $ 46,402
Income taxes - 200
Non-cash transactions:
Issuance of 115,000 shares Common Stock
and $225,000 in contingent consideration
in Exchange for Interest in Silicon Beach
Issuance of 4,452,508 Shares of Common Stock
and 1,000,000 Shares of $1.00
par value Series A Convertible
Preferred Stock for acquisition
of AvTel Holdings, Inc.
Issuance of 35,000 Shares of Common Stock
and $188,325 in debt for the acquisition of
WestNet Communications, Inc.
The accompanying notes are an integral part of these consolidated financial
statements.
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - INTERIM REPORTING
The unaudited consolidated financial statements included herein have
been prepared by AvTel Communications, Inc. and its subsidiaries (the
"Company") in accordance with generally accepted accounting principles and
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in complete financial statements prepared in accordance
with generally accepted accounting principles have been omitted. The
unaudited consolidated financial statements and selected notes included
herein should be read in conjunction with the audited consolidated financial
statements and the notes hereto included in the Company's Annual Report on
Form 10-KSB for the year ended September 30, 1996. Operating results for
the three month and nine month period ended June 30, 1997, are not
necessarily indicative of the results that may be expected for the year
ended September 30, 1997.
The foregoing unaudited consolidated financial statements reflect all
adjustments, which, in the opinion of management, are necessary to present
fairly the consolidated financial position and results of operations for the
periods presented. The financial statements have been presented reflecting
the effects of the reverse purchase for accounting purposes (see Note 3).
The statements therefore reflect those of the subsidiary as if it were the
parent company. Accordingly, the balance sheet reflected in this 10QSB filing
is therefore that of AvTel Holdings, Inc., a California corporation ("AHI").
The statement of operations has been presented with the operating results of
AHI and the historical operating results of Hi, Tiger International, Inc.
("HITI"), the predecessor company, a Utah corporation, since AHI has only
been in existence since April, 1996 and did not commence operations until
August 1996. Accordingly, the cash flow statement is presented reflecting
the current changes of AHI as the parent company and the historical
information for HITI.
Note 2 - ACQUISITIONS
In connection with its acquisition of all the issued and outstanding
capital stock of AHI, on October 23, 1996, the Company amended and restated its
Articles of Incorporation to, among other things, authorize 5,000,000 shares
of preferred stock. The Company's Board of Directors is authorized to
designate one or more series of such preferred stock and to designate the
rights, preferences and privileges of each such series. The AHI acquisition
was completed in accordance with an Acquisition Agreement dated August 30, 1996
("Acquisition Agreement"). The transaction was accomplished by way of a merger
(the "Merger") in which a wholly owned subsidiary of the Company was merged
with and into AHI which was the surviving entity and became a wholly owned
subsidiary of the Company. Pursuant to the Merger, the Company authorized
and issued 1,000,000 shares of Series A Convertible Preferred Stock which have
certain liquidation preferences, bear a cumulative dividend, payable
semi-annually, at 8% and are convertible, upon the happening of certain
events, into shares of the Company's $.001 par value common stock. The
Merger has been accounted for as a reverse purchase by AHI of the Company
whereby the holders of AHI's Common Stock acquired, after giving effect to
the Merger, a controlling interest in the Company. Accordingly, the assets
and liabilities of the Company and its subsidiary, The Friendly Net, LLC
("TFN"), are reflected at their fair market values, as are the assets and
liabilities of Silicon Beach Communications, Inc., which was acquired in
November, 1996, and WestNet Communications, Inc., which was acquired in
February 1997. The foregoing unaudited financial statements reflect, for the
previous periods noted, comparative data as to AHI only. AHI began operations
in April, 1996.
In November, 1996, the Company, through a subsidiary, acquired all the
issued and outstanding capital stock of Silicon Beach Communications, Inc., a
California corporation ("SBC") that serves as an Internet Service Provider
("ISP") and provides software development services.
In February, 1997, the Company, through a subsidiary, acquired all of
the issued and outstanding shares of stock of WestNet Communications, Inc.,
a California corporation ("WNC") that serves as an ISP in certain regions of
southern California.
In March , 1997, the Company, acquired the remaining 20% minority
interest in TFN, a Utah limited liability company held by Tree of Stars,
Inc. ("TOSI"), a Nevada corporation of which Paul G. Begum is President and
a principal shareholder. Mr. Begum is the former president and Chief
Executive Officer of the Company who, together with TOSI owns directly or
indirectly approximately 9.8% of the issued and outstanding common stock of
the Company. The acquisition was facilitated through a payment of cash in
the amount of $10,000 and the issuance of $20,000 of short term loans.
In addition, a loan payable to Mr. Begum has been discounted from $40, 900
to zero. The note payable was in consideration of consulting services
performed by Mr. Begum prior to the Merger. Prior to realizing a gain, the
Company set this amount aside in a reserve account intended be used to
offset any unexpected expenses that might arise relating to the Company,s
operation prior to the Merger (see Note 4). TFN is now a wholly-owned
subsidiary of the Company.
