<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential For Use of the Commission Only [as permitted by
Rule 14a-6(e)(2)]
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
AVTEL COMMUNICATIONS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of filing fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-
11.
(1) Title of each class of securities to which transaction applies: Common
Stock
(2) Aggregate number of securities to which transaction applies: 38,330,056
(3) Per unit price or their underlying value of transaction computed pursuant
to Exchange Act Rule 0-11: (*) $2.56
(4) Proposed maximum aggregate value of transaction: $98,124,943
(5) Total fee paid: $19,625
[_] Fee previously paid with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid: _____________________
(2) Form, Schedule or Registration Statement no.: ________________
(3) Filing party: __________________________________________
(4) Date filed: _____________________________________________
(*) Based on the average of the bid and asked prices reported on the NASDAQ
Electronic Bulletin Board on August 22, 1997.
<PAGE>
PRELIMINARY COPY
AVTEL
COMMUNICATIONS, INC.
--------------------
September 9, 1997
To the Shareholders of AvTel Communications, Inc.:
You are cordially invited to attend a Special Meeting of Shareholders of
AvTel Communications, Inc. (the "Company" or "AvTel"), to be held at 10:00 a.m.,
local time, on September 26, 1997, at the Company's offices at 130 Cremona
Drive, Suite C, Santa Barbara, California (the "Special Meeting"). Copies of
the Notice of Special Meeting of Stockholders, Proxy Statement and Proxy are
enclosed.
At the Special Meeting you will be asked to approve two proposals that will
materially change the Company. As described in the enclosed Proxy Statement, you
will be asked to approve a Stock Exchange Agreement dated April 29, 1997, as
amended (the "Exchange Agreement"), between the Company and Matrix Telecom,
Inc., a Texas corporation ("Matrix"). The Exchange Agreement provides for the
acquisition by the Company, by way of a stock for stock exchange (the "Share
Exchange"), of all of the issued and outstanding capital stock of Matrix in
exchange for shares of the Company's Common Stock. After giving effect to the
Share Exchange, the former shareholders of Matrix will hold approximately 84% of
the issued and outstanding Common Stock of the Company which would allow such
shareholders, if acting in concert, to control the election of directors and
other matters which are subject to a vote of the Company's shareholders.
The consummation of the Share Exchange is subject to the satisfaction of
several conditions. These include the approval of the Company's shareholders
of a change in the Company's state of incorporation from Utah to Delaware. To
effect this reincorporation in Delaware, the Company will be merged (the
"Reincorporation Merger") with and into AvTel Communications, Inc., a Delaware
corporation ("AvTel Delaware"). AvTel Delaware is a newly-formed, wholly-owned
subsidiary of the Company formed for the sole purpose of the Reincorporation
Merger. AvTel Delaware will be the surviving corporation in the Reincorporation
Merger. The Reincorporation Merger will occur immediately before or
concurrently with the Share Exchange.
The Agreement and Plan of Merger relating to the Reincorporation Merger
will provide that AvTel Delaware will issue to the Company's shareholders one
share of AvTel Delaware Common Stock for each four shares of the Company's
Common Stock outstanding immediately prior to the Reincorporation Merger. The
Company's Series A Convertible Preferred Stock and its outstanding options will
be similarly adjusted. Accordingly, by approving the Reincorporation Merger,
the shareholders of the Company will also be approving, in effect, a four to one
reverse stock split of their shares. Shareholders will receive cash in lieu of
any fractional shares that would otherwise be issued as part of the
Reincorporation Merger.
Approval of the Reincorporation Merger will also constitute approval of the
Certificate of Incorporation and Bylaws of AvTel Delaware as the surviving
entity in the Reincorporation Merger. In addition, the Company believes that,
concurrently with the Share Exchange, two of the Company's four directors, Frank
Dziuba and Barry Peters, will resign and will be replaced by three nominees of
Matrix. These proposals and related matters are described in greater detail in
the enclosed Notice of Special Meeting of Shareholders and Proxy Statement.
130 CREMONA DRIVE, SUITE C, SANTA BARBARA, CALIFORNIA 93117
TELEPHONE: (805) 685-0355 FAX: (805) 685-9685
<PAGE>
The Company's management believes that the combination of AvTel and Matrix
will benefit AvTel by, among other things, expanding AvTel's product offerings
and customer base, improving AvTel's access to capital sources, thus reducing
the cost of capital to the Company, and allowing AvTel to benefit from Matrix's
established corporate infrastructure. Matrix has a much more developed
administrative and billing infrastructure, and has regulatory authorizations as
a long-distance provider in place in 49 states. Other reasons for the Share
Exchange are set forth in the Proxy Statement in greater detail. Although the
Board of Directors believes that the Share Exchange is in the best interests of
the shareholders of AvTel, no fairness opinion has been sought from an
investment bank that the transaction is fair from a financial point of view to
AvTel's shareholders. Nor has an opinion or private letter ruling been obtained
with respect to the tax treatment of the Share Exchange or the Reincorporation
Merger.
The Board of Directors of the Company has unanimously approved the Share
Exchange, the Reincorporation Merger and all related transactions. The
affirmative vote of the holders of a majority of the outstanding shares of each
of the Company's Common Stock and the Company's Preferred Stock is needed to
approve and adopt the proposals outlined above.
Certain shareholders, including the Company's current Directors, who own
shares representing approximately 61% of the issued and outstanding shares of
the Company's Common Stock have indicated that they will vote their shares in
favor of the proposals contemplated by the attached Proxy Statement. In
addition, the holders of all shares of the Company's Preferred Stock have
indicated that they will vote their shares in favor of the proposals.
Accordingly, without the affirmative vote of any other shareholder, there will
be sufficient votes for approval and adoption of the proposals submitted in the
Proxy Statement.
THE BOARD OF DIRECTORS BELIEVES THAT THE SHARE EXCHANGE AND REINCORPORATION
MERGER ARE ADVANTAGEOUS TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS
SHAREHOLDERS AND HAS UNANIMOUSLY RECOMMENDED APPROVAL THEREOF BY THE
SHAREHOLDERS.
APPROVAL OF THE PROPOSED SHARE EXCHANGE WITH MATRIX IS CONDITIONED UPON
APPROVAL OF THE PROPOSAL TO REINCORPORATE IN DELAWARE. AS A CONSEQUENCE, A VOTE
AGAINST THE PROPOSAL TO APPROVE THE REINCORPORATION MERGER, WILL CONSTITUTE A
VOTE AGAINST THE SHARE EXCHANGE. WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING
OR NOT, YOU ARE REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE
ENCLOSED ENVELOPE IN ORDER THAT AS MANY SHARES AS POSSIBLE MAY BE REPRESENTED AT
THE SPECIAL MEETING.
Sincerely,
AVTEL COMMUNICATIONS, INC.
/s/ ANTHONY E. PAPA
Anthony E. Papa
President & Chief Executive Officer
<PAGE>
PRELIMINARY COPY
AVTEL
COMMUNICATIONS, INC.
--------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 26, 1997
Notice is hereby given that a Special Meeting of Shareholders of AvTel
Communications, Inc. (the "Company" or "AvTel") will be held at 130 Cremona
Drive, Suite C, Santa Barbara, California, on September 26, 1997, at 10:00 a.m.,
local time (the "Special Meeting").
The items of business to be conducted at the Special Meeting are:
1. The ratification and approval of a Stock Exchange Agreement dated
April 29, 1997, as amended, in the form attached to the Proxy Statement as
Exhibit A (the "Exchange Agreement") between the Company and Matrix Telecom,
Inc., a Texas corporation ("Matrix"), pursuant to which:
A. The Company will acquire Matrix by way of a stock for stock
exchange (the "Share Exchange") with the shareholders of Matrix (the
"Matrix Shareholders");
B. The Matrix Shareholders, after giving effect to the Share
Exchange, will own approximately 84% of the issued and outstanding Common
Stock of the Company;
C. Holders of outstanding Matrix stock options would receive non-
qualified stock options of the Company; and
D. The Company will enter into a Registration Rights and Lockup
Agreement in the form attached as Exhibit B to the Exchange Agreement which
will provide certain registration rights for, and restrictions on, the
Matrix Shareholders.
2. The ratification and approval of an Agreement and Plan of Merger
between the Company and AvTel Communications, Inc., a Delaware corporation
("AvTel Delaware") substantially in the form attached to the Proxy Statement as
Exhibit B, pursuant to which:
A. Concurrently with, or immediately prior to, the Share Exchange,
the Company will change its state of incorporation from Utah to Delaware by
merging with and into AvTel Delaware, a newly-formed, wholly-owned
subsidiary of the Company (the "Reincorporation Merger");
B. AvTel Delaware shall succeed to all the rights, benefits, duties
and obligations of the Company (including its rights, benefits, duties and
obligations under the Exchange Agreement described in the proposal above);
C. Outstanding shares of the Company's Common Stock and Preferred
Stock (and outstanding options to purchase Common Stock) will be converted
into shares of AvTel Delaware (or options, as the case may be) on a four to
one basis, with cash to be paid in lieu of any fractional shares;
<PAGE>
D. The Certificate of Incorporation of AvTel Delaware, as the
surviving corporation, will be in substantially the form attached to the
Proxy Statement as Exhibit C; and
E. The Bylaws of AvTel Delaware, as the surviving corporation, will
be in substantially the form attached to the Proxy Statement as Exhibit D.
All as described more fully in the accompanying Proxy Statement.
3. Such other matters as may properly come before the Special Meeting or
any adjournment or postponement thereof.
The approval of the Reincorporation Merger by the Company's shareholders is
a condition precedent to the consummation of the transactions contemplated by
the Share Exchange. Therefore, a vote against the Reincorporation Merger
proposal is a vote against both the Share Exchange and the Reincorporation
Merger.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSALS TO
CONSUMMATE THE SHARE EXCHANGE, AND TO REINCORPORATE IN DELAWARE, WHICH PROPOSALS
ARE DESCRIBED IN MORE DETAIL IN THE ACCOMPANYING PROXY STATEMENT
Any action may be taken on the foregoing proposals at the Special Meeting
on the date specified above, or on any date or dates to which the Special
Meeting may be adjourned. Shareholders of record at the close of business on
August 16, 1997, are entitled to vote at the Special Meeting and at any
adjournments thereof.
It is not anticipated that any other business will come before the Special
Meeting. If, however, such matters are presented, proxies will be voted thereon
as determined by a majority of the Board of Directors.
AVTEL COMMUNICATIONS, INC.
/s/ JAMES P. PISANI
James P. Pisani
Executive Vice President.
Chief Operating Officer & Secretary
Santa Barbara, California
September 9, 1997
YOUR VOTE IS IMPORTANT
Please immediately date, sign and return your proxy in the enclosed
envelope. If you attend the meeting, you may withdraw your proxy and vote in
person.
THANK YOU FOR ACTING PROMPTLY
<PAGE>
PRELIMINARY COPY
AVTEL
COMMUNICATIONS, INC.
-------------------
PROXY STATEMENT
This Proxy Statement and the attached Form of Proxy are being furnished to
the shareholders of AvTel Communications, Inc., a Utah corporation (the
"Company" or "AvTel") on behalf of the Board of Directors of the Company in
connection with a special meeting (the "Special Meeting") of Shareholders to be
held September 26, 1997, at the Company's principal offices, at 10:00 a.m.,
local time, and at any adjournments thereof. The Company's principal offices are
located at 130 Cremona Drive, Suite C, Santa Barbara, California 93117 and its
telephone number is (805) 685-0355.
These proxy solicitation materials are first being mailed to shareholders
on or about September 5, 1997. The specific proposals to be considered and acted
upon at the Special Meeting include (i) the approval of the Stock Exchange
Agreement dated April 29, 1997, as amended (the "Exchange Agreement"), between
the Company and Matrix Telecom, Inc., a Texas corporation ("Matrix"), pursuant
to which the Company will acquire, by way of a stock for stock exchange (the
"Share Exchange"), all of the issued and outstanding capital stock of Matrix
(and options to acquire Common Stock of Matrix) in exchange for shares of the
Company's Common Stock (and options to acquire the Company's Common Stock) to be
issued to the shareholders of Matrix (the "Matrix Shareholders"); and (ii) a
proposal to change the Company's state of incorporation from Utah to Delaware by
way of merger by the Company with and into AvTel Communications, Inc., a
Delaware corporation ("AvTel Delaware"), a wholly-owned subsidiary of the
Company (hereinafter referred to as the "Reincorporation Merger"), and, as part
of the conversion of shares in the Reincorporation Merger, to effect a four for
one reverse stock split of the Company's shares of Common Stock (the "Reverse
Stock Split"). The Reincorporation Merger and the Reverse Stock Split are
conditions to the completion of the Share Exchange. These proposals are
described in greater detail in this Proxy Statement.
Approval of these proposals will also constitute shareholder approval of
certain other matters, including (i) approval of a Registration Rights and
Lockup Agreement with the Matrix Shareholders in substantially the form of
Exhibit B to the Exchange Agreement attached as Exhibit A hereto (the
"Registration Rights and Lockup Agreement"), (ii) approval of the Merger
Agreement between the Company and AvTel Delaware in substantially the form of
Exhibit B hereto, (iii) approval of the Certificate of Incorporation of AvTel
Delaware in substantially the form of Exhibit C hereto, and (iv) approval of the
Bylaws of AvTel Delaware in substantially the form of Exhibit D hereto.
-1-
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE NO.
<TABLE>
<CAPTION>
<S> <C>
THE SPECIAL MEETING; INFORMATION CONCERNING
VOTING AND PROXY SOLICITATION.............................................. 4
Record Date and Outstanding Shares........................................ 4
Voting and Solicitation................................................... 4
Revocability.............................................................. 4
THE SHARE EXCHANGE......................................................... 5
Background and Reasons for Transaction.................................... 5
Terms of the Share Exchange............................................... 7
Comparative Per Share Data................................................ 9
Management of AvTel Delaware After the Share Exchange..................... 9
Relationship with Matrix.................................................. 11
Accounting Treatment...................................................... 12
No Legal Opinions or Tax Rulings.......................................... 12
Regulatory Approval....................................................... 12
Vote Required............................................................. 12
Recommendation of Management.............................................. 13
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.......................... 13
Balance Sheets, June 30, 1997............................................. 13
Statements of Operations For the Six Month Period Ended June 30, 1997..... 17
Statements of Operations For the Year Ended December 31, 1996............. 18
Notes to Unaudited Pro Forma Condensed Financial Information............... 19
THE REINCORPORATION MERGER................................................. 21
General................................................................... 21
Principal Reasons for the Reincorporation Merger.......................... 22
Regulatory Approval....................................................... 24
Comparison of Shareholder Rights under Utah and Delaware
Corporate Law and Charter Documents................................... 24
Dissenter's Rights as a Result of the Reincorporation Merger.............. 32
Federal Income Tax Consequences........................................... 33
Vote Required............................................................. 33
Recommendation of Management.............................................. 34
DESCRIPTION OF THE COMPANY................................................. 34
Background................................................................ 34
Business of the Company................................................... 34
Management's Discussion and Analysis of Financial
Condition and Results of Operation.................................... 36
Properties................................................................ 38
Litigation................................................................ 38
Market for Common Equity and Related Stockholder Matters.................. 39
DESCRIPTION OF MATRIX...................................................... 40
Background................................................................ 40
Business of Matrix........................................................ 40
Selected Financial Data................................................... 42
Statement of Operations Data.............................................. 43
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operation.................................... 45
Transactions with Affiliates............................................ 49
Regulation.............................................................. 50
Intellectual Property................................................... 50
Employees............................................................... 50
Properties.............................................................. 50
Litigation.............................................................. 51
Capitalization and Related Matters...................................... 51
SHAREHOLDER PROPOSALS..................................................... 51
OTHER MATTERS............................................................. 51
INDEX TO FINANCIAL STATEMENT OF THE COMPANY AND MATRIX.................... 52
</TABLE>
EXHIBITS
Exhibit A - Stock Exchange Agreement
Exhibit B - Agreement and Plan of Merger
Exhibit C - Certificate of Incorporation of AvTel Delaware
Exhibit D - Bylaws of AvTel Delaware
Exhibit E - Utah Revised Business Corporations Act
REVOCABLE PROXY FOR SPECIAL MEETING OF SHAREHOLDERS SEPTEMBER 26, 1997
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<PAGE>
THE SPECIAL MEETING
INFORMATION CONCERNING VOTING AND PROXY SOLICITATION
RECORD DATE AND OUTSTANDING SHARES
As of August 16, 1997 (the "Record Date"'), the outstanding securities of the
Company consisted of 7,136,827 shares of voting common stock ("Company Common
Stock"), and 1,000,000 shares of Series A Convertible Preferred Stock ("Company
Preferred Stock"). The presence in person or by proxy of holders of a majority
of the issued and outstanding shares of Company Common Stock and a majority of
the issued and outstanding shares of Company Preferred Stock will constitute a
quorum for the transaction of such business as shall properly come before the
meeting.
VOTING AND SOLICITATION
Each share of Company Common Stock has one vote on all matters. The shares of
the Company Preferred Stock are non-voting. However, the Utah Revised Business
Corporations Act ("URBCA") provides that the Reincorporation Merger must be
approved by a majority of the shares of the Company Preferred Stock, voting
separately as a class. Accordingly, the affirmative vote of a majority of the
outstanding shares of Company Common Stock and a majority of the outstanding
shares of Company Preferred Stock is needed to approve the matters submitted for
approval pursuant to this Proxy Statement.
The cost of soliciting proxies will be borne by the Company. The Company
expects to reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation material to such
beneficial owners. Proxies may be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation, in
person or by telephone or telegram. Anthony E. Papa, James P. Pisani and Frank
Dziuba, directors and executive officers of the Company, and Barry A. Peters, a
director, own, collectively, an aggregate of 4,357,508 shares, representing 61%
of the issued and outstanding Common Stock of the Company as of the Record Date.
As directors, Messrs. Papa, Pisani, Dziuba and Peters have unanimously
recommended approval by the shareholders of the proposals set forth in this
Proxy Statement and have indicated their intentions to vote in favor of the
adoption and approval of such proposals. All of the holders of the Company
Preferred Stock have indicated their intentions to vote in favor of the adoption
and approval of the proposals. Accordingly, there will be sufficient votes for
approval and adoption of the proposals submitted for approval pursuant to this
Proxy Statement without the affirmative vote of any other shareholders besides
Messrs. Papa, Pisani, Dziuba, Peters and the holders of the Company Preferred
Stock. To the knowledge of the Company's Board of Directors, as of the Record
Date, none of AvTel's directors or executive officers held any shares of the
capital stock of Matrix.
The Board of Directors is not aware of any business to be acted upon at the
Special Meeting other than as described herein. If, however, other matters are
properly brought before the Special Meeting, including any adjournment or
postponement thereof, the persons appointed as proxies will have discretion to
vote or act thereon according to their best judgment.
REVOCABILITY
A shareholder giving a proxy has the power to revoke it at any time before it
is exercised by filing with the Secretary of the Company an instrument revoking
it or a duly executed proxy bearing a later date or by personal attendance and
voting at the Special Meeting. Subject to such revocation, all shares
represented by each properly executed proxy received by the Company will be
voted in accordance with the instructions indicated thereon, and if instructions
are not indicated, will be voted in favor of all proposals.
-4-
<PAGE>
THE SHARE EXCHANGE
BACKGROUND AND REASONS FOR TRANSACTION
In October 1996, the Company completed a transaction in which it acquired
all of the issued and outstanding capital stock of AvTel Holdings, Inc., a
California corporation ("A.I."), in exchange for 4,252,508 shares of Company
Common Stock. After giving effect to this transaction, among other things, (i)
the shareholders of A.I. acquired approximately 61% of the issued and
outstanding Company Common Stock, (ii) the Company's Board of Directors and
executive management was replaced by that of A.I., (iii) the Company had access,
directly or indirectly, to the increased capital resources available to A.I.,
and (iv) the Company began to implement a strategy to expand and grow its
business as a non-facilities based telecommunications carrier providing a
comprehensive array of broadband voice and data network services. This business
development strategy involved, among other things, selected acquisitions and
strategic alliances and pursuit of capital resources necessary for the Company
to implement this strategy and to finance the anticipated expansion and growth.
In November 1996 and February 1997, respectively, the Company acquired all
the issued and outstanding capital stock of Silicon Beach Communications, Inc.,
an Internet Service Provider ("ISP") and software development firm based in
Santa Barbara, California and of WestNet Communications, Inc., an ISP based in
Ventura, California.
In early March, 1997, Anthony E. Papa, and James P. Pisani, President and
Chief Executive Officer and Executive Vice President, Chief Operating Officer,
respectively, of the Company began preliminary discussions with several
representatives of Matrix concerning a possible transaction in which the
businesses of AvTel and Matrix would be combined. These discussions resulted,
primarily, from the Company's perception of Matrix's attractiveness as an
acquisition candidate based on product and marketing synergies, the availability
of capital resources and the existence of a management and administrative
infrastructure. (See "DESCRIPTION OF MATRIX")
At its April 3, 1997 meeting, the Board of Directors reviewed the potential
Matrix transaction and authorized Mr. Papa and Mr. Pisani to enter into
negotiations with Matrix in an effort to determine whether the terms of a
proposed transaction could be agreed upon. At that meeting, the Board of
Directors also authorized management to retain legal counsel in connection with
the transaction. The Board discussed the possibility of retaining an outside
financial advisor to render a fairness opinion in connection with the
transaction. After reviewing the extensive financial analysis prepared by the
Company's management and accountants, and the estimated costs of retaining an
outside financial advisor, the Board determined that any value that might be
provided by such a financial advisor would not be worth the cost to the Company.
The Company's management, assisted by legal counsel, entered into negotiations
with Matrix and its counsel with respect to the provisions of the proposed
agreement and related documents. On April 14, 1997, the Company announced
publicly its intention to enter into a business combination with Matrix.
During this period, management circulated to the members of the Board
copies of preliminary drafts of the Exchange Agreement and related documents
reflecting negotiations with Matrix to date, together with materials describing
the remaining unresolved issues. Thereafter, extensive review and negotiation
of the provisions of the draft Exchange Agreement and related documents by
representatives of both sides ensued. During this process, the Board of
Directors continued to evaluate and consider other near- and short-term
alternative strategies to implement its growth and expansion plans and related
corporate financing objectives, including the private placement of its debt and
equity securities and obtaining credit facilities from private and institutional
sources.
The Board met again on April 25, 1997, at which time the Exchange Agreement
and the fairness of the Matrix offer were again analyzed and considered by the
Board in detail. The Board reviewed with legal counsel and management the
points negotiated with Matrix and the resulting changes to the Exchange
Agreement and related documents. After a full discussion of the proposed
transaction structure, the draft documentation, related financial and legal
issues, the Company's other prospects for acquisition partners, and the
Company's financial condition and operations, the Board of Directors unanimously
voted to approve the execution and delivery of the Exchange Agreement on behalf
of the Company, subject to the receipt of required shareholder and regulatory
approvals. The Exchange Agreement was executed by the parties on April 29,
1997, at which time they issued a joint press release announcing such execution
to the public. The Company and Matrix amended the Exchange Agreement as of
August
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<PAGE>
25, 1997, to extend the time for closing, to adjust the number of shares
of Matrix Common Stock and the number of options to be converted in the Share
Exchange, to finalize the terms of the Reverse Stock Split, to update the
related disclosure schedules and to make other modifications to the transaction.
The Board of Directors concluded that the terms of the Exchange Agreement
would provide greater advantages for the Company in accomplishing these
strategies than other alternatives then being considered for a number of
reasons. Matrix's business focus is primarily that of a long distance telephone
provider, a business in which the Company is not presently engaged but one in
which the Company had planned to develop or acquire because of the opportunities
for revenue growth and market expansion and because of the cross marketing
opportunities for the Company's ISP and other operations. (See "DESCRIPTION OF
MATRIX"). Matrix also has an established and larger corporate infrastructure
than that of the Company, including sales, billing, accounting and
administrative functions. In addition, Matrix has access to over 6,000
independent sales agents pursuant to long-term distribution agreements. These
existing resources will provide opportunities for the Company to improve
efficiencies and consolidate various similar functions that are either in an
incubation stage or are being performed using specialized resources (e.g.,
executive management, sales, etc.) that could more effectively be used
elsewhere.
Matrix also has available to it significantly greater capital resources,
including working capital, than those presently available to the Company. The
Company has pursued various financing opportunities and has received expressions
of interest from several sources of capital including venture capital firms,
institutional lenders and other private sources. However, by virtue of the
Exchange Agreement, the Company will have the opportunity to avail itself of
capital resources on an intercompany basis and without the distraction, delay
and expense of other capital funding alternatives. Moreover, the availability
of this capital in this manner will likely be on terms, including interest
rates, maturity, debt covenants and the like, that are more favorable to the
Company than those which would generally be available from outside sources.
Also, the combination of the Company's and Matrix's operations, asset and
business base and financial condition are likely to provide greater
opportunities for outside financing for the Company in the future.
The Share Exchange was also perceived by the Board of Directors to be in
the best interest of the Company and its shareholders because it should allow
AvTel to meet the applicable listing criteria of the National Market System of
NASDAQ. Promptly following the completion of the Share Exchange, the Company
intends to seek a listing on the National Market System. The Company believes
that such qualification will improve the liquidity of its Common Stock and as a
result will be beneficial to shareholder value.
The Company did not engage an investment banking firm or financial advisor
to assist it in the negotiations with or for the valuation of the Share Exchange
nor has it obtained a fairness or similar valuation opinion with respect to the
Share Exchange. The negotiations were conducted at arms-length and, in arriving
at the exchange ratio for the shares of the Company Common Stock that will,
subject to shareholder approval, be exchanged for common stock of Matrix, the
Company's management considered, among other things, (a) Matrix's current and
prospective business operations, revenues, profitability, existing
infrastructure (including established sales, billing, accounting and other
functions); (b) comparable values ascribed to other similar enterprises in the
same business as that in which Matrix is engaged (including other enterprises
whose financial statements and results of operation are publicly available); and
(c) customary financial valuation and analysis methods including net book
values, multiples of earnings and revenues and similar valuation techniques.
Accordingly, on the basis of these considerations, the Board unanimously
approved the execution of the Exchange Agreement and, subject to shareholder
approval, the consummation of the transactions contemplated therein.
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<PAGE>
TERMS OF THE SHARE EXCHANGE.
A copy of the Exchange Agreement, as amended, is attached as Exhibit A to
this Proxy Statement. The following discussion regarding the terms of the
Exchange Agreement is subject to, and qualified in its entirety by, the detailed
provisions of the Exchange Agreement and the exhibits thereto.
CONVERSION OF SHARES. Pursuant to the terms of the Exchange Agreement, at
the Closing, as defined therein, all of the issued and outstanding shares of
Matrix Common Stock will be exchanged for 9,582,514 shares of AvTel Delaware
Common Stock (after adjustment for the Reverse Stock Split discussed below),
representing an exchange ratio of 2.482 shares of AvTel Delaware Common Stock to
one share of Matrix Common Stock (the "Exchange Ratio"). AvTel Delaware will not
issue any fractional shares or interests in the AvTel Delaware Common Stock in
the Share Exchange. If any holder of Matrix Common Stock would otherwise be
entitled to a fractional share upon exchange thereof, AvTel Delaware will round
the number of shares of AvTel Delaware Common Stock to be issued to such
shareholder to the nearest whole share. Matrix will become a wholly-owned
subsidiary of AvTel Delaware as a result of the Share Exchange.
The 9,582,514 shares to be issued by AvTel Delaware will represent
approximately 84% of the issued and outstanding AvTel Delaware Common Stock.
Of the 9,582,514 shares to be issued by AvTel Delaware, 1,999,997 will be issued
to Best Connections, Inc. ("Best"), a wholly-owned subsidiary of Matrix. These
shares are held by Best subject to options awarded pursuant to an option plan
for Matrix's outside sales agents. Under Delaware law, these shares may not be
voted or counted in determining a quorum for the purpose of taking any corporate
action so long as they are held by Best. (See "Best Option Plan"), below).
The remaining 7,582,517 shares to be held by Matrix Shareholders after the Share
Exchange will represent approximately 81% of the outstanding AvTel Delaware
Common Stock (excluding the shares held by Best). As a result, the Matrix
Shareholders, if acting in concert, will be able to control the election of
Directors of AvTel Delaware and other matters which are subject to a vote of the
shareholders of AvTel Delaware. (See "Description of Matrix - Capitalization
and Related Matters").
CONVERSION OF STOCK OPTIONS. Matrix currently has outstanding non-
qualified stock options to purchase 9,000 shares of Matrix Common Stock, all of
which are held by three former employees of Matrix. The current exercise price
of each of these options is $5.56 per share. Pursuant to the Exchange
Agreement, these options will be converted into options to purchase 22,338
shares of AvTel Delaware Common Stock, at an exercise price of $2.24 per share.
These options will be fully vested and exercisable in full by their holders as a
result of the Share Exchange. These options will be in addition to the options
to purchase 324,819 shares of the Company Common Stock currently outstanding
(after adjustment for the Reverse Stock Split).
BEST OPTION PLAN. Best markets Matrix's telephone services through
approximately 6,000 outside sales agents pursuant to distribution agreements.
In February 1997, Best, in cooperation with Matrix, established its 1997 Stock
Option Plan (the "Best Option Plan") in order to benefit and provide increased
incentives to this outside sales force. In connection with the establishment of
the Best Option Plan, shareholders of Matrix transferred 805,840 shares of
Matrix Common Stock to Best. Best has awarded (or committed to award) options to
purchase these shares to members of the outside sales force pursuant to the
terms of the Best Option Plan. In connection with the Share Exchange, these
Matrix shares will be converted into 1,999,997 shares of AvTel Delaware Common
Stock. Options to purchase AvTel Delaware Common Stock under the Best Option
Plan (to the extent they become exercisable) will have an exercise price of
$1.50 per share (after adjustment for the transactions contemplated hereby).
REPRESENTATIONS AND WARRANTIES. Pursuant to the Exchange Agreement each
of AvTel and Matrix have made certain representations and warranties to the
other concerning, among other things, (i) their respective capitalization and
capital structure, (ii) their respective corporate organization and status,
(iii) their authority to execute the Exchange Agreement and to perform their
respective obligations thereunder, (iv) the accuracy of their respective
financial statements and the lack of any material adverse events since the date
of the last of such financial statements, (v) the existence of contracts with
their respective affiliates, (vi) the existence of employee benefit plans,
(vii) the existence of litigation, actual or threatened, (viii) the accuracy of
tax returns previously filed by each party and (ix) the need for third party
consents in connection with the transactions contemplated by the Exchange
Agreement. Pursuant to the Exchange Agreement, the accuracy of the
representations and warranties of each of AvTel and Matrix is a condition
-7-
<PAGE>
to the other party's obligation to complete the transactions contemplated
thereby. Further, the representations and warranties of the parties will survive
the closing of the Exchange Agreement for a period of one year. The Matrix
Shareholders are third party beneficiaries of the representations and warranties
made by AvTel.
CONDITIONS TO CLOSING. The obligation of Matrix to complete the Exchange
Agreement is subject to and conditional upon, among other things, (i) approval
by the shareholders of the Company of the Exchange Agreement and the
transactions contemplated thereby, including the Reincorporation Merger and the
Reverse Stock Split, (ii) the receipt of any and all governmental or other third
party consents required to effect the transactions contemplated by the Exchange
Agreement, (iii) the execution by Matrix Shareholders holding at least 90% of
the Matrix Common Stock of an Exchange Statement in the form attached as Exhibit
A to the Exchange Agreement, (iv) the execution by AvTel of the Registration
Rights and Lockup Agreement, and (v) the accuracy of the representations and
warranties of AvTel in the Exchange Agreement as of the date thereof and as of
the closing date of the Exchange Agreement and the performance by AvTel of its
obligations under the Exchange Agreement as of the closing date of the Exchange
Agreement.
The obligation of AvTel to complete the Exchange Agreement is subject to
and conditional upon, among other things, (i) the approval by the shareholders
of the Company of the Exchange Agreement and the transactions contemplated
thereby, including the Reincorporation Merger, (ii) the receipt of any and all
governmental or other third party consents required to effect the transactions
contemplated by the Exchange Agreement, (iii) the execution by Matrix
Shareholders holding at least 90% of the Matrix Common Stock of an Exchange
Statement, (iv) the execution by Matrix and Matrix Shareholders holding at least
90% of the Matrix Common Stock of the Registration Rights and Lockup Agreement,
and (v) the accuracy of the representations and warranties of Matrix in the
Exchange Agreement as of the date thereof and as to the closing date of the
Exchange Agreement and the performance by Matrix of its obligations under the
Exchange Agreement as of the closing date of the Exchange Agreement.
After the Closing, each holder of shares of Matrix Common Stock shall, upon
the surrender of the certificate or certificates representing such shares to
AvTel Delaware's registrar and transfer agent, be entitled to receive a
certificate or certificates evidencing shares of the AvTel Delaware Common
Stock. On the effective date of the Share Exchange (the "Effective Date"), (i)
each share of Matrix Common Stock so surrendered prior to the Effective Date
will be canceled and extinguished and automatically converted into the right to
receive that number of shares of AvTel Delaware Common Stock required by the
Exchange Ratio; and (ii) all outstanding stock options of Matrix immediately
prior to the Closing will be canceled and extinguished and automatically
converted into options to purchase that number of shares of AvTel Delaware Stock
required by the Exchange Ratio.
As a condition precedent to the consummation of the transactions
contemplated by the Exchange Agreement, the Company's shareholders are to adopt
and approve all required or necessary resolutions providing for the
reincorporation of the Company in Delaware and the Reverse Stock Split. (See
"The Reincorporation Merger").
REGISTRATION RIGHTS AND LOCKUP AGREEMENT. Pursuant to the terms of the
Exchange Agreement, the Company, Matrix and the Matrix Shareholders will enter
into the Registration Rights and Lockup Agreement effective as of the Closing of
the Share Exchange. Pursuant to the Registration Rights and Lockup Agreement,
certain persons and entities who hold an aggregate of 58.1% of the outstanding
Matrix Common Stock will agree, for a two-year period commencing on the closing
of the transactions contemplated by the Exchange Agreement, not to offer,
pledge, sell, or otherwise dispose of any shares of AvTel Delaware issued to
them pursuant to the terms of the Exchange Agreement.
The Registration Rights and Lockup Agreement will require that AvTel
Delaware use its best efforts to become listed on the NASDAQ Small Cap System or
the NASDAQ NMS whereupon it will be required to file a shelf registration
statement providing for the sale by the Matrix Shareholders of all securities
issued to them in connection with the Exchange Agreement, subject to the two-
year holding restriction imposed on certain of the Matrix Shareholders described
above. Under the Registration Rights and Lockup Agreement, AvTel Delaware is
obliged to use its reasonable efforts to keep the shelf registration statement
effective on a continuous basis for a period described in the Registration
Rights and Lockup Agreement. In addition, if AvTel Delaware securities are not
listed on the NASDAQ Small Cap System or the NASDAQ NMS within six months
following the Closing or AvTel is otherwise unable to qualify for use of a shelf
registration statement within such period, the Matrix Shareholders are entitled
to
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<PAGE>
exercise certain "demand" registration rights with respect to the AvTel Delaware
Common Stock received by them in connection with the Exchange Agreement. The
Matrix Shareholders may require AvTel Delaware to undertake up to two
registrations of their securities. All costs and expenses of both shelf and
demand registrations (excluding any underwriting discounts and fees of counsel
to the Matrix Shareholders) will be borne by AvTel Delaware.
The full text of the Registration Rights and Lockup Agreement is included
in the Exchange Agreement. This summary does not purport to be complete and is
qualified by reference to the full text of the Registration Rights and Lockup
Agreement included in Exhibit A to this Proxy Statement.
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Avtel
and Matrix and per share data on a pro forma combined basis, based on the
assumptions that (i) the Share Exchange was effective at the beginning of the
periods indicated and was accounted for using the purchase method of accounting,
and (ii) the Reorganization Merger was effective at the beginning of the periods
indicated. The unaudited pro forma combined per share data provided below is not
necessarily indicative of the results of operations or the financial position
which would have occurred had the transactions been consummated on the indicated
dates or which may be attained in the future. This data should be read in
conjunction with the historical consolidated financial statements and the
related notes thereto of Avtel and Matrix and the unaudited pro forma condensed
combined financial statements, which are included in this Proxy Statement. The
unaudited pro forma combined per share data below is shown for illustrative
purposes only.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR AT OR FOR THE SIX
ENDED DECEMBER 31, MONTHS ENDED JUNE 30,
1996 1997
<S> <C> <C>
AVTEL:
Book value per Common share $(0.03) $(0.06)
Cash dividends declared per Common share - -
Net loss per Common share (0.05) (0.04)
MATRIX:
Book value per Common share 2.46 2.51
Cash dividends declared per Common share - -
Net income per Common share 0.88 0.05
PRO FORMA:
Book value per Common share N/A 0.94
Cash dividends declared per Common share - -
Net income per Common share 0.26 -
AVTEL EQUIVALENTS(1):
Book value per Common share N/A 0.38
Cash dividends declared per Common share - -
Net income per Common share 0.10 -
</TABLE>
N/A - Not Applicable
(1) Represents pro forma amounts based upon the Exchange Ratio of 2.482 shares
of AvTel Delaware Common Stock for each share of Matrix Common Stock.
MANAGEMENT OF AVTEL DELAWARE AFTER THE SHARE EXCHANGE.
BOARD OF DIRECTORS OF AVTEL DELAWARE. Frank Dziuba and Barry A. Peters,
who are currently Directors of the Company, have indicated that they will resign
as directors immediately prior to the Closing of the Share Exchange, as
contemplated by the Exchange Agreement. The Company expects that John E. Allen,
Ronald W. Howard and Gregory T. Mutz will be appointed to fill the vacancies on
the Board of AvTel Delaware. Accordingly, if all of the
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<PAGE>
conditions to the completion of the Share Exchange are satisfied, including
approval by the shareholders of AvTel, the composition of the Board of Directors
of AvTel Delaware will be as follows:
<TABLE>
<CAPTION>
NAME POSITION WITH AVTEL UTAH POSITION WITH AVTEL DELAWARE
- ------------------- ----------------------------------- -------------------------------------
<S> <C> <C>
Anthony E. Papa President, Chief Executive Officer Chairman of the Board, President,
and Director Chief Executive Officer and Director
James P. Pisani Executive Vice President, Chief Executive Vice President, Chief
Operating Officer, Chief Financial Operating Officer, Chief Financial
Officer, Secretary and Director Officer, Secretary and Director
John E. Allen None Director
Ronald W. Howard None Director
Gregory T. Mutz None Director
</TABLE>
Certain biographical information with respect to each of the persons named
above is set forth below.
ANTHONY E. PAPA, age 35, is Chairman of the Board, President and Chief
Executive Officer of the Company, and will continue to hold those offices with
AvTel Delaware. Mr. Papa is also one of the principal shareholders of the
Company. Before being elected a Director in October, 1996, Mr. Papa had served
as President of ICS Communications, Inc.("ICS"), Richardson, Texas, a national
provider of cable television, wireless paging, local and long-distance telephone
services from December 1992. Before joining ICS, Mr. Papa served as general
manager for Spectradyne, Inc., the largest provider of pay-per-view
entertainment and interactive services to the hospitality industry. Mr. Papa is
a director of International School of Information Management, Inc., an
accredited university and an electronic publisher and provider of electronic
services. Mr. Papa received a B.S. in Management from Iona College, in New
Rochelle, New York.
JAMES P. PISANI, age 33, is Executive Vice-President, Chief Operating Officer,
Chief Financial Officer and Secretary of the Company, and will continue to hold
those offices with AvTel Delaware. Mr. Pisani is also a principal shareholder
of the Company and, prior to being elected a Director in October 1996, he served
as Vice President of Sales for ICS. While at ICS, Mr. Pisani was responsible
for that firm's business-to-business and consumer sales activities. Prior to
joining ICS, from June 1989 to June 1994, Mr. Pisani served as Vice-President
of a national mortgage banking firm serving, primarily, institutional accounts.
Mr. Pisani graduated from Princeton University in 1986, with a degree in
Economics.
JOHN E. ALLEN, age 61, is Vice Chairman of the Board of Amli Residential
Properties Trust and President of Amli Realty Co. ("AMLI"), which he co-founded
in 1980. Prior to co-founding AMLI, he was a partner at the Chicago law firm of
Mayer, Brown & Platt, with which he had been associated since 1964. Mr. Allen
is a member of the Board of Directors of UICI, an insurance and financial
services company. Mr. Allen received a B.S. in Business from Indiana University
in 1961 and a J.D. from Indiana University School of Law in 1964.
RONALD W. HOWARD, age 49, has been employed by United Group Association, Inc.,
a management company ("UGA"), since July 1, 1997, and prior to that date served
as a consultant to UGA in a financial and management advisory capacity since
November, 1996. Prior to his consulting with UGA, Mr. Howard was Executive Vice
President of Associates First Capital Corporation, a financial services company,
from August 1990 to July 1996. Additionally, from 1993 to 1996, Mr. Howard
served as Chairman of Associates Investment Corporation, an industrial loan
chartered bank located in Salt Lake City, Utah. Mr. Howard also serves as a
member of the Board of Directors of U.S. Metroline Services, Inc., U.S. Telco,
Inc. and as an executive officer of Sun Network Technologies, LLC. Mr. Howard
earned a B.S. in Marketing from Sacred Heart University, in Fairfield,
Connecticut.
-10-
<PAGE>
GREGORY T. MUTZ, age 51, is chairman of the Board of Amli Residential
Properties Trust and Chairman of the Board of AMLI, which he co-founded in 1980.
Mr. Mutz is also a Director of Baldwin & Lyons, Inc., a Director of the Illinois
Chapter of The Nature Conservancy and a member of the Board of Visitors at
DePauw University. Prior to co-founding AMLI, he was an officer with White,
Weld & Co., Incorporated (1976-78) and associated with the law firm of Mayer,
Brown & Platt (1973-76). He received a B.A. from DePauw University in 1967 and
a J.D. from the University of Michigan law School in 1973. He is also a member
of the Urban Land Institute.
EXECUTIVE COMPENSATION/EMPLOYMENT AGREEMENTS. The Company currently has
employment agreements in place with each of Messrs. Papa and Pisani. Under
these employment agreements, generally, each executive is employed for a term
commencing in August 1996 and expiring July 31, 1999. However, as described
below, these employment agreements will be terminated effective upon the Closing
of the Share Exchange.
In connection with the execution of the Exchange Agreement, Messrs. Papa and
Pisani have agreed that, upon closing of the transactions contemplated thereby,
their respective employment agreements shall be terminated and will no longer be
of any force and effect. Thereafter, their employment relationship with AvTel
Delaware will be on an at-will basis. Mr. Papa will continue to serve as
Chairman of the Board, President and Chief Executive Officer of the Company and
Mr. Pisani will continue to serve as Executive Vice President and Chief
Operating Officer, Chief Financial Officer and Secretary. Both Mr. Papa and Mr.
Pisani will continue to serve as directors of the Company and will continue to
serve as officers and employees of the Company (at the pleasure of the Board)
at their current salaries. Messrs. Papa and Pisani have already waived their
rights to receive guaranteed bonuses of $50,000 each under their employment
agreements with the Company and have also waived their rights to performance
bonuses for the fiscal year ending September 30, 1997, in the amount of 75% of
their respective base salaries, which are called for by their current employment
agreements. Upon consummation of the Share Exchange, neither of Messrs. Papa or
Pisani will be entitled to guaranteed bonuses, but may receive bonuses from time
to time at the discretion of the Board of Directors.
Frank Dziuba will continue to be employed as the Company's Senior Vice
President - Software Development, and Steve DeWindt will continue to be employed
as the Presdient of the Company's Business Network Services Division pursuant to
the terms of their existing employment agreements with the Company.
CONTROL BY JENSEN HOLDERS. Following completion of the Share Exchange, Mr.
Ronald L. Jensen, various adult children of Mr. Jensen and several corporations
controlled by Mr. Jensen and members of his family (collectively, the "Jensen
Holders") will hold approximately 69% of the outstanding AvTel Delaware Common
Stock (excluding the shares to be held by Best) and will constitute AvTel
Delaware's largest single stockholding group. Accordingly, the Jensen Holders
can be expected to have the ability to control the direction of the Company.
RELATIONSHIP WITH MATRIX
The Matrix Loan. Under the terms of the Exchange Agreement, Matrix was
required to provide to the Company an unsecured loan (the "Matrix Loan") in the
maximum aggregate amount of $500,000. When the Exchange Agreement was amended
on August 25, 1997, the maximum aggregate amount of the Matrix Loan was
increased to $750,000. The loan is in the form of a revolving credit facility
under which the Company is permitted to draw down up to three increments of
$250,000 each. As of August ___, 1997, the Company has borrowed the full
$750,000 permitted under the Matrix Loan.
The Matrix Loan bears interest at a rate equal to 8% per annum until October
31, 1997. Thereafter, the interest rate increases to a rate equal to 12% per
annum until maturity. If the loan is not paid at maturity, the interest rate
increases to 15% per annum. Interest is payable monthly, and all principal and
accrued interest outstanding under the Matrix Loan are due and payable on
December 1, 1997. If the Share Exchange is not consummated, the Company will
have to attempt to access some other source of funds in order to repay the
Matrix Loan. See "Description of the Company - Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources."
-11-
<PAGE>
Current Operational Transactions with Matrix. AvTel currently sells Matrix's
long distance telephone services to its customers. Because these sales have
only very recently commenced, this business has not yet accounted for any
significant revenues of the Company.
ACCOUNTING TREATMENT.
The Share Exchange will be treated for accounting purposes as a reverse
acquisition of AvTel by Matrix. After the Share Exchange, the Matrix
Shareholders will own approximately 81% of the outstanding AvTel Delaware Common
Stock (excluding the shares held by Best). The acquisition will be accounted for
using the purchase method and the results of operations of AvTel will be
recorded by Matrix from the date of acquisition forward. In addition, it is
anticipated that AvTel Delaware's fiscal year end will become December 31.
NO LEGAL OPINIONS OR TAX RULINGS.
The proposed acquisition of Matrix by AvTel Delaware is intended to qualify as
a tax-free reorganization under the Internal Revenue Code of 1986. If the
acquisition qualifies as a tax-free reorganization, no gain or loss will be
recognized for income tax purposes by either AvTel Delaware or Matrix, or their
respective shareholders, as a result of the acquisition. Management of the
Company does not believe that the Share Exchange will have any materially
adverse tax consequences for the Company's shareholders. However, neither AvTel
Delaware nor Matrix has requested a tax ruling from the Internal Revenue Service
or an opinion of legal counsel with respect to the acquisition. Accordingly, no
assurance can be given that the acquisition will qualify as a tax-free
reorganization.
REGULATORY APPROVAL.
The shares of the AvTel Delaware Common Stock to be issued to the Matrix
Shareholders will not be registered under the Securities Act of 1933, as amended
(the "Act") in reliance on the exemption from such registration requirements
provided by Section 4(2) of the Act for transactions not involving any public
offering. In order to claim the availability of such exemptions, the Matrix
Shareholders will make representations with respect to their acquisition of
shares of AvTel Delaware's Common Stock, such shares will be restricted
securities, and the certificates will bear legends restricting their subsequent
resale in the absence of registration under the Securities Act or the
availability of an exemption therefrom. The representations and warranties to
be made by the Matrix Shareholders at the closing of the Share Exchange are
included in the Exchange Statement to be executed and delivered by each Matrix
Shareholder at the Closing.
The acquisition of Matrix is also subject to regulatory approval by the
Federal Communications Commission ("FCC") and the corresponding state
telecommunications regulatory authorities of certain states in which Matrix
operates. The Company has been advised by Matrix that most of these regulators
require only the filing of a prior notice of the Share Exchange, and that those
states that require a formal approval process will not delay the closing of the
Share Exchange if an appropriate application has been filed. Accordingly, the
Company does not foresee any substantial difficulty or delay in completing the
Share Exchange as a result of the required regulatory approvals.
VOTE REQUIRED.
Under Utah law, the affirmative vote of a majority of the outstanding shares
of Company Common Stock is required for approval of the proposed Share Exchange.
If approved by the Company's shareholders, it is anticipated that the Share
Exchange would be completed within thirty (30) days of such approval,
concurrently with or immediately after consummation of the Reincorporation
Merger. However, consummation of the Share Exchange is subject to the
satisfaction or waiver of various conditions precedent, including the delivery
of an executed Exchange Statement by each of the Matrix Shareholders and
optionholders.
Certain shareholders, including the Company's current Directors, who own
shares representing approximately 61% of the issued and outstanding shares of
the Company Common Stock have indicated that they will vote their shares in
favor of the Share Exchange. Accordingly, without the affirmative vote of any
other shareholder, there will be sufficient votes for approval and adoption of
the Share Exchange.
-12-
<PAGE>
RECOMMENDATION OF MANAGEMENT.
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THAT THE TRANSACTIONS
CONTEMPLATED BY THE PROPOSED SHARE EXCHANGE ARE DESIRABLE AND IN THE BEST
INTERESTS OF THE COMPANY'S SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE "FOR" SUCH PROPOSAL. MANAGEMENT BELIEVES THAT THE
SHAREHOLDERS WILL BENEFIT THROUGH MATRIX'S EXISTING BUSINESS BASE, OPERATIONS,
FINANCIAL AND OTHER RESOURCES AVAILABLE TO MATRIX. (SEE "DESCRIPTION OF
MATRIX").
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements present (i)
the transactions contemplated by the Exchange Agreement as a reverse acquisition
of the Company by Matrix using the purchase method of accounting, (ii) the
combination of Best, an affiliated company of Matrix, and Matrix in a share
exchange accounted for as entities under common control using historical costs,
and (iii) the acquisition of WestNet Communications, Inc. ("WNI") by AvTel using
the purchase method of accounting, all as if these transactions had been
consummated, with respect to the statements of operations, at the beginning of
the earliest period presented, or, with respect to the balance sheet, as of the
date presented. Such information is derived from and should be read in
conjunction with, the separate historical financial statements of the Company
and Matrix and other financial information appearing elsewhere in this Proxy
Statement. The unaudited pro forma condensed combined financial statements have
been included for comparative purposes only and do not purport to be indicative
of the results of operations or financial position which actually would have
been obtained if the transaction contemplated by the Exchange Agreement had been
consummated at the beginning of the earliest period presented or as of the date
presented or of the results of operations or financial position which may be
obtained in the future.
In connection with the reverse acquisition, AvTel will change its fiscal year
end from September 30 to December 31. For purposes of these pro forma financial
statements, the financial information of AvTel has been presented based on a
fiscal year end of December 31 by combining appropriate historical periods of
AvTel.
Because the purchase price is determined based on the trading price of AvTel
shares immediately prior to the public announcement of the Share Exchange, which
results in a significantly higher value than the total value of the underlying
tangible and intangible net assets, a significant amount of goodwill results.
The operations of AvTel do not support the carrying value of such goodwill,
accordingly, immediately following the transaction, and as a result of the
transaction, such goodwill will be written off to operations.
-13-
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
Matrix/Best
Pro Forma Pro Forma Pro Forma
Assets Matrix Best Adjustments Combined AvTel Adjustments Combined
- ------ ------ ----- ------------ ----------- ----- ----------- ---------
(Note B) (Note C)
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 4,240,644 211,169 -- 4,451,813 431,405 -- 4,883,218
Accounts receivable, net 8,465,520 -- -- 8,465,520 205,871 -- 8,672,391
Due from affiliates 964,300 -- -- 964,300 86,000 (500,000)/(6)/ 550,300
Other current assets 1,570,087 -- -- 1,570,087 18,869 -- 1,588,956
----------- --------- ---------------- ---------- --------- -------------- ----------
15,240,551 211,169 -- 15,451,720 743,145 (500,000) 15,694,865
Property and equipment, net 1,418,196 15,137 -- 1,433,333 523,805 -- 1,957,138
Loans to affiliates 1,924,303 -- -- 1,924,303 -- -- 1,924,303
Investments -- 3,317,940 (3,317,940)/(2)/ -- -- -- --
Goodwill, net -- -- -- -- 567,614 7,557,588/(2)/ --
(8,125,202)/(5)/
Other assets, net 3,369 -- -- 3,369 5,499 -- 8,868
Deferred income taxes 134,288 -- -- 134,288 -- -- 134,288
----------- --------- ---------------- ---------- --------- -------------- ----------
$18,720,707 3,544,246 (3,317,940) 18,947,013 1,840,063 (1,067,614) 19,719,462
=========== ========= ================ ========== ========= ============== ==========
</TABLE>
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
JUNE 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
Matrix/Best
Liabilities and Pro Forma Pro Forma Pro Forma
Stockholders' Equity Matrix Best Adjustments Combined AvTel Adjustments Combined
- --------------------- ------ ---- ----------- -------- ----- ----------- ---------
(Note B) (Note C)
<S> <C> <C> <C> <C> <C> <C> <C>
Current liabilities
Accounts payable and other
accrued expenses $ 2,063,743 -- -- 2,063,742 201,434 2,265,176
Accrued network services
costs 4,328,597 -- -- 4,328,597 -- -- 4,328,597
Deferred revenue -- -- -- -- 123,013 -- 123,013
Sales and excise tax
payable 1,341,572 -- -- 1,341,572 -- -- 1,341,572
Due to affiliates 2,207,665 177,008 -- 2,384,673 199,041 -- 2,583,714
Income tax payable 20,447 -- -- 20,447 -- -- 20,447
Lease obligations -
current portion -- -- -- -- 32,368 -- 32,368
Note payable -- -- -- -- 628,099 (500,000)/(6)/ 128,099
----------- --------- ---------------- ---------- --------- --------------- ----------
9,962,023 177,008 -- 10,139,031 1,183,955 (500,000) 10,822,986
Lease obligation, less
current portion -- -- -- -- 77,889 -- 77,889
Stockholders' Equity
Preferred stock -- -- -- -- 1,000,000 -- 1,000,000
Common stock 8,255,626 -- 3,367,238/(2)/ 11,622,864 7,136 (5,352)/(1)/ 11,367
(11,613,281)/(4)/
Paid in capital in excess
of par value -- 3,209,779 (3,209,779)/(2)/ -- 135,475 5,352/(1)/ 18,307,721
6,993,196/(2)/
11,173,698/(4)/
</TABLE>
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
JUNE 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
Matrix/Best
Liabilities and Pro Forma Pro Forma Pro Forma
Stockholders' Equity Matrix Best Adjustments Combined AvTel Adjustments Combined
- --------------------- ------ ---- ----------- ----------- ----- ----------- ---------
(Note B) (Note C)
<S> <C> <C> <C> <C> <C> <C> <C>
Retained earnings
(accumulated deficit) 942,641 157,459 (157,459)(2) 942,641 (564,392) 564,392/(2)/ (7,182,561)
(8,125,202)/(5)/
Treasury Stock
(439,583) -- (3,317,940) (3,757,523) -- 439,583/(4)/ (3,317,940)
----------- --------- ----------- ---------- --------- ---------------- ----------
8,758,684 3,367,238 (3,317,940) 8,807,982 578,219 (567,614) 8,818,587
----------- --------- ----------- ---------- --------- ---------------- ----------
$18,720,707 3,544,246 (3,317,940) 18,947,013 1,840,063 (1,067,614) 19,719,462
=========== ========= =========== ========== ========= ================ ==========
</TABLE>
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Matrix/Best
Pro Forma Pro Forma
Matrix Best Adjustments Combined AvTel
------ ---- ----------- ----------- -----
(Note D)
<S> <C> <C> <C> <C> <C>
Revenues $26,829,063 497,300 (497,300)/(2)/ 26,829,063 1,346,084
Cost of revenues 18,314,213 -- -- 18,314,213 314,560
----------- ------- -------------- ---------- ---------
Gross margins 8,514,850 497,300 (497,300)/(2)/ 8,514,850 1,031,524
Operating expenses
Selling, general and
administrative 7,800,920 471,542 (497,300) 7,775,162 1,268,338
Depreciation and
amortization 364,200 2,890 367,090 59,845
Total operating ----------- ------- -------------- ---------- ---------
expenses 8,165,120 474,432 (497,300) 8,142,252 1,328,183
----------- ------- -------------- ---------- ---------
Operating income (loss) 349,730 22,868 -- 372,598 (296,659)
Interest expense (6,864) -- -- (6,864) (3,481)
Other income, net (44,238) 35 -- (44,203) 30,290
Income (loss) before ----------- ------- -------------- ---------- ---------
income taxes 298,628 22,903 -- 321,531 (269,850)
Income tax expense (benefit) 125,426 -- 9,619/(3)/ 135,045 --
----------- ------- -------------- ---------- ---------
173,202 22,903 (9,619) 186,486 (269,850)
Equity in net income (loss)
of DNS -- -- -- -- --
Net income (loss) $ 173,202 22,903 (9,619) 186,486 (269,850)
=========== ======= ============== ========== =========
Net income (loss) per common
share $0.05 0.06 (0.04)
=========== ========== =========
Weighted average shares
outstanding 3,484,260 3,055,147 7,123,751
=========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
AvTel/
Pro Forma WNI Pro Forma Pro Forma Pro Forma
WNI Adjustments Combined Adjustments Combined
-------------- ------- --------------- ------------ ----------
(Note E) (Note F)
<S> <C> <C> <C> <C> <C>
Revenues $ 108,583 -- 1,454,667 -- 28,283,730
Cost of revenues 18,526 -- 333,086 -- 18,647,299
----------- ------- -------------- ---------- ----------
Gross margins 90,057 -- 1,121,581 -- 9,636,431
Operating expenses
Selling, general and
administrative 84,726 -- 1,353,064 -- 9,128,226
Depreciation and
amortization 7,000 6,400(2) 73,245 (8,683)/2/ 431,652
----------- ------- -------------- ---------- ---------
Total operating
expenses 91,726 6,400 1,426,309 (8,683) 9,559,878
----------- ------- -------------- ---------
Operating income (loss) (1,669) (6,400) (304,728) 8,683 76,553
Interest expense -- -- (3,481) -- (10,345)
Other income, net (8,990) -- 21,300 -- (22,903)
Income (loss) before ----------- ------- -------------- ---------- ---------
income taxes (10,659) (6,400) (286,909) 8,683 43,305
Income tax expense (benefit) -- -- -- (116,857)/(3)/ 18,188
----------- ------- -------------- ---------- ---------
Equity in net income (loss)
of DNS -- -- -- -- --
Net income (loss) (10,659) (6,400) (286,909) 125,540 25,117
=========== ======= ============= ========== =========
Net income (loss) per common
share (0.04) --
============== =========
Weighted average shares
outstanding 7,129,584 9,364,913
============== =========
</TABLE>
-17-
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Matrix/Best
Pro Forma Pro Forma Pro Forma
Matrix Best Adjustments Combined AvTel WNI Adjustments
------ ---- ----------- ----------- ----- --- -----------
(Note D) (Note E)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $71,558,295 1,280,273 (1,280,273)/(2)/ 71,558,295 263,139 964,658 --
Cost of revenues 47,674,396 -- -- 47,674,396 89,121 129,049 --
----------- --------- ---------------- ---------- --------- ------- -----------
Gross margins 23,883,899 1,280,273 (1,280,273)/(2)/ 23,882,899 174,018 835,609 --
Operating expenses
Selling, general and
administrative 18,798,926 1,193,332 (1,280,273) 18,711,985 504,991 521,018 --
Depreciation and
amortization 993,940 10,021 -- 1,003,961 -- 84,000 77,000/(2)/
---------- --------- ---------------- ---------- --------- ------- -----------
Total operating expenses 19,792,866 1,203,353 (1,280,273) 19,715,946 504,991 605,018 77,000
---------- --------- ---------------- ---------- --------- ------- -----------
Operating income (loss) 4,091,033 76,920 -- 4,167,953 (330,973) 230,591 (77,000)
Interest expense (230,922) -- -- (230,922) (945) -- --
Other Income, net 271,172 18,619 -- 289,871 21,268 (60,175) --
--------- --------- ---------------- ---------- --------- ------- -----------
Income (loss) before income 4,131,283 95,619 -- 4,226,902 (310,650) 170,416 (77,000)
taxes
Income tax expense (benefit) 1,686,878 -- 40,160/(3)/ 1,727,038 -- -- --
----------- --------- ---------------- ---------- --------- ------- -----------
2,444,405 95,619 (40,160) 2,499,864 (310,650) 170,416 (77,000)
Equity in net income (loss) 122,327 -- -- 122,327 -- -- --
of DNS
Net income (loss) $ 2,566,732 95,619 (40,160) 2,622,191 (310,650) 170,416 (77,000)
=========== ========= ================ ========== ========= ======= ===========
Net income (loss) per $ 0.88 1.05 (0.05)
common share =========== ========== =========
Weighted average shares 2,919,978 2,490,865 5,908,169
outstanding =========== ========== =========
<CAPTION>
AvTel/ Pro Forma
WNI Pro Forma Adjust- Pro Forma
Combined ments Combined
------------- --------- --------
(Note F)
<S> <C> <C> <C>
Revenues 1,227,797 -- 72,786,092
Cost of revenues 218,170 -- 47,892,566
--------- ------------- ----------
Gross margins 1,009,627 -- 24,893,526
Operating expenses
Selling, general and
administrative 1,026,009 -- 19,737,994
Depreciation and
amortization 161,000 -- 1,164,961
--------- ------------- ----------
Total operating expenses 1,187,009 -- 20,902,955
--------- ------------- ----------
Operating income (loss) (177,382) -- 3,990,571
Interest expense (945) -- (231,867)
Other Income, net (38,907) -- 250,964
--------- ----------
Income (loss) before income (217,234) -- 4,009,668
taxes
Income tax expense (benefit) -- (42,977)/(3)/ 1,684,061
--------- ------------- ----------
(217,234) 42,977 2,325,607
Equity in net income (loss) -- -- 122,327
of DNS
Net income (loss) (217,234) 42,977 2,447,934
========= ============= ==========
Net income (loss) per (0.04) 0.26
========= ==========
Weighted average shares 5,943,169 9,068,309
outstanding ========= ==========
</TABLE>
-18-
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
(A) Basis of Presentation
The unaudited pro forma condensed financial information reflects the
exchange of 376,727 shares of Matrix stock for 100% of the outstanding
shares of Best Connections, Inc.("Best"), an affiliated company. Due
to the existence of the common control of Matrix and Best, their share
exchange was accounted for as a combination of entities under common
control with the assets of Best being recorded at their historical
cost basis. The unaudited pro forma condensed financial information
also reflects the exchange of 35,000 shares of AvTel common stock,
$100,000 cash and secured promissory notes of $177,000 for 100% of the
oustanding shares of WestNet Communications, Inc. ("WNI"). The
transaction was accounted for as a purchase. Additionally, the
unaudited pro forma condensed financial information also reflects the
exchange of AvTel common stock for all of the outstanding common stock
of Matrix pursuant to the Share Exchange. Although AvTel common stock
is being used in the Share Exchange, for accounting purposes the Share
Exchange is being treated as a reverse acquisition of AvTel by Matrix.
After the Share Exchange, the former shareholders of Matrix will own
81% of AvTel. This transaction will be accounted for using the
purchase method of accounting.
June 30, 1997 Pro Forma Balance Sheet Adjustments
-------------------------------------------------
(B) Matrix/Best - The pro forma adjustments applicable to the June 30, 1997
balance sheet assume the Best share exchange took place as of June 30,
1997.
(1) Matrix issues 376,727 shares of Matrix stock for 100% of the
outstanding shares of Best. Best's primary asset consists of
805,840 shares of Matrix common stock. As part of the Best/ Matrix
merger, Matrix assumes the Best obligation related to 805,840
outstanding options to purchase common shares at $3.75 per share
(1,999,997 post-Reverse Stock Split AvTel shares at $1.50 per
share). Such outstanding options will result in compensation
expense in the future for AvTel as such options vest.
(2) To eliminate Best's investment in Matrix common stock and reflect
issuance of Matrix common shares for Best.
(C) Matrix/AvTel - The pro forma adjustments applicable to the June 30,
1997 balance sheet assume the AvTel Share Exchange took place as of
June 30, 1997 and reflect a preliminary purchase price allocation.
(1) Reflects 1 for 4 reverse split of AvTel's common stock.
(2) This adjustment reflects recording of the purchase price of AvTel
by Matrix using the trading value of the AvTel shares immediately
prior to the public announcement of the Share Exchange as required
for a reverse acquisition.
The preliminary allocation of the purchase price is as follows:
<TABLE>
<CAPTION>
Carrying Fair Pro Forma
Value Value Adjustment
------------ ------------ -----------
<S> <C> <C> <C>
Current Assets $ 743,145 743,145 -
Property and equipment 523,805 523,805 -
Goodwill 567,614 8,1256,202 (7,557,588)
Other assets 5,499 5,499 -
Current liabilities (1,183,955) (1,183,955) -
Lease obligation, less current portion (77,889) (77,889) -
$ 8,135,807
===========
</TABLE>
The purchase price is comprised of the following:
preferred stock $1,000,000
common stock 7,135,807
---------
$8,135,807
-19-
<PAGE>
(3) For purposes of the determination of the purchase price, the trading
value of AvTel common shares for a period immediately prior to the
public announcement of the Share Exchange was used. This resulted in a
price per share of $1.00 pre reverse split and a total purchase price
of $8,135,807.
(4) This adjustment recapitalizes Matrix based on par value of AvTel common
stock.
(5) Goodwill recorded in the acquisition results from recording the reverse
purchase acquisition utilizing the market trading price of AvTel common
stock which significantly exceeds the fair value of the underlying net
tangible and intangible assets of AvTel. Accordingly, immediately
following the Share Exchange the resulting goodwill in the amount of
$8,125,202 will be charged to operations of AvTel.
(6) To eliminate $500,000 advance to AvTel by.
(D) Matrix and Best six months ended June 30, 1997 and year ended December 31,
1996 pro forma statements of operations adjustments.
(1) For purposes of the Unaudited Pro Forma Condensed statements of
operations presented the acquisition of Best is assumed to have been
completed as of January 1, 1996.
(2) To eliminate commission revenue at Best and commission expense at
Matrix.
(3) This adjustment reflects the tax impact of Best's income at 42% (the
combined federal and state). Best was a limited liability company
prior to June 30, 1997.
(E) AvTel and WNI's six months ended June 30, 1997 and year ended December 31,
1996 pro forma statements of operations adjustments.
(1) For purposes of the Unaudited Pro Forma Condensed Statements of
Operations presented the acquisition of WNI is assumed to have been
completed as of January 1, 1996. The acquisition by AvTel of Silicon
Beach Communications, Inc. in November 1996 and of the 20% minority
interest of The Friendly Net, LLC in March 1997 have not been included
in these pro forma financial statements due to their not being material
for these purposes.
(2) To amortize goodwill at AvTel related to the WNI acquisition over 36
months.
(F) Matrix and AvTel's six months ended June 30, 1997 and year ended December
31, 1996 pro forma statements of operations adjustments.
(1) For purposes of the Unaudited Pro Forma Condensed Statements of
Operations presented the Share Exchange is assumed to have been
completed as of January 1, 1996.
(2) To eliminate $8,683 amortization of goodwill at AvTel for the six month
period ended June 30, 1997. There was no goodwill amortization for the
year ended December 31, 1996.
(3) To adjust income tax expense to reflect utilization of AvTel losses at
a combined federal and state rate of 42%.
(4) For purposes of determining the purchase price, the trading value of
AvTel shares was used for a period immediately preceding the
announcement of the Share Exchange. However, the net asset values of
AvTel including goodwill cannot be supported by the operations of
AvTel. Accordingly, immediately following the Share Exchange, the
resulting goodwill in the amount of $8,125,202 will be charged to
operations. Since this is a one time charge resulting from the Share
Exchange, it is not reflected in the pro forma statements of
operations.
-20-
<PAGE>
THE REINCORPORATION MERGER
GENERAL.
The proposed Reincorporation Merger would be effected by a merger of the
Company with and into its wholly-owned subsidiary, AvTel Delaware, which was
formed solely for purposes of the Reincorporation Merger and has no operating
history. The proposed Reincorporation Merger would be accomplished under the
terms of an Agreement and Plan of Merger between the Company and AvTel Delaware
in substantially the form annexed hereto as Exhibit B (the "Merger Agreement").
The summary of the Merger Agreement contained herein is qualified in its
entirety by the full text of the Merger Agreement. Upon effectiveness of the
Reincorporation Merger, the separate existence of the Company will cease, AvTel
Delaware will survive, all the properties, rights, privileges, powers and
franchises of the Company will vest in AvTel Delaware and all debts, liabilities
and duties of the Company shall become the debts, liabilities and duties of
AvTel Delaware.
Upon effectiveness of the Reincorporation Merger, the shares of the Company
Common Stock will automatically be converted into shares of common stock of
AvTel Delaware ("AvTel Delaware Common Stock"), on a four to one basis.
Accordingly, the 7,136,827 shares of Company Common Stock currently outstanding
would be converted into approximately 1,784,206 shares of AvTel Delaware Common
Stock (less a nominal number of shares reflecting cash paid for fractional
shares). The 1,000,000 outstanding shares of the Company Preferred Stock will
be converted into 250,000 shares of AvTel Delaware's Series A Preferred
Convertible Stock ("AvTel Delaware Preferred Stock"), having substantially the
same rights, preferences and privileges as the Company Preferred Stock. In
addition, all options to purchase Company Common Stock outstanding on the
effective date of the Reincorporation Merger will become options to purchase
that number of shares of AvTel Delaware Common Stock equal to one quarter of the
number of shares of Company Common Stock specified in the relevant option
agreement. The exercise price per share for such options will be increased to
four times the exercise price per share set forth in the relevant option
agreement.
AvTel Delaware will be governed, as to corporate matters, by the Delaware
General Corporation Law and by a new Certificate of Incorporation (the "Delaware
Certificate") and new Bylaws (the "Delaware Bylaws"), copies of which are
attached hereto as Exhibits C and D, respectively, which will result in certain
fundamental changes in the rights of shareholders. For a description of these
and other changes in shareholders' rights, see "Comparison of Shareholder Rights
under Utah and Delaware Corporation Laws and Charter Documents". All
references in this Proxy Statement to the Delaware Certificate and the Delaware
Bylaws are qualified in their entireties by reference to the full text of these
documents.
The Reincorporation Merger will effect only a change in the legal domicile of
the Company and other changes of a legal nature, certain of which are described
in this Proxy Statement. The Reincorporation Merger will NOT result in any
change in the business, management, assets or liabilities or location of the
principal facilities of the Company. However, all of such items will be changed
materially by the Share Exchange. See "The Share Exchange", above. Shareholders
should note that their approval of the Reincorporation Merger also will
constitute their approval of the assumption by AvTel Delaware of the Company's
obligations. After the Reincorporation Merger, the shares of Common Stock of
AvTel Delaware will continue to be traded on the Electronic Bulletin Board of
the NASDAQ Stock Market, ("NASDAQ") or if the Company's application thereto is
accepted, on the NASDAQ National Market System ("NASDAQ NMS"). If the Company
for any reason fails to qualify for trading on the NASDAQ NMS, management
intends to apply for trading on the NASDAQ Small Cap System. Trading in shares
of AvTel Delaware Common Stock will continue to be quoted under the symbol
"AVCO".
Anthony E. Papa and James P. Pisani, Frank Dziuba and Barry A. Peters, the
persons who currently serve as directors of the Company, will serve as
directors of AvTel Delaware immediately upon the effectiveness of the
Reincorporation Merger for the same term as they would otherwise serve as
directors of the Company. However, upon the closing of the Share Exchange, it
is expected that Messrs. Dziuba and Peters will resign. The remaining directors
of the Company intend to appoint John E. Allen, Ronald W. Howard and Gregory T.
Mutz, persons designated by Matrix, to fill the vacancies on the Board of AvTel
Delaware (See "The Share Exchange - Management of AvTel Delaware After the Share
Exchange").
-21-
<PAGE>
The Company will continue to maintain its executive offices in Santa Barbara,
California. Certificates for Company Common Stock will be deemed to represent
shares of AvTel Delaware Common Stock as adjusted by the Reverse Stock Split.
Following the Reincorporation Merger, previously outstanding stock certificates
for Company Common Stock will constitute "good delivery" in connection with
sales through a broker, or otherwise, of shares of AvTel Delaware Common Stock.
Following the Reincorporation Merger and the Share Exchange, the Company will
cause Letters of Transmittal to be delivered to shareholders requesting that
stock certificates in the Company be delivered to the Company's transfer agent,
American Registrar and Transfer Company, for replacement by stock certificates
of AvTel Delaware. It will not be necessary for shareholders to exchange their
Company stock certificates for AvTel Delaware stock certificates, although
shareholders may exchange their certificates if they wish.
PRINCIPAL REASONS FOR THE REINCORPORATION MERGER.
The Reincorporation Merger is a condition precedent to the transaction
contemplated by the Exchange Agreement which the Board of Directors believes is
in the best interests of the Company and its shareholders. See "The Share
Exchange". Other reasons for the proposed reincorporation are summarized below.
ABILITY TO ATTRACT AND RETAIN DIRECTORS. The Board of Directors believes that
a Reincorporation Merger will enhance the Company's ability to attract and
retain qualified members of the Board of Directors as well as encourage
directors to continue to make independent decisions in good faith on behalf of
the Company. The Company believes that the more favorable corporate environment
afforded by Delaware will enable it to compete more effectively with other
public companies, most of which are incorporated in Delaware, to attract new
directors and to retain its current directors. Reincorporation in Delaware will
allow the Company the increased flexibility and predictability afforded by
Delaware law.
ADVANTAGES OF DELAWARE CORPORATION LAW. For many years, Delaware has followed
a policy of encouraging incorporation under its jurisdiction. In furtherance of
that policy, Delaware has long been the leading state in adopting, construing
and implementing comprehensive and flexible corporate laws responsive to the
legal and business needs of corporations. As a result, Delaware's General
Corporation Law ("Delaware Law" or "DGCL") has become widely regarded as the
most extensive and well-defined body of corporate law in the United States.
Because of Delaware's prominence as the state of incorporation for many major
corporations, both the legislature and courts in Delaware have demonstrated an
ability and a willingness to act quickly and effectively to meet changing
business needs. Moreover, the Delaware courts have rendered a substantial
number of decisions interpreting and explaining Delaware Law. The
Reincorporation Merger accordingly will be beneficial to AvTel Delaware in that
it will provide (i) a greater degree of predictability and certainty regarding
how AvTel Delaware affairs should be conducted in order to comply with
applicable laws (such predictability and certainty resulting from a large body
of case law decided under those laws) and (ii) the comfort and security
resulting from the responsiveness of Delaware's legislature and courts to the
needs of corporations organized under Delaware's jurisdiction. For these
reasons, many U.S. corporations have initially chosen Delaware as their home
state for their state of incorporation or have subsequently changed their
corporate domicile to Delaware in a manner similar to the proposed
Reincorporation Merger.
ANTITAKEOVER IMPLICATIONS. Certain aspects of the Reincorporation Merger,
including the application of DGCL (S)203 to the Company, the limitations to be
included in the Delaware Bylaws on a shareholder's ability to make proposals at
an annual or special meeting of the Company, and various other provisions of the
Delaware Certificate and Delaware Bylaws, none of which previously applied to
the Company, may have the effect of deterring hostile takeover attempts. DGCL
(S)203, for example, from which AvTel Delaware does NOT intend to opt out,
restricts certain "business combinations" with "interested shareholders" for
three (3) years following the date on which a person becomes an interested
shareholder, unless the Board of Directors approves the business combination.