Note 3 - RECENT DEVELOPMENTS
In March 1997, the Company's Board of Directors granted, pursuant
to the Company's 1997 Incentive Stock Option Plan (the "1997 Plan") a
total of $849,900 tock options which are exercisable at $0.62 - $3.00
per share. Of the total, 92,000 qualified stock options were issued to
SBC employees inconjunction with the terms of the acquisition of SBC,
50,000 non-qualified stock options to a non-employee inconjunction with
the Merger and 43,000 non-qualified stock options to consultants for
services rendered. A total of 46,000 qualified stock options issued to
SBC employees, the 50,000 non-qualified stock options issued to the
non-employee and the 43,000 non-qualified stock options issued to
consultants have vested as of June 30, 1997.
In April, 1997, the Company entered into a Stock Exchange Agreement
(the "Stock Exchange Agreement") with Matrix Telecom, Inc., a Texas
corporation ("Matrix") pursuant to which the Company will issue to persons
who own 100% of the issued and outstanding common stock of Matrix
(the "Matrix Stockholders") an aggregate of 34,590,049 of the Company's
$.001 par value common stock in exchange for 100% of the issued and
outstanding capital stock of Matrix. As a result of the transaction, the
Matrix Stockholders will, after giving effect to the exchange, acquire and
hold approximately 79% of the issued and outstanding common stock of the
Company on a fully diluted basis. The consummation of the transaction under
the Stock Exchange Agreement is subject to the satisfaction of a number of
the terms and conditions, including a condition that prior to the exchange,
the Company,s shareholders shall have approved the transaction as well as a
proposal to reincorporate the Company in the state of Delaware. The Stock
Exchange Agreement also provides for the Company to effect either a reverse
stock split prior to the reincorporating or reduce the number of the
Company's common stock (or other securities convertible into common stock)
that will be issued to the Company's shareholders in the reincorporating to
such lesser number of common stock (or such other securities) as the
Company and Matrix shall agree. The Stock Exchange Agreement additionally
provides for Matrix to provide to the Company a secured loan in the
maximum aggregate amount of $500,000, that the transaction is to be
treated as a reverse purchase for financial reporting purposes and
that it is intended to be a tax free reorganization.
Note 4 - OTHER
In June 1997, the Company recognized a gain on the forgiveness of debt
of $40,900 as a result of eliminated its indebtedness to Paul Begum,
former CEO and Chairmen of the Board as part of an agreement to acquire
the remaining 20% minority interest in TFN. The agreement was executed in
February, 1997, and the forgiveness of debt was set aside in a reserve
account intended be used to offset any unexpected expenses that might
arise relating to the Company's operation prior to the Merger.
Concurrently with recognizing this gain, the Company recorded $12,500 in
telecommunications expenses related to TFN's business which had been
previously in dispute with US West Communications. These expenses had not
been recorded by TFN in the periods for which they were incurred and were
therefore recognized as an expense in the current period. As of June 30,
1997, it is believed that all expenses have been captured and the remaining
deferred revenue to Mr. Begum was recorded as income.
The Company additionally recognized a decrease in payroll expense in
the current period due to the elimination of the accrued liability for
payroll and payroll taxes for TFN and WNC in the amount of $46,000. The
Company switched its payroll services to outside company and in doing so
changed the timing of payroll payments to the fifteenth and last day of
the month from the first and fifteenth of the month. The Company,
therefore , now recognizes all payroll expenses in the month they are
incurred.
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited (Continued)
Item 2 - Management's Discussion and Analysis
General
The following discusses the financial position and results of
operations of the Company and its consolidated subsidiaries, The Friendly
Net LLC, a Utah Limited Liability Company ("TFN"), Silicon Beach
Communications, Inc., a California corporation ("SBC"), WestNet
Communications, Inc. ("WNC"), and AvTel Holdings, Inc., a California
corporation ("AHI"). This discussion and analysis should be read in
conjunction with the consolidated financial statements and notes thereto
of the Company and subsidiaries.
Financial Condition and Results of Operations
The decrease in total current assets from September 30, 1996, to
June 30, 1997, relates, primarily, to the use of cash for operating
activities relating to the integration of the Company and AHI following
the Merger, the integration of SBC and WNC, and increased selling and
general administrative expenses.
The increase in net fixed assets over the periods resulted primarily
from the acquisitions of SBC and WNC in November, 1996 and February, 1997
respectively. The increase in notes receivable-related party is due to a
short term loan to the Company's Senior Vice President of Software
Development and Business Network Services Division President. The Company
anticipates the repayment of the notes in full by October 31, 1997.