The Utah Revised Business Corporation Act ("URBCA") does not contain comparable
provisions with respect to business combinations. A hostile takeover attempt may
have a positive or a negative effect on the Company and its shareholders,
depending on the circumstances surrounding a particular takeover attempt.
Takeover attempts that have not been negotiated or approved by the board of
directors of a corporation can seriously disrupt the business and management of
a corporation and, generally, present to the shareholders the risk of terms
which may be less than favorable to all of the shareholders
-22-
<PAGE>
than would be available in a board-approved transaction. Board approved
transactions may be carefully planned and undertaken at an opportune time in
order to obtain maximum value for the corporation and all of its shareholders
with due consideration to matters such as the recognition or postponement of
gain or loss for tax purposes, the management and business of the acquiring
corporation and maximum strategic deployment of corporate assets.
Unsolicited takeover attempts may be unfair or disadvantageous to a
corporation and its shareholders for other reasons. A non-negotiated takeover
bid may be timed to take advantage of temporarily depressed stock prices.
Further, a non-negotiated takeover bid may be designed to foreclose or minimize
the possibility of more favorable competing bids or may involve the acquisition
of only a controlling interest in the corporation's stock, without affording all
shareholders the opportunity to receive the same economic benefits.
By contrast, in a transaction in which an acquirer must negotiate with an
independent board of directors, such board of directors can and should take into
account the underlying and long-term values of the corporation's assets, the
possibilities for alternative transactions on more favorable terms, the possible
advantages of a tax-free reorganization, the anticipated favorable developments
in the corporation's business not yet reflected in the stock price and the
equality of treatment of all the corporation's shareholders.
The Board of Directors recognizes that hostile takeover attempts do not always
have the unfavorable consequences or effects described above and may frequently
be beneficial to the shareholders, providing all of the shareholders with
considerable value for their shares. However, the Board of Directors believes
that the potential steps to reduce the likelihood of such takeover attempts are
in the best interests of the Company and its shareholders.
Notwithstanding the belief of the board of directors as to the benefits to
shareholders of the changes, shareholders should recognize that one of the
effects of such changes may be to discourage a future attempt to acquire control
of the Company which is not presented to and approved by the Board of Directors,
but which a substantial number and perhaps even a majority of the Company's
shareholders might believe to be in their best interests or in which
shareholders might receive a substantial premium for their shares over the
current market prices. As a result, shareholders who might desire to
participate in such a transaction may not have an opportunity to do so.
Although the Reincorporation Merger is required as a condition to the
consummation of the Share Exchange, pursuant to which the Matrix Shareholders
will acquire 84% of the outstanding capital stock of the Company's successor,
AvTel Delaware, the Reincorporation Merger is not being proposed in order to
prevent any known attempt to acquire control of the Company (or such successor),
obtain representation on the Board of Directors or take any significant action
affecting the Company (or such successor).
DIRECTORS' LIABILITY AND INDEMNIFICATION. Over the past decade, the frequency
and magnitude of claims and litigation against directors and officers of
corporations have increased. Over the same period, the cost of directors' and
officers' insurance policies has increased substantially, with the amount of
risk covered by such policies having significantly decreased. As a result, and
because potential personal liability associated with service as a director or
officer of a corporation can be significant, it has become increasingly
difficult for corporations to find and retain talented and experienced directors
and officers. Although, as more particularly described below, the URBCA and the
Company's existing Amendment and Restated Articles of Incorporation and Bylaws
allow the corporation to reduce or eliminate a director's personal liability to
the corporation and to indemnify directors, officers and agents of the
corporation, the Reincorporation Merger should enable the corporation to more
effectively reduce the potential personal liability of members of the Board of
Directors associated with their service as directors and to expand the scope of
the Company's indemnification of its directors and officers. This should enable
the Company to continue finding and retaining talented and experienced directors
and officers.
In 1986, Delaware amended its corporate law to allow corporations to limit the
personal monetary liability of its directors for their conduct as directors
under certain circumstances. The Directors have elected to adopt such a
provision in the Delaware Certificate. It should be noted that Delaware Law
does not permit a Delaware corporation to limit or eliminate the liability of
its directors for intentional misconduct, bad faith conduct or any transaction
from which the director derives an improper personal benefit or for violations
of federal laws. The Board of Directors believes that the Reincorporation
Merger will enhance the Company's ability to recruit and retain directors in the
-23-
<PAGE>
future; however, the shareholders should be aware that such a provision inures
to the benefit of the directors, and the interest of the Board of Directors in
recommending the Reincorporation Merger may, therefore, be in conflict with the
interests of the shareholders.
POSSIBLE DISADVANTAGES. Despite the unanimous belief of the Board of
Directors that the Reincorporation Merger is in the best interests of the
Company and its shareholders, it should be noted that Delaware Law has been
criticized by some commentators on the grounds that it does not afford minority
shareholders the same substantive rights and protections as are available in a
number of other states by, for example, making it more difficult for minority
shareholders to elect directors and influence corporate policies. See
"Comparison of Shareholder Rights under Utah and Delaware Corporate Laws and
Charter Documents".
Despite the unanimous belief of the Board of Directors as to the benefits to
shareholders of the Reincorporation Merger, the Reincorporation Merger may be
disadvantageous to the extent that it has the effect of discouraging a future
takeover attempt that is not approved by the Board of Directors but may be
deemed by a majority of the shareholders to be in their best interests (because,
for example, the possible takeover could cause shareholders to receive a
substantial premium for their shares over their then current market value or
over the shareholders' cost basis in such shares). As a result of such effects
of the Reincorporation Merger, shareholders who might wish to participate in a
tender offer may not have an opportunity to do so.
REGULATORY APPROVAL.
The change of domicile of the Company to Delaware may be deemed to constitute
the issuance and sale of securities within the meaning of the U.S. Securities
Act of 1933, as amended (the "Securities Act"). The deemed issuance of
securities will not be registered under the Securities Act and will be effected
in reliance upon the exemptions provided by Section 3(a)(9) of the Securities
Act and Rule 145 promulgated under the Securities Act. However, the issuance of
the shares of AvTel Delaware Common Stock pursuant to the Reincorporation Merger
will require the Company to file applications, notices or obtain permits from
various states in which the Company's shareholders are domiciled and, before
mailing this Proxy Statement, the Company filed an application for a permit
authorizing the sale and issuance of such securities with the California
Department of Corporations, and has filed notices with the states of Iowa,
Minnesota, Nevada and New Mexico.
COMPARISON OF SHAREHOLDER RIGHTS UNDER UTAH AND DELAWARE CORPORATE LAW AND
CHARTER DOCUMENTS
GENERAL. Subject to shareholder approval prior to the effective time (the
"Effective Time") of the Reincorporation Merger, the Company will change its
domicile to Delaware and shall thereafter be governed by the DGCL and by the
Delaware Certificate and the Delaware Bylaws ("Delaware Charter Documents").
Upon the filing with and acceptance by the Secretary of State of Delaware of a
Certificate of Merger in Delaware, the Company will become AvTel Delaware and
the outstanding shares of Company Common Stock will be deemed for all purposes
to evidence ownership of, and to represent, shares of AvTel Delaware Common
Stock.
The Delaware Charter Documents effectively replace the Company's current
Amended and Restated Articles of Incorporation ("Utah Articles") and Amended and
Restated Bylaws ("Utah Bylaws") (together, the "Utah Charter Documents") by (i)
changing the authorized capital (See "Authorized Capital Stock"), (ii) setting a
range of 5 - 9 persons as the authorized number of directors and authorizing the
Board to fix the number of directors within that range by resolution (the Utah
Bylaws set a range of 3-5 persons and authorize the Board to amend the bylaws to
fix the number within that range), and (iii) providing officers, directors and
agents of AvTel Delaware with certain indemnification rights in addition to
those currently provided for the Company.
If the Reincorporation Merger is consummated, holders of Company Common Stock
and Company Preferred Stock (and holders of options, warrants or other
securities exchangeable for or convertible into Company Common Stock) will
become holders of AvTel Delaware Common Stock, which will result in their rights
as shareholders being governed by the laws of the State of Delaware. In
addition, their rights as shareholders will be governed by the Delaware Charter
Documents. It is not practical to describe all of the differences between the
Delaware Articles and the Utah Articles and the Delaware Bylaws and the Utah
Bylaws or all of the differences between the laws of the States
-24-
<PAGE>
of Delaware and Utah. The following is a summary of some of the significant
rights of the shareholders under Utah and Delaware Law and under the Utah and
Delaware Charter Documents. This summary is qualified in its entirety by
reference to the full text of such documents and laws. See the Delaware
Certificate and the Delaware Bylaws, copies of which are attached to the Proxy
Statement as Exhibits C and D, respectively.
AUTHORIZED CAPITAL STOCK. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock, and 5,000,000 shares of Preferred
Stock. The authorized capital stock of AvTel Delaware will be 20,000,000 shares
of AvTel Delaware's Common Stock $.01 par value and 1,000,000 shares of AvTel
Delaware's Preferred Stock, $.01 par value. The Company has issued and
outstanding 1,000,000 shares of Series A Convertible Preferred Stock which will
be converted into an aggregate of 250,000 shares of AvTel Delaware Series A
Convertible Preferred Stock having substantially the same rights, preferences
and privileges, including certain rights to convert such AvTel Delaware Series A
Convertible Preferred Stock into the AvTel Delaware Common Stock. (For details
with respect to the Series A Convertible Preferred Stock, see the Certificate of
Incorporation of AvTel Delaware attached as Exhibit C.) The conversion ratio of
one to one will remain the same. No holder of Company Common Stock has
preemptive rights with respect to any class of stock of AvTel Utah and no such
preemptive rights will be afforded the holders of AvTel Delaware Common Stock
under the Delaware Charter Documents. Upon consummation of the Reincorporation
Merger and the Share Exchange, there will be issued and outstanding: (a)
approximately 11,366,720 shares of AvTel Delaware Common Stock, of which
9,582,514 shares or 84% of the total issued and outstanding will be held by the
Matrix Shareholders; (b) 250,000 shares of Series A Convertible Preferred Stock
of AvTel Delaware (convertible into 250,000 shares of AvTel Delaware Common
Stock); (c) 324,819 shares of AvTel Delaware Common Stock reserved for issuance
pursuant to outstanding stock options, including those granted under the
Company's 1997 Stock Incentive Plan (the "1997 Plan") which will be assumed by
AvTel Delaware pursuant to the Reincorporation Merger, and the outstanding
options of Matrix, which will be assumed by AvTel Delaware after the Share
Exchange; and (d) 100,000 shares of AvTel Delaware Common Stock reserved for
issuance in connection with the possible grant of stock options in the future
under the 1997 Plan. The 11,366,720 shares of AvTel Delaware Common Stock to be
outstanding (and the 9,582,514 shares to be held by the Matrix Shareholders)
include 1,999,997 shares that will be held by Best. Under Delaware law, these
shares may not be voted or considered in determining the presence of a quorum
for shareholder action.
VOTING RIGHTS WITH RESPECT TO EXTRAORDINARY CORPORATE TRANSACTIONS
DELAWARE. Approval of mergers and consolidations and sales, leases or
exchanges of all or substantially all of the property or assets of a
corporation, requires the affirmative vote or consent of the holders of a
majority of the outstanding shares entitled to vote, except that, unless
required by the certificate of incorporation, no vote of shareholders of the
corporation surviving a merger is necessary if: (i) the merger does not amend
the certificate of incorporation of the corporation; (ii) each outstanding share
immediately prior to the merger is to be an identical share after the merger and
(iii) either no common stock of the corporation and no securities or obligations
convertible into common stock are to be issued in the merger, or the common
stock to be issued in the merger plus that initially issuable on conversion of
other securities issued in the merger does not exceed 20% of the common stock of
the corporation outstanding immediately before the merger.
UTAH. A merger, share exchange or sale of all or substantially all of the
assets of a corporation (other than in the ordinary course of the corporation's
business) requires the approval of a majority (unless the articles of
incorporation, the Bylaws or a resolution of the board of directors requires a
greater number) of the outstanding shares of the corporation (voting in separate
voting groups, if applicable). No vote of the shareholders of the surviving
corporation in a merger is required if: (i) the articles of incorporation of the
surviving corporation will not be changed; (ii) each shareholder of the
surviving corporation whose shares were outstanding immediately before the
effective date of the merger will hold the same number of shares, with identical
designations, preferences, limitations and relative rights, immediately after
the merger; (iii) the number of voting shares outstanding immediately after the
merger, plus the number of voting shares issuable as a result of the merger
(either by the conversion of securities issued pursuant to the merger or the
exercise of rights and warrants issued pursuant to the merger), will not exceed
by more than 20% of the total number of voting shares of the surviving
corporation outstanding immediately before the merger; and (iv) the number of
participating shares (shares that entitle their holder to participate without
limitation in distributions) outstanding immediately after the merger, plus the
number of participating shares issuable as a result of the merger
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(either by the conversion of securities issued pursuant to the merger or the
exercise of rights and warrants issued pursuant to the merger), will not exceed
by more than 20% the total number of participating shares of the surviving
corporation outstanding immediately before the merger.
SHAREHOLDERS CONSENT WITHOUT A MEETING
DELAWARE. Unless otherwise provided in the certificate of incorporation,
action requiring the vote of shareholders may be taken without a meeting,
without prior notice and without a vote, by the written consent of shareholders
having not less than the minimum number of votes that would be necessary to take
such action at a meeting at which all shares entitled to vote thereon were
present and acted.
UTAH. Unless otherwise provided in the articles of incorporation, action
requiring the vote of shareholders may be taken without a meeting and without
prior notice by one or more written consents of the shareholders having not less
than the minimum number of votes that would be necessary to take such action at
a meeting at which all shares entitled to vote thereon were present and voted
(if shareholder action is by less than unanimous written consent, notice shall
be provided to the shareholders who did not consent at least ten (10) days
before the consummation of the transaction, action or event authorized by the
shareholders). In addition, any written consent for the election of directors
must be unanimous and the shareholders of any corporation in existence prior to
July 1, 1992, are required to adopt a resolution permitting action by less than
unanimous written consent otherwise, the shareholders are only permitted to act
by unanimous written consent.
DISSENTERS' RIGHTS
DELAWARE. Shareholders are entitled to demand appraisal of their shares in
the case of mergers or consolidations, except where (i) they are shareholders of
the surviving corporation and the merger did not require their approval under
the DGCL; (ii) the corporation's shares are either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by The National Association of Securities Dealers,
Inc.; or (iii) the corporation's shares are held of record by more than 2,000
shareholders. Appraisal rights are available in either (i), (ii) or (iii)
above, however, if the shareholders are required by the terms of the merger or
consolidation to accept any consideration other than (a) stock of the
corporation surviving or resulting from the merger or consolidation, (b) shares
of stock of another corporation which are either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. Or held
of record by more than 2,000 shareholders, (c) cash in lieu of fractional
shares, or (d) any combination of the foregoing Appraisal rights are not
available in the case of a sale, lease, exchange or other disposition by a
corporation of all or substantially all of its property and assets.
UTAH. In connection with a merger, share exchange or sale, lease, exchange or
other disposition of all or substantially all of the assets of a corporation
(other than in the ordinary course of the corporation's business), a dissenting
shareholder, after complying with certain procedures, is entitled to payment
from the corporation of the fair value of the shareholder's shares. The fair
value is estimated by the corporation. However, if the shareholder is unwilling
to accept the corporation's estimate, the shareholder may provide the
corporation with an estimate of the fair value and demand payment of that
amount. If the corporation is unwilling to pay that amount, the corporation
shall apply for judicial determination of the fair value. Unless the articles
of incorporation, Bylaws or a resolution of the Board of Directors provide
otherwise, shareholders are not entitled to dissenters' rights when the shares
are listed on a national securities exchange or the National Market System of
NASDAQ, or are held of record by more than 2,000 holders. However, this
exception does not apply if, pursuant to the corporate action, the shareholder
will receive anything except (i) shares of the surviving corporation, (ii)
shares of a corporation that is or will be listed on a national securities
exchange, the National Market System of NASDAQ, or held of record by more than
2,000 holders, (iii) cash in lieu of fractional shares or (iv) any combination
of the foregoing.
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DIVIDENDS
DELAWARE. Dividends may be paid either (i) out of surplus (the excess at any
time of the net assets of the corporation over the amount of its capital), or
(ii) in case there is no surplus, out of the corporation's net profits for the
fiscal year in which the dividend is declared and/or its net profits for the
preceding fiscal year.
UTAH. A corporation is prohibited from making a distribution to its
shareholders if, after giving effect to the distribution, the corporation would
not be able to pay its debts as they become due in the usual course of business
or the corporation's total assets would be less than its total liabilities (plus
any amounts necessary to satisfy any preferential rights).
ANTI-TAKEOVER STATUTES
DELAWARE. Except under certain circumstances, the Delaware Law prohibits a
"business combination" between the corporation and an "interested shareholder"
within three (3) years of the shareholder becoming an "interested shareholder".
Generally, an "interested shareholder" is a person or group that directly or
indirectly, controls fifteen percent (15%) or more of the outstanding voting
stock or is an affiliate or associate of the corporation and was the owner of
fifteen percent (15%) or more of such voting stock at any time within the
previous three (3) years. A "business combination" includes a merger,
consolidation, sale or other disposition of assets having an aggregate value in
excess of ten percent (10%) of the aggregate market value of the consolidated
assets of the corporation or its outstanding stock, and certain transactions
that would increase the interested shareholders' proportionate share ownership
in the board of directors prior to the date the interested shareholder became an
interested shareholder under the DGCL, such business combinations between a
corporation and an interested shareholder are prohibited unless (a) prior to the
date the person became an interested director the Board of Directors approved
either the business combination or the transaction which resulted in the person
becoming an interested shareholder; (b) the interested shareholder acquired at
least eighty-five percent (85%) of the outstanding voting stock of the
corporation in the transaction in which the shareholder became an interested
shareholder excluding, for purposes of determining the number of shares
outstanding, shares held by persons who are directors and also officers and by
employee stock plans in which participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered; (c) the
business combination is approved by a majority of the board of directors and by
the affirmative vote of two thirds of the votes entitled to be cast by
disinterested shareholders at an annual or special meeting, (d) the corporation
does not have a class of voting stock that is listed on a national securities
exchange, authorized for quotation on an interdealer quotation system of a
registered national securities association, or held by more than two thousand
(2,000) shareholders unless any of the foregoing results from action taken,
directly or indirectly, by an interested shareholder or (e) the corporation has
opted out of this provision. AvTel Delaware has not opted out of these
provisions governing business combinations as permitted under the Delaware Law.
UTAH. The Utah Control Share Acquisitions Act, set forth in Sections 61-6-1
through 61-6-12 of the Utah Code Annotated, provides, among other things, that,
when any person obtains shares (or the power to direct the voting shares) of "an
issuing public corporation" such that the person's voting power equals or
exceeds any of three levels (20%, 33 1/3% or 50%), the ability to vote (or to
direct the voting of) the "control shares" is conditioned on approval by a
majority of the corporation's shares (voting in voting groups, if applicable),
excluding the "interested shares". Shareholder approval may occur at the next
annual meeting of the shareholders, or, if the acquiring person requests and
agrees to pay the associated costs of the corporation, at a special meeting of
the shareholders (to be held within fifty (50) days of the corporation's receipt
of the request by the acquiring person). If authorized by the articles of
incorporation or the Bylaws, the corporation may redeem "control shares" at the
fair market value if the acquiring person fails to file an "acquiring person
statement" or if the shareholders do not grant voting rights to control shares.
If the shareholders grant voting rights to the control shares, and if the
acquiring person obtained a majority of the voting power, shareholders may be
entitled to dissenters' rights under the URBCA. An acquisition of shares does
not constitute a control share acquisition if (i) the corporation's articles of
incorporation or Bylaws provide that this Act does not apply, (ii) the
acquisition is consummated pursuant to a merger in accordance with the URBCA or
(iii) under certain other specified circumstances.
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QUORUM OF DIRECTORS
DELAWARE. Unless a greater or lesser number is required for a quorum by the
certificate of incorporation or Bylaws (but in no event less than one-third of
the votes of the entire board or committee), a majority of the directors then in
office shall constitute a quorum.
UTAH. A quorum of the board of directors consists of a majority of the fixed
number of directors if the corporation has a fixed board size, or if the
corporation's Bylaws provide for a variable board size, a majority of the number
of directors prescribed, or if no number is prescribed, the number in office.
However, the articles of incorporation or the Bylaws may establish a higher or
lower number of directors to constitute a quorum, but in no event may the number
be less than one-third of the number of directors.
DERIVATIVE SUITS
DELAWARE. The plaintiff must have been a shareholder of the corporation at
the time of the transaction of which he complains or his stock thereafter must
have devolved upon him by operation of law.
UTAH. A person may not commence a derivative action unless the person was a
shareholder of the corporation at the time when the transactions complained of
occurred (unless the person became a shareholder through transfer by operation
of law from a person who was a shareholder at the time). The complaint must be
verified and allege with particularity (i) the demand made on the board of
directors and that either the demand was refused or ignored by the board of
directors, or (ii) if no demand was made on the board of directors, why the
person did not make the demand. If a court finds that the proceeding was
commenced without reasonable cause, the court may require the plaintiff to pay
the defendant's reasonable expenses, including counsel fees.
SPECIAL MEETINGS OF SHAREHOLDERS
DELAWARE. Shareholders generally do not have the right to call meetings of
shareholders unless such right is granted in the certificate of incorporation or
Bylaws. However, if a corporation fails to hold its annual meeting within a
period of 30 days after the date designated therefor, or if no date has been
designated for a period of 13 months after its last annual meeting, the Delaware
court of Chancery may order a meeting to be held upon the application of a
shareholder.
UTAH. Special meetings of the shareholders may be called by: (i) the board of
directors (ii) the person or persons authorized by the Bylaws to call a special
meeting, or (iii) the holders of shares representing at least 10% of all votes
entitled to be cast on any issue proposed to be considered at the special
meeting. The corporation shall give notice of the date, time and place of the
meeting no fewer than ten (10) and no more than sixty (60) days before the
meeting (unless otherwise required by law or the articles of incorporation).
Notice of a special meeting must include a description of the purposes for which
the special meeting is called.
AMENDMENTS TO CHARTER
DELAWARE. Amendments to the certificate of incorporation require the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote thereon, except that if the certificate of incorporation requires the
vote of a greater number of proportion of the directors or of the holders of any
class of stock than is required by Delaware Law with respect to any matter, the
provision of the certificate of incorporation may not be amended, altered or
repealed except by such greater vote.
UTAH. The board of directors may propose amendments to the articles of
incorporation for submission to the shareholders. For an amendment to be
adopted, (i) the board of directors must recommend the amendment to the
shareholders (unless the board determines that because of a conflict of interest
or other special circumstances it should not make a recommendation and
communicates the basis for its determination to the shareholders), and (ii)
unless the articles of incorporation, the Bylaws (if authorized by the articles
of incorporation) or a resolution of the board of directors require a greater
number, the amendment must be approved by (a) a majority of the votes entitled
to be cast
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on the amendment by any voting group as to which the amendment would create
dissenters' rights, (b) a majority of the votes entitled to be cast on the
amendment by any voting group as to which the amendment would materially and
adversely affect the voting group's rights in shares (including preferential
rights, rights in redemption, preemptive rights, voting rights or rights in
certain reverse splits), and (c) a majority of the votes cast for all other
voting groups (voting separately, as applicable).
NOTICE, ADJOURNMENT AND PLACE OF STOCKHOLDERS' MEETINGS.
DELAWARE. There is no specific statutory requirement under Delaware law with
regard to advance notice of director nominations and shareholder proposals.
Absent a bylaw restriction, director nominations and shareholder proposals may
be made without advance notice at the annual meeting. However, federal
securities laws generally provide that shareholder proposals that the proponent
wishes to include in the Company's proxy materials must be received not less
than 120 days in advance of the date stated in the proxy statement released in
connection with the previous year's annual meeting.
The Delaware Bylaws provide that, in order for director nominations or
shareholder proposals to be properly brought before the annual meeting, the
shareholder must have delivered timely notice to the Secretary of the
Corporation. To be timely under the Delaware Bylaws, notice must be received by
the Secretary of the Company not later than the following dates: (i) with
respect to a meeting of stockholders, 60 days in advance of such meeting if such
meeting is to be held on a day which is within 30 days preceding the anniversary
of the previous year's meeting, or 90 days in advance of such meeting if such
meeting is to be held on or after the anniversary of the previous year's
meeting; and (ii) with respect to any other meeting of stockholders or a special
meeting of stockholders, the close of business on the tenth day following the
date of public disclosure of the date of such meeting. These notice
requirements help ensure that shareholders are aware of all proposals to be
voted on at the annual meeting and have the opportunity to consider each
proposal in advance of the annual meeting.
UTAH. The Utah Law and Utah Charter Documents require that notice of
stockholders' meetings be given between ten (10) and sixty (60) days before a
meeting unless the stockholders waive or reduce the notice period by unanimous
consent in writing.
Both Utah and Delaware law provide for adjournments of stockholders' meetings.
The Utah Charter Documents require notice of the adjournment if the adjournment
is for thirty (30) days or more. Delaware Law and the Delaware Charter
Documents require that if the adjournment is for more than thirty (30) days or
if a new record date is fixed, notice must be given to the stockholders as for
an original meeting.
Both the Delaware law and Utah law permit meetings of stockholders to be held
at such place as is designated by or in the manner provided in the Bylaws. If
not so designated, Delaware law requires that the meeting be held at the
registered office of the Delaware corporation, while Utah law provides for the
principal office of the corporation.
STOCKHOLDER CONSENT IN LIEU OF MEETING.
Under Utah and Delaware law, shareholders holding a majority of the
outstanding voting power may execute an action by written consent in lieu of a
shareholder meeting. Both Utah and Delaware law permit a corporation to
eliminate such actions by written consent in its charter. The Delaware
Certificate, like the Utah Certificate, does not prohibit actions by written
consent. As a result, the Matrix Shareholders, acting together, will be able to
elect directors and to take many other significant corporate actions by written
consent. Delaware law will require AvTel Delaware to notify non-consenting
shareholders promptly of any such action.
DIRECTORS
DELAWARE. The Delaware Bylaws provide that the number of members of the Board
of Directors shall not be less than five (5), nor more than nine (9), with the
actual number being determined by a resolution of the Board of Directors or by
the holders of AvTel Delaware Common Stock at an annual meeting. A majority of
the number of directors then in office constitutes a quorum for the transaction
of business. The Delaware Bylaws provide that a vacancy among the
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directors may be filled for the unexpired term by the vote of a majority of the
remaining directors in office, although less than a quorum.
UTAH. The Utah Bylaws provide that the Board of Directors of the Company
consists of not less than three (3), nor more than five (5) directors with
actual number being determined by resolutions adopted by the Board of Directors
or the holders of Company Common Stock. A majority of the number of directors
constitutes a quorum for the transaction of business. The AvTel Utah Bylaws
provide that a vacancy among the directors may be filled for the unexpired term
by the affirmative vote of a majority of the remaining directors in office,
though less than a quorum.
ELECTION AND REMOVAL OF DIRECTORS
DELAWARE. The Delaware Bylaws provide that Directors shall hold office until
the next annual meeting of shareholders following their election. Any director,
or the entire Board of Directors, may be removed only for cause, and only by the
vote of a majority of the voting power of the Company.
UTAH. The Utah Bylaws provide that each Director shall hold office until the
next annual meeting of shareholders and until his or her successor shall have
been elected and qualified.
LIMITATIONS ON THE LIABILITY OF DIRECTORS
DELAWARE. The Delaware Certificate provides that a Director shall not be
personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its shareholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for certain unlawful
distributions under Section 174 of the DGCL; or (iv) for any transaction from
which the director derived an improper personal benefit. Furthermore, the
Delaware Bylaws include a provision permitting AvTel Delaware to indemnify its
officers, directors, employees and agents to the greatest extent permitted by
the DGCL.
UTAH. The Utah Articles includes provisions eliminating the liability of the
directors for monetary damages to the fullest extent permitted under the URBCA.
However, the URBCA is more limited than the Delaware Law. The URBCA does not
limit liability for (i) the amount of a financial benefit received by a
director to which he is not entitled; (ii) an intentional infliction of harm on
the corporation or the shareholders; (iii) unlawful distributions in violation
of Section 16-10a-842 of the URBCA; or (d) an intentional violation of
criminal law.
INSPECTION OF BOOKS AND RECORDS
DELAWARE. Any shareholder of record, upon written demand under oath stating
the purpose thereof, has the right during the usual hours for business to
inspect for any proper purpose, the corporation's stock ledger, a list of its
shareholders and its other books and records and to make copies or extract
therefrom.
UTAH. Upon providing the corporation with a written demand at least five (5)
business days before the date the shareholder wishes to make an inspection, a
shareholder and his agent and attorneys are entitled to inspect and copy ,
during regular business hours, (i) the articles of incorporation, Bylaws,
minutes of shareholders meetings for the previous three (3) years, written
communications to shareholders for the previous three (3) years, names and
business addresses of the officers and directors, the most recent annual report
delivered to the State of Utah, and financial statements for the previous three
(3) years and (ii) if the shareholder is acting in good faith and for a proper
purpose, excerpts from the records of the board of directors and shareholders
(including minutes of meetings, written consents and waivers of notices),
accounting records and shareholder lists.
TRANSACTIONS WITH OFFICERS AND DIRECTORS.
DELAWARE. Under the DGCL, contracts or transactions in which a director or
officer is financially interested are not automatically void or voidable, if
approved by the shareholders or the directors under substantially the same
circumstances as in Utah. Approval by the shareholders, however, requires only
a simple majority. Board approval
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must be by a majority of the disinterested directors, but interested directors
may be counted for purposes of establishing a quorum.
UTAH. The Utah Law provides that every director who is in any way, directly
or indirectly, interested in a proposed contract or transaction with the Company
is liable to account to the Company for any profit made as a consequence of the
Company entering into such transaction unless such person (a) disclosed his or
her interest at the meeting of directors where the proposed transaction was
first considered, and, after his or her disclosure, the transaction was approved
by the a majority of the disinterested directors; (b) disclosed his or her
interest prior to a meeting or written consent of shareholders and, after his or
her disclosure, the transaction was approved by the a majority of the
disinterested shares; or (c) can show that the contract or transaction was fair
and reasonable to the Company.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
DELAWARE. The Delaware Law permits a corporation to adopt provisions in its
certificate of incorporation eliminating or limiting the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of fiduciary duty as a director, with the following exceptions: (a) a breach of
the director's duty of loyalty; (b) payment of an unlawful stock dividend or
making an unlawful stock repurchase or redemption; (c) acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of law; or
(d) in any transaction in which the director derived an improper personal
benefit. The Delaware Certificate eliminates the liability of directors of the
corporation for monetary damages to the fullest extent permissible under
Delaware Law.
The Delaware Law permits a corporation to indemnify its directors, officers,
employees and other agents under circumstances similar to those for which the
Utah Charter Documents provide. The Delaware Charter Documents require AvTel
Delaware to indemnify all such persons whom it has the power to indemnify to the
fullest extent legally permissible by the Delaware Law. The Delaware Bylaws
permit AvTel Delaware to advance expenses to a director or officer, provided
that the director or executive officer undertakes to repay amounts advanced
unless it is ultimately determined that such person ultimately is entitled to
indemnification, and subject to such other conditions as the Board may impose.
Indemnification rights conferred on a person by the Delaware Bylaws are deemed
to be contractual, in that their repeal or modification shall have prospective
effect only and shall not affect rights in effect under the bylaws at the time
of an alleged occurrence, act or omission that is the basis of a proceeding
against the person or the corporation. Indemnification rights to which a person
becomes entitled under the Delaware Bylaws continue after the person ceases to
be a director, officer, employee or other agent of AvTel Delaware.
Indemnification rights under the Delaware Law are not exclusive. Accordingly,
AvTel Delaware's Bylaws specifically permit AvTel Delaware to indemnify its
directors, officers, employees and other agents pursuant to an agreement, bylaw
provision, shareholder vote or vote of disinterested directors or otherwise, any
or all of which may provide indemnification rights broader than those currently
available under the Utah or Delaware indemnification statutes.
UTAH. The URBCA permits a corporation, if so provided in its articles of
incorporation, its bylaws or in a shareholder resolution, to eliminate or limit
the personal liability of a director to the corporation or its shareholders for
monetary damages due to any action taken or any failure to take action as a
director, except liability for: (a) improper financial benefits receive by a
director; (b) intentional inflictions of harm on the corporation or its
shareholders; (c) payment of dividends to shareholders making the corporation
insolvent; and (d) intentional violations of criminal law. The Utah Charter
Documents eliminate the liability of directors of the corporation for monetary
damages to the fullest extent permissible under URBCA.
Under the URBCA, a corporation may indemnify its directors, officers,
employees and other agents made party to any proceeding because of their
relationship to the corporation against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with such
proceeding if that person acted in good faith and in a manner reasonably
believed to be in the corporation's best interests, and, in the case of a
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The URBCA also permits a corporation to
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indemnify its directors, officers, employees and other agents in connection with
a proceeding by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that the person is such an agent of the corporation,
against expenses actually and reasonably incurred by such person in connection
with the proceeding. The URBCA prohibits the indemnification of an agent in
connection with a proceeding by or in the right of the corporation in which the
director was adjudged liable to the corporation, or in connection with any other
proceeding in which the agent is adjudged liable on the basis that the agent
derived an improper personal benefit. The Utah Charter Documents permit
indemnification of all such persons whom it has the power to indemnify to the
fullest extent legally permissible under the URBCA. The URBCA permits a
corporation to advance expenses incurred by a director, officer, employee or
agent who is a party to a proceeding in advance of final disposition of the
proceeding if that person provides (a) a written affirmation of his good faith
belief that he acted in good faith, in the corporation's best interests and, in
the case of a criminal proceeding, had no reasonable cause to believe his
conduct was unlawful; (b) a written undertaking by or on behalf of that person
to repay the advance if it ultimately determined that indemnification by the
Company is inappropriate; and (c) the corporation determines under the facts
then known that indemnification would not be precluded. The Utah Charter
Documents permit such advances.
Both the Delaware Charter Documents and Utah Documents provide that AvTel
Delaware and the Company, respectively, may purchase insurance on behalf of
those persons entitled to be indemnified by the Company.
DISSENTER'S RIGHTS AS A RESULT OF THE REINCORPORATION MERGER.
Shareholders have dissenter's rights in Utah as a result of the proposed
Reincorporation Merger. Shareholders who oppose the Reincorporation Merger will
have the right to receive payment for the value of their shares as set forth in
sections 16-10(a)-1301 et .seq. of the URBCA. A copy of these sections is
attached hereto as Exhibit E to this Proxy Statement. The requirements for a
shareholder to properly exercise his or her rights under these provisions are
very technical in nature, and the following summary is qualified in its entirety
by the actual statutory provisions which should be carefully reviewed by any
shareholder wishing to assert such rights.
Under Utah Law, such dissenter's rights will be available only to those
shareholders of the Company who (i) object to the proposed Reincorporation
Merger in writing prior to or at the Special Meeting (a negative vote will not
itself constitute such a written objection); (ii) does not vote any of his or
her shares in favor of the proposed Reincorporation Merger at the Special
Meeting; (iii) file a written demand with the Company prior to the Special
Meeting requesting payment of the fair value of the shares held by such
shareholders; and (iv) meet the other requirements of the governing Utah
statutes.
Within ten days after the effective date of the Reincorporation Merger and
Share Exchange, AvTel Delaware will send to each shareholder who has satisfied
all of the foregoing conditions a written notice in which AvTel Delaware will
offer to pay dissenting shareholders for their shares at a price deemed by AvTel
Delaware to be the fair value of such shares and supply a form for dissenting
shareholders to demand payment. Shareholders will have sixty days to make their
payment demands or lose such rights. If the fair value of the shares is agreed
on between the dissenting shareholders and AvTel Delaware within 60 days after
the effective date of the acquisition, AvTel Delaware will make payment within
60 days after the effective date on surrender of the certificates representing
such shares.
If the dissenting shareholders and AvTel Delaware do not agree on the fair
value of the shares within the 60 day period, then within 60 days after receipt
of written demand from any dissenting shareholders, AvTel Delaware shall
initiate a judicial proceeding seeking determination of the fair value of such
shares prior to giving effect to the Reincorporation Merger and Share Exchange.
If AvTel Delaware fails to institute such a proceeding, it will pay the
dissenting shareholders the amount demanded. All dissenting shareholders must
be a party to the proceeding, and all such shareholders will be entitled to
judgment against AvTel Delaware for the amount of the fair value of their
shares, to be paid on surrender of the certificates representing such shares.
The judgment will include an allowance for interest (at a rate determined by the
court) to the date of payment.
Within 20 days after demanding payment, whether or not a judicial proceeding
is instituted, each shareholder demanding payment must submit the certificates
representing his or her shares to AvTel Delaware for notation thereon
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that such demand has been made. Failure to do so will permit AvTel Delaware to
terminate the shareholder's valuation rights under the Utah statute unless a
court should otherwise direct.
The loss or forfeiture of appraisal rights simply means the loss of the right
to receive a cash payment from AvTel Delaware in exchange for shares. In such
event the shareholder would still hold the appropriate number of shares of AvTel
Delaware.
FEDERAL INCOME TAX CONSEQUENCES
The Reincorporation Merger is intended to be a tax free reorganization under
the Internal Revenue Code of 1986, as amended (the "Code"). Assuming the
Reincorporation Merger qualifies as a reorganization, no gain or loss will be
recognized to the holders of capital stock of the Company as a result of
consummation of the Reincorporation Merger, and no gain or loss will be
recognized by the Company or AvTel Delaware. Each former holder of capital
stock of the Company will have the same basis in the capital stock of the AvTel
Delaware received by such holder pursuant to the Reincorporation Merger as such
holder has in the capital stock of the Company held by such holder at the time
of consummation of the Reincorporation Merger. Each shareholder's holding
period with respect to the AvTel Delaware capital stock will include the period
during which such holder held the corresponding Company capital stock, provided
the latter was held by such holder as a capital asset at the time of
consummation of the Reincorporation Merger. The Company has not obtained a
ruling from the Internal Revenue Service or an opinion of legal or tax counsel
with respect to the consequences of the Reincorporation Merger.
A successful IRS challenge to the reorganization status of the Reincorporation
Merger would result in shareholders recognizing taxable gain or loss with
respect to each share of Company Common Stock surrendered equal to the
difference between the shareholder's basis in such share and the fair market
value, as of the Effective Time, of the AvTel Delaware Common Stock received in
exchange therefor. In such event, a shareholder's aggregate basis in the AvTel
Delaware Common Stock so received would equal its fair market value as of the
Effective Time, and the shareholder's holding period for such stock would begin
the day after the Share Exchange.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE PROPOSAL TO REINCORPORATE IN DELAWARE INCLUDING THE
APPLICABILITY OF THE LAWS OF ANY STATE OR OTHER JURISDICTION.
VOTE REQUIRED.
Under Utah law, the affirmative vote of a majority of the outstanding shares
of Company Common Stock and a majority of the outstanding shares of Company
Preferred Stock, each voting as a class, is needed to approve the proposed
Reincorporation Merger. If approved by the Company's shareholders, it is
anticipated that the Reincorporation Merger would be completed within thirty
(30) days of such approval and that consummation of the Share Exchange would
follow promptly thereafter. However, consummation of the Share Exchange is
subject to the satisfaction or waiver of various conditions precedent, including
the delivery of an executed Exchange Statement by each of the Matrix
Shareholders and optionholders.
Certain shareholders, including the Company's current Directors, who own
shares representing approximately 61% of the issued and outstanding shares of
the Company Common Stock have indicated that they will vote their shares in
favor of the Reincorporation Merger. In addition, the holders of all shares of
the Company's Preferred Stock have indicated that they will vote their shares in
favor of the Reincorporation Merger. Accordingly, without the affirmative vote
of any other shareholder, there will be sufficient votes for approval and
adoption of the Reincorporation Merger.
Although the Board of Directors has recommended that the foregoing proposal be
adopted, shareholders should be aware that the continuing Directors may have a
personal interest in the Reincorporation Merger because it broadens the scope of
indemnification available to Directors. The broader scope of indemnification
available under Delaware Law could result in increased costs and expenses to the
Company to the potential indirect detriment of the shareholders. See "Comparison
of Shareholder Rights under Utah and Delaware Corporation Laws and Charter
Documents".
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RECOMMENDATION OF MANAGEMENT
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THAT THE TRANSACTIONS
CONTEMPLATED BY THE PROPOSED REINCORPORATION MERGER ARE DESIRABLE AND IN THE
BEST INTERESTS OF THE COMPANY'S SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE "FOR" SUCH PROPOSAL.
DESCRIPTION OF THE COMPANY
BACKGROUND.
The Company is a non-facilities based telecommunications carrier providing
a comprehensive array of broadband voice and data network services. The Company
was incorporated on October 27, 1981, but did not commence its current business
until February, 1995 when it acquired, through a subsidiary, The Friendly Net,
LLC ("TFN") a Utah limited liability company.
The acquisition of TFN, a Utah-based Internet Service Provider ("ISP") was
part of a general strategy to evaluate and acquire business enterprises in the
telecommunications industry which, in the opinion of management, represented
opportunities for revenue growth and profitability. The TFN acquisition was
accomplished through an agreement with the Company's wholly owned subsidiary,
Hi, Tiger, Inc., pursuant to which 260,000 shares of Company Common Stock,
options to purchase 75,000 shares of Company Common Stock and $21,000 in cash
were exchanged for an 80% interest in TFN. The remaining 20% interest was
acquired in March 1997 from Tree of Stars, Inc., a Nevada corporation ("TOSI"),
whose President and principal shareholder is Paul G. Begum, a significant
shareholder of the Company and its former President and Chairman.
Prior to October 23, 1996, the Company conducted operations under the name
"Hi, Tiger International, Inc.". The name change was effected in connection with
the Company's acquisition of AvTel Holdings, Inc., a California corporation
("A.I.") on that date. As a result of the acquisition of A.I., the Company
implemented a complete change in its Board of Directors and executive
management, began to pursue several acquisitions and strategic alliances and
started development of a sales and operational strategy to position the Company
as a non-facilities based telecommunications carrier providing a comprehensive
array of broadband voice and data network services.
The acquisition of A.I. was effected pursuant to the merger of a wholly-
owned subsidiary of the Company with and into A.I. (the "AI Merger") as a result
of which the Company acquired 100% of the issued and outstanding capital stock
of A.I. in exchange for 4,252,508 shares of the Company Common Stock,
representing approximately 61% of the issued and outstanding Company Common
Stock after giving effect to the AI Merger, and 1,000,000 shares of newly
authorized shares of the Company's Series A Convertible Preferred Stock.
Since the AI Merger, the Company has, under its current management team,
aggressively pursued selective acquisitions, strategic alliances and the
development and implementation of sales and marketing efforts.
BUSINESS OF THE COMPANY
ACQUISITIONS AND STRATEGIC ALLIANCES. In November, 1996, the Company
acquired Silicon Beach Communications, Inc. ("SBC"), a privately held California
corporation that serves as an ISP and provides software development services.
The acquisition was structured as a stock for stock transaction in which the
Company issued an aggregate of 115,000 shares of Company Common Stock in
exchange for all the issued and outstanding capital stock of SBC.
In February, 1997, the Company acquired all the issued and outstanding
capital stock of WestNet Communications, Inc. ("WNI"), a Ventura, California
ISP. Following completion of this acquisition, the Company
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began to integrate the customer bases, network facilities and other operations
of SBC and WNI in order to achieve desired efficiencies and economies of scale.
SALES AND OPERATIONAL STRATEGY. Prior to the AI Merger, the Company's
sales and operational strategy was directed, primarily, at increasing revenues
through expansion of the customer base for the TFN ISP operations.
Following the AI Merger, the Company's new executive management team also
began to develop and implement a comprehensive sales and marketing strategy
designed to position the Company as a leading provider of broadband network
services, providing complete internetworking solutions for small- and mid-size
business and professional offices and certain personal applications.
This strategy is based on the assumption that network connectivity for
these market applications is becoming a critical element in the ability of these
business, professional and other organizations to improve productivity and lower
costs through the use of a variety of telecommunications services, including
branch office, remote office and telecommuter networking as well as network
access to customers, vendors, financial institutions and the Internet. While
management expects that these factors will result in an increased market demand
for these services, there are no assurances regarding the size of such demand or
that the Company will be selected to provide its services in response to such
demand.
The implementation of this strategy involves the creation and marketing of
products and services designed for both business and personal applications,
namely Business Network Services and Personal Network Services, respectively.
The Company is developing and implementing sales and marketing strategies which,
it believes, will result in monthly, recurring revenues from networking
customers under multi-year term agreements. However, this strategy is in its
formative stages and the Company is recruiting, hiring, training and developing
the personnel resources necessary to manage and staff the sales and marketing
efforts. Delays or other difficulties in these recruitment and other activities
could adversely affect the Company's ability to timely and effectively implement
these revenue-generating objectives.
INTERNETWORKING. At an increasing rate, business, professional and other
organizations are seeking to internetwork their Local Area Networks ("LANs") and
Wide Area Networks ("WANs") to share information and computing resources for
applications such as e-mail, transaction processing, the sharing of databases,
multi-site engineering and product development and electronic image transfer.
The communications traffic of many organizations has grown steadily during the
past two decades leading to enterprise-wide networks facilitating rapid and
efficient data communications between work groups, departments and branch
locations. Additionally, a shift to enterprise-wide remote access has occurred
due to increased business mobility, increased telecommuting, reduced cost of WAN
services and widespread adoption of remote access standards. Internet and
remote access devices extend the organization network beyond the branch office,
bringing remote users closer to the enterprise and permitting connection to the
corporate LAN so users can work anywhere, any time. Users can access e-mail,
databases and servers as if they were in the corporate office.
The Company believes that, as a result of these shifts, internetworking,
the method used for interconnecting networks, has been undergoing rapid growth
over the past ten years as reflected in the significant growth in sales and
distribution of routers, remote access servers, intranet software and other
various components that enable internetworking. As the computing paradigm
migrates to client-server architectures, enterprise-wide networks allow those
technologies to be implemented. The Company's strategy recognizes the
opportunity to bridge the gap between telecom and computer providers and
simplify networking complexities by becoming a single point of contact.
NETWORK PROVISIONING. The Company believes that communications
requirements such as bandwidth availability and network design are replacing
computer requirements such as processor speed, memory or operating systems as
the delimiting factors for business applications. Video conferencing, remote
patient diagnostics with medical imaging and telecommuting are all business
applications in which the success of the deployment is defined by the available
bandwidth. The ultimate realization of this trend is the World-Wide Web ("WWW")
and WWW applications developed with Internet-specific tools such as SUN
Microsystems' Java(TM). These Web applications are
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computer platform and operating system independent but depend entirely upon
connectivity and bandwidth for successful deployment and execution.
As a result, connectivity is becoming one of the most important factors in
enhancing business productivity and customer service. Large corporations have
historically created private wide area networks through leased dedicated data
lines. However, dedicated point-to-point facilities have several deficiencies:
. Leased lines are very expensive
. Remote offices and telecommuters are omitted
. Leased lines are not suited for unscheduled and asynchronous
communications
As a result, small and medium size companies that have sought the benefits
of internetworking have been required to use modems and dial-up telephone lines
which are generally too slow to handle today's applications.
Growing demands for high speed capabilities have given way to the emergence
of new carrier-based data communication services to overcome the deficiencies of
both dedicated leased and dial-up lines. WAN solutions vary substantially
depending on an organization's size and communications needs. Traditionally,
wideband digital transmission circuits (such as T1 and DS-1) were leased from
public carriers to provide voice, fax and data communications links between
larger offices and low speed leased lines (such as DS-O) for branch office
connectivity. For some applications, however, this has proven expensive and
inefficient because the entire bandwidth capacity is dedicated 24 hours per day,
whether or not it is used.
The birth of "packet" based services such as X.25 were developed to address
the issue of allocation and utilization. Today, "fast packet" networking
technologies such as Frame Relay and Asynchronous Transfer Mode ("ATM") have
emerged as an integrated, cost-effective, flexible WAN solution. These networks
allow for "bandwidth on demand" between any two endpoints on a WAN. While ATM
is not generally available through public carriers, Frame Relay services are now
widely offered throughout the United States and are increasing in demand.
COMPANY STRATEGY. The Company intends to be a leading provider of
broadband network services, providing complete internetworking solutions for
small to mid-size offices. The Company's services are sold through a network of
value added resellers and a direct sales force focused on select vertical
markets.
Wide Area Network connectivity for small to medium size offices is fast
becoming a critical element in each organizations' infrastructure. These
enterprises require branch office, remote office and telecommuter networking as
well as network access to customers, vendors and the Internet. As a result,
management believes that market demand has been created for flexible, cost-
effective internetworking solutions representing the following primary market
trends:
. Demand for WAN connectivity for small to medium size offices is
increasing
. Capabilities of server integrated internetworking are increasing
. Outsourcing of network services is increasing
Management believes that there are significant opportunities created by all
three trends in becoming an affordable, single source provider of integrated
voice and data internetworking solutions. The Company intends to market a
variety of products and services tailored around its PointStream point-to-point
facilities, FrameLink Frame Relay facilities, and Internet service through its
subsidiaries, TFN, SBC and WNI, providing customers with access through 1+, 0+,
800#, PPP, SLIP, frame relay, T1, T3, ISDN and virtual network sharing.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
SIX MONTHS ENDED JUNE 30, 1997
The decrease in total current assets from the fiscal year ended September
30, 1996, to the three months ended June 30, 1997, relates, primarily, to the
use of cash for operating activities relating to the integration of the Company
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<PAGE>
and AI following their 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 the year ended September 30, 1996,
to the quarter ended June 30, 1997, arose, primarily, from the increase in trade
payables arising from the AI 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 AI Merger and acquisitions of SBC and WNC; a
promissory note issued in connection with the Exchange Agreement with Matrix;
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 quarter due, primarily,
to substantial costs and expenses incurred in connection with the AI Merger, 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 AI Merger is treated, for accounting purposes, as a reverse purchase whereby
the holders of AI's Common Stock acquired, after giving effect to the AI 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 AI only. Since AI did not
begin operations until August, 1996, no comparative financial analysis is
available for AI, 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.
TWELVE MONTHS ENDED SEPTEMBER 30, 1996
As of September 30, 1996, the Company had only been in operation since
January 1995 (twenty-one months). During 1996, customers with repeat business
for the Company's The Friendly Net ("TFN") operations accounted for a majority
of the revenues generated.
During fiscal 1996, general and administrative expenses decreased to 119%
of gross revenues as compared to 163% for 1995 resulting in a loss from
operations of $49,000 for the year ended September 30, 1996, compared to 1995
with losses from operations of $128,000 and 1994 prior to the acquisition of The
Friendly Net with losses from operations of $22,000. During fiscal 1995 the
increased general and administrative expenses were a result of increased
activity in the search for potential acquisition candidates and the expenses
resulting from staffing and training personnel for the operations of The
Friendly Net, while the volume of revenues generated had not reached a point
where the gross margin generated was sufficient to offset the cost of the
initial start-up expenses.
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 AI Merger, acquired access to
the capital resources of AI. 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.
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Prior to the quarter ended June 30, 1997 and pursuant to the terms of the
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 Exchange Agreement or December 1,
1997. Management expects that, following consummation of the transactions
contemplated by the 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 Exchange Agreement are
consummated. Further, if for some reason the transactions contemplated by the
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.
INFLATION, COMPETITION AND REGULATION
The Company's operations have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices. The
Company encounters competition from a variety of firms offering Internet
services in its market area. Many of these firms have long standing customer
relationships and are well-staffed and well financed. The Company believes that
competition in the Internet service industry is based on competitive pricing,
although the ability, reputation and technical support of a concern is also
significant. The Company does not believe that any recently enacted or
presently pending proposed legislation will have a material adverse effect on
its results of operations.
PROPERTIES
The Company leases facilities in three locations. The Company's corporate
location is approximately 1,500 square feet and is located at 130 Cremona Drive,
Suite C, Santa Barbara, CA 93117. The Company leases these facilities on a
month-to-month basis for a monthly rent of $1.65 per square foot. TFN's office
location is approximately 1,100 square feet and is located at 350 West
Broadway, Suite 111, Salt Lake City, UT 84101. TFN's office lease is rented on
a month-to-month basis at a monthly rate of $1,000. SBC's office location is
approximately 3,441 square feet and is located at 104 West Anapamu, Suite C,
Santa Barbara 93101. SBC leases this space under a 5 year lease at a monthly
rate of $4,645. In addition, the Company and its subsidiaries operate points-
of-presence for the purpose of creating local access points to its network
backbone. Only one of these locations, Provo, Utah, requires monthly rent in
addition to what is listed above, with 20 square feet of space at a monthly
rate of $100.00.
LITIGATION
There is no pending legal proceeding to which the Company is party that in
the opinion of management of the Company is likely to have a material adverse
effect on the Company's business, financial condition or results of operations.
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company Common Stock is traded over-the-counter on the NASDAQ Electronic
Bulletin Board under the trading symbol "AVCO" (formerly "HITI"). There is no
established public trading market for the Company Preferred Stock. The
following high and low bid information for the Company Common Stock was provided
by the NASDAQ Electronic Bulletin Board. The quotations provided reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. On April 11, 1997, (the trading day prior to the
public announcement of the Company's intent to enter into the Matrix
transaction) the high and low sales prices for the Company Common Stock were
$2.00 and $1.12.
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, 1995 HIGH BID LOW BID
<S> <C> <C>
First Quarter $0.7500 $0.6250
Second Quarter $0.6875 $0.6875
Third Quarter $0.6875 $0.5625
Fourth Quarter $0.5000 $0.5000
YEAR ENDING SEPTEMBER 30, 1996
HIGH BID LOW BID
First Quarter $0.5000 $0.5000
Second Quarter $0.8750 $0.5000
Third Quarter $1.4370 $0.7500
Fourth Quarter $1.0000 $1.0000
YEAR ENDING SEPTEMBER 30, 1997
HIGH BID LOW BID
First Quarter $1.3750 $0.5000
Second Quarter $0.8750 $0.5000
Third Quarter $4.5000 $0.7813
Fourth Quarter $3.7813 $2.4375
(through September 5, 1997)
</TABLE>
On September 5, 1997, the bid and asked quotations for the Company Common
Stock as quoted on the NASDAQ Electronic Bulletin Board were $____ and $_____.
The number of shareholders of record of the Company Common Stock as of
August 16, 1997, was approximately 163. At that date there were two record
holders of the Company Preferred Stock.
Following the closing of the transactions contemplated by Exchange
Agreement and subject to shareholder approval thereof, management intends to
submit an application to allow trading of AvTel Delaware Common Stock on the
NASDAQ National Market System ("NMS") or, if such application is for any reason
rejected, on the NASDAQ Small Cap System ("SCS"). While management believes
that the Company size, shareholder base and other factors will, following
completion of the Exchange Agreement, enable it to obtain trading on NASDAQ NMS
or NASDAQ SCS, there are no assurances that this will occur, in which event the
trading in AvTel Delaware Common Stock will continue to be reported on NASDAQ
Electronic Bulletin Board.
The Company has not paid any cash dividends to date and does not anticipate
paying dividends in the foreseeable future. It is the present intention of
management to utilize all available funds for the development of the Company's
business. The terms of the Company's Series A Convertible Preferred Stock
prevent the payment of any dividend on the Company Common Stock unless (i) all
cumulative dividends on the Series A Convertible Preferred
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Stock have been fully paid, and (ii) the holders of at 50% of the outstanding
shares of the Series A Convertible Preferred Stock have approved such dividend.
DESCRIPTION OF MATRIX
MATRIX IS A PRIVATELY-HELD CORPORATION AND, PRIOR THE CONSUMMATION OF THE
SHARE EXCHANGE, HAS NOT BEEN SUBJECT TO THE REPORTING REQUIREMENTS OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE FOLLOWING INFORMATION
CONCERNING MATRIX HAS BEEN PROVIDED TO THE COMPANY BY THE MANAGEMENT OF MATRIX
FOR INCLUSION IN THIS PROXY STATEMENT.
BACKGROUND.
Matrix is a provider of domestic and international long distance
telecommunication services primarily to residential and small business customers
in the United States. Matrix began operations in 1990. The majority of
Matrix's sales and marketing is produced by three affiliated companies, each of
which generate a substantial portion of Matrix's revenue. One of these
affiliated companies is Best, which Matrix acquired by means of a share exchange
effective July 1, 1997.
The address of Matrix's principal place of business is 8721 Airport
Freeway, Fort Worth, Texas 76180 and its phone number is (817) 581-9380.
BUSINESS OF MATRIX
Matrix provides long distance service to over 200,000 customers in 49
states. Matrix's current strategy is to compete as a reseller, contracting with
Sprint Corporation ("Sprint"), Pacific Gateway Exchange, Inc. ("PGE"),
Cincinnati Bell Long Distance ("CBLD") and other quality carriers to provide
switching and transmission of its customer's traffic. Matrix is fully certified
or registered in all states where required and operates under Section 214
authority from Federal Communications Commission ("FCC"). Matrix has a national
Carrier Identification Code ("CIC") which enables Matrix to manage and control
its customer base more effectively. The CIC also permits Matrix to market to
subscribers of other carriers by having the customer dial the CIC directly, a
process which is known in the industry as "casual calling."
Matrix has invested in call rating, billing, and customer service
infrastructure. In addition, Matrix has entered into billing and collection
agreements with local exchange carriers ("LECs"), including all of the Regional
Bell Operating Companies ("RBOCs"), General Telephone Operating Companies
("GTOCs") and Sprint local telephone companies. These billing agreements permit
Matrix to include its billing on the customer's local telephone bill. Matrix
believes that these LEC billing agreements are the most effective mechanism for
billing its residential customers, because of the convenience to its customers
of receiving one bill for both local and long distance service and the benefits
derived from the LECs' extensive collections infrastructure. Matrix's billing
information systems and services also allows it to provide direct bills to its
larger commercial customers, a market segment which Matrix is currently
expanding.
Matrix markets its services primarily through direct mail, outbound
telemarketing and a network of over 6,000 independent agents. Approximately 25%
of revenue is derived from casual calling. Although casual calling has been in
existence since the mid-1980s, only recently have companies such as Matrix begun
to aggressively pursue this market opportunity.
MARKETING AND SERVICES. Since it commenced operations in May 1990,
Matrix's primary focus has been on sales to the small business customer, defined
as businesses with ten employees or less, and residential customers. The
majority of sales have been generated through telemarketing, a network of about
6,000 independent agents, and casual calling derived from marketing by direct
mail. Matrix further intends to expand its customer base by adding medium sized
business customers (with billings up to $5,000 per month) through its Commercial
Division. A discussion of Matrix's service offerings and residential and
commercial marketing follows.
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Residential Services. Matrix markets its residential services under the
--------------------
Matrix brand name. Sales consist of both "1 plus" calling, for which the
customer must select Matrix as its long distance carrier, and casual calling.
Products consist of those indexed to AT&T's basic tariffed rate ("AT&T rate"),
whereby the customer is offered a defined percentage discount off the AT&T rate.
This satisfies the particular subscriber who prefers to be guaranteed a certain
discount rather than pay a fixed cost per minute. As AT&T rates change, Matrix
rates for these services change commensurably. The "1 plus" customer may also
choose services which have fixed charges for either "peak" and "off peak"
periods, or a "flat rate" which is the same 24 hours a day, 7 days a week.
Products which follow the "peak-off peak" structure generally have slightly
higher charges during the day, and lower charges during the nights and weekends,
than "flat rate" products, and are often more attractive to residential
subscribers who place the majority of their long distance calls during "off
peak" periods.
Casual calling represents about 25% of Matrix's revenue base and has the
potential to grow faster than the basic residential market. A prerequisite to
growing casual calling revenues is expansion of Matrix's leased facilities into
additional equal access areas. This presently requires the connection of
dedicated facilities known as Feature Group Ds ("FG-Ds") between LEC switching
facilities and those of Matrix's underlying network provider. Matrix markets
its residential services primarily through direct mail pieces that seek to
educate potential customers regarding casual calling and its benefits. Direct
mail is targeted towards residential customers within a specified geographic
region and includes a service explanation and dialing instructions, a general
pricing comparison, and a set of reminder stickers highlighting Matrix's CICs
for customers to keep near their telephone. Matrix has periodically conducted
subsequent mailings into its existing territory to stimulate incremental usage
by new and existing customers, and to build brand awareness. Matrix's
experience indicates that subsequent mailings into its geographic markets have
generated incremental new customer usage, in some cases with response rates
equal to initial mailings into such markets. Approximately 130 such areas are
served today, and Matrix plans to expand its coverage to include approximately
70% of the U.S. domestic market by the end of 1997.
Whether a residential customer dials Matrix's access codes or is
presubscribed, their calls will appear on the customer's regular monthly local
telephone bill.
Matrix's inbound customer service department is designed to complement
Matrix's "1 plus" and casual calling marketing strategies. Customer Service
Representatives ("CSRs") are available 24 hours a day, 7 days a week in order to
answer inquiries generated by Matrix's marketing campaigns, as well as to
support existing customers. CSRs are trained to answer a broad range of
inquiries from prospective customers relating to service, pricing, and optional
features.
Commercial Services. In order to provide an additional distribution
-------------------
channel for Matrix's telecommunications products and services, Matrix has
developed and begun to implement a plan to build a direct commercial sales
force. Matrix intends to open regional sales offices throughout the country in
order to market these services. Matrix's commercial sales agents will market
Matrix's services through personal contacts which will emphasize customer
service, network quality, value-added services, reporting, rating and
promotional discounts.
In addition to competitive rates and a wide variety of products, Matrix is
able to offer business customers a highly specialized direct bill summary
package that includes call summaries by account code, department, employee,
project, client, area code, country code, and time-of-day. Customer call
management reports are available in a variety of media formats.
Other Value-Added Services. Matrix has introduced and is developing
--------------------------
additional value-added services to extend features available to its existing
customer base and to attract additional customers. Matrix currently offers 800
service, calling cards, and paging services as well as its basic long distance
services. In addition, Matrix expects to introduce other enhanced products, and
may decide to provide additional services, including the resale of local
telecommunications services, cellular and other wireless products and services,
Internet access, and other enhanced long distance products such as packet
switching, video conferencing and conference calling.
CUSTOMER SERVICES. To ensure that in-bound telemarketing and customer
service are always available, Matrix's customer service department operates 24
hours a day, 7 days a week to provide full-service support for its residential
and commercial customer base and to handle marketing inquiries from potential
and existing customers.
-41-
<PAGE>
Matrix's call centers are equipped with state-of-the-art computer and
telecommunications technology. Incoming calls are managed with the help of an
automatic call distributor and an automated attendant. Such a system allows for
management of call queue time, the formation of distinct work groups for
different projects, and on-line monitoring of customer service calls for quality
assurance purposes. Bilingual CSRs are available during day and evening shifts.
BILLING AND DATA PROCESSING. Matrix has dedicated substantial resources
to its management information systems. Matrix's information systems enable
Matrix to (i) monitor and respond to the evolving needs of its customers by
developing new and customized services; (ii) provide sophisticated billing
information that can be tailored to meet the requirements of its customer base;
(iii) provide high quality customer service; (iv) detect and minimize fraud; (v)
verify payables to suppliers; and (vi) integrate additions to its customer base.
In addition, Matrix has complete facilities for rating, formatting and
distributing direct bills to its larger commercial subscribers. Small business
customers may receive either a direct or a LEC bill, depending upon the services
provided to the customer.
COMPETITION. The telecommunications industry is highly competitive and
affected by rapid regulatory and technological change. Matrix believes that the
principal competitive factors in its business include pricing, customer service,
network quality, service offerings and the flexibility to adapt to changing
market conditions. Matrix's future success will depend upon its ability to
compete with AT&T, MCI, Sprint and other carriers (including the RBOCs when
approved to enter the long distance market) and other long distance providers,
many of which have considerably greater financial and other resources than
Matrix.
Matrix believes it competes favorably in its targeted markets, due to its
effective sales channels, competitive pricing and customer service
infrastructure. Matrix also believes that its success will depend increasingly
on its ability to offer on a timely basis new services based on evolving
technologies and industry standards.
SELECTED FINANCIAL DATA
The following selected operations data of Matrix for the years ended December
31, 1996, 1995 and 1994 and balance sheet data as of December 31, 1996 and 1995
have been derived from Matrix's audited financial statements included herein.
The selected operations data of Matrix for the years ended December 31, 1993 and
1992, and balance sheet data as of December 31, 1994, 1993 and 1992 have been
derived from unaudited financial statements of Matrix. The selected financial
data as of June 30, 1997 and for the six months ended June 30, 1997 and 1996
have been derived from unaudited interim financial statements of Matrix. The
results of operations for the first six months of the year are not necessarily
indicative of the results for the full year. These selected financial data
should be read in conjunction with Matrix's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Matrix's
financial statements and notes thereto included elsewhere herein.
-42-
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Years ended December 31, Six months ended June 30,
------------------------ -------------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $24,088,039 40,568,566 59,551,307 64,289,718 71,558,295 37,579,184 26,829,063
Operating income (loss) (365,051) (397,804) 604,109 2,422,393 4,091,034 2,176,360 349,730
Net income (loss) 16,684 (474,797) 643,200 (2,440,493) 2,566,734 (261,215) 173,202
Net income (loss) per common
share N/A N/A 0.36 (1.19) 0.88 (0.09) (0.05)
Cash dividends per common
share N/A N/A - - - - -
Weighted average common
shares outstanding N/A N/A 1,800,000 2,044,296 2,919,978 2,754,037 3,484,260
BALANCE SHEET DATA:
As of December 31 As of June 30
----------------- -------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Working capital (deficit) $ (418,851) (326,746) (140,741) 206,071 6,790,219 5,278,528
Total assets 11,253,619 11,167,630 14,957,279 17,580,694 20,338,404 18,720,707
Long term debt - - - - - -
Stockholders' equity 1,427,979 1,729,133 2,372,333 3,539,522 8,585,483 8,758,684
</TABLE>
N/A - not applicable
-43-
<PAGE>
Notes to Selected Financial Data of Matrix
(1) Matrix was originally formed May 29, 1990 as a Texas general partnership.
The partners consisted of Matrix Communications, Limited ("MCL") a Texas limited
liability partnership and Onward and Upward, Inc. ("OUI"). Effective January 1,
1994, the partnership was dissolved. Prior to the dissolution, cash
distributions were made to OUI in satisfaction of its partnership interest.
Concurrent with the dissolution, all remaining tangible and intangible assets
and liabilities of Matrix then owned by MCL were transferred to Matrix Telecom,
Inc., a Texas corporation. Effective June 30, 1995, MCL was liquidated and its
sole asset (Matrix capital stock) was distributed to MCL's partners in
proportion to their ownership interests.
(2) Matrix original stock issuance consisted of 100 common shares. Effective
December 31, 1994, a 10 for 1 stock split was declared. Concurrent with the
dissolution of MCL on June 30, 1995, Matrix's then outstanding 1,000 shares of
common stock were canceled and 100,000 shares were distributed to the prior MCL
partners in proportion to the ownership interest in MCL. Effective March 10,
1997, a 18 for 1 stock split was declared resulting in 3,484,260 shares being
then outstanding. All share amounts have been restated to reflect the stock
splits and share exchanges.
(3) In October 1995, Matrix issued 969,228 shares of its common stock valued
at $3,607,682 in exchange for all of the outstanding common stock of DNS
Communications, Inc., a Houston based long distance reseller. Subsequent to the
acquisition, the operations of DNS generated substantial losses. DNS's customer
churn rate and bad debts as well as projected cash flows were evaluated and as
of December 31, 1995 it was determined that the remaining investment in the DNS
acquired customer base totaling approximately $4,462,000 should be written off.
See note 7 to Matrix's financial statements for the three years ended December
31, 1996 included elsewhere herein.
-44-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
<TABLE>
<CAPTION>
The following table sets forth statement of operations data as a percentage of revenues for the period indicated.
------------------------------ -----------------------------------------------
Six months ending June 30, Years ending December 31,
1997 1996 1996 1995 1994
--------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of revenues 68.26% 67.32% 66.62% 66.85% 67.29%
------- ---------- -------- ------------------------------
Gross margin 31.74% 32.68% 33.38% 33.15% 32.71%
Selling, general, and
administrative expenses 29.08% 25.46% 26.27% 27.83% 30.32%
Depreciation and amoritzation 1.36% 1.43% 1.39% 1.55% 1.37%
------- ---------- -------- ------------------------------
Total operating
expenses 30.43% 26.89% 27.66% 29.38% 31.69%
Operating income 1.30% 5.79% 5.72% 3.77% 1.01%
Interest Expense (0.03)% (0.47)% (0.32)% (0.01)% (0.30)%
Other income, net 0.09% 0.15% 0.38% 0.26% 0.15%
------- ---------- -------- ------------------------------
Income before
income taxes 1.37% 5.47% 5.77% 4.02% 0.87%
Income tax expense (benefit) 0.72% 2.41% 3.42% 1.68% (0.21)%
------- ---------- -------- ------------------------------
Income before equity in net
income (loss) of subsidiary 0.65% 3.07% 2.36% 2.33% 1.08%
Equity in net income (loss) of
subsidiary 0.00% (3.76)% 0.17% (6.13)% ---
------- ---------- -------- ------------------------------
Net income (loss) 0.65% (0.70)% 2.53% (3.80)% (1.08)%
======= ========== ========== ==============================
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues: Total revenues for the six months ended June 30, 1997 decreased
28.6% or $10.8 million from $37.6 million for the six months ended June 30,
1996. The decrease was primarily the result of a reduction in sales by
affiliated distributors for Matrix. Matrix is dependent upon sales generated by
affiliated companies which represent 73.7% and 63.6% of total sales for the six
months ended June 30, 1996 and 1997 respectively. Total sales for affiliated
distributors for the six months ended June 30, 1996 were $28.2 million and
decreased to $17.3 million for the six months ended June 30, 1997.
Additionally, the resale of certain AT&T long distance products was discontinued
in June 1996. The customer base associated with these products continues to
decline through normal attrition. Sales from this channel decreased from $2.6
million sales for the first six months in 1996 to $847,000 for the first six
months in 1997. Matrix's strategy is to reduce its dependency upon a small
number of sales distributors, ultimately decreasing the associated risk
involved. Accordingly, revenues associated with non-affiliated sales channels
(excluding the AT&T base) increased 22.8% or $1.7 million to $9.1 million for
the six months ended June 30, 1997 from $7.4 million for the six months ended
June 30, 1996. Sales generated by these non-affiliated channels represent 33.3%
of total revenues for the six months ended June 30, 1997, compared to 19.3% for
the same period in 1996.
-45-
<PAGE>
Gross margin: Gross margin decreased 30.7% to $8.5 million for the six
months ended June 30, 1997 from $12.3 million for six months ended June 30,
1996. As a percentage of revenue, gross margin decreased 1.0% from 32.7% to
31.7% for the six months ended June 30, 1996 and 1997 respectively. The decrease
primarily resulted from an increase in the cost of long distance services which
includes network and bad debt. Matrix realized a reduction in network cost for
the six months ended June 30, 1996 from credits received from a major network
vendor. The first six months of 1997 reflect lower rates by the same vendor due
to a re-negotiated contract in the fourth quarter of 1996; however, the effect
is negated by the significant revenue decreases related to a major sales
distributor whose product line carried high gross margins. Additionally, overall
retail rates have been lowered to meet competitive industry demands;
accordingly, Matrix is experiencing decreasing product margins. Bad debt as a
percentage of revenue increased insignificantly to 2.8% for the six months ended
June 30, 1997 from 2.4% for the six months ended June 30, 1996. Actual bad debt
dollars decreased for the first six months in 1997 compared to the first six
months in 1996 due to decreased revenues.
Selling, general and administrative expenses: As a percentage of revenues,
selling, general and administrative expenses increased 3.6 % the first six
months of 1997 compared to the first six months of 1996, and actual expenses
decreased $1.8 million from $9.6 million for the six months ended June 30, 1996
to $7.8 million for the same period in 1997. The primary reason for the decrease
in actual expenses is that commissions paid to the sales distributors and
billing and collections fees paid to the local exchange carriers decreased $2.5
million. Both commissions and billing and collection fees are variable with
changes in revenues. Billing and collection fees did not change as a percentage
of revenue significantly and its' decrease in actual dollars in the first six
months of 1997 was primarily due to decreased revenues. Likewise, commissions
decreased as revenues dropped; however, as a percentage of revenue, commissions
decreased 2.4% compared to the first six months of 1996, primarily resulting
from the prepayment of future commissions to CoreMarketing, LLC, a distributor
affiliated with Matrix. The resulting prepaid commission expense is being
amortized over the estimated eighteen month life of the customer base. Certain
other selling, general and administrative expenses not necessarily variable with
revenues increased approximately $1.0 million or 6.5% in the first six months of
1997 over the same period in 1996. First, salary expense increased approximately
$68,000 primarily due to an increase in the number of employees in the call and
provisioning centers to accommodate certain affiliates with their back office
support, and to normal compensatory increases. Second, advertising expense of
approximately $604,000 was expended in the 1997 period incurred for direct
mailing to potential dial around casual customers. Third, professional and
legal services and certain regulatory fees associated with doing business as a
carrier increased a net amount of approximately $336,000 in the first six months
of 1997 compared to the first six months of 1996. Professional and legal
services increased $90,000 in the first six months of 1997, representing an
increase in professional services of $183,000 and a decrease in legal expense of
$93,000. Increases in professional services were primarily due to $84,000 to out
source special programming projects, $72 ,000 to out source telemarketing
services, and $17 ,000 to out source third party verification. Legal expenses
decreased in 1996 primarily from bringing in house certain tariff, state and FCC
reporting and filing requirements. Carrier fees specific to providing
telecommunication service increased $246,000 in the first six months of 1997 as
compared with the comparable period of 1996. This increase resulted from a new
fee payable by Matrix for having reached a certain threshold of customers.
Certain other overhead expenses decreased about $251,000 during the first six
months of 1997 compared to the same period for 1996. Office, equipment, travel
and rent expenses represented the greatest decrease.
Depreciation and amortization: Depreciation and amortization decreased 32.2%
or $173,000 to $364,000 for the six months ended June 30, 1997 from $537,000 for
the six months ended June 30,1996, primarily as a result of older assets of
Matrix being fully depreciated. As a percentage of sales, depreciation and
amortization decreased in the first six months of 1997 compared to the same
period in 1996 by a de minimis amount.
Interest expense and other income: For the six months ended June 30, 1997,
interest expense decreased 96.1% or $170,000 to $67,000 from $177,000 for the
six months ended June 30, 1996. Actual dollars decreased in 1997 from a
reduction in borrowing by Matrix for operations. As a percentage of revenues,
both periods represent insignificant amounts. Other income decreased 57.3% for
the period ended June 30, 1997 to $24,500 from $57,500 for the six months ended
June 30,1996. Actual dollars earned from interest on cash investments changed
insignificantly.
Income tax: Income taxes decreased $711,000 to $194 ,000 from $905,000
primarily due to decreased operating income. The effective tax rate was 42.0%
for the six months ended June 30, 1997 and 43.9% for the six months ended June
30, 1996.