The increase in total liabilities from September 30, 1996, to June 30,
1997, arose, primarily, from the increase in trade payables arising from the
Merger and the acquisition of SBC and WNC; the increase in deferred revenue
associated with the acquisition of SBC and WNC which, in the course of its
business, is paid in advance by certain customers for ISP services; the
increase in notes payable relating to certain promissory notes issued in
connection with the Merger and acquisitions of SBC and WNC; a promissory
note issued in connection with the Matrix Stock Exchange Agreement; and
certain deferred compensation arrangements and accounts payable with certain
officers and directors.
Stockholders' equity decreased from September 30, 1996 to June 30,
1997, as a result of the operating losses experienced during the period due,
primarily, to substantial costs and expenses incurred in connection with the
Merger with AHI, the acquisitions of SBC and WNC, and increased management
and other costs relating to the development and implementation of the
Company's marketing strategies. The Merger involving the Company and AHI
is treated, for accounting purposes, as a reverse purchase whereby the
holders of AHI's Common Stock acquired, after giving effect to the Merger,
a controlling interest in the Company. For financial reporting purposes,
comparative data for periods prior to the quarter ended June 30, 1997,
reflects the financial condition and results of operation of AHI only.
Since AHI did not begin operations until August, 1996, no comparative
financial analysis is available for AHI, with respect to the quarter ended
June 30, 1996, as compared to similar data for the Company, for the same
quarter in 1997, as to revenues, operating income and expenses, net income,
cash and other topics that would normally be addressed in statements of
operations and cash flows.
Liquidity and Capital Resources
Consistent with management's intentions to develop and execute the
Company's business sales and marketing strategies, it is anticipated that
the Company's needs for capital will in the near term exceed funds
generated from operations. The Company has, as a result of the Merger
with AHI acquired access to the capital resources of AHI. While these
funds have been employed to support the recent implementation of the
Company's business and other strategies, other capital resources will
continue to be explored. Accordingly, management has evaluated a number
of alternative solutions to the Company's capital needs, including secured
and unsecured debt, capital equipment leases to facilitate the anticipated
growth of sales, marketing and technical development, issuance of debt or
equity securities, strategic alliances, or any combination of the foregoing.
In connection with the contemplated acquisition by the Company of all
of the issued and outstanding capital stock of Matrix Telecom, Inc., a
Texas corporation ("Matrix"), the Company has entered into a Stock
Exchange Agreement with Matrix which provides, among other things, for
Matrix to provide to the Company a secured loan (the "Matrix Loan") in
the maximum aggregate amount of $500,000. The loan is in the form of a
revolving credit facility under which the Company may draw down up to two
increments of $250,000 each.
Prior to the quarter ended June 30, 1997 and pursuant to the terms
of the Stock Exchange Agreement, the Company has availed itself of an
aggregate of $500,000 under the Matrix Loan. All amounts of principal
and interest outstanding under the Matrix Loan are due and payable on
the earlier to occur of one hundred eighty (180) days after termination
of the Stock Exchange Agreement or December 1, 1997. Management expects
that, following consummation of the transactions contemplated by the Stock
Exchange Agreement, the Company will be able to avail itself of the
additional capital resources of Matrix. While these additional resources
should be sufficient to support the near term business development and
other strategies of the combined companies, other capital resources may
from time to time be required by the Company.
There are no assurances that such other capital resources will be
available to implement management's objectives with respect to the
combined companies assuming that the transactions contemplated by the
Stock Exchange Agreement are consummated. Further, if for some reason
the transactions contemplated by the Stock Exchange Agreement are not
consummated, the amounts outstanding under the Matrix Loan would become
due and payable as early as December 1, 1997. In such a case, management
would be required to explore alternative solutions to fulfill the
Company's capital requirements, including, payment of the indebtedness
under the Matrix Loan.
Under the circumstances, there are no assurances that the additional
funds necessary to satisfy the Company's repayment obligations and future
capital needs will be available, or, if available, that they will be in
sufficient amounts and under terms and conditions acceptable to the Company.
If these additional funds are not available in sufficient amounts or at the
times and under term acceptable to the Company, management may be required to
significantly curtail, restrict or delay the execution of some parts of the
Company's business strategy and such actions could have a material adverse
effect on the Company's ability to execute its business plan and strategy.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K.
On May 19, 1997 the Company filed a Report 8-K to report the execution
of a Stock Exchange Agreement to acquire 100% of all of the outstanding
capital stock Matrix Telecom, Inc., a Texas corporation.
On April 30, 1997 the Company filed a Report 8-K to report the execution
of a Stock Exchange Agreement to acquire 100% of all of the outstanding
capital stock of Matrix Telecom, Inc., a Texas corporation.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AvTel Communications, Inc.
(Registrant)
DATE: August 13, 1997 By: /s/
James P. Pisani
Its Principal Financial &
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF AVTEL COMMUNICATIONS, INC. AS OF JUNE 30, 1997 AND THE RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE AND NINE MONTHS THEN
ENDED AN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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