-46-
<PAGE>
Equity in net income (loss) of DNS: For the six months ended June 30, 1996,
Matrix's equity in the loss of a 100% owned subsidiary, DNS was ($1.4) million,
and cash advances to DNS were $3.9 million. In July 1996, Matrix sold the
customer base acquired in the DNS acquisition in addition to certain blocks of
customers acquired during 1995 and 1996 together with related assets to a former
officer of Matrix and a former shareholder of DNS for approximately $5.3
million. Matrix recorded a gain on this sale of approximately $3.2 million
during the third quarter of 1996. The gain is recorded in equity in net income
(loss) of DNS in the statement of operations for the year ended December 31,
1996.
TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1995.
Revenues: Total revenues for the year ended December 31, 1996 increased 11.3%
or $7.3 to $71.6 million from $64.3 million for the year ended December 31,
1995. This increase was due primarily to increases in revenues from a major
affiliated distributor of the casual calling product. Prior to 1996, casual
calling services were limited to the state of California; however, in 1996
direct mail marketing of casual calling services was expanded to eleven
additional states increasing total revenues in 1996 over 1995 by greater than
$2.8 million. Additional revenues were from the resale of certain AT&T long
distance products. This sales program was implemented at the end of 1995 and
increased total sales over 1995 by approximately $3.0 million. Finally, new
distributors not actively selling Matrix products in 1995 increased total
revenues in 1996 by $1.5 million. Attrition rates associated with long distance
products are a normal industry occurrence; however, methods of calculation
differ within the industry. Matrix calculates its attrition at approximately
6.0% per month.
Gross margin: Gross margin increased 12.1% or $2.5 million, from $21.3
million for the year ended December 31, 1995 to $23.8 million for the year ended
December 31, 1996. As a percentage of revenue, gross margin increased from
33.2% in 1995 to 33.4% in 1996. Changes in gross margin were affected by two
factors accounted for in cost of long distance services. First, actual network
cost for the year ended December 31, 1996 increased $5.5 million from $40.6
million for the year ended December 31, 1995 to $46.1 million for the year ended
December 31, 1996. The majority of the actual dollars was due to increased
revenues. As a percentage of revenue, network cost increased 1.3% in 1996
compared to 1995. The primary reason for the increase was increased revenues
from distributors whose products are being sold at lower retail rates than in
the prior year in response to the competitive demand of the industry; thus,
decreasing Matrix's product margins. Second, bad debt expense decreased
$821,000 or 1.5% for the year ended December 31, 1996 from 3.7% for the year
ended December 31, 1995. Approximately $494 ,000 of the reduction in actual bad
debt resulted from revised estimates to reflect actual amounts received through
the local exchange carriers, Matrix's billing and collection agents.
Additionally, $327,000 of the reduction was related to travel card fraud.
Matrix changed its network vendor for its travel card services due to the new
vendor's ability to provide real time fraud monitoring. Travel card fraud was
less than $100,000 in 1996. Overall, the percentage decrease in bad debt was
greater than the percentage increase in the cost of network accounting resulting
in a small change in gross margin.
Selling, general and administrative expenses: Selling, general and
administrative expenses increased 5.1% or $910,000 to $18.8 million for the year
ended December 31, 1996 from $17.9 million for the year ended December 31, 1995.
As a percentage of revenues, these expenses decreased 1.5% from 27.8% in 1995 to
26.3% in 1996. Billing and collection expense reacts as variable expense and
fluctuates with changes in revenues. Billing and collection fees for the year
ended December 31, 1996 increased approximately $737,000 from $3.4 million for
the year ended December 31, 1995. As a percentage of revenue, billing and
collection fees changed insignificantly; therefore, its change was consistent
with the increase in revenues. Salary expense increased $742 ,000 in 1996 for
several reasons: $257,000 was paid for four new key employee positions in 1996,
and $178 ,000 was paid in salary and commissions related to two new sales
distributors in 1996. Additionally, $43 ,000 was paid in relocation and
recruitment expense, $121,000 was paid in salaries for six new employees among
several function areas, and $117,000 was paid in fees to temporary employment
agencies. The remaining increases were primarily compensatory in nature.
Commissions and professional and legal expense decreased by $454,000 and
$267,000 respectively for the year ended December 31, 1996. Actual commission
as a function of revenue normally changes in the same direction as changes in
revenues; however, commissions in 1996 decreased, but revenues increased. As a
percentage of revenues, commissions decreased 1.7% from 11.0% to 9.3% in 1996.
The change is due to in an increasing revenue base in 1996 for which commissions
are not paid; therefore commission as a percentage of revenues continues to
decline as these particular revenue bases grow. Professional and legal expenses
decreased $267,000 for the year ending December 31, 1996 compared to 1995. The
decrease relates primarily to expending $240,000 for various lawsuits and other
matters related to the conduct of its business. Management believes these
contingencies upon resolution will not materially affect the financial condition
of Matrix. Other net miscellaneous selling, general and administrative expenses
increased approximately $153,000
-47-
<PAGE>
in 1996 over the prior year. Matrix moved its corporate offices due to space
constraints to a more suitable location and experienced approximately $81,000 in
additional costs in holdover penalties related to the prior location.
Interest expense and other income: Interest expense increased $225,000 from
$6,300 in 1995 to $231,000 in 1996. Matrix increased its borrowing from a
majority stockholder for use in operations. The note was extinguished by the
end of second quarter in 1996. Other income increased $106,000 in 1996 from
$166,000 in 1995. The increase was primarily from interest earned on cash
investments in the third and fourth quarters of 1996 and income earned from
affiliates from providing certain back office support.
Income taxes: Income taxes increased $605 ,000 from $1.1 million for the year
ended December 31,1995 to $1.7 million for the year ended December 31, 1996 due
to increased operating income. The effective tax rate was 40.8% and 41.8% for
the year ended December 31, 1996 and 1995 respectively.
Equity in net income (loss) of DNS: In October 1995, Matrix issued 53,846
shares of its common stock valued at $3.6 million in exchange for all of the
outstanding common stock of DNS Communications, Inc., a Houston based long
distance reseller. The transaction was accounted for under the purchase method
of accounting. The purchase price paid in excess of the book value of DNS net
assets was pushed down to DNS and was allocated based upon the estimated fair
value of the assets and liabilities acquired at the date of acquisition.
Subsequent to the acquisition, the operations of DNS generated substantial
losses. DNS's customer churn rate and bad debts as well as projected cash flows
were evaluated and as of December 31, 1995 it was determined that the remaining
investment in the DNS should be written off. In July 1996, Matrix sold the
customer base acquired in the DNS acquisition in addition to certain blocks of
customers acquired during 1995 and 1996 together with related assets to a former
officer of Matrix and a former shareholder of DNS for approximately $5.3
million. Matrix recorded a gain on this sale of approximately $3.2 million.
This gain is recorded in equity in net income (loss) of DNS in the 1996
statement of operations.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Revenues: Total revenues for the year ended December 31, 1995 increased 7.9%
or $4.7 million from $59.5 million for the year ended December 31, 1994. The
increase primarily resulted from an increase in billed minutes of use from
casual calling customers. Matrix's major distributor of the casual product
significantly increased marketing activities to the international consumer.
Gross margin: Gross margin for the year ended December 31, 1995 increased 9.4%
or $1.8 million from $19.5 million for the year ended December 31, 1994. As a
percentage of revenues, gross margin increased .44% from 32.7% for the year
ended December 31, 1994 to 33.2% for the year ended December 31, 1995. The
increase in gross margin resulted primarily from a net reduction of
approximately $2.9 million in cost of long distance services which includes
network cost and bad debt. Actual network cost increased $2.6 million from
$38.1 million for the year ended December 31, 1994 primarily from increased
revenues in 1995; however, network cost as a percentage of revenues decreased
.73% for the year ended December 31, 1995 from 63.9% for the year ended December
31, 1994. The decrease resulted primarily from moving travel card traffic to a
new network provider resulting in savings of .08 cents per minute. Bad debt
expense for the year ended December 31, 1995 increased as a percentage of
revenue .29% or $348,000 from 3.37% for the year ended December 31, 1994.
Matrix was able to significantly reduce its travel card abuse by moving its
traffic to a vendor capable of providing real time monitoring of travel card
use. Other significant increases in bad debt expense were consistent with
increases in revenue.
Selling, general and administrative expenses: Selling, general and
administrative expenses decreased $168,000 or .93% for the year ended December
31, 1995 from $18.1 million for the year ended December 31, 1994. For the year
ended December 31, 1994, Matrix expended $1.1 million to deploy its nationwide
Carrier Identification Code ("CIC"). The CIC allows the end user in equal access
areas the opportunity to select a long distance carrier other than their primary
carrier. Other selling, general and administrative expenses increased for the
year ended December 31, 1995 compared to the year ended December 31, 1994.
First, salaries increased $383,000 primarily from an increase in the number of
employees during 1995. Second, Matrix expended $240,000 in 1995 for various
lawsuits and other matters related to the conduct of its business. Third,
carrier costs related to doing business within the telecommunications
environment increased $241,000 primarily as a result of a change in estimates to
reflect the actual costs. Finally, actual commissions increased $267,000 due to
increased sales in 1995; however, as a percent of revenue, commissions decreased
.42% as a result of an increase in billable minutes from a non commissioned
product.
-48-
<PAGE>
Interest expense and other income: Interest expense decreased $171,000 or
96.4% for the year ended December 31, 1995 from $177,000 for the year ended
December 31, 1994. The decrease resulted from Matrix decreasing its borrowing
requirements. Matrix financed operations including its capital expenditures
from operating cash in 1995. Interest income increased $77,000 for the year
ended December 31, 1995 from $89,000 for the year ended December 31, 1994. The
increase was primarily a result of earned income on cash investments.
Income taxes: Income taxes increased $1.2 million to $1.1 million for the year
ended December 31, 1995 from a tax benefit of approximately $127,000 for the
year ended December 31, 1994. The increase was primarily due to increased
operating income in 1995. The effective tax rate was 41.8% for the year ended
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of operating cash flow for Matrix are revenues derived
from the resale of domestic and international long distance services to the
public. Minor sources of revenues are received for provision of back office
support to affiliated and non affiliated companies and for earnings from
investment income. The primary uses of cash are payments for the underlying
network vendors for provisioning long distance services, for commissions paid to
sales distributors and agents for solicitation of long distance services from
business and residential customers, and for billing and collections services
from the major local exchange carriers for billing and collecting directly from
the end user of long distance services. Matrix has financed its growth,
including its capital expenditures, through funds provided by operations. Net
cash provided from operations totaled $2.2 million for the six months ended June
30, 1997 and $1.8 million for the year ended December 31, 1996.
Matrix's accounts receivable decreased to $8.5 million at June 30, 1997 from
$10.5 million as of December 31, 1996, a decrease of $2.0 million. The decrease
is due to a corresponding decrease in sales generated for the six months ended
June 30, 1997.
Matrix loaned $2.4 million to affiliates (including, for these purposes,
AvTel) in 1997. $1.9 million was loaned to Core Marketing, LLC for the quarter
ended March 31, 1997, and $500,000 was loaned to AvTel for the quarter ended
June 30, 1997. For the six months ended June 30, 1996, Matrix had loans
outstanding from a wholly owned subsidiary, DNS for $3.9 million which were paid
in July 1996.
Current liabilities decreased to $10.3 million at June 30, 1997 from $11.7
million as of December 31, 1996, a decrease of $1.4 million. The decrease in
current liabilities is due to a corresponding decrease in sales generated for
the six months ended June 30, 1997.
Matrix financed its capital expenditures for purchases of furniture and
equipment from funds generated from operations for the six months ended June 30,
1997 and the year ended December 31, 1996 in the amounts of $127,000 and
$716,000 respectively. During recent years, Matrix has generated sufficient
cash flow from operations to fund its investing activities and repayment of
previous financing needs.
TRANSACTIONS WITH AFFILIATES
Dependence on Jensen-Controlled Companies for Marketing Services. Mr. Ronald
L. Jensen and his adult children own approximately 35% of UICI, a publicly-
traded insurance and financial services company. Among other things, UICI's
marketing organizations sell Matrix long distance products to their customers.
The adult Jensen children own approximately 80% of Core Marketing, LLC ("Core").
Core sells Matrix long distance services using its direct mail facilities and
its telemarketing facilities. UGA, a company owned 100% by Ronald L. Jensen,
has provided sales and marketing services to the Company. Effective December 31,
1996, UGA sold its agency force to UICI and its telemarketing and direct mail
operations to Core. Matrix paid sales commissions and related payments to UICI,
Core and UGA, together with certain other affiliated entities (including Best
Connections, which has subsequently been acquired by Matrix) of $5,335,233 in
1996 and $6,314,878 and $5,108,123 in 1995 and 1994, respectively. For the six
months ending June 30, 1997, such payments totaled $782,661.
Network Services From Affiliate of Shareholders. Certain shareholders of
Matrix including Mr. Jensen, his adult children, Howard Neckowitz, Gail Granton,
Ron Anderson and Chuck Taylor, own in the aggregate in excess of 60% of the
outstanding shares of Pacific Gateway Exchange, Inc. ("PGE"), a public company.
PGE is a provider of international and domestic long distance telephone
services. Matrix purchases long distance services from PGE for
-49-
<PAGE>
resale to its customers. Matrix paid PGE $20,527,236 for such services in 1996,
and $17,195,182 and $9,259,150 in 1995 and 1994, respectively. For the six
months ending June 30, 1997, such payments totaled $5,859,692.
Loans to Affiliates. During the first six months of 1997, Matrix made a loan
to Core in the total amount of $1,924,303. The loan is due September 1, 1998,
and is interest-free. Also during this period, an outstanding receivable from a
major shareholder for shares purchase was paid in the aggregate principal amount
of $723,600.
For additional information on the above transactions, see Note 3 to the Matrix
Financial Statements for the year ending December 31, 1996, and Note 3 of the
Matrix Financial Statements for the six months ending June 30, 1997.
Conflicts of Interest. As noted above, the Company depends on certain
relationships with UICI and Core. The interests of UICI, Core and other
companies in which Mr. Jensen or other Matrix Shareholders own an interest may
conflict with the interest of the Company, including with respect to the amount
of compensation payable by the Company and the freedom of Mr. Jensen, such other
shareholders and such companies to engage in other activities, and with respect
to any negotiations of, disputes under, or breaches of any such agreements or
arrangements.
Pursuant to Delaware law, the Board of Directors of the Company will adopt a
policy that all material transactions in which there may be a conflict of
interest between the Company and Mr. Jensen or any other Matrix Shareholder (or
any entity affiliated or controlled by any of them) are reviewed and approved by
a majority of the independent members of the Board.
REGULATIONS
The services which Matrix provides are subject to varying degrees of federal,
state and local regulation. The FCC exercises jurisdiction over all facilities
of, and services offered by, telecommunications common carriers to the extent
that they involve the provision, origination or termination of jurisdictionally
interstate or international communications. The state public service
commissions ("PSCs") retain jurisdiction over jurisdictionally intrastate
communications. The FCC and relevant PSCs have the authority to regulate
interstate and intrastate rates, respectively, ownership of transmission
facilities and the terms and conditions under which Matrix's services are
provided. In general, neither the FCC nor the relevant state PSCs exercise
direct oversight over cost justification for Matrix's services or Matrix's
profit levels, but either or both may do so in the future. However, Matrix is
required by federal and state law and regulations to file tariffs listing the
rates, terms and conditions of services provided. Matrix generally is also
required to obtain certification from the relevant state PSC prior to the
initiation of intrastate service, and is required to maintain a certificate
issued by the FCC in connection with the provision of international services.
Any failure to maintain proper federal and state tariffs or certification or any
difficulties or delays in obtaining required authorization could have a material
adverse effect on Matrix.
INTELLECTUAL PROPERTY
Matrix has registered several trademarks for use in its marketing materials.
The logo used by Matrix to market its long distance service is a registered
trademark of Matrix. [ Also marks of Best?] While Matrix believes its registered
trademarks are important to its business in terms of further protecting its
existing common law right to use such trademarks, Matrix does not believe that
failure to register its trademarks poses any material risk of infringement on
its rights to use such trademarks.
EMPLOYEES
As of July 31, 1997, Matrix had approximately 110 full-time employees,
including employees of Best, its wholly-owned subsidiary. None of these
employees are represented by a union. Matrix supplements its permanent work
force from time to time with contractors, administrative personnel through
employment agencies, and part time employees. Matrix believes that it has good
relations with its employees.
PROPERTIES
Matrix currently leases approximately 24,050 square feet of space for its
corporate headquarters at 8721 Airport Freeway in Fort Worth, Texas, pursuant to
a lease agreement expiring on June 30, 2000. The monthly rent (not including
electricity) as of June 30, 1997 is approximately $19,888.
-50-
<PAGE>
LITIGATION
Matrix is a party from time to time to litigation or proceedings incident to
its business, including but not limited to, informal complaints before the FCC
and state agencies regarding certain marketing and billing issues. There is no
pending legal proceeding to which Matrix is party that in the opinion of
management of Matrix is likely to have a material adverse effect on Matrix's
business, financial condition or results of operations.
CAPITALIZATION AND RELATED MATTERS
The authorized capital stock of Matrix consists of 10,000,000 shares of Common
Stock ("Matrix Common Stock") of which 3,860,987 shares are issued and
outstanding and held, as of July 31, 1997, by 24 persons and entities. Of such
shares, 805,840 shares are held by Best, a wholly-owned subsidiary of Matrix,
and are the subject of options awarded or to be awarded by Best to outside sales
agents. Under Delaware law, these shares may not be voted or counted in
determining a quorum for shareholder action so long as they are held by Best.
Of the remaining 3,055,147 shares, 2,601,709, representing approximately 85% of
such remaining outstanding shares of Matrix, are held by the Jensen Holders.
The remainder of the shares of Matrix Common Stock are held by employees or
former employees of Matrix or other companies affiliated with Mr. Jensen. The
Company has been informed by Matrix that no formal agreements exist among the
shareholders of Matrix with respect to the voting of their common stock in
Matrix or AvTel Delaware.
There is currently no established public trading market for Matrix Common
Stock. Matrix has not paid any cash dividends on the Matrix Common Stock.
SHAREHOLDER PROPOSALS
No proposals have been submitted by shareholders of the Company for
consideration at the Special Meeting. It is anticipated that the next annual
meeting of shareholders will be held in February, 1998. Shareholders may present
proposals for inclusion in the Proxy Statement to be mailed in connection with
the next annual meeting of shareholders of the Company, provided such proposals
are received by AvTel Delaware no later than September 12, 1997, and are
otherwise in compliance with applicable laws and regulations and the governing
provisions of the articles of incorporation and bylaws of the Company.
OTHER MATTERS
Management does not know of any business other than referred to in the Notice
which may be considered at the meeting. If any other matters should properly
come before the Special Meeting, such matters will be properly addressed and
resolved and those in attendance will vote on such matters in accordance with
their best judgment.
AVTEL COMMUNICATIONS, INC.
BY ORDER OF THE BOARD OF DIRECTORS
/S/ ANTHONY E. PAPA
SANTA BARBARA, CALIFORNIA
SEPTEMBER 9, 1997
-51-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
AvTel Communications, Inc. and Subsidiaries:
- --------------------------------------------
Independent Auditor's Report............................................ F-1
Consolidated Balance Sheet, September 30, 1996.......................... F-2
Consolidated Statements of Operations, For the Years Ended
September 30, 1996 and 1995........................................... F-4
Consolidated Statements of Changes in Stockholders' Equity,
For the Years Ended September 30, 1996 and 1995........................ F-5
Consolidated Statements of Cash Flows, For the Years Ended
September 30, 1996 and 1995........................................... F-8
Notes to Consolidated Financial Statements.............................. F-10
Consolidated Balance Sheets September 30, 1996
and June 30, 1997 (Unaudited)......................................... F-20
Consolidated Statement of Operations For The
Three Months and Nine Months Ending June 30, 1997
and 1996 (Unaudited)................................................. F-22
Consolidated Statement of Cash Flows For The Nine
Months Ending June 30, 1997 and 1996 (Unaudited)..................... F-23
Notes to Financial Statements (Unaudited)............................... F-25
Matrix Telecom, Inc.:
- ---------------------
Independent Auditors' Report............................................ F-27
Balance Sheets, December 31, 1996 and 1995.............................. F-28
Statement of Operations
Years ended December 31, 1996, 1995 and 1994............................ F-29
</TABLE>
-52-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
(Continued)
-----------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994............................ F-30
Statement of Cash Flows
Years ended December 31, 1996, 1995 and 1994............................ F-31
Notes to Financial Statements
December 31, 1996, 1995 and 1994........................................ F-33
Balance Sheets (Unaudited)
June 30, 1997 and December 31, 1996..................................... F-43
Statements of Operations
For the Six Month Periods Ended June 30, 1997 and 1996 (Unaudited)...... F-44
Statements of Cash Flows
For the Six Month Periods Ended June 30, 1997 and 1996 (Unaudited)...... F-45
Notes to Financial Statements
June 30, 1997 and 1996 (Unaudited)...................................... F-46
</TABLE>
-53-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Avtel Communications, Inc. and Subsidiaries
(Formerly Hi, Tiger International, Inc.)
Santa Barbara, California
Dear Members of the Board:
We have audited the accompanying consolidated balance sheet of Avtel
Communications, Inc. and Subsidiaries (formerly Hi, Tiger International, Inc.),
as of September 30, 1996, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the two years in the period
ended September 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Avtel
Communications, Inc. and Subsidiaries (formerly Hi, Tiger International, Inc.),
as of September 30, 1996, and the results of its operations and its cash flows
for the two years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
Respectfully submitted,
/s/ Robison, Hill & Co.
Robison, Hill & Co.
Certified Public Accountants
Salt Lake City, Utah
December 12, 1996
F-1
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
ASSETS 1996
- ------ --------
<S> <C>
Current Assets
Cash $ 9,420
Note Receivable - Related Party -
Interest Receivable -
Accounts Receivable (Net of Allowance
for Doubtful Accounts of $4,841) 17,936
--------
Total Current Assets 27,356
--------
Fixed Assets
Equipment 159,306
Equipment Lease 21,280
Furniture & Fixtures 6,866
Less Accumulated Depreciation (84,426)
--------
Net Fixed Assets 103,026
--------
Total Assets $130,382
========
</TABLE>
F-2
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
-------------------------------------------
(formerly Hi, Tiger International, Inc.)
CONSOLIDATED BALANCE SHEET
(Continued)
-----------
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996
- ------------------------------------ ---------
<S> <C>
Current Liabilities
Accounts Payable, Trade 25,269
Interest Payable -
Income Taxes Payable 200
Accrued Liabilities 6,266
Lease Obligation - Current Portion 6,120
Accounts Payable - Related Party 40,900
---------
Total Current Liabilities 78,755
---------
Long Term Liabilities
Lease Obligation - Long Term Portion 3,890
---------
Total Long Term Liabilities 3,890
---------
Total Liabilities 82,645
---------
Minority Interest 18,911
---------
Stockholders' Equity
Common Stock (Par Value $.001),
50,000,000 shares authorized.
2,513,299 shares
issued and outstanding
September 30, 1996 2,513
Paid in Capital in Excess of Par
Value 520,249
Retained Deficit (493,936)
---------
Total Stockholders' Equity 28,826
---------
Total Liabilities and
Stockholders' Equity $ 130,382
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
September 30,
------------------
1996 1995
---------- ----------
<S> <C> <C>
REVENUES
- --------
Sales $ 299,315 $ 157,136
Cost of Sales 67,034 29,280
---------- ----------
Gross Margin 232,281 127,856
EXPENSES
- --------
General and Administrative 276,485 253,355
Bad Debt Expense 4,842 2,739
---------- ----------
Total Operating Expense 281,327 256,094
---------- ----------
Income (Loss) From Operations (49,046) (128,238)
Other Income (Expense)
Interest Income 2,450 5,148
Misc. Income 811 128
Interest Expense (6,999) (9,223)
Gain on Sale of Equipment 383 -
---------- ----------
Net Other Income (Loss) (3,355) (3,947)
---------- ----------
Income (Loss) Before Taxes (52,401) (132,185)
Income Taxes (206) (200)
Minority Income (2,727) 5,151
---------- ----------
Net Income (Loss) $ (55,334) $ (127,234)
========== ==========
Weighted Average Shares
Outstanding 2,425,672 2,163,172
========== ==========
Loss Per Share $ (.02) $ (.06)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Common Stock to be Issued Capital in
---------------------------- ------------------------ Excess of Earnings
Shares Amount Shares Par Value Par Value (Deficit)
------------ ------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1994 1,947,300 $1,947 30,000 $ 30 $299,673 $(311,368)
October 7, 1994 shares issued
to an individual for cash
at $.50 per share 30,000 $ 30 (30,000) $ (30) - -
January 1, 1995 shares issued
to a related corporation and
individuals in exchange for
ownership units of a Limited
Liability Company at $.247
per share (includes options
to purchase 75,000 shares
at $.75 per share (see NOTE 1
Purchase of Subsidiary) 260,000 $ 260 - - $ 64,080 -
April 25, 1995 shares issued
to an individual for cash
at $.50 per share subject to
a Repurchase Agreement
(See NOTE 6) 100,000 $ 100 - - $ 49,900 -
May 31, 1995 shares issued
to a company for cash
at $.40 per share 49,999 $ 50 - - $ 19,950 -
</TABLE>
F-5
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
Common Stock
Common Stock to be Issued Capital in
---------------------------- ------------------------ Excess of Earnings
Shares Amount Shares Par Value Par Value (Deficit)
------------ ------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
July 28, 1995 shares issued
to an individual in
exchange for services
at $.377 per share 5,000 $ 5 - - $ 1,880 -
Compensation Expense on
Stock Options
(See NOTE 5) - - - - $ 49,687 -
Net Loss - - - - - $(127,234)
Balance September 30, 1995 2,392,299 $2,392 - - $485,170 $(438,602)
March 25, 1996 exercise of
Stock Options at $.50
per share 20,000 $ 20 - - $ 9,980 -
March 25, 1996 shares issued
to an individual at
$.50 per share 5,000 $ 5 - - $ 2,495 -
March 28, 1996 shares issued
to an individual at
$.75 per share 16,000 $ 16 - - $ 11,984 -
</TABLE>
F-6
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
Common Stock
Common Stock to be Issued Capital in
---------------------------- ------------------------ Excess of Earnings
Shares Amount Shares Par Value Par Value (Deficit)
------------ ------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
July 30, 1996 exercise of
Stock Options by Directors
at $.01 per share 50,000 $ 50 - - $ 450 -
August 6, 1995 exercise of
Stock Options by Employees
at $.01 per share 10,000 $ 10 - - $ 90 -
August 8, 1996 shares issued
to an individual at
$1.00 per share 10,000 $ 10 - - $ 9,990 -
September 3, 1996 exercise of
Stock Options by Director
at $.01 per share 10,000 $ 10 - - $ 90 -
Net Loss - - $ (55,334)
------- ------- ------- -------- -------- ----------
Balance September 30, 1996 $ 2,513,299 $ 2,513 $520,249 $(493,936)
=========== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
September 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net Loss $(55,334) $(127,234)
-------- ---------
Adjustments Used to Reconcile
Net Loss to Net Cash
Minority Income 2,727 (5,151)
Provided by (Used In)
Operating Activities:
Compensation Expense from
Stock Options - 49,687
(Increase) Decrease in
Accounts Receivable 1,399 (19,336)
(Increase) Decrease in
Interest Receivable 9,310 (5,148)
Increase (Decrease) in
Payables 19,162 51,274
Increase (Decrease) in
Interest Payable (41,892) 6,960
Depreciation and Amortization 54,189 30,237
-------- ---------
Net Adjustments 44,895 108,523
-------- ---------
Net Cash Used In Operating
Activities (10,439) (18,711)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Acquisition of Equipment (43,664) (15,833)
Acquisition of Subsidiary - (21,000)
------- -------
Net Cash Used by Investing Activities (43,664) (36,833)
------- -------
</TABLE>
F-8
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the Year Ended
September 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
- ----------------------------------------
Proceeds From Capital Stock Issued $ 35,200 $70,000
Proceeds From Loans 46,000 -
Proceeds From Borrowing
on Notes Payable - -
Cash Loans Made - -
Cash Payments on Notes Payable (26,900) (5,173)
Cash Payments on Capital Leases (8,044) (3,226)
-------- -------
Net Cash Provided by Financing
Activities 46,256 61,601
-------- -------
Net Increase (Decrease) in Cash
and Cash Equivalents (7,847) 6,057
Cash and Cash Equivalents at
Beginning of the Year 17,267 11,210
-------- -------
Cash and Cash Equivalents at
End of the Year $ 9,420 $17,267
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH
- -------------------------------
FLOW INFORMATION:
- -------------------
Interest $ 48,891 $ 2,263
Income Taxes $ 200 $ 200
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
- -----------------------------------------------------------------------
On February 14, 1995 the Company issued 260,000 shares of stock in exchange for
an 80% ownership interest in a limited liability company.
On July 28, 1995 the Company issued 5,000 shares of stock in exchange for
services.
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------
This summary of accounting policies for Avtel Communications, Inc. and
Subsidiaries (formerly Hi, Tiger International, Inc.) is presented to assist in
understanding the Company's financial statements. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Organization and Basis of Presentation
- --------------------------------------
The Company was organized under the laws of the State of Utah on October
27, 1981. The Company was in the development stage as of September 30, 1994.
The Company commenced operations on January 1, 1995.
Nature of Business
- ------------------
The Company provides a comprehensive array of broadband network services,
focused primarily on the business customer. The Company's current management
consists of key executives from the telecommunications industry who are
developing and implementing a business strategy to integrate voice, data and
video internetworking solutions for small and mid-size offices and select
vertical markets. The Company has, since October 1, 1996, completed
acquisitions and formed strategic alliances with companies that enable Avtel to
offer a broad spectrum of communications services.
Purchase of Subsidiary
- ----------------------
On February 14, 1995, Hi, Tiger, Inc. a wholly owned subsidiary of the
Company, entered into an agreement whereby 260,000 shares of the Company's
common stock, and options to purchase 75,000 shares of common stock at an
exercise price of $.75 any time through December 31, 1996, and $21,000 cash were
exchanged for an 80% interest in The Friendly Net, a Utah Limited Liability
Company("TFN"). TFN, which began operations on January 1, 1995, had total
assets with a historical cost value of $106,675, consisting of computer
equipment with historical value of $100,934 and office furniture and fixtures
with historical value of $5,741, and no liabilities on the date of the exchange.
This transaction has been accounted for as a purchase using the recorded value
of net assets of the seller due to the related party relationship. Accordingly,
assets and liabilities are reflected at their historical values. Shareholders'
equity has been restated to reflect shares exchanged in the reorganization as
outstanding as of January 1, 1995, and income and expenses have been presented
since January 1, 1995.
F-10
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------
Consolidation
- -------------
The consolidated financial statements include the accounts of the Company
and Hi, Tiger, Inc. ("HTI") its wholly owned subsidiary and The Friendly Net
LLC., HTI's majority-owned (80%) subsidiary. The effect of all intercompany
balances and transactions have been eliminated in combination.
Cash Equivalents
- ----------------
For the purpose of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with maturity of three months or less to be
cash equivalents to the extent the funds are not being held for investment
purposes.
Loss per Common Share
- ---------------------
Earnings per common share are based upon the weighted average number of
common shares outstanding during each year. Fully diluted earnings per share
are not presented because they are anti-dilutive.
Fixed Assets
- ------------
Fixed assets are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated economic useful lives
of the related assets as follows:
Computer equipment 3 years
Office furniture and fixtures 5-10 years
Upon sale or other disposition of property and equipment, the cost and
related accumulated depreciation or amortization are removed from the accounts
and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as
incurred. Major overhauls and betterments are capitalized and depreciated over
their estimated economic useful lives.
F-11
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF ACCOUNTING POLICIES (Continued)
- --------------------------------------------------------------------
Capital Lease
- -------------
The Company is the lessee of computer equipment under a capital leases
expiring in 1997 and 1998. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the asset. The assets are amortized over the lower of the lease
term or their estimated productive lives. Amortization of assets under capital
lease is included in depreciation expense for September 30, 1996 and 1995.
NOTE 2 - INCOME TAXES
- ---------------------
The Company has accumulated tax losses estimated at $365,000 expiring in
years beginning 1998. Current tax laws limit the amount of loss available to be
offset against future taxable income when a substantial change in ownership
occurs. The amount of net operating loss carryforward available to offset
future taxable income will be limited if there is a substantial change in
ownership.
NOTE 3 - RELATED PARTY TRANSACTIONS
- -----------------------------------
Various shareholders had loaned the Company $5,173; $13,000 and $13,900
respectively. The notes were payable on demand plus interest at 10% per annum.
The balance due as of September 30, 1996 and 1995 was $ 0 and $26,900 plus
accrued interest of $ 0 and $41,892 respectively.
The Company had loaned $46,000 to an affiliated company. The note was
payable on demand plus interest at 10% per annum. The balance due as of
September 30, 1996 and 1995 was $ 0 and $46,000 plus accrued interest of $ 0 and
$9,310 respectively.
The Friendly Net L.L.C. has entered into a lease agreement with an
affiliated company in the amount of $1,000 per month. (See Note 4)
Beginning January 1, 1995, the Company agreed to Pay Paul G. Begum, former
President and Chief Executive Officer of the Company and a principal
shareholder, a consulting fee of $3,000 per month. Certain portions of Mr.
Begum's consulting fees have been accrued so that at September 30, 1996,
$40,900, including interest was due Mr. Begum. Pursuant to the Merger (see Note
7 - Subsequent Events)
F-12
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
- -----------------------------------------------
on October 23, 1996, an agreement was entered into with Mr. Begum, $48,000 will,
subject to certain setoff rights, be paid to Mr. Begum over a twelve (12) month
period beginning November, 1996 at $4,000 per month.
NOTE 4 - COMMITMENTS
- --------------------
As of September 30, 1996 and 1995 all activities of the Company have been
conducted by corporate officers from either their homes or business offices.
Currently, there are no outstanding debts owed by the Company for the use of
these facilities and there are no commitments for future use of the facilities.
The Friendly Net L.L.C. has entered into a commercial lease of office space
with Tree of Stars, Inc./P.D.O. (an affiliated company). The lease provides for
rental payments of $1,000 per month and expires April 30, 1997.
The Friendly Net LLC. Has entered into a commercial lease of storage space
with Utah County association of Realtors. The lease provides for rental
payments of $100 per month and expires June 20, 1998.
NOTE 5 - STOCK OPTIONS
- ----------------------
On March 22, 1995 the Company adopted stock option plans for specified
directors and employees pursuant to which 45,000 stock options at $.75 per share
were awarded to employees and 105,000 stock options at $.25 per share were
awarded to specified directors, and 5,000 stock options at $.75 were awarded to
a director. The outstanding and exercisable options expire on periods of
between two and three years from the dates of grant, which is during the period
September, 1997 through September, 1998. Compensation expense charged to
operations in 1995 was $49,687.
The following is a summary of transactions:
<TABLE>
<CAPTION>
Shares Under Option
-------------------
September 30,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Outstanding, beginning of year 270,000 -
Granted during the year 144,444 270,000
Canceled during the year (22,000) -
Exercised during the year (90,000) -
------- --------
Outstanding, end of year
(at prices ranging from $.25
to $.75 per share) 302,444 270,000
======= ========
</TABLE>
F-13
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 5 - STOCK OPTIONS (Continued)
- ----------------------------------
<TABLE>
<CAPTION>
Shares Under Option
-----------------------
September 30,
-----------------------
1996 1995
----------- ----------
<S> <C> <C>
Eligible, end of year for
exercise currently (at prices
ranging from $.25 to $.75
per share) 302,444 270,000
========== ==========
</TABLE>
NOTE 6 - STOCK REPURCHASE AGREEMENT
- -----------------------------------
On March 27, 1995 the Company entered into an agreement whereby at the
option of Peter D. Olsen, a principal shareholder of the Company, the Company is
to purchase 100,000 shares of its own stock from Mr. Olsen at $.75 per share.
The terms of the agreement provide that the option was to be exercised by June
30, 1995 with full payment by July 31, 1995. The agreement also provided Mr.
Olsen the option to buy 20,000 shares at $.50 per share by March 31, 1996. On
June 28, 1995 Mr. Olsen sent a letter to the Company exercising the election to
put the 100,000 shares back to the Company. On August 6, 1996 Mr. Olsen sent a
letter to the Company rescinding the June 28, 1995 letter. As of September 30,
1996, the option is considered null and void.
NOTE 7 - SUBSEQUENT EVENTS
- --------------------------
On October 23, 1996, the Company completed a merger transaction (the
"Merger") in which it acquired 100% of the issued and outstanding capital stock
of Avtel Holdings, Inc., a California corporation in exchange for 4,252,508
shares of the Company's $.001 par value common stock, comprising approximately
61% of the Company's issued and outstanding common stock after giving effect to
the Merger, and 1,000,000 shares of newly authorized shares of the company's
Series A Convertible Preferred Stock. The Merger, which was consummated in
accordance with the terms of an Acquisition Agreement dated August 30, 1996, was
approved by the Company's shareholders at a special meeting held October 23,
1996. The transaction has been accounted for as a purchase. Assets and
liabilities are reflected at their fair market value.
In November, 1996, the Company acquired Silicon Beach Communications, Inc.
("SBC"), a privately held California corporation, that serves an Internet
Service Provider ("ISP") and provides software development services. The
acquisition was structured as a stock for stock transaction in which the Company
issued an aggregate of 115,000 shares of its Common Stock in exchange for all
the issued and outstanding capital stock of SBC.
The following pro forma balance sheets and statements of operations give
effect to the above events as if they had occurred on October 1, 1995:
F-14
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 7 - SUBSEQUENT EVENTS (Continued)
<TABLE>
<CAPTION>
As
Reported Silicon
In The Avtel Beach
Accompanying Holdings Communi-
Financial Inc. cations Pro forma Pro Forma
Statements 10/31/96 10/31/96 Adjustments Balance
---------- -------- -------- ----------- ---------
ASSETS (Unaudited) (Unaudited)
- ------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash $ 9,420 $ 959,943 $ 5,685 $ - $ 975,048
Accounts Receivable,
Net 17,936 13,324 26,926 - 58,186
Other Receivables - - 11,296 - 11,296
Prepaid Expenses - - 11,613 - 11,613
Total Current
Assets 27,356 973,267 55,520 - 1,056,143
Fixed Assets
Equipment 159,306 - 239,866 - 399,172
Equipment Lease 21,280 - - - 21,280
Furniture & Fixtures 6,866 - 3,963 - 10,829
Less Accumulated
Depreciation (84,426) - (5,630) - (90,056)
Net Fixed Assets 103,026 - 238,199 - 341,225
Other Assets
Due From Stockholder - - 6,722 - 6,722
Total Assets $ 130,382 $ 973,267 $ 300,441 - $1,404,090
</TABLE>
F-15
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 7 - SUBSEQUENT EVENTS (Continued)
- --------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts Payable,
Trade $25,269 $ 62,047 $ 70,399 $ - $157,715
Income Taxes Payable 200 800 800 - 1,800
Accrued Liabilities 6,266 10,041 10,970 - 27,277
Advance Payments - - 15,201 - 15,201
Line of Credit - - 24,900 - 24,900
Lease Obligation,
Current Portion 6,120 - 32,823 - 38,943
Loans, Current Portion - - 60,220 - 60,220
Officer Payable 40,900 51,100 - - 92,000
------- -------- -------- --- --------
Total Current
Liabilities 78,755 123,988 215,313 - 418,056
------- -------- -------- --- --------
Long Term Liabilities
Lease Obligation, 3,890 - 77,662 - 81,552
Loans - - 3,930 - 3,930
------- -------- -------- --- --------
Total Liabilities 82,645 123,988 296,905 - 503,538
------- -------- -------- --- --------
Minority Interest 18,911 - - - 18,911
------- -------- -------- --- --------
</TABLE>
F-16
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 7 - SUBSEQUENT EVENTS (Continued)
- --------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common Stock 2,513 3,000 1,000 (3,000) A
(1,000) A
4,253 B
115 C 6,881
Preferred Stock - 1,000,000 - (1,000,000) A
1,000,000 D 1,000,000
Offering Costs - (6,709) - 6,709 E -
Paid in Capital in
Excess of Par Value 520,249 - 10,833 3,000 A
1,000 A
(4,253) B
(115) C
(6,709) E
(147,012) F
(8,297) G 368,696
Retained
Earnings (Deficit) (493,936) (147,012) (8,297) 147,012 F
--------- ---------- --------
8,297 G (493,936)
----------- ----------
Total Stockholders'
Equity 28,826 849,279 3,536 - 881,641
--------- ---------- -------- ----------- ----------
Total Liabilities
and Stockholders'
Equity $ 130,382 $ 973,267 $300,441 $ - $1,404,090
========= ========== ======== =========== ==========
</TABLE>
F-17
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 7 - SUBSEQUENT EVENTS (Continued)
- --------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
REVENUES
- --------
Sales $299,315 $ 13,197 $432,916 $ - $ 745,428
Cost of Sales 67,034 6,138 - - 73,172
-------- --------- -------- --------- ---------
Gross Margin 232,281 7,059 432,916 - 672,256
EXPENSES
- --------
General and
Administrative 276,485 159,137 441,213 - 876,835
Bad Debt Expense 4,842 - - - 4,842
-------- --------- -------- -------- ---------
Total Operating
Expense 281,327 159,137 441,213 - 881,677
-------- --------- -------- -------- ---------
Income (Loss)
From Operations (49,046) (152,078) (8,297) - (209,421)
Operating Loss
Per Share $ - $ (.09)
======== ========
</TABLE>
F-18
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly Hi, Tiger International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Continued)
NOTE 7 - SUBSEQUENT EVENTS (Continued)
- --------------------------------------
The accompanying unaudited condensed pro forma Balance Sheet has been prepared
as if the merger took place on October 1, 1996. The accompanying unaudited
condensed pro forma Statement of Operations has been prepared as if the merger
took place on October 1, 1995.
PRO FORMA ADJUSTMENTS
The adjustments to the accompanying unaudited condensed pro forma financial
statements are described below:
(A) Cancellation of all authorized, issued and outstanding shares of all
classes of Avtel Holdings, Inc. and Silicon Beach Communications, Inc. common
and preferred stock.
(B) Issuance of 4,252,508 shares of $.001 par value common stock of the Company
in accordance with the acquisition agreement to purchase of Avtel Holdings, Inc.
(C) Issuance of 115,000 shares of $.001 par value common stock of the Company
in accordance with the acquisition agreement to purchase Silicon Beach
Communications, Inc.
(D) Issuance of 1,000,000 shares of newly authorized shares of the Company's
Series A Convertible preferred stock in accordance with the acquisition
agreement to purchase Avtel Holdings, Inc.
(E) Elimination of offering costs of Avtel Holdings, Inc.
(F) Elimination of current period earnings of Avtel Holdings, Inc. from
Retained Deficit due to purchase accounting.
(G) Elimination of current period earnings of Silicon Beach Communications,
Inc. from Retained Deficit due to purchase accounting.
F-19
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and June 30, 1997 - (Unaudited)
<TABLE>
<CAPTION>
Three Months Fiscal Year
Ended Ended
June 30, 1997 September 30, 1996
------------- ------------------
<S> <C> <C>
ASSETS
- ------
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-) 206,871 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
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and June 30, 1997 - (Unaudited)
(Continued)
<TABLE>
<CAPTION>
Three Months Fiscal Year
Ended Ended
June 30, 1997 September 30, 1996
------------- -------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS EQUITY
- -----------------------------------
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
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months and Six Months Ending June 30, 1997 and 1996 - (Unaudited)
<TABLE>
<CAPTION>
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
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
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)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ending June 30, 1997 and 1996 - Unaudited
<TABLE>
<CAPTION>
Predecessor Company
For The Nine For The Nine
Months Ended Months Ended
June 30, 1997 March 31, 1996
-------------- --------------------
<S> <C> <C>
Cash Flows From Operating Activities:
- -------------------------------------
Net Loss $(483,461) $(36,611)
Adjustments to reconcile net loss 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) -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ending June 30, 1997 and 1996 - Unaudited
(Continued)
<TABLE>
<CAPTION>
Predecessor Company
For The Nine For The Nine
Months Ended Months Ended
June 30, 1997 March 31, 1996
-------------- ---------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
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 431,405 17,267
--------- --------
Cash and Cash Equivalents at End of Period $ 431,405 $ 24,883
========= ========
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.
</TABLE>
F-24
<PAGE>
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 merger for accounting purposes (see Note 2). The
statements therefore reflect those of the subsidiary as if it were the parent
company. Accordingly, the balance sheet reflected in this 10Q filing is
therefore that of AvTel Holdings, Inc. ("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. 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 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 principle 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
F-25
<PAGE>
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).
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
stock options which are exercisable at $0.62 - $3.00 per share. Of the total,
92,000 qualified stock options were issued to SBC employees in conjunction with
the terms of the acquisition of SBC, 50,0000 non-qualified stock options to a
non-employee in conjunction 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 (as
subsequently amended in August 1997, the "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 38,330,056 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 84% of the issued and outstanding common stock of the Company.
The consummation of the transaction under the 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 Exchange Agreement also provides for the Company to effect
either a four to one reverse stock split. The Exchange Agreement additionally
provides for Matrix to provide to the Company a secured loan in the maximum
aggregate amount of $750,000, and that the transaction 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.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Matrix Telecom, Inc.:
We have audited the accompanying balance sheets of Matrix Telecom, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matrix Telecom, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
January 24, 1997, except as to the first paragraph
of note 4 which is as of March 10, 1997.
F-27
<PAGE>
MATRIX TELECOM, INC.
BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,622,395 3,164,053
Accounts receivable, net 10,507,580 9,997,081
Due from affiliates 1,212,414 834,150
Other current assets 2,200,751 251,960
----------- ----------
Total current assets 18,543,140 14,247,244
Investment and advances to DNS Communications, Inc. - 1,244,637
Property and equipment, net 1,621,355 1,796,398
Other assets, net 39,621 142,318
Deferred income taxes 134,288 150,097
----------- ----------
Total assets $20,338,404 17,580,694
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and other accrued expenses $ 2,060,426 1,872,373
Accrued network service costs 4,863,663 6,419,260
Sales and excise taxes payable 1,676,677 1,694,367
Due to affiliates 2,597,559 3,340,222
Income taxes payable 554,596 377,463
Deferred income taxes - 337,487
----------- ----------
Total current liabilities 11,752,921 14,041,173
----------- ----------
Stockholders' equity:
Common stock, no par value; authorized 10,000,000 shares,
3,484,260 and 2,769,228 shares issued at December 31,
1996 and 1995, respectively 8,255,626 5,336,815
Retained earnings (accumulated deficit) 769,441 (1,797,293)
Treasury stock, 69,120 common shares, at cost (439,584) -
----------- ----------
Total stockholders' equity 8,585,483 3,539,522
Commitments and contingencies
----------- ----------
Total liabilities and stockholders' equity $20,338,404 17,580,694
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $71,558,295 64,289,718 59,551,307
Cost of revenues 47,674,396 42,980,127 40,074,801
----------- ---------- ----------
Gross margin 23,883,899 21,309,591 19,476,506
----------- ---------- ----------
Operating expenses:
Selling, general and administrative 18,798,925 17,888,856 18,057,296
Depreciation and amortization 993,940 998,342 815,101
----------- ---------- ----------
19,792,865 18,887,198 18,872,397
----------- ---------- ----------
Operating income 4,091,034 2,422,393 604,109
Interest expense (230,922) (6,299) (176,922)
Other income, net 271,171 165,616 88,514
----------- ---------- ----------
Income before income tax expense 4,131,283 2,581,710 515,701
Income tax expense (benefit) 1,686,876 1,081,726 (127,499)
----------- ---------- ----------
2,444,407 1,499,984 643,200
----------- ---------- ----------
Equity in net income (loss) of DNS 122,327 (3,940,477) -
----------- ---------- ----------
Net income (loss) $ 2,566,734 (2,440,493) 643,200
=========== ========== ==========
Net income (loss) per share $ .88 (1.19) .36
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Retained
earnings Total
Partners' Common (accumulated Treasury stockholders'
capital stock deficit) stock equity
------- ----- -------- ----- ------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 1,729,133 - - - 1,729,133
Dissolution of partnership
and contribution of assets
to a corporation (1,729,133) 1,729,133 - - -
Net income - - 643,200 - 643,200
----------- --------- ---------- -------- ----------
Balance at December 31, 1994 - 1,729,133 643,200 - 2,372,333
Purchase of DNS
Communications, Inc.
(969,228 common shares) - 3,607,682 - - 3,607,682
Net (loss) - - (2,440,493) - (2,440,493)
----------- --------- --------
Balances at December 31, 1995 - 5,336,815 (1,797,293) - 3,539,522
Purchase of 69,120
common shares - - - (439,584) (439,584)
Issuance of 589,752
common shares - 2,195,211 - - 2,195,211
Issuance of 194,400 common
shares - 723,600 - - 723,600
Net income - - 2,566,734 - 2,566,734
----------- --------- ---------- -------- ----------
Balances at December 31, 1996 $ - 8,255,626 769,441 (439,584) 8,585,483
=========== ========= ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,566,734 (2,440,493) 643,200
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 993,940 998,342 815,101
Amortization of advanced commissions 618,791 - -
Provision for bad debts 1,461,471 1,955,842 1,974,903
Loss on disposition of assets - - 14,365
Deferred income taxes (321,678) 530,885 (343,494)
Equity in (income) loss of DNS (122,327) 3,940,477 -
Changes in assets and liabilities:
Accounts receivable (1,971,970) (2,170,807) (2,994,971)
Due from affiliate 345,336 630,395 (1,452,481)
Federal and state income tax receivable - 631,183 (631,183)
Other current assets (393,781) (96,791) 161,967
Accounts payable and accrued liabilities (1,397,160) 526,850 5,051,696
Due to affiliate (742,663) 591,889 1,293,631
----------- ----------- -----------
Net cash provided by
operating activities 1,036,693 5,097,772 4,532,734
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (701,718) (529,805) (1,125,444)
Payments for billing and collection agreements (14,482) - (17,600)
Purchase of acquired customer bases - (103,970) (32,723)
Repayments (advances) to DNS, net 1,577,432 (1,577,432) -
Proceeds from sale of property and equipment - 52,173 77,967
----------- ----------- -----------
Net cash provided by (used in)
investing activities 861,232 (2,159,034) (1,097,800)
----------- ----------- -----------
Cash flows from financing activities:
Net change in notes payable - - (3,230,121)
Purchase of common stock for treasury (439,583) - -
----------- ----------- -----------
Net cash used in financing activities (439,583) - (3,230,121)
----------- ----------- -----------
Net increase in cash and cash equivalents 1,458,342 2,938,738 204,813
Cash and cash equivalents at beginning of year 3,164,053 225,315 20,502
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,622,395 $ 3,164,053 $ 225,315
=========== =========== ===========
</TABLE>
F-31
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash paid (received) during the year for:
Interest $ 212,404 6,300 175,134
========== ========= =======
Income taxes, net of refunds $1,482,103 (475,177) 847,179
========== ========= =======
Noncash financing activities:
Common stock issued for DNS acquisition $ - 3,607,682 -
========== ========= =======
Common stock issued for advanced commissions $2,195,211 - -
========== ========= =======
Common stock issued for receivable from
major shareholder $ 723,600 - -
========== ========= =======
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Business and Background
-----------------------
All references to the "Company" or "Matrix Telecom" refer to Matrix
Telecom, Inc. and its predecessors. The Company provides long distance
telephone service to its customers in forty-nine states over intercity
facilities provided by fully certified dominant domestic and
international carriers. Matrix resells to both residential and
commercial customers; however, the primary focus is to the small
business owner with five or fewer employees whose usage resembles that
of the residential customer. The Company is fully certified by the
Federal Communications Commission and certified to operate in all
states requiring such certification. The Company holds billing and
collection agreements with all regional bell operating companies, GTE,
and other independent telephone companies.
The Company was originally formed May 29, 1990 as a Texas general
partnership. The partners consisted of Matrix Communications, Limited
("MCL") a Texas limited liability partnership and Onward and Upward,
Inc. ("OUI"). Effective January 1, 1994, the partnership was dissolved
(see note 4). Prior to the dissolution, cash distributions were made
to OUI in satisfaction of its partnership interest. Concurrent with
the dissolution, all remaining tangible and intangible assets and
liabilities of the Company then owned by MCL were transferred to
Matrix Telecom, Inc., a Texas corporation. The transfer was a tax free
transaction and significant controlling interest in the company did
not change. Effective June 30, 1995, MCL was liquidated and its sole
asset (Matrix Telecom capital stock) was distributed to MCL's partners
in proportion to their ownership interests.
(b) Basis of Presentation
---------------------
The Company includes the operations of DNS Communications, Inc. in its
financial statements using the equity method of accounting. The
Company utilized the equity method due to the temporary period of time
that its investment in the operations of DNS was retained (see note
7).
(c) Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all
demand deposits, time deposits, and other investments with a remaining
maturity at date of purchase of less than ninety days to be cash
equivalents.
(d) Commissions
-----------
Commissions to sales agents are paid and expensed based on a
percentage of billings as incurred.
Commissions paid in advance of $1,576,000 as of December 31, 1996,
included in other current assets, are being expensed over a period of
eighteen months based on estimated billings of the customers for which
the commissions were paid. (See note 4).
(e) Revenue Recognition
-------------------
Long distance revenues are recognized as service is provided to
customers.
(f) Property and Equipment
----------------------
Property and equipment are recorded at cost. Maintenance and repairs
are charged against income as
F-33
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
incurred, while renewals and major replacements are capitalized. The
cost and related accumulated depreciation of assets sold or retired
are removed from the accounts, and any resulting gain or loss is
reflected in operations. The Company provides depreciation on fixed
assets using the straight-line method over the estimated useful lives
of the respective assets.
(g) Income Taxes
------------
Effective January 1, 1994 the Company began accounting for income
taxes under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Prior to January 1, 1994, the Company operated as a partnership.
Accordingly, the Company was not a taxable entity. Income taxes were
the responsibility of the individual partners.
(h) Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(i) Concentrations of Credit Risk
-----------------------------
The Company's subscribers are primarily small business owners and
residential subscribers and are not concentrated in any specific
geographic region of the United States. The Company has agreements
with LECs, which provide billing and collection services to the
majority of the Company's subscribers. A significant portion of the
Company's accounts receivable is due from these Companies.
(j) Accounts Receivable
-------------------
Accounts receivable are net of allowances for doubtful accounts and
other provisions of $626,790 and $730,354 as of December 31, 1996 and
1995, respectively. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of
subscribers, historical trends and other information.
(k) Financial Instruments
---------------------
The Company's financial instruments include cash, receivables,
payables and accrued expenses. The carrying amount of such financial
instruments approximates fair value because of the short maturity of
these instruments.
(l) Earnings (loss) per share
-------------------------
Earnings (loss) per share are computed based on average common shares
outstanding which were 2,919,978, 2,044,296, and 1,800,000 in 1996,
1995 and 1994, respectively.
F-34
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(2) Property and Equipment
----------------------
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated December 31
-----------
useful life 1996 1995
----------- ---- ----
<S> <C> <C> <C>
Communications system 2-5 years $1,328,679 1,328,679
Office furniture and equipment software 1-7 years 2,815,451 2,449,746
Leasehold improvements lease term 416,220 256,412
---------- -----------
4,560,350 4,034,837
(2,938,995) (2,238,439)
---------- -----------
$1,621,355 1,796,398
========== ===========
</TABLE>
Depreciation expense was $877,000, $882,000 and $683,000 for 1996, 1995 and
1994, respectively.
(3) Related Party Transactions
--------------------------
The Company has had transactions in the normal course of business with
various companies which are affiliated with shareholders of the Company.
Pacific Gateway Exchange, Inc. ("PGE"), an affiliated company, provides the
Company with significant domestic and international transmission services.
Common shareholders hold an interest in both PGE and the Company.
Affiliates of the Company also act as agents for the Company in the
solicitation of new customers. In addition, the Company's employees are
leased from United Group Service Center, an affiliate, who provides such
services to a number of affiliated companies. The Company provides long
distance service to a number of affiliated companies. Balances with
affiliates are settled monthly.
Due from affiliates consists of the following:
<TABLE>
<CAPTION>
December 31
-----------
1996 1995
---- ----
<S> <C> <C>
Excell Agent Services (long distance services) $ 193,285 129,007
Interactive Media Works (IMW) 525 336,345
(long distance services)
Core Marketing (long distance services) 134,652 -
Other transactions with various affiliates 160,352 368,798
Receivable from major shareholder for 723,600 -
stock issued ---------- ----------
$1,212,414 $ 834,150
========== ==========
The due to affiliates consists of the following: 1996 1995
---- ----
PGE (network transmission services) $2,244,411 2,559,031
United Group Association (UGA) and
Core Marketing (commission) 144,612 294,484
208,536 486,707
---------- ----------
Other transactions with various affiliates
$2,597,559 3,340,222
========== ==========
</TABLE>
F-35
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
Significant services and transactions incurred in the normal course of
operations with affiliated companies are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Network transmission services - PGE $20,527,236 17,195,182 9,259,150
Expenses paid on behalf of PGE for access services, for
which the Company was reimbursed 5,040,051 3,142,222 853,060
Expenses incurred for leasing employees from United
Group Service Center 4,542,007 3,655,712 2,442,442
Consulting fees to United Group Association ("UGA") - - 313,294
Sales commissions to affiliates: TravelCom 800, Core
Marketing, UICI, UGA and Best Connections 5,335,233 6,314,878 5,108,123
Long distance revenues from affiliates: UGA, UICI IMW,
and Core Marketing 5,445,903 3,180,302 1,240,203
Advances to TravelCom 800 - 126,500 468,609
Overhead expenses reimbursed to/from UGA Divisions 77,231 105,007 151,038
Interest paid to shareholder 173,380 6,299 175,134
</TABLE>
During 1996, the Company obtained loans from a significant shareholder for
working capital and other purposes of $4,900,000. Such amount was repaid
during 1996.
(4) Stockholders' Equity
--------------------
Matrix Telecom original stock issuance consisted of 100 common shares.
Effective December 31, 1994, a 10 for 1 stock split was declared.
Concurrent with the dissolution of MCL on June 30, 1995, the Company's then
outstanding 1,000 shares of common stock were cancelled and 100,000 shares
were distributed to the prior MCL partners in proportion to their ownership
interest in MCL. In addition, effective March 10, 1997, an 18 for 1 stock
split was declared. All share amounts have been restated to reflect the
stock splits and share exchange.
In October 1995, the Company issued 969,228 shares of its no par value
common stock valued at $3,607,682 for 100% of the outstanding shares of DNS
Communications, Inc. ("DNS"), a Houston based long distance reseller.
Matrix Telecom is a private company and accordingly, its stock does not
have a readily determinable market value. For purposes of determining the
cost of DNS, the stock consideration of $3.72 per share was valued based on
the price paid by a shareholder of the Company to purchase the Company's
common stock issued to the former owners of DNS in the acquisition of DNS
(see note 7).
In December 1996, the Company issued 589,752 shares of its no par value
common stock to its majority shareholder in settlement of future
commissions due to affiliates also owned by this majority shareholder as of
October 31, 1996. A value of $3.72 per share was used in determining the
number of shares to issue in settlement of the $2,195,211 obligation. Of
this amount, $619,000 was expensed as commission expense in 1996.
F-36
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
Periodically the Board approves stock options for certain officers and
employees. Stock option transactions during 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
Weighted-average
Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding at December 31, 1994 - -
Granted 21,600 $5.56
-------
Outstanding at December 31, 1995 21,600 5.56
Granted 217,800 5.56
Cancelled 230,400 5.56
-------
Outstanding at December 31, 1996 9,000 5.56
=======
</TABLE>
As of December 31, 1996 and 1995 all outstanding options were exercisable.
Outstanding options do not expire. The Company accounts for its stock
options in accordance with the provisions of APB Opinion No. 25 as allowed
by SFAS No. 123 "Accounting for Stock Based Compensation." Options granted
in 1996 were cancelled shortly after grant and accordingly no value has
been attributed to such options. The fair value of options granted in 1995
is not material based on the minimum value method.
In connection with the cancellation of 194,400 of the above options during
1996, the Company sold to such employees 194,400 shares of common stock at
$3.72 per share. As of December 31, 1996, the Company has recorded a
$723,600 receivable for such shares, which was subsequently collected.
Proceeds used to pay for these shares were loaned to the employees by a
major shareholder of the Company. Also as a part of this transaction, the
Company and the employees entered into agreements whereby such shares could
be put or called, as applicable, under certain conditions. As of December
31, 1996, the shares subject to this agreement could be put or called at a
price per share of approximately $4.61 totalling $896,000.
During May 1996 the Company purchased 69,120 shares of treasury stock for
$439,583.
F-37
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(5) Leasing Activities and Other Commitments
----------------------------------------
The Company has no significant capital lease liabilities; however, the
Company leases office space and various equipment under operating leases
expiring in various years through 2000. In the normal course of business,
operating leases are generally renewed or replaced by other leases. Total
rental expenses were $325,000 in 1996, $239,000 in 1995 and $156,000 in
1994. Minimum future rental payments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 253,587
1998 265,552
1999 276,575
2000 253,527
----------
$1,049,241
==========
</TABLE>
Substantially all of the Company's switching and transmission facilities
have been provided by two suppliers under negotiated contractual
agreements. The Company purchases long distance services at certain per-
minute rates, which vary depending on the time and type of call. At
December 31, 1996, there are outstanding contractual agreements committing
the Company to minimum usage requirements for the duration of the contracts
as set forth below:
<TABLE>
<CAPTION>
<S> <C>
1997 $14,925,000
1998 1,050,000
-----------
$15,975,000
===========
</TABLE>
(6) Federal and State Income Taxes
------------------------------
The Company was originally organized as a partnership and continued to
operate as a partnership until December 31, 1993. Effective January 1,
1994, the Company became a C corporation for federal income tax purposes.
Deferred income taxes for 1996 and 1995 reflect the impact of temporary
differences between financial statement carrying amounts and tax bases of
assets and liabilities. The tax effects of temporary differences that give
rise to significant portions of the net deferred tax assets at December 31,
1996 and 1995 are presented below:
F-38
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31
-----------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Financial over tax amortization of purchased
customer base $134,288 150,097
Less valuation allowance - -
-------- --------
Net deferred tax asset 134,288 150,097
Deferred tax liabilities:
Tax versus financial recognition of expenses - (337,487)
-------- --------
Net deferred tax asset (liability) $134,288 (187,390)
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and prior taxes paid in making this assessment. Based
upon its evaluation of these factors, management believes that the deferred
tax asset is realizable.
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income as a result of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $1,404,637 870,502 175,338
State and local taxes, net of federal income
tax benefit 125,518 116,346 43,835
Deferred tax asset recorded at conversion
of partnership - - (346,672)
Other differences 156,721 94,878 -
---------- --------- --------
$1,686,876 1,081,726 (127,499)
========== ========= ========
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current tax expense:
Federal $1,751,047 480,736 172,770
State and local 257,507 70,105 43,225
---------- --------- --------
2,008,554 550,841 215,995
Deferred tax expense (benefit):
Federal (254,350) 424,708 (274,794)
State and local (67,328) 106,177 (68,700)
---------- --------- --------
(321,678) 530,885 (343,494)
---------- --------- --------
$1,686,876 1,081,726 (127,499)
========== ========= ========
</TABLE>
F-39
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
The difference between the tax and book bases of the assets and liabilities
of the partnership upon dissolution and contribution to Matrix Telecom was
recorded as a deferred tax benefit as of January 1, 1994, the effective
date of the dissolution of the partnership.
(7) Acquisition
-----------
In October 1995, the Company issued 969,228 shares of its common stock
valued at $3,607,682 in exchange for all of the outstanding common stock of
DNS Communications, Inc., a Houston based long distance reseller. The
transaction was accounted for under the purchase method. The purchase price
in excess of the book value of DNS net assets was pushed down to DNS and
was allocated based upon the estimated fair value of the assets and
liabilities acquired at the date of acquisition and included the following:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 1,978,262
Acquired customer base 6,351,131
Other noncurrent assets 114,384
Accounts payable and accrued expenses (2,346,102)
Deferred tax liability (2,489,993)
-----------
Value assigned to common stock issued $ 3,607,682
===========
</TABLE>
Summarized financial information related to DNS is as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Current assets $2,461,961
Noncurrent assets 555,739
----------
$3,017,700
==========
Current liabilities (includes $1,577,432 payable to Matrix) $3,350,495
Shareholder's deficit (332,795)
----------
$3,017,700
==========
Period from
Year Ended October 1, 1995 to
December 31, 1996 December 31, 1995
----------------- -----------------
Revenue $11,027,000 $4,277,000
Gain on sale of acquired customer bases 3,221,000 -
Net income (loss) 122,000 (3,940,000)
</TABLE>
F-40
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
Subsequent to the acquisition, the operations of DNS generated substantial
losses. DNS's customer churn rate and bad debts as well as projected cash
flows were evaluated and as of December 31, 1995 it was determined that the
remaining investment in the DNS acquired customer base totaling
approximately $4,462,000 should be written off. Such amount net of related
deferred taxes is included in the loss of DNS reflected above for 1995.
In June 1996, the Company sold the customer base acquired in the DNS
acquisition in addition to certain blocks of customers acquired during 1995
and 1996 together with related assets to a former officer of the Company
and a former shareholder of DNS for approximately $5,270,000. The Company
recorded a gain on this sale of approximately $3,221,000. This gain is
recorded in equity in net income (loss) of DNS in the 1996 statement of
operations.
(8) Contingencies
-------------
The Company presently has 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
these contingencies upon resolution will not materially affect the
financial condition of the Company.
F-41
<PAGE>
MATRIX TELECOM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
(unaudited)
Assets
- ------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 4,240,644 4,622,396
Accounts receivable, net 8,465,520 10,507,580
Due from affiliates 964,300 1,212,414
Other current assets 1,570,087 2,200,751
------------ ----------
15,240,551 18,543,141
Property and equipment, net 1,418,196 1,621,355
Loans to affiliates 1,924,303 -
Other assets, net 137,657 173,909
----------- ----------
$18,720,707 20,388,405
=========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities
Accounts payable and other accrued expenses $ 2,063,742 2,060,425
Accrued network services costs 4,328,597 4,863,663
Sales and excise tax payable 1,341,572 1,676,680
Due to affiliates 2,207,665 2,597,559
Income tax payable 257,014 554,596
----------- ----------
9,962,023 11,752,923
Stockholders' Equity
Common stock 8,255,626 8,255,626
Retained earnings (accumulated deficit) 942,641 769,439
Treasury stock, 69,120 common shares, at cost (439,583) (439,583)
----------- ----------
8,758,684 8,585,482
----------- ----------
$18,720,707 20,338,405
=========== ==========
</TABLE>
F-42
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF OPERATIONS
For the Six Month Periods Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues $26,829,063 37,579,184
Cost of Revenues 18,314,213 25,298,873
----------- ----------
Gross Margin 8,514,850 12,280,311
Operating expenses
Selling, general and administrative 7,800,920 9,566,846
Depreciation and amortization 364,200 537,105
----------- ----------
Total operating expenses 8,165,120 10,103,951
----------- ----------
Operating income (loss) 349,730 2,176,360
Interest expense (6,864) (176,689)
Other income, net (44,238) 57,525
----------- ----------
Income (loss) before income taxes 298,628 2,057,196
Income tax expense (benefit) 125,426 905,166
----------- ----------
173,202 1,152,030
Equity in net income (loss) of DNS - (1,413,245)
----------- ----------
Net income (loss) 173,202 (261,215)
=========== ==========
Net income (loss) per share $ 0.05 (0.09)
=========== ==========
Weighted average shares outstanding 3,484,260 2,754,037
=========== ==========
</TABLE>
F-43
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended June 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 173,202 (261,215)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization 364,200 537,105
Amortization of advanced commissions 832,094 -
Provision for bad debts 668,948 842,918
Loss on disposition of assets 2,748 -
Equity in loss of DNS - 1,413,245
Changes in assets and liabilities:
Accounts receivable 1,373,111 (2,318,204)
Due from affiliates 24,514 (436,418)
Other current assets (201,430) (252,247)
Accounts payable and accrued liabilities (1,401,002) 1,753,254
Due to affiliate (389,894) 507,665
----------- ----------
Net cash provided by operating activities 1,446,491 1,786,103
Cash Flows from Investing Activities:
Purchase of property and equipment (127,540) (574,729)
Advance to AvTel 500,000 -
Loans made to affiliates (1,924,303) -
Repayments (advances) to DNS, net - (3,978,905)
----------- ----------
Net cash used in investing activities (2,551,843) (4,553,634)
Cash Flows from Financing Activities:
Net change in notes payable - 2,896,000
Purchase of common stock for treasury - (439,583)
Repayment of affilate loans 723,600 -
----------- ----------
Net cash provided by financing activities 723,600 2,456,417
Net decrease in cash and cash equivalents (381,752) (311,114)
Cash and cash equivalents at beginning of period 4,622,396 3,164,053
----------- ----------
Cash and cash equivalents at end of period $ 4,240,644 2,852,939
=========== ==========
Cash paid during the period for:
Interest $ 11 173,380
=========== ==========
Income taxes, net of refunds $ 871,150 827,936
=========== ==========
</TABLE>
F-44
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
(Unaudited)
(1) Basis of Financial Reporting
----------------------------
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission; however, Matrix
Telecom believes the disclosures which are made are adequate to make
the information presented not misleading. These financial statements
and footnotes should be read in conjunction with the financial
statements and notes thereto of Matrix Telecom for the three year
period ended December 31, 1996 included elsewhere herein.
The unaudited financial information for the six months ended June 30, 1997
and 1996 has not been audited by independent public accountants;
however, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
results of operations for the six-month periods have been included
therein. The results of operations for the first six months of the
year are not necessarily indicative of the results of operations which
might be expected for the entire year.
The balance sheet as of December 31, 1996, has been taken from the audited
financial statements as of that date.
(2) Proposed Merger
---------------
On April 29, 1997, Matrix Telecom entered into a Stock Exchange Agreement
with AvTel Communications, Inc. whereby AvTel would issue shares of
its common stock for all of the outstanding common stock of Matrix
Telecom. After the share exchange, the former shareholders of Matrix
Telecom will hold approximately 81% of the then-outstanding common
stock of AvTel. The share exchange is subject to AvTel shareholders'
approval and various other conditions to closing. The transaction will
be accounted for as a reverse acquisition of AvTel by Matrix Telecom
using the purchase method of accounting.
(3) Loans made to affiliates
------------------------
In March 1997, Matrix Telecom loaned approximately $1,924,000 to Core
Marketing, L.L.C., an affiliated company, with no interest, due
September 1998. In June 1997, Matrix Telecom loaned AvTel
Communications, Inc. $500,000 at rates ranging from eight to fifteen
percent, due by December 1997 or 180 days after the termination of the
Exchange Agreement. In February 1997, a major shareholder repaid
Matrix Telecom the $723,600 outstanding balance due for the purchase
of common stock.
(4) Sale of DNS
-----------
In July 1996, Matrix Telecom sold the customer base acquired in the DNS
acquisition (in addition to certain blocks of customers acquired
during 1995 and 1996), together with related assets, to a former
officer of Matrix Telecom and a former shareholder of DNS for
approximately $5,270,000. Matrix Telecom recorded a gain on this sale
of approximately $3,221,000. This gain is recorded in the equity in
net income (loss) of DNS in the July 1996 statement of operations.
F-45
<PAGE>
PRELIMINARY COPY
AVTEL COMMUNICATIONS, INC.
REVOCABLE PROXY
FOR SPECIAL MEETING OF SHAREHOLDERS
SEPTEMBER 26, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of AvTel Communications, Inc., a Utah
corporation (the "Company"), hereby appoints Anthony E. Papa and James P.
Pisani and each of them, with full power of substitution, as proxies for
the undersigned to vote, as designated below, and otherwise represent all
the shares registered in the name of the undersigned at the Special Meeting
of Shareholders of the Company to be held on September 26, 1997, at 10:00
a.m. at 130-B Cremona Drive, Santa Barbara, California, and at any
adjournment thereof, with the same effect as if the undersigned were
present and voting such shares, on the following matters as set forth in
the accompanying Proxy Statement. Either of such proxies or their
substitutes, as shall be present and shall act at said meeting or any
adjournment or adjournments thereof shall have and may exercise all the
powers of said proxies hereunder.
(1) APPROVAL OF SHARE EXCHANGE
_____ FOR ______ AGAINST _____ ABSTAIN
The ratification and approval of the Stock Exchange Agreement dated
April 29, 1997, as amended, (the "Exchange Agreement") between the Company
and Matrix Telecom, Inc., a Texas corporation ("Matrix"), pursuant to
which: (i) the Company will acquire Matrix by way of a stock for stock
exchange (the "Share Exchange") with the shareholders of Matrix (the
"Matrix Shareholders"); (ii) the Matrix Shareholders, after giving effect
to the Share Exchange, will own approximately 84% of the issued and
outstanding Common Stock of the Company; (iii) holders of outstanding
Matrix stock options would receive non-qualified stock options of the
Company; and (iv) the Company will enter into a Registration Rights and
Lockup Agreement which will provide certain registration rights for, and
restrictions on, certain of the Matrix Shareholders.
(2) APPROVAL OF REINCORPORATION MERGER
_____ FOR ______ AGAINST _____ ABSTAIN
The ratification and approval of an Agreement and Plan of Merger
between the Company and AvTel Communications, Inc., a Delaware corporation
("AvTel Delaware") pursuant to which: (i) concurrently with, or immediately
prior to, the Share Exchange, the Company will change its state of
incorporation from Utah to Delaware by merging with and into AvTel
Delaware, a newly-formed, wholly-owned subsidiary of the Company (the
"Reincorporation Merger"); (ii) AvTel Delaware shall succeed to all the
rights, benefits, duties and obligations of the Company (including its
rights, benefits, duties and obligations under the Exchange Agreement
described in the proposal above); (iii) outstanding shares of the Company's
Common Stock and Preferred Stock (and outstanding options to purchase
Common Stock) will be converted into shares of AvTel Delaware (or options,
as the case may be) on a four to one basis, with cash to be paid in lieu of
any fractional shares; (iv) the Certificate of Incorporation of AvTel
Delaware, as the surviving corporation, will be in substantially the form
attached to the Proxy Statement; and (v) the Bylaws of AvTel Delaware, as
the surviving corporation, will be in substantially the form attached to
the Proxy Statement.
<PAGE>
(2) OTHER MATTERS
As determined by a majority of the Board of Directors of the Company
on such other business, if any, as may properly come before the meeting or
any adjournments thereof.
The undersigned acknowledges receipt of the Notice of Special
Meeting of Shareholders and Proxy Statement dated September 9, 1997,
together with the Exhibits attached thereto.
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH INSTRUCTIONS INDICATED;
HOWEVER, IF NO INSTRUCTIONS ARE GIVEN, this Proxy will be voted FOR
ratification and approval of the Share Exchange and the Reincorporation
Merger, and as determined by a majority of the Board of Directors of the
Company upon any other matter properly presented to the meeting or at any
adjournments thereof.
If the shares are held jointly, each holder should
sign. If signing for estates, trusts, partnerships
or corporations, title or capacity should be stated.
Sign exactly as the name(s) appear on the stock
certificate(s).
Dated:
_________________________, 1997
(Signature) ______________________________
(Signature) ______________________________
SIGNATURES MUST CORRESPOND EXACTLY WITH THE NAME(S) APPEARING ON THIS PROXY.
EACH JOINT OWNER MUST SIGN. HOWEVER, WHERE SHARES ARE HELD IN JOINT
TENANCY, THE SIGNATURE OF ONE JOINT TENANT IS SUFFICIENT.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
<PAGE>
EXHIBIT A
=========
STOCK EXCHANGE AGREEMENT
(WITH EXHIBITS AND AMENDMENTS)
<PAGE>
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (this "Agreement") made this 29th day of April,
1997, is by and between Matrix Telecom, Inc. ("Matrix") and AvTel
------
Communications, Inc. ("Avtel").
-----
1. STOCK EXCHANGE
At Closing (as hereinafter defined), the stockholders of Matrix listed on
Schedule I (the "Stockholders") will deliver to Avtel 3,484,260 properly
---------- ------------
endorsed, unencumbered Matrix common shares (the "Stock"), representing
-----
100% of the outstanding Matrix common stock, in exchange for 34,590,049
shares of common stock of Avtel (such numbers to be adjusted to give
effect to the Merger and Reverse Stock Split (defined below)), which will
not be registered under the Securities Act of 1933, as amended.
2. EXCHANGE STATEMENT
Prior to the Closing, Matrix shall deliver to Avtel a duly executed
EXCHANGE STATEMENT from each Stockholder in the form attached hereto as
Exhibit A (each, an "Exchange Statement").
--------- ------------------
3. MATRIX NON-QUALIFIED STOCK OPTIONS
At Closing, Matrix will cancel all non-qualified stock options (covering
9,000 Matrix shares) that it has granted and that remain outstanding as
of the date hereof, and Avtel will issue to the beneficiaries thereof,
89,348 Avtel non-qualified stock options (such numbers to be adjusted to
give effect to the Merger and Reverse Stock Split (defined below)) having
the same exercise period and exercise prices as currently apply to such
Matrix options all as set forth on Schedule II.
-----------
4. REGISTRATION RIGHTS AND LOCK-UP AGREEMENTS
At Closing, Avtel and Matrix, on behalf of the Stockholders, shall enter
into a REGISTRATION RIGHTS AND LOCK-UP AGREEMENT in the form set forth on
Exhibit B.
---------
5. MATRIX OPERATIONS; INVESTMENT PURPOSES
Avtel will own Matrix and operate its business in the ordinary course and
has no intention of disposing of significant assets.
6. POOLING OF INTERESTS
The parties intend that the transaction contemplated hereby will be
treated as a pooling of interests and agree to abide by the restrictions
contained in Accounting Series Release 135 ("ASR 135"). In this
-------
connection, no Stockholder will be allowed to sell any Avtel shares prior
to release of Avtel and Matrix combined earnings covering a period of
combined earnings of not less than 30 days in accordance with ASR 135.
7. INCOME TAX TREATMENT
The parties intend that the transaction will be treated as a tax-free
reorganization under IRC Section 368(a)(1)(B) and will take no actions
that will violate applicable requirements.
8. AVTEL SHAREHOLDERS' MEETING
Avtel shall, in accordance with applicable law, as soon as practicable:
(a) duly call, give notice of, convene and hold a special meeting of
its stockholders (the "Stockholders' Meeting") for the purpose of
---------------------
considering and taking action upon this Agreement;
A-1
<PAGE>
(b) subject to the fiduciary duties of the Board of Directors of
Avtel under applicable law, include in a proxy statement (the
"Proxy Statement") to be distributed to its stockholders the
---------------
recommendation of the Board of Directors of Avtel that the
stockholders of Avtel vote in favor of the approval and adoption
of this Agreement and the transactions contemplated hereby;
(c) provide Matrix with copies of the proposed Proxy Statement and a
reasonable opportunity to review and comment upon such Proxy
Statement before it is mailed to Avtel's shareholders; and
(d) use its best efforts to (i) obtain and furnish the information
required to be included by it in the Proxy Statement and respond
promptly to any comments made by the Securities and Exchange
Commission with respect to the Proxy Statement and any
preliminary version thereof and cause the Proxy Statement to be
mailed to its stockholders at the earliest practicable time and
(ii) obtain the necessary approvals by its stockholders of this
Agreement and the transactions contemplated hereby.
9. AVTEL MERGER; REVERSE STOCK SPLIT
(a) Prior to the Closing hereunder, Avtel shall merge (the "Merger")
------
with and into a Delaware corporation, whereupon the separate
corporate existence of Avtel shall cease and such Delaware
corporation (hereinafter, "Newco") shall continue as the
-----
surviving corporation. The Merger shall have the effects set
forth under the laws of the State of Delaware. Without limiting
the generality of the foregoing, and subject thereto, all the
properties, rights, privileges, powers and franchises of Avtel
shall vest in Newco, and all debts, liabilities and duties of
Avtel shall become the debts, liabilities and duties of Newco.
The certificate of incorporation and bylaws of Newco shall be
the certificate of incorporation and bylaws of the pre-existing
Delaware corporation, substantially in the form agreed to prior
to the Merger by Matrix and Avtel and approved by the
shareholders of Avtel at the Stockholder's Meeting. Subject to
clause (b) below, at the effective time of the Merger, by virtue
----------
of the Merger and without any action on the part of Avtel or
Newco or the stockholders of Avtel, each share of common stock
and preferred stock and each option of Avtel issued and
outstanding immediately prior to the effective time of the
Merger shall by virtue of the Merger be canceled and
extinguished and be converted into the right to receive one
share of the common stock or preferred stock or an option to
acquire one share of common stock of Avtel, as applicable, of
Newco.
(b) Subject to the approval of Avtel's stockholders at the
Stockholders' Meeting, prior to the Closing, Avtel shall either
(i) effect a reverse stock split pursuant to which each share of
Avtel common stock and preferred stock and each option granted
by Avtel to acquire Avtel common stock shall be converted into
the right to receive such lesser amount of Avtel common stock,
preferred stock or an option to acquire a lesser amount of Avtel
common stock, as applicable, as Avtel and Matrix shall agree or,
(ii) reduce the number of common stock, preferred stock or
options to acquire Newco common stock that will be issued to
Avtel stockholders in the Merger to such lesser number of shares
of common stock, preferred stock or options to acquire Newco
common stock as Avtel and Matrix shall agree (the adjustment
contemplated by clauses (i) or (ii) being referred to herein as
----------- ----
the "Reverse Stock Split"). At such time as Avtel and Matrix
shall agree upon the details of the Reverse Stock Split, Avtel
and Matrix shall amend this Agreement to adjust the number of
shares of Avtel common stock issuable to the stockholders of
Matrix pursuant to this Section 1 and the number of shares of
---------
Avtel common stock for which Avtel is required to grant options
to holders of Matrix options pursuant to Section 3, in each
---------
case, in a manner which is directly proportional to the
adjustments made to the Avtel common stock and options to
acquire Avtel common stock pursuant to the Reserve Stock Split.
10. AVTEL TO SUPPLY INFORMATION
Until the Closing Date (as hereinafter defined), Avtel shall give Matrix
full access during normal business hours, without unreasonable
interference with business operations, to all of its the facilities,
properties, books, contracts, commitments and records and shall make its
officers and employees available to Matrix,
A-2
<PAGE>
as Matrix shall from time to time reasonably request. Matrix and its
representatives will be furnished all information concerning Avtel that
Matrix reasonably requests.
11. MATRIX TO SUPPLY INFORMATION
Until the Closing Date, Matrix shall give Avtel full access during normal
business hours, without unreasonable interference with business
operations, to all of its the facilities, properties, books, contracts,
commitments and records and shall make its officers and employees
available to Avtel, as Avtel shall from time to time reasonably request.
Avtel and its representatives will be furnished all information
concerning Matrix that Avtel reasonably requests. Matrix shall provide
to Avtel such information as may be required by the Proxy Statement which
information shall be true and accurate in all material respects.
12. BRIDGE LOAN
Matrix agrees that following the execution of this Agreement, Matrix will
make a bridge loan available to Avtel in the maximum principal amount of
$500,000 on the following terms:
(a) Up to $250,000 may be drawn by Avtel any time after the execution
of this Agreement and prior to the earlier to occur of (i) August
31, 1997 or (ii) the termination of this Agreement.
(b) Up to an additional $250,000 may be drawn by Avtel at any time on
or after July 1, 1997 and prior to the earlier to occur of (i)
August 31, 1997 or (ii) the termination of this Agreement.
(c) Disbursements shall be made on five days' written notice to
Matrix. No disbursements shall be made after the termination of
this Agreement.
(d) The loan shall be recourse and shall bear interest at the rate of
8% per annum through August 31, 1997, and thereafter at a rate of
12% until maturity and, after maturity at a rate of 15%, in all
cases subject to reduction to comply with applicable usury laws.
Interest shall be payable monthly in arrears, based on a 360-day
year, and all principal and accrued interest shall be due and
payable on or before the earlier of (i) 180 days after the
termination of this Agreement or (ii) December 1, 1997.
(e) Avtel shall pay all expenses of documenting the loan, including
any necessary California usury permit, if any.
13. MATRIX REPRESENTATIONS
Matrix represents to Avtel as follows:
(a) Schedule I is a complete and accurate list of all of the shares of
----------
Matrix common stock owned by each of the Stockholders. Schedule II
-----------
is a complete and accurate list of all Matrix options issued and
outstanding.
(b) Matrix is a corporation duly organized, validly existing and in good
standing under the laws of the State of Texas with all requisite
corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted.
(c) Matrix has full power and authority to enter into this Agreement and
to carry out the transactions contemplated hereby, and this
Agreement has been duly and validly executed and delivered by Matrix
and constitutes the legal, valid and binding obligation of Matrix,
enforceable in accordance with its terms. The execution, delivery
and performance of this Agreement and all other transactions
contemplated hereby will not cause any material default or breach in
any contract, loan agreement or other instrument to which Matrix is
a party or violate any law or decree or judgment of any government
or governmental agency having jurisdiction over Matrix.
(d) Matrix's authorized capital stock consists of 10,000,000 shares of
common stock, no par value, of which 3,484,260 shares are issued and
outstanding. Schedule II is a list of all Matrix stock options
-----------
A-3
<PAGE>
existing as of the date hereof together with a list of all stock
options that Matrix has agreed to issue but has not yet issued.
(e) The financial statements of Matrix listed on Schedule III fairly
------------
present in all material respects Matrix's financial position and
assets and its results of operation and changes in financial
position with respect to the respective dates thereof and the
periods covered thereby, in conformity with the United States
generally accepted accounting principles at the time in effect
("GAAP"), and Matrix's past accounting practices, consistently
----
applied during such periods, and such financial statements,
including the notes thereto, make full and adequate disclosure of,
and provision for, all of Matrix's material obligations and
liabilities as of the date thereof, whether accrued, absolute,
contingent or otherwise, to the extent required by GAAP. Since the
date of the last of such financial statements, there have been no
material adverse changes to the business or condition of Matrix that
have not been disclosed to Avtel.
(f) Schedule IV contains a list of all material contracts between Matrix
-----------
and any of its officers, directors or shareholders, true, correct
and complete copies of which have been furnished to Avtel.
(g) Schedule V contains a true, correct and complete list of all of
----------
Matrix's employee benefit plans and a list of each employee of
Matrix as of the date hereof, his/her current position, annual
salary and current bonus entitlement.
(h) Except as set forth in Schedule VI, Matrix is not a party to and has
-----------
not been threatened with any legal action, governmental
investigation or proceeding or any other material claim or
proceeding, including, without limitation, any tax audit.
(i) Matrix has provided Avtel copies of the prior three year's federal
and state income tax returns and represents that it believes such
returns fairly reflect Matrix's tax obligations for such periods and
that no adjustments for such periods have been proposed. All
federal, state, local and foreign tax returns required to be filed
by or with respect to Matrix through the Closing Date have been or
will be accurately prepared, and have been or will be duly and
timely filed, and all taxes, interest, penalties, assessments and/or
deficiencies due with respect to any taxable period ending on or
before the Closing Date have been or will be timely paid, or
adequate provision for the payment thereof has been or will be made
on Matrix's financial statements or books of account.
(j) Except as disclosed on Schedule VII, no notice to, filing with,
------------
authorization of, exemption by, or consent of any person, entity or
public or governmental authority is required in order for Matrix to
consummate the transactions contemplated hereby.
14. AVTEL REPRESENTATIONS
Avtel represents to Matrix as follows:
(a) Avtel is a corporation duly organized, validly existing and in good
standing under the laws of the State of Utah with all requisite
corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted.
(b) Avtel has full power and authority to enter into this Agreement and
to carry out the transactions contemplated hereby, and this
Agreement has been duly and validly executed and delivered by Avtel,
and constitutes the legal, valid and binding obligation of Avtel,
enforceable in accordance with its terms. The execution, delivery
and performance of this Agreement and all other transactions
contemplated hereby will not cause any material default or breach in
any contract, loan agreement or other instrument to which Avtel is a
party or violate any law or decree or judgement of any government or
governmental agency having jurisdiction over Avtel.
(c) Avtel's authorized capital stock consists of 50,000,000 shares of
common stock, $.001 par value, per share, of which 7,135,807 shares
are issued and outstanding and 5,000,000 shares of preferred stock
of which 1,000,000 shares designated, $1.00 par value Series A
Convertible Preferred Stock are issued and outstanding. All such
shares were held as of April 9, 1997 as set forth on Schedule VIII.
-------------
All of the issued shares of the capital stock of Avtel have been
duly and validly authorized and issued, are fully paid and non-
assessable. The shares of common stock to be delivered by Avtel to
A-4
<PAGE>
the Stockholders pursuant to this Agreement have been duly and
validly authorized and, when issued and delivered as provided
herein, will be duly and validly issued and fully paid and non-
assessable. Schedule IX is a list of all Avtel stock options
-----------
existing as of the date hereof, together with a list of all stock
options Avtel has agreed to issue but has not yet issued, and Avtel
has not entered into any agreement to issue additional stock options
except as disclosed on Schedule IX.
-----------
(d) The financial statements of Avtel listed on Schedule X fairly
----------
present in all material respects Avtel's financial position and
assets and its results of operation and changes in financial
position with respect to the respective dates thereof and the
periods covered thereby, in conformity with GAAP and Avtel's past
accounting practices, consistently applied during such periods, and
such financial statements, including the notes thereto, make full
and adequate disclosure of, and provision for, all of Avtel's
material obligations and liabilities as of the date thereof, whether
accrued, absolute, contingent or otherwise, to the extent required
by GAAP. Since the date of the last of such financial statements,
there have been no material adverse changes to the business or
condition of Avtel that have not been disclosed to Matrix.
(e) Schedule XI contains a list of all material contracts between Avtel
-----------
and any of its officers, directors or shareholders, true, correct
and complete copies of which have been furnished to Matrix.
(f) Schedule XII contains a true, correct and complete list of all of
------------
Avtel's employee benefit plans and a list of each employee of Avtel
and its subsidiaries as of the date hereof, his/her current
position, annual salary (and proposed adjustments thereto for the
next 6 months) and current bonus entitlement.
(g) Except as set forth in Schedule XIII, Avtel is not a party to and
-------------
has not been threatened with any legal action, governmental
investigation or proceeding or any other material claim or
proceeding, including, without limitation, any tax audit.
(h) Avtel has provided Matrix copies of the prior three year's federal
and state income tax returns and represents that it believes such
returns fairly reflect Avtel's tax obligations for such periods and
that no adjustments for such periods have been proposed. All
federal, state, local and foreign tax returns required to be filed
by or with respect to Avtel from January 1, 1993 through the Closing
Date have been or will be accurately prepared, and have been or will
be duly and timely filed, and all taxes, interest, penalties,
assessments and/or deficiencies due with respect to any taxable
period ending on or before the Closing Date have been or will be
timely paid, or adequate provision for the payment thereof has been
or will be made on Avtel's financial statements or books of account.
(i) Except as disclosed on Schedule XIV, no notice to, filing with,
------------
authorization of, exemption by, or consent of any person, entity or
public or governmental authority is required in order for Avtel to
consummate the transactions contemplated hereby.
15. CONDITIONS PRECEDENT TO OBLIGATIONS OF MATRIX
(a) Avtel's representations and warranties contained herein shall be
true in all material respects on and as of the date of this
Agreement and shall also be true in all material respects (except
for such changes as are contemplated by the terms of this Agreement)
on and as of the Closing Date with the same force and effect as
though made by Avtel on and as of the Closing Date.
(b) Avtel shall, in all material respects, have performed all
obligations and agreements and complied with all covenants contained
in this Agreement, to be performed and complied with by it on or
prior to the Closing Date; and Avtel shall have delivered to Matrix
a certificate, dated as of the Closing Date, certifying as to its
compliance with Section 15(a) and Section 15(b).
------------- -------------
(c) The Registration Rights Agreement shall have been executed by the
Avtel and delivered to Matrix.
(d) The shareholders of Avtel shall have approved this Agreement and the
transactions contemplated hereby.
(e) Any and all governmental and other consents required in connection
with this Agreement shall have been obtained.
A-5
<PAGE>
(f) Each Stockholder shall have executed an Exchange Statement.
16. CONDITIONS PRECEDENT TO OBLIGATIONS OF AVTEL
(a) Matrix's representations and warranties contained herein shall be
true in all material respects on and as of the date of this
Agreement and shall also be true in all material respects (except
for such changes as are contemplated by the terms of this Agreement)
on and as of the Closing Date with the same force and effect as
though made by Matrix on and as of the Closing Date.
(b) Matrix shall, in all material respects, have performed all
obligations and agreements and complied with all covenants contained
in this Agreement to be performed and complied with by it on or
prior to the Closing Date and Matrix shall have delivered to Avtel a
certificate, dated as of the Closing Date, certifying as to its
compliance with Section 16(a) and Section 16(b).
------------- -------------
(c) The Registration Rights Agreement shall have been executed by Matrix
and the Exchange Statements shall have ben executed by the
Stockholders and such documents shall have been delivered to Avtel.
(d) The shareholders of Avtel shall have approved this Agreement and the
transactions contemplated hereby.
(e) Any and all governmental consents required in connection with this
Agreement shall have been obtained.
17. CLOSING
The Closing (the "Closing") shall take place at such place as Matrix and
-------
Avtel shall agree on the date that is three business days after the
conditions referred to in clauses (d) and (e) of paragraphs 15 and 16
----------- --- ------------- --
shall have been obtained or on such later date to which the parties
hereto otherwise shall agree (such date being the "Closing Date").
------------
18. SURVIVAL
The covenants, agreements, representations or warranties of the parties
hereto contained in this Agreement or in any certificate or other writing
delivered pursuant to, or in connection with, this Agreement shall
survive one year from the Closing Date.
19. TERMINATION
This Agreement may be terminated at any time on or prior to the Closing
Date:(i) with the mutual consent of Avtel and Matrix or (ii) by Avtel or
Matrix, if the Closing shall not have taken place on or before July 1,
1997, or such later date as may be mutually approved in writing by Avtel
or Matrix. This Agreement shall terminate automatically if the
shareholders of Avtel do not approve this Agreement or any of the
transactions contemplated hereby.
20. MISCELLANEOUS
(a) This Agreement shall be governed by the laws of the State of Texas,
without regard to the conflict of law rules of such state.
(b) This Agreement may be amended, modified or supplemented but only in
writing signed by all of the parties hereto.
(c) All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, or by confirmed facsimile
transmission, or on two business days following delivery to a
commercial overnight air courier service, or five days after being
mailed, first class postage prepaid, return receipt requested.
A-6
<PAGE>
If to Matrix, addressed as follows:
5215 North O'Connor Blvd.
Suite 300
Irving, Texas 75039
Attention: Ronald W. Howard
Facsimile: (972) 506-3266
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: David A. Carpenter
Facsimile: (312) 701-7711
If to Avtel, addressed as follows:
130 Cremona Drive, Suite C
Santa Barbara, California 93117
Attention: Anthony Papa
Facsimile: (805) 685-9685
with a copy to:
Price, Postel & Parma LLP
200 E. Carrillo Street, Suite 400
Santa Barbara, California 93101
Attention: Raymond LeBlanc
Facsimile: (805) 882-9869
or to such other individual or address as a party hereto may designate
for itself by notice given as herein provided.
(d) The failure of a party hereto at any time or times to require performance
of any provision hereof shall in no manner affect its right at a later
time to enforce the same. No waiver by a party of any condition or of any
breach of any term, covenant, representation or warranty contained in
this Agreement shall be effective unless in writing, and no waiver in any
one or more instances shall be deemed to be a further or continuing
waiver of any such condition or breach in other instances or a waiver of
any other condition or breach of any other term, covenant, representation
or warranty.
(e) This Agreement may be executed simultaneously in counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(f) The Stockholders shall be deemed to be third party beneficiaries of the
rights of Matrix hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first above written by their duly authorized
representatives.
A-7
<PAGE>
MATRIX TELECOM, INC. AVTEL COMMUNICATIONS, INC.
By:_____________________________ By:_____________________________
________________________________ ________________________________
(Print Name) (Print Name)
Its:_____________________________ Its:_____________________________
(duly authorized) (duly authorized)
A-8
<PAGE>
EXHIBIT A
FORM OF EXCHANGE STATEMENT
The undersigned understands that the common stock of AvTel Communications,
Inc. ("Avtel") to be issued to the undersigned as consideration for shares of
-----
common stock of Matrix Telecom, Inc. ("Matrix") pursuant to that certain Stock
------
Exchange Agreement (the "Stock Exchange Agreement") entered into as of April 29,
------------------------
1997 between Avtel and Matrix will not be registered under the Securities Act of
1933, as amended (the "1933 Act"), or any applicable state securities laws, but
--------
rather is being issued pursuant to the "private placement" exemption from
registration provided by Section 4(2) under the 1933 Act and certain analogous
state exemptions. In connection with the offer and sale of the Avtel shares to
the undersigned pursuant to the Stock Exchange Agreement, the undersigned hereby
represents and warrants as follows:
(a) The undersigned (i) has such knowledge and experience in financial and
business matters that the undersigned is capable of evaluating the merits and
risks of the prospective investment in Avtel shares and (ii) is capable of
assuming the risk of the loss of the entire investment in connection therewith.
(b) The undersigned is not purchasing the shares of Avtel pursuant to the Stock
Exchange Agreement as a result of any general solicitation or general
advertising, including advertisements, articles, notices or other communications
published in any newspaper, magazine or similar media or broadcast over radio or
television, or any seminar or meeting whose attendees have been invited by
general solicitation or general advertising.
(c) The Avtel shares being purchased by the undersigned are acquired for the
undersigned's own account for investment and not with a view toward subdivision,
resale or redistribution thereof in a manner prohibited under the 1933 Act or
under the securities laws of any state, and the undersigned does not presently
have any reason to anticipate any change in the undersigned's circumstances or
other particular occasion or event that would create a need to sell such shares.
The undersigned has no contract, undertaking, agreement, understanding or
arrangement with any person to sell, transfer or pledge to any person any part
or all of the Avtel shares the undersigned is purchasing or any interest
therein, and the undersigned has no present plans to enter into the same.
(d) The undersigned received the annual report on Form 10-K filed by Avtel with
respect to its most recently completed fiscal year (and the related proxy
statement for Avtel's 1997 Annual Stockholder's Meeting) and all other documents
filed by Avtel with the Securities Exchange Commission since the date of such
Annual Report. The undersigned has understood such materials and has had an
opportunity to ask questions and receive answers about the terms and conditions
of the offering and sale of Avtel stock under the Stock Exchange Agreement, and
has received all information that the undersigned has requested from Avtel
concerning Avtel and the transactions contemplated by the Stock Exchange
Agreement.
(e) The undersigned has not relied, in connection with this transaction, upon
any statements, representations, warranties or agreements other than those set
forth in the documents referred to in clause (d) above and the Stock Exchange
----------
Agreement.
(f) The undersigned understands that the shares of Avtel stock being purchased
by the undersigned pursuant to the Stock Exchange Agreement will bear the
following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE TRANSFERRED
WITHOUT SUCH REGISTRATION EXCEPT PURSUANT TO TRANSACTIONS EXEMPT FROM THE
REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE
SECURITIES LAWS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(g) In connection with an intended exchange of the shares of Matrix common stock
held by the undersigned for shares of Avtel common stock, the undersigned hereby
directs that all Matrix shares held by the undersigned be exchanged at the
Closing (as defined in the Stock Exchange Agreement) for Avtel shares in the
manner contemplated by the Stock Exchange Agreement. The officers of Matrix are
hereby authorized to take all action on behalf of the undersigned and to act as
attorney-in-fact, with full power of substitution, for the undersigned in
connection with the consummation of the transactions contemplated
A-9
<PAGE>
by the Stock Exchange Agreement, including, without limitation, the execution of
the Registration Rights Agreement (as defined therein). All Avtel shares
received are to be registered in the same name as the Matrix shares held by the
undersigned.
(h) The undersigned hereby represents and warrants that the undersigned has full
power to direct the exchange of the Matrix shares as set forth above and that
the shares of Matrix common stock to be exchanged by the undersigned are free
and clear of any liens or encumbrances.
(i) The undersigned understands that a false statement herein may be a violation
of law and could result in a claim for damages against the undersigned.
Signature________________________________
Print Name______________________________
Date:___________________________________
No. of Matrix Shares Held:_________
A-10
<PAGE>
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AND LOCK-UP AGREEMENT (this "Agreement") is made and
entered into as of __________, 1997, by and between Avtel Communications,
Inc. (the "Company") and Matrix Telecom, Inc. ("Matrix") on behalf of the
Persons listed on Schedule A attached hereto, including their successors,
assigns and transferees (herein referred to collectively as the "Holders" and
individually as a "Holder").
WHEREAS, on the date hereof each Holder is or will become the owner of Common
Stock (as defined below) of the Company in connection with that certain Stock
Exchange Agreement, dated April 29, 1997 (the "Stock Exchange Agreement")
between the Company and Matrix; and
WHEREAS, in connection with the Stock Exchange Agreement, the Holders have
agreed to enter into the Lock-Ups (as defined below) as provided in Section 2
below; and
WHEREAS, as a condition to the closing of the Stock Exchange Agreement, the
Company has agreed to grant the Holders the registration rights provided for
in Sections 3 and 4 below;
NOW, THEREFORE, the parties hereto, in consideration of the foregoing, the
mutual covenants and agreements hereinafter set forth, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, agree as follows:
1. Definitions.
-----------
As used in this Agreement, the following capitalized defined terms shall have
the following meanings:
"Closing Price" of the Common Stock for any given day shall mean (i) if the
-------------
Common Stock is listed or admitted to trading on a national securities
exchange, the reported last sale price of the Common Stock, regular way, on
such day or, in case no such sale takes place on such day, the average of the
reported closing bid and asked prices, regular way, on such national
securities exchange on such day or (ii) if the Common Stock is not listed or
admitted to trading on any national securities exchange but is quoted by the
Nasdaq SmallCap Market or the Nasdaq National Market of the Nasdaq Stock
Market, Inc. ("NASDAQ"), the last reported sales price per share, regular
way, on such day or, in case no such sale takes place on such day, or the
last reported sales price is not quoted by NASDAQ, the average of the
reported closing bid and asked prices, regular way, on such day.
"Common Stock" shall mean the Common Stock, par value $.01, per share, of the
------------
Company.
"Company" shall mean Avtel Communications, Inc., a Delaware Corporation, and
-------
its successors.
"Dispose of" shall have the meaning provided in Section 2(a).
----------
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
------------
from time to time.
"Holder" or "Holders" shall mean the persons listed on Schedule A attached
------ -------
hereto, including their successors, assigns and transferees.
"Lock-ups" shall mean the restrictions on transfer to which the Holders are
--------
subject pursuant to Section 2(a).
"Lock-up Period" shall mean the applicable time periods to which the Holders
--------------
have agreed to the Lock-ups.
"Person" shall mean an individual, partnership, corporation, trust,
------
unincorporated organization or other legal entity or a government or agency
or political subdivision thereof.
"Registrable Securities" shall mean the Shares, excluding (i) Shares that
----------------------
have been disposed of under the Shelf Registration Statement or any other
effective registration statement, (ii) Shares sold or otherwise transferred
pursuant to Rule 144 under the Securities Act, (iii) Shares that are held by
Holders who are not
A-11
<PAGE>
affiliates of the Company that are or become eligible for sale pursuant to
Rule 144(k) under the Securities Act, and (iv) Shares held by each Holder who
is an affiliate of the Company if all of such Shares are or become eligible
for sale pursuant to Rule 144 under the Securities Act and could be sold in
one transaction in accordance with the volume limitations contained in Rule
144(e)(1)(i) under the Securities Act.
"Registration Expenses" shall mean any and all expenses incident to
---------------------
performance of or compliance with this Agreement, including, without
limitation: (i) all applicable registration and filing fees imposed by the
SEC, or the National Association of Securities Dealers, Inc. ("NASD"), (ii)
all fees and expenses incurred in connection with compliance with state
securities or "blue sky" laws (including reasonable fees and disbursements of
counsel in connection with qualification of any of the Registrable Securities
under any state securities or blue sky laws and the preparation of a blue sky
memorandum) and compliance with the rules of the NASD, (iii) all expenses of
any Persons in preparing or assisting in preparing, word processing, printing
and distributing the Shelf Registration Statement, any Prospectus,
certificates and other documents relating to the performance of and
compliance with this Agreement, (iv) all fees and expenses incurred in
connection with the listing, if any, of any of the Registrable Securities on
any securities exchange or exchanges pursuant to Section 4(l) hereof, and (v)
the fees and disbursements of counsel for the Company and of the independent
public accountants of the Company, including the expenses of any special
audits or "cold comfort" letters required by or incident to such performance
and compliance. Registration Expenses shall specifically exclude underwriting
discounts and commissions, the fees and disbursements of counsel representing
a selling Holder or any underwriter or agent acting on behalf of a Holder,
and transfer taxes, if any, relating to the sale or disposition of
Registrable Securities by a selling Holder, all of which shall be borne by
such Holder in all cases.
"Registration Notice" shall have the meaning set forth in Section 4(b)
-------------------
hereof.
"Registration Statement" shall mean a registration statement, including a
----------------------
Shelf Registration Statement, of the Company that covers all of the
Registrable Securities and all amendments (including post-effective
amendments) to such registration statement, and all exhibits thereto and
materials incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
---
"Securities Act" shall mean the Securities Act of 1933, as amended from time
--------------
to time.
"Shares" shall mean the Common Stock issued to the Holders pursuant to the
------
Stock Exchange Agreement.
"Shelf Registration Statement" shall mean a Registration Statement covering
----------------------------
the Registrable Securities filed pursuant to Rule 415 under the Securities
Act, or any similar rule established by the SEC.
"Stock Exchange Agreement" shall have the meaning set forth in the recitals.
------------------------
2. Lock-up Agreement.
-----------------
(a) Each of the Holders identified in Schedule B hereby agrees that, from
the date hereof until two years following the closing of the sale of Common
Stock to the Holder pursuant to the Stock Exchange Agreement, without the
prior written consent of the Company, such Holder will not offer, pledge,
sell, contract to sell, grant any options for the sale of or otherwise
dispose of, directly or indirectly (collectively, "Dispose of"), any Shares.
(b) All other Holders hereby agree that, from the date hereof until the date
on which the Company releases a press release announcing earnings on a
consolidated basis, including the operations of Matrix, covering a period of
combined earnings of not less than 30 days, without the prior written consent
of the Company, such Holders will not Dispose of any Shares.
3. Shelf Registration Under the Securities Act.
-------------------------------------------
(a) Filing of Shelf Registration Statement. Following the date hereof, the
--------------------------------------
Company shall use its best efforts to become listed on the Nasdaq SmallCap
Market or the Nasdaq National Market of NASDAQ whereupon it shall file, a
Shelf Registration Statement providing for the sale by the Holders of all of
the Registrable Securities in accordance with the terms hereof and will use
its reasonable efforts to cause such
A-12
<PAGE>
Shelf Registration Statement to be declared effective by the SEC as soon
thereafter as is practicable. The Company agrees to use its reasonable
efforts to keep the Shelf Registration Statement with respect to the
Registrable Securities continuously effective for a period expiring on the
earlier of (i) the date on which all of the Registrable Securities covered by
the Shelf Registration Statement have been sold pursuant thereto and (ii) the
date on which (A) all Shares held by Holders who are not affiliates of the
Company, in the opinion of counsel for the Company are eligible for sale
pursuant to Rule 144(k) under the Securities Act and (B) all Shares held by
each Holder who is an affiliate of the Company, in the opinion of counsel for
the Company are eligible for sale pursuant to Rule 144 under the Securities
Act and could be sold in one transaction in accordance with the volume
limitations contained in Rule 144(e)(1)(i) under the Securities Act.
(b) Demand Rights. Notwithstanding clause (a) above and subject to the
-------------
restrictions on disposition included in Section 2, if the Company is unable
to become listed on the Nasdaq SmallCap Market or the Nasdaq National Market
within six months of the date hereof, or is otherwise unable to qualify for
use of a Shelf Registration Statement, on the date which is six months from
the date hereof, the Company shall, upon receipt of a notice (a "Registration
Notice") given at least 14 days prior to the six-month anniversary hereof,
file on behalf of all Holders from whom it shall have received a Registration
Notice, and use its best efforts to cause to become effective as soon as
practical thereafter, a Registration Statement registering the offering and
sale of the Registrable Securities which the Company has been requested to
register by such Holders. In addition, subject to the restrictions on
disposition included in Section 2 and on a maximum of two separate occasions
(and if the Company at such time does not have an effective Shelf
Registration Statement covering the Registerable Securities), at any time
after the six month anniversary of the date hereof that the Company shall
receive a Registration Notice from Holders holding Shares representing in
excess of 25% of the Shares, it shall file, and use its best efforts to cause
to become effective as soon as practical thereafter, a Registration Statement
registering the offering and sale of the Registrable Securities held by such
Holder (and those of any other Holder, subject to Section 2, who requests to
have its Shares included in such Registration Statement). The Company shall
promptly following receipt of a Registration Notice pursuant to the last
sentence hereof notify the Holders of all other Registrable Securities and,
upon request of such Holders, allow such Holders to include their Registrable
Securities in the aforementioned Registration Statement. Notwithstanding the
above, (i) if a request for registration pursuant to this Section 2(b) is
made within 30 days prior to the conclusion of the Company's fiscal year, or
within 40 days after the end of the Company's fiscal year, the Company shall
not be required to file a registration statement until such time as the
Company receives its audited financial statements for such fiscal year, and
(ii) the Company shall be entitled to postpone for a reasonable period of
time (not to exceed 90 days, which may not thereafter be extended) the filing
of any registration statement otherwise required to be prepared and filed by
it pursuant to this Section 2(b) if (x) the Company is in possession of
material information that has not been disclosed to the public and the
Company deems it advisable not to disclose such information in the
registration statement or (y) the board of directors of the Company shall
determine in good faith that such offering will interfere with a pending or
contemplated financing, merger, acquisition, sale of assets, recapitalization
or other similar corporate action of the Company, and in the case of clause
(x) or (y) above, the Company shall have furnished to the Holder or Holders
of Registrable Securities requesting such registration an officers'
certificate to that effect.
(c) Expenses. The Company shall pay all Registration Expenses in
--------
connection with the registration pursuant to Sections 3(a) or 3(b). The
Company shall not be liable for any underwriting discounts and commissions,
the fees and disbursements of counsel representing such Holder or any
underwriter or agent acting on behalf of a Holder, and transfer taxes, if
any, relating to the sale or disposition of such Holder's Registrable
Securities pursuant to the Registration Statement or Rule 144 under the
Securities Act.
(d) Inclusion in Registration Statement. Any Holder who does not provide
-----------------------------------
the information reasonably requested by the Company in connection with any
Registration Statement filed hereunder by the Company as promptly as
practicable after receipt of such request, but in no event later than ten
(10) days thereafter, shall not be entitled to have its Registrable
Securities included in any Registration Statement filed by the Company
pursuant to this Agreement.
4. Registration Procedures.
-----------------------
In connection with the obligations of the Company with respect to the
Registration Statements contemplated by Section 3 hereof, the Company shall:
A-13
<PAGE>
(a) prepare and file with the SEC, within the time period set forth in
Section 3 hereof, the Registration Statements, which Registration Statements
shall (i) be available for the sale of the Registrable Securities in
accordance with the intended method or methods of distribution by the selling
Holders thereof and (ii) comply as to form in all material respects with the
requirements of the applicable form and include all financial statements
required by the SEC to be filed therewith;
(b) furnish to each Holder of Registrable Securities that has delivered a
Registration Notice to the Company or otherwise is entitled to have its
Registrable Securities included in a Registration Statement, without charge,
as many copies of each Prospectus and any amendment or supplement thereto in
order to facilitate the public sale or other disposition of the Registrable
Securities; the Company consents to the use of the Prospectus and any
amendment or supplement thereto by each such Holder of Registrable Securities
in connection with the offering and sale of the Registrable Securities
covered by the Prospectus or amendment or supplement thereto;
(c) use its reasonable efforts to register or qualify the Registrable
Securities by the time any Registration Statement is declared effective by
the SEC under all applicable state securities or blue sky laws of such
jurisdictions in the United States and its territories and possessions as any
Holder of Registrable Securities covered by the Registration Statement shall
reasonably request in writing, keep each such registration or qualification
effective during the period such Registration Statement is required to be
kept effective or during the period offers or sales are being made by a
Holder that has delivered a Registration Notice to the Company, whichever is
shorter; provided, however, that in connection therewith, the Company shall
-------- -------
not be required to (i) qualify as a foreign corporation to do business or to
register as a broker or dealer in any such jurisdiction where it would not
otherwise be required to qualify or register but for this Section 4(c), (ii)
subject itself to taxation in any such jurisdiction, or (iii) file a general
consent to service of process in any such jurisdiction;
(d) furnish to each Holder of Registrable Securities that has delivered a
Registration Notice to the Company or is otherwise entitled to have its
Registrable Securities included in a Registration Statement, without charge,
at least one conformed copy of the Registration Statement and any post-
effective amendment thereto (without documents incorporated therein by
reference or exhibits thereto, unless requested);
(e) cooperate with the selling Holders of Registrable Securities to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any Securities Act legend;
and enable certificates for such Registrable Securities to be issued for such
numbers of shares and registered in such names as the selling Holders may
reasonably request at least two business days prior to any sale of
Registrable Securities;
(f) make available for inspection by the Holders of Registrable Securities
that have provided a Registration Notice to the Company and any counsel,
accountants or other representatives retained by such Holders all financial
and other records, pertinent corporate documents and properties of the
Company and cause the officers, directors and employees of the Company to
supply all such records, documents or information reasonably requested by
such Holders, counsel, accountants or representatives in connection with the
Registration Statement; provided, however, that such records, documents or
-------- -------
information which the Company determines in good faith to be confidential and
notifies such Holders, counsel, accountants or representatives in writing
that such records, documents or information are confidential shall not be
disclosed by such Holders, counsel, accountants or representatives unless (i)
such disclosure is ordered pursuant to a subpoena or other order from a court
of competent jurisdiction, or (ii) such records, documents or information
become generally available to the public other than through a breach of this
Agreement;
(g) use its reasonable efforts to cause all Registrable Securities to be
listed on any securities exchange or automated quotation or other trading
system on which similar securities issued by the Company are then listed or
traded;
The Company may require each Holder of Registrable Securities to furnish to
the Company in writing such information regarding the proposed distribution
by such Holder of such Registrable Securities as the Company may from time to
time reasonably request in writing.
5. Repurchase by Company of Shares Subject to Registration Notice. Upon receipt
--------------------------------------------------------------
by the Company of a Registration Notice, the Company may, but shall not be
obligated to, purchase from such Holder all, but
A-14
<PAGE>
not less than all, of the Shares which are the subject of such Registration
Notice at a price per share equal to the average of the Closing Prices of the
Common Stock for the twenty trading days immediately preceding the date of
the Registration Notice. In the event the Company elects to purchase the
Shares which are the subject of a Registration Notice, the Company shall
notify the Holder of such Shares within five business days of the date of
receipt of the Registration Notice by the Company, which notice shall
indicate: (i) that the Company will purchase the Shares which are the subject
of the Registration Notice, (ii) the price per share, calculated in
accordance with the preceding sentence, which the Company will pay to such
Holder and (iii) the date upon which the Company shall repurchase such
Shares, which date shall not be later than the tenth business day after
receipt of the Registration Notice relating to such Shares.
6. Indemnification.
---------------
(a) Indemnification by the Company. The Company agrees to indemnify and
------------------------------
hold harmless each Holder and its officers and directors and each Person, if
any, who controls any Holder within the meaning of Section 15 of the
Securities Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to which such Holder, officer, director or
controlling Person may become subject under the Securities Act or otherwise
(A) that arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
or any amendment thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading or (B) that arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or alleged untrue statement
or any omission or alleged omission, if such settlement is effected with the
written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including
reasonable fees and disbursements of counsel), reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body, commenced or
threatened, in each case whether or not a party, or any claim whatsoever
based upon any such untrue statement or alleged untrue statement or omission
or alleged omission, to the extent that any such expense is not paid under
subparagraph (i) or (ii) above;
provided, however, that the indemnity provided pursuant to this Section 6(a)
- -------- -------
shall not apply to any Holder with respect to any loss, liability, claim,
damage or expense that arise out of or are based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with written information furnished to the Company by
such Holder expressly for use in a Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto.
(b) Indemnification by Holders. Each Holder severally agrees to indemnify
--------------------------
and hold harmless the Company and the other selling Holders, and each of
their respective directors and officers (including each director and officer
of the Company who signed the Registration Statement), and each Person, if
any, who controls the Company or any other selling Holder within the meaning
of Section 15 of the Securities Act, to the same extent as the indemnity
contained in Section 6(a) hereof, but only insofar as such loss, liability,
claim, damage or expense arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in the Shelf
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by such selling Holder expressly
for use therein.
(c) Indemnification Proceedings. Any Person entitled to indemnification
---------------------------
hereunder will (i) give prompt notice to the indemnifying party of any claim
with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party; provided, however, that any
Person entitled to indemnification hereunder shall have the
A-15
<PAGE>
right to employ separate counsel and to participate in the defense of such
claim, but the fees and expenses of such counsel shall be at the expense of
such Person and not of the indemnifying party unless (x) the indemnifying
party has agreed to pay such fees or expenses, or (y) the indemnifying party
shall have failed to assume the defense of such claim or employ counsel
reasonably satisfactory to such Person, or (z) in the reasonable judgment of
the Person to be indemnified, a conflict of interest may exist between such
Person and the indemnifying party with respect to such claims (in which case,
if the Person notifies the indemnifying party in writing that such Person
elects to employ separate counsel at the expense of the indemnifying party,
the indemnifying party shall not have the right to assume the defense of such
claim on behalf of such Person). If such defense is not assumed by the
indemnifying party, the indemnifying party will not be subject to any
liability for any settlement made without its consent (but such consent will
not be unreasonably withheld). No indemnified party will be required to
consent to entry of any judgement or enter into any settlement which does not
include as an unconditional term thereof the giving by all claimants or
plaintiffs to such indemnified party of a release from all liability in
respect to such claim.
7. Rule 144 Sales.
--------------
(a) Compliance. The Company covenants that, so long as it is subject to the
----------
reporting requirements of the Exchange Act, it will file the reports required
to be filed by it under the Exchange Act so as to enable any Holder to sell
Registrable Securities pursuant to Rule 144 under the Securities Act.
(b) Cooperation with Holders. In connection with any sale, transfer or
------------------------
other disposition by any Holder of any Registrable Securities pursuant to
Rule 144 under the Securities Act, the Company shall cooperate with such
Holder to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold and not bearing any Securities
Act legend, and enable certificates for such Registrable Securities to be for
such number of shares and registered in such names as the selling Holders may
reasonably request at least two business days prior to any sale of
Registrable Securities. The Company's obligation set forth in the previous
sentence shall be subject to the delivery, if reasonably requested by the
Company or its transfer agent, by counsel to such Holder, in form and
substance reasonably satisfactory to the Company and its transfer agent, of
an opinion that such Securities Act legend need not appear on such
certificate.
8. Miscellaneous.
-------------
(a) Amendments and Waivers. The provisions of this Agreement, including
----------------------
the provisions of this sentence, may not be amended, modified, supplemented
or waived, nor may consent to departures therefrom be given, without the
written consent of the Company and the Holders of a majority of the
outstanding Registrable Securities. Notice of any such amendment,
modification, supplement, waiver or consent adopted in accordance with this
Section 8(a) shall be provided by the Company to each Holder of Registrable
Securities at least thirty (30) days prior to the effective date of such
amendment, modification, supplement, waiver or consent.
(b) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery, (i) if to a Holder, at such Holder's registered address appearing
on the share register of the Company or (ii) if to the Company, at its
corporate headquarters, Attention: President.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; or at
the time delivered if delivered by an air courier guaranteeing overnight
delivery.
(c) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders.
(d) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
A-16
<PAGE>
(e) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware without giving
effect to the conflicts of law provisions thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above
AVTEL COMMUNICATIONS, INC.
By:____________________________
Name:__________________________
Title:_________________________
MATRIX TELECOM, INC.
On behalf of all Holders
By:____________________________
Name:__________________________
Title:_________________________
A-17
<PAGE>
Schedule A
----------
HOLDERS
BestConnections
UGA
James Jensen
Jami Jensen
Jeff Jensen
Janet Jensen
Julie Jensen
UA Plus
Howard Neckowitz
Ron Jensen
Ray Waters
Gary Friedman
E. Scott Crist
Gail Granton
Chuck Taylor
Ron Anderson
Joe Renteria
Virginia Baker
Tom Cargal
Greg Reid
Greg Reid (in Trust)
Cole Dawson
Vernon Woelke
A-18
<PAGE>
Schedule B
----------
Holders Subject to a Two Year Lock-up
UGA
Ronald L. Jensen
James Jensen
Jami Jensen
Jeff Jensen
Janet Jensen
Julie Jensen
UA Plus
A-19
<PAGE>
AMENDMENT TO STOCK EXCHANGE AGREEMENT
-------------------------------------
This Amendment to Stock Exchange Agreement, dated August 25, 1997 is by and
between Matrix Telecom, Inc. ("Matrix") and AvTel Communications, Inc.
("AvTel").
W I T N E S S E T H
-------------------
WHEREAS, Matrix and AvTel have entered into that certain Stock Exchange
Agreement, dated April 29, 1997 (the "Stock Exchange Agreement") which provided
for, among other things, the exchange by the stockholders of Matrix of all of
the issued and outstanding capital stock and options of Matrix for capital stock
and options of AvTel;
WHEREAS, by letter agreement, dated July 28, 1997 (the "Letter Agreement") the
date by which completion of the transactions by the Stock Exchange Agreement is
required to be completed was extended through November 30, 1997; and
WHEREAS, as contemplated by Paragraph 9(b) of the Stock Exchange Agreement,
--------------
AvTel and Matrix have agreed to effect the Reverse Stock Split (as defined in
the Stock Exchange Agreement) by the conversion of each share of AvTel common
stock into the right to receive 1/4 of a share of common stock of Newco (thereby
effecting a four to one reverse stock split) pursuant to the terms of the Merger
(as defined in the Stock Exchange Agreement);
WHEREAS, since the date of the Stock Exchange Agreement, Matrix has acquired all
of the issued and outstanding capital stock of Best Connections, Inc. in
exchange for 376,727 shares of Matrix common stock;
NOW THEREFORE, in consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
9. Defined Terms. Capitalized terms used herein, unless otherwise defined or
-------------
the context requires otherwise, are used herein as defined in the Stock Exchange
Agreement.
10. Amendment to Paragraph 1. Paragraph 1 of the Stock Exchange Agreement is
------------------------ -----------
hereby amended to read in its entirety as follows:
"At Closing (as hereinafter defined), the stockholders of Matrix listed on
Schedule I (the "Stockholders") will deliver to AvTel 3,860,987 properly
- ----------
endorsed, unencumbered shares of Matrix common stock, representing 100% of the
outstanding Matrix common stock, in exchange for 9,582,514 shares of common
stock of AvTel, after giving effect to the Merger and Reverse Stock Split
(defined below), which will not be registered under the Securities Act of 1933,
as amended."
11. Amendment to Paragraph 2. Paragraph 2 of the Stock Exchange Agreement is
------------------------ -----------
hereby amended by adding the following sentence at the end of the paragraph:
"Prior to the Closing, Matrix shall deliver to AvTel a duly executed
Exchange Statement from each holder of a non-qualified stock option of Matrix in
the form attached as Exhibit B."
---------
12. Amendment to Paragraph 3. Paragraph 3 of the Stock Exchange Agreement is
------------------------ -----------
hereby amended to read in its entirety as follows:
"At Closing, Matrix will cancel all non-qualified stock options (covering
9,000 Matrix shares) that it has granted and that remain outstanding as of the
date hereof, and AvTel will issue to the beneficiaries thereof, 22, 338 AvTel
non-qualified stock options, after giving effect to the Merger and Reverse Stock
Split, having the exercise period and exercise price set forth in Exhibit B
---------
hereto."
13. Amendment to Paragraph 6. Paragraph 6 of the Stock Exchange Agreement,
------------------------ -----------
including the heading thereto, is hereby deleted and replaced entirely by the
following:
"[INTENTIONALLY OMITTED.]"
A-20
<PAGE>
14. Amendment to Paragraph 9(a). The last sentence of Paragraph 9(a) of the
--------------------------- --------------
Stock Exchange Agreement is hereby amended to read in its entirety as follows:
"At the effective time of the Merger, by virtue of the Merger, and without
any action on the part of AvTel or Newco or the stockholders of Newco, each
share of common stock and preferred stock, and each option of AvTel issued and
outstanding immediately prior to the effective time of the Merger shall by
virtue of the Merger be canceled and extinguished and be converted into the
right to receive one quarter of a share of common stock or preferred stock or an
option to acquire one quarter of a share of common stock, as applicable, of
Newco; provided, however, that Newco shall not be required to issue any
-------- -------
fractional shares of common stock or preferred stock but instead shall be
entitled to purchase any fractional shares resulting from the Merger at the fair
market value thereof. This 1/4 to 1 conversion of shares is referred to herein
as the "Reverse Stock Split."
15. Amendment to Paragraph 9(b). Paragraph 9(b) of the Stock Exchange
--------------------------- --------------
Agreement shall be deleted in its entirety.
16. Amendments to Paragraph 12.
--------------------------
(a) The $500,000 amount set forth in the first sentence of Paragraph 12 is
------------
hereby deleted and replaced with $750,000.
(b) The following clause is hereby inserted after clause (b) of Paragraph
---------- ---------
12 and clauses (c), (d) and (e) of Paragraph 12 are hereby renumbered to be
- -- ---------- --- --- ------------
clauses (d), (e) and (f), respectively:
- ----------- --- ---
"(c) up to an additional $250,000 may be drawn by AvTel at any time on or
after July 1, 1997 and prior to the earlier of (i) September 30, 1997, or (ii)
the termination of this Agreement."
(c) The date "August 31, 1997" set forth in the first sentence of clause
------
(d) of Paragraph 12 of the Stock Exchange Agreement (which after giving effect
- --- ------------
to this Amendment will become clause (e)) is hereby deleted and replaced with
----------
the date "October 31, 1997."
17. Amendment to Paragraph 15. Clause (f) of Paragraph 15 of the Stock
------------------------- ---------- ------------
Exchange Agreement is hereby amended to read in its entirety as follows:
"Stockholders holding at least 90% of the issued and outstanding common
stock of Matrix shall have executed and delivered to Matrix an Exchange
Statement."
18. Amendment to Paragraph 19. The date "July 1, 1997" set forth in the first
-------------------------
sentence of Paragraph 19 is hereby deleted and replaced with the date "November
------------
30, 1997", consistent with the terms of the Letter Agreement.
19. Amendment to Schedules. Schedules I, II, and VII of the Stock Exchange
---------------------- ----------- -- ---
Agreement are hereby deleted and replaced with Schedules I, II, and VII attached
----------- -- ---
hereto.
20. Amendment to Registration Rights Agreement. The Registration Rights
------------------------------------------
Agreement included as Exhibit B to the Stock Exchange Agreement (Exhibit C after
--------- ---------
giving effect to this Agreement) is hereby amended by deleting Section 2(b)
thereof.
21. Amendment to Exhibits. Any references in the Stock Exchange Agreement to
---------------------
Exhibit B are hereby amended to refer to Exhibit C to the Stock Exchange
- --------- ---------
Agreement and the Registration Rights Agreement previously included as Exhibit B
---------
to the Stock Exchange Agreement is hereby amended to become Exhibit C thereto.
---------
Exhibit B to the Stock Exchange Agreement shall read entirely as set forth in
- ---------
Exhibit B attached hereto.
- ---------
22. Effectiveness of Amendment. This Amendment shall become effective upon
--------------------------
the execution hereof by each of the parties hereto. Except as amended hereby,
the Stock Exchange Agreement shall remain in full force and effect.
23. Counterparts. This Amendment may be executed simultaneously in
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
A-21
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
on the dated first above written by their duly authorized representatives.
MATRIX TELECOM, INC. AVTEL COMMUNICATIONS, INC.
By:____________________ By:___________________________
Title:_________________ Title:________________________
A-22
<PAGE>
EXHIBIT B
FORM OF OPTION EXCHANGE STATEMENT
The undersigned understands that the option or options to acquire common stock
of AvTel Communications, Inc. ("Avtel") to be issued to the undersigned as
-----
consideration for options to acquire shares of common stock of Matrix Telecom,
Inc. ("Matrix") pursuant to that certain Stock Exchange Agreement (the "Stock
------ -----
Exchange Agreement") entered into as of April 29, 1997 between Avtel and Matrix
- ------------------
will not be registered under the Securities Act of 1933, as amended (the "1933
----
Act"), or any applicable state securities laws, but rather are being issued
- ---
pursuant to the "private placement" exemption from registration provided by
Section 4(2) under the 1933 Act and certain analogous state exemptions. In
connection with the offer and sale of the Avtel options to the undersigned
pursuant to the Stock Exchange Agreement, the undersigned hereby represents and
warrants as follows:
(a) The undersigned (i) has such knowledge and experience in financial and
business matters that the undersigned is capable of evaluating the merits and
risks of the prospective investment in Avtel options and the resulting Avtel
shares to be issued upon the exercise of the options and (ii) is capable of
assuming the risk of the loss of the entire investment in connection therewith.
(b) The undersigned is not acquiring the Avtel options pursuant to the
Stock Exchange Agreement as a result of any general solicitation or general
advertising, including advertisements, articles, notices or other communications
published in any newspaper, magazine or similar media or broadcast over radio or
television, or any seminar or meeting whose attendees have been invited by
general solicitation or general advertising.
(c) The Avtel options being acquired by the undersigned are acquired for
the undersigned's own account for investment and not with a view toward
subdivision, resale or redistribution thereof in a manner prohibited under the
1933 Act or under the securities laws of any state, and the undersigned does not
presently have any reason to anticipate any change in the undersigned's
circumstances or other particular occasion or event that would create a need to
sell such options. The undersigned has no contract, undertaking, agreement,
understanding or arrangement with any person to sell, transfer or pledge to any
person any part or all of the Avtel options the undersigned is acquiring or any
interest therein, and the undersigned has no present plans to enter into the
same.
(d) The undersigned received the annual report on Form 10-K filed by Avtel
with respect to its most recently completed fiscal year (and the related proxy
statement for Avtel's 1997 Annual Stockholder's Meeting) and all other documents
filed by Avtel with the Securities Exchange Commission since the date of such
Annual Report. The undersigned has understood such materials and has had an
opportunity to ask questions and receive answers about the terms and conditions
of the offering and the issuance of Avtel options under the Stock Exchange
Agreement, and has received all information that the undersigned has requested
from Avtel concerning Avtel and the transactions contemplated by the Stock
Exchange Agreement.
(e) The undersigned has not relied, in connection with this transaction,
upon any statements, representations, warranties or agreements other than those
set forth in the documents referred to in clause (d) above and the Stock
----------
Exchange Agreement.
(f) In connection with an intended exchange of the options to acquire shares of
Matrix common stock held by the undersigned for options to acquire shares of
Avtel common stock, the undersigned hereby directs that all Matrix options held
by the undersigned be exchanged at the Closing (as defined in the Stock Exchange
Agreement) for Avtel options in the manner contemplated by the Stock Exchange
Agreement. The officers of Matrix are hereby authorized to take all action on
behalf of the undersigned and to act as attorney-in-fact, with full power of
substitution, for the undersigned in connection with the consummation of the
transactions contemplated by the Stock Exchange Agreement. All Avtel options
received are to be registered in the same name as the Matrix options held by the
undersigned.
(g) The undersigned hereby represents and warrants that the undersigned has
full power to direct the exchange of the Matrix options as set forth above and
that the options to acquire shares of Matrix common stock to be exchanged by the
undersigned are free and clear of any liens or encumbrances.
A-23
<PAGE>
(h) The undersigned understands that a false statement herein may be a
violation of law and could result in a claim for damages against the
undersigned.
(i) The undersigned understands and agrees that the undersigned shall receive
the number of options to acquire Avtel shares listed below, that the exercise
price of such options shall be $2.24 per share, that all such options shall be
fully vested when issued and that the options shall expire at the close of
business on December 31, 2002 unless they shall have been exercised by the
undersigned on or before such date.
Signature________________________________
Print Name______________________________
Date:___________________________________
No. of Matrix Options Held:_________
No. of Avtel Options to be acquired:_________
A-24
<PAGE>
EXHIBIT B
=========
AGREEMENT AND PLAN OF MERGER
(REINCORPORATION MERGER)
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
OF
AVTEL COMMUNICATIONS, INC,
--------------------------
A DELAWARE CORPORATION
AND
AVTEL COMMUNICATIONS, INC.,
---------------------------
A UTAH CORPORATION
THIS AGREEMENT AND PLAN OF MERGER, dated as of _________, 1997, (the
"Agreement") is between AVTEL COMMUNICATIONS, INC., a Delaware corporation
("AvTel-Delaware") and AVTEL COMMUNICATIONS, INC., a Utah corporation ("AvTel-
Utah"). AvTel-Delaware and AvTel-Utah are sometimes referred to herein as the
"Constituent Corporations".
RECITALS
A. AvTel-Delaware is a corporation duly organized and existing under the laws
of the State of Delaware and has an authorized capital stock of 21,000,000
shares, 20,000,000 of which are designated "Common Stock", par value $.01 per
share, and 1,000,000 of which are designated "Preferred Stock", par value $.01
per share, 250,000 of which have been designated Series A Convertible Preferred
Stock. As of __________, 1997, and as of the date of this Agreement, 100 shares
of Common Stock of AvTel-Delaware are issued and outstanding, all of which are
held by AvTel-Utah. No shares of Preferred Stock of AvTel-Delaware are issued
and outstanding.
B. AvTel-Utah is a corporation duly organized and existing under the laws
of the State of Utah and has an authorized capital stock of 55,000,000 shares,
50,000,000 of which are designated "Common Stock", 5,000,000 of which are
designated "Preferred Stock", and 1,000,000 of which have been designated Series
A Convertible Preferred Stock. As of August 16, 1997, and as of the date of
this Agreement, 7,136,827 shares of Common Stock of AvTel-Utah are issued and
outstanding, and 1,000,000 shares of Series A Convertible Preferred Stock of
AvTel-Utah are issued and outstanding.
C. The Board of Directors of AvTel-Utah has determined that, for the purpose
of effecting the reincorporation of AvTel-Utah in the State of Delaware, it is
advisable and in the best interests of AvTel-Utah that AvTel-Utah merge with and
into AvTel-Delaware upon the terms and conditions herein provided.
D. The respective Boards of Directors of AvTel-Delaware and AvTel-Utah have
approved this Agreement and have directed that this Agreement be submitted to a
vote of their respective sole stockholder and shareholders, and executed by the
undersigned officers.
E. AvTel-Delaware is a wholly owned subsidiary of AvTel-Utah.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, AvTel-Delaware and AvTel-Utah hereby agree, subject to the terms
and conditions hereinafter set forth, as follows:
AGREEMENT
1. MERGER
------
1.1 Merger. In accordance with the provisions of this Agreement, the
------
Delaware General Corporation Law and the Utah Revised Business Corporation Act,
AvTel-Utah shall be merged with and into AvTel-Delaware (the "Merger"), the
separate existence of AvTel-Utah shall cease and AvTel-Delaware shall be, and is
herein sometimes referred to as, the "Surviving Corporation" and the name of the
Surviving Corporation shall be "AvTel Communications, Inc."
1.2 Filing and Effectiveness. The Merger shall become effective when the
------------------------
following actions shall have been completed:
B-1
<PAGE>
A. This Agreement and the Merger shall have been adopted and approved
by the shareholders of AvTel-Utah and the sole stockholder of AvTel-Delaware in
accordance with the requirements of the Delaware General Corporation Law and the
Utah Revised Business Corporation Act;
B. All of the conditions precedent to the consummation of the Merger
specified in this Agreement shall have been satisfied or duly waived by the
party entitled to satisfaction thereof;
C. An executed Certificate of Merger or an executed counterpart of
this Agreement meeting the requirements of the Delaware General Corporation Law
shall have been filed with the Secretary of State of the State of Delaware; and
D. Executed Articles of Merger or an executed counterpart of this
Agreement meeting the requirements of the Utah Revised Business Corporation Act
shall have been filed with the Secretary of State of the State of Utah.
The date and time when the Merger shall become effective, as aforesaid, is
herein called the "Effective Date of the Merger".
1.3 Effect of the Merger. Upon the Effective Date of the Merger, the
--------------------
separate existence of AvTel-Utah shall cease and AvTel-Delaware, as the
Surviving Corporation shall (i) continue to possess all of its assets, rights,
powers and property as constituted immediately prior to the Effective Date of
the Merger, (ii) be subject to all actions previously taken by its and AvTel-
Utah's Board of Directors, (iii) succeed, without other transfer, to all of the
assets, rights, powers and property of AvTel-Utah, including all shares of any
subsidiary held by AvTel-Utah, in the manner more fully set forth in Section 259
of the Delaware General Corporation Law, (iv) continue to be subject to all of
the debts, liabilities and obligations of AvTel-Delaware as constituted
immediately prior to the Effective Date of the Merger, and (v) succeed, without
other transfer, to all of the debts, liabilities and obligations of AvTel-Utah
in the same manner as if AvTel-Delaware had itself incurred them, all as more
full provided under the applicable provisions of the Delaware General
Corporation Law and the Utah Revised Business Corporation Act.
2. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
-----------------------------------------
2.1 Certificate of Incorporation. The Certificate of Incorporation of
----------------------------
AvTel-Delaware as in effect immediately prior to the Effective Date of the
Merger shall continue in full force and effect as the Certificate of
Incorporation of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.2 Bylaws. The Bylaws of AvTel-Delaware as in effect immediately prior
------
to the Effective Date of the Merger shall continue in full force and effect as
the Bylaws of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.3 Directors and Officers. The directors and officers of AvTel-Utah
----------------------
immediately prior to the Effective Date of the Merger shall be the directors and
officers of the Surviving Corporation until their successors shall have been
duly elected and qualified or until as otherwise provided by law, or by the
Certificate of Incorporation or the Bylaws of the Surviving Corporation.
3. MANNER OF CONVERSION OF STOCK
-----------------------------
3.1 AvTel-Utah Common Shares. Upon the Effective Date of the Merger, each
------------------------
share of AvTel-Utah Common Stock issued and outstanding immediately prior to the
Merger shall, by virtue of the Merger and without any action by the Constituent
Corporations, the holder of such shares or any other person, be converted into
and exchanged for one-quarter (1/4) of a fully paid and nonassessable share of
Common Stock, par value $0.01 per share, of the Surviving Corporation. No
fractional share interests of the Surviving Corporation's Common Stock shall be
issued but shall, instead, be paid in cash or check by AvTel-Delaware to the
holder of such shares in that amount equal to the fair market value of such
fractional share.
B-2
<PAGE>
3.2 AvTel-Utah Preferred Shares. Upon the Effective Date of the Merger,
---------------------------
each share of Series A Convertible Preferred Stock of AvTel-Utah, par value
$1.00 per share, issued and outstanding immediately prior to the Merger shall,
by virtue of the Merger and without any action by the Constituent Corporations,
the holder of such shares or any other person, be converted into or exchanged
for one-quarter (1/4) fully paid and nonassessable share of Series A Convertible
Preferred Stock of the Surviving Corporation, par value $0.01 per share. The
rights, preferences and privileges of the Series A Convertible Preferred Stock
of the Surviving Corporation are as set forth in the Certificate of
Incorporation of the Surviving Corporation. No fractional share interests of
the Surviving Corporation's Preferred Stock shall be issued but shall, instead,
be paid in cash or check by AvTel-Delaware to the holder of such share in that
amount equal to the fair market value of such fractional share.
3.3 AvTel-Utah Stock Option Plans.
-----------------------------
A. Upon the Effective Date of the Merger, the Surviving Corporation
shall assume the obligations of AvTel-Utah under The AvTel Communications, Inc.,
1997 Stock Option Plan (the "1997 Plan") and shall assume the obligations of
AvTel-Utah with respect to each unexpired and unexercised option to purchase
shares of Common Stock of AvTel-Utah that was granted outside any stock option
plan and was outstanding immediately prior to the Merger ("Outside Option").
Each outstanding and unexercised option to purchase one (1) share of Common
Stock of AvTel-Utah pursuant to the 1997 Plan or pursuant to an Outside Option
(an "Option") shall be converted into, subject to the provisions in paragraph
(B) of this Section 3.3, an option to purchase one-quarter (1/4) share of the
Surviving Corporation's Common Stock (a "New Option") on the same terms as
provided in the 1997 Plan and the related stock option agreement evidencing such
option or the stock option agreement evidencing the applicable Outside Option,
provided, however, that the exercise price for such New Option shall be equal to
four times the exercise price stated in the agreement evidencing such Option.
B. Following the Effective Date of the Merger, the number of shares
of the Surviving Corporation's Common Stock to which an Option holder would be
otherwise entitled upon exercise of an assumed Option shall be rounded down to
the nearest whole number. In addition, no "additional benefits" (within the
meaning of Section 424(a)(2) of the Internal Revenue Code of 1986, as amended)
shall be accorded to the optionees pursuant to the assumption of their options.
3.4 AvTel-Delaware Common Stock. Upon the Effective Date of the Merger,
---------------------------
each share of Common Stock, par value $0.01 per share, of AvTel-Delaware issued
and outstanding immediately prior thereto shall, by virtue of the Merger and
without any action by AvTel-Delaware, the holder of such shares or any other
person, be canceled and returned to the status of authorized but unissued
shares.
3.5 Exchange of Certificates. After the Effective Date of the Merger,
------------------------
each holder of an outstanding certificate representing shares of AvTel-Utah
Common Stock or Preferred Stock may be asked to surrender the same for
cancellation to an exchange agent, whose name will be delivered to holders prior
to any requested exchange (the "Exchange Agent"), and each such holder shall be
entitled to receive in exchange therefor a certificate or certificates
representing the number of shares of the Surviving Corporation's Common Stock or
Preferred Stock, as the case may be, into which the surrendered shares were
converted as herein provided. Until so surrendered, each outstanding
certificate theretofore representing shares of AvTel-Utah Common Stock or
Preferred Stock shall be deemed for all purposes to represent the number of
shares of the Surviving Corporation's Common Stock or Preferred Stock,
respectively, into which such shares of AvTel-Utah Common Stock or Preferred
Stock, as the case may be, were converted in the Merger.
The registered owner on the books and records of the Surviving
Corporation or the Exchange Agent of any such outstanding certificate shall,
until such certificate shall have been surrendered for transfer or conversion or
otherwise accounted for to the Surviving Corporation or the Exchange Agent, have
and be entitled to exercise any voting and other rights with respect to and to
receive dividends and other distributions upon the shares of Common Stock or
Preferred Stock of the Surviving Corporation represented by such outstanding
certificate as provided above.
Each certificate representing Common Stock or Preferred Stock of the
Surviving Corporation so issued in the Merger shall bear the same legends, if
any, with respect to the restrictions on
B-3
<PAGE>
transferability as the certificate of AvTel-Utah so converted and given in
exchange therefore, unless otherwise determined by the Board of Directors of the
Surviving Corporation in compliance with applicable laws, or other such
additional legends as agreed upon by the holder and the Surviving Corporation.
If any certificate for shares of AvTel-Delaware stock is to be issued
in a name other than that in which the certificate surrendered in exchange
therefor is registered, it shall be a condition of issuance thereof that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer, that such transfer otherwise be proper and comply with
applicable securities laws and that the person requesting such transfer pay to
the Exchange Agent any transfer or other taxes payable by reason of issuance of
such new certificate in a name other than that of the registered holder of the
certificate surrendered or establish to the satisfaction of AvTel-Delaware that
such tax has been paid or is not payable.
4. GENERAL
-------
4.1 Covenants of AvTel-Delaware. AvTel-Delaware covenants and agrees that
---------------------------
it will, on or before the Effective Date of the Merger, take such actions as may
be required by the Utah Revised Business Corporation Act.
4.2 Further Assurances. From time to time, as and when required by AvTel-
------------------
Delaware or by its successor or assigns, there shall be executed and delivered
on behalf of AvTel-Utah such deeds and other instruments, and there shall be
taken or caused to be taken by it such further and other actions as shall be
appropriate or necessary in order to vest or perfect in or conform of record or
otherwise by AvTel-Delaware the title to and possession of all the property,
interests, assets rights, privileges, immunities, powers, franchises and
authority of AvTel-Utah and otherwise to carry out the purposes of this
Agreement, and the officers and directors of AvTel-Delaware are fully authorized
in the name and on behalf of AvTel-Utah or otherwise to take any and all such
action and to execute and deliver any and all such deeds and other instruments.
4.3 Abandonment. At any time before the Effective Date of the Merger,
-----------
this Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either AvTel-Utah or of AvTel-Delaware,
or of both, notwithstanding the approval of this Agreement by the shareholders
of AvTel-Utah or the sole stockholder of AvTel-Delaware.
4.4 Amendment. The Boards of Directors of the Constituent Corporations
---------
may amend this Agreement at any time prior to the filing of this Agreement (or
certificate in lieu thereof) with the Secretary of State of the State of
Delaware, provided that an amendment made subsequent to the adoption of this
Agreement by the stockholders of either Constituent Corporation shall not: (i)
alter or change the amount or kind of shares, securities, cash, property and/or
rights to be received in exchange for or on conversion of all or any of the
shares of any class or series thereof of such Constituent Corporation, (ii)
alter or change any term of the Certificate of Incorporation of the Surviving
Corporation to be effected by the Merger, or (iii) alter or change any of the
terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class or series of capital stock of any
Constituent Corporation.
4.5 Registered Office. The registered office of the Surviving Corporation
-----------------
in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801 and
The Corporation Trust Company is the registered agent of the Surviving
Corporation at such address.
4.6 Agreement. Executed copies of this Agreement will be on file at the
---------
principal place of business of the Surviving Corporation at 130 Cremona Drive,
Santa Barbara, California 93111 and copies thereof will be furnished to any
stockholder of either Constituent Corporation, upon request and without cost.
4.7 Governing Law. This Agreement shall in all respects be construed,
-------------
interpreted and enforced in accordance with and governed by the laws of the
State of Delaware and, so far as applicable, the merger provisions of the Utah
Revised Business Corporation Act.
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<PAGE>
4.8 Counterparts. In order to facilitate the filing and recording of this
------------
Agreement the same may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, this Agreement having first been approved by the resolutions
of the Board of Directors of AvTel-Delaware and AvTel-Utah is hereby executed on
behalf of each of such two corporations and attested by their respective
officers thereunto duly authorized.
AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
By_______________________________
Anthony E. Papa, President
ATTEST:
- -----------------------------
James P. Pisani, Secretary
B-5
<PAGE>
EXHIBIT C
=========
CERTIFICATE OF INCORPORATION OF AVTEL DELAWARE
<PAGE>
CERTIFICATE OF INCORPORATION
----------------------------
OF
--
AVTEL COMMUNICATIONS, INC..
---------------------------
ARTICLE I.
The name of the Corporation is AVTEL COMMUNICATIONS, INC.
ARTICLE II.
The address of the Corporation's registered office in the State of Delaware is
1209 Orange Street, City of Wilmington, County of Newcastle, Delaware 19805. The
name of its registered agent at such address is The Corporation Trust Company.
ARTICLE III.
The nature of the business or purposes to be conducted or promoted is to engage
in any lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law.
ARTICLE IV.
The Corporation is authorized to issue two classes of stock, designated common
and preferred, respectively. The total number of shares of all classes of stock
which the Corporation has authority to issue is 21,000,000, consisting of
20,000,000 shares of common stock, par value $0.01, and 1,000,000 shares of
preferred stock, par value $0.01. As to the preferred stock of the Corporation,
250,000 shares shall be designated as "Series A Convertible Preferred Stock"
with the preferences, limitations and rights set forth hereunder.
The Board of Directors may amend these Articles of Incorporation to do any of
the following:
a. designate in whole or in part, the preferences, limitations and
relative rights, within the limits set forth in the Delaware General Corporation
Law, of any class of shares, before the issuance of any shares of that class;
b. create one or more series within a class of shares, fix the number
of shares of each such series, and designate, in whole or part the preferences,
limitations and relative rights of the series within the limits set forth in the
Delaware General Corporation Law, all before the issuance of any shares of that
series;
c. alter or revoke the preferences, limitations and relative rights
granted to or imposed upon any wholly unissued class of shares or any wholly
unissued series of any class of shares; or
d. increase or decrease the number of shares constituting any series,
the number of shares of which was originally fixed by the Board either before or
after the issuance of shares of the series, provided that the number may not be
decreased below the number of shares of the series then outstanding, or
increased above the total number of authorized shares of the applicable class of
shares available for designation as part of the series.
DESIGNATION OF FIRST SERIES OF PREFERRED STOCK
The first series of preferred stock is hereby designated AvTel Communications,
Inc. Series A Convertible Preferred Stock ("Series A Convertible Preferred
Stock"). The number of shares constituting Series A Convertible Preferred Stock
shall be 250,000.
1. GENERAL DEFINITIONS. For purposes of designating the preferences,
-------------------
privileges, restrictions and rights of the Series A Convertible Preferred Stock,
the following definitions shall apply:
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<PAGE>
1.1 "Board of Directors" shall mean the Board of Directors of the
Corporation.
1.2 "Business Day" shall mean any day other than Saturdays, Sundays
or other days on which commercial banks are authorized or required to close in
the State of Delaware.
1.3 "Common Stock" shall refer to the Common Stock of the
Corporation.
1.4 "Distribution" shall mean the transfer of cash or property
without consideration, whether by way of dividend or otherwise, or the purchase
or redemption of shares of this Corporation for cash or property, including any
such transfer, purchase or redemption by a Subsidiary of this Corporation.
1.5 "Issuance Date" shall mean July 31, 1996.
1.6 "Junior Shares" shall mean all Common Stock and any other shares
of this Corporation other than the Series A Convertible Preferred Stock.
1.7 "Person" means a corporation, an association, a trust, a
partnership, a joint venture, an organization, a business, an individual, a
government or political subdivision thereof or a governmental body.
1.8 "Public Offering" with respect to any securities means the
registration of such securities under the Securities Act, under a firm
commitment underwriting, for sale to the public.
1.9 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as may be in effect from time to time.
1.10 "Subsidiary" shall mean any corporation at least 50% of whose
outstanding voting shares shall at the time be owned by the Corporation or by
one or more of such subsidiaries.
2. DIVIDEND RIGHTS OF PREFERRED STOCK. The holders of the Series A
----------------------------------
Convertible Preferred Stock shall be entitled to receive, out of any funds
legally available therefor, cumulative dividends, on each outstanding share of
Series A Convertible Preferred Stock, at the rate of eight percent (8.0%) of the
Liquidation Preference (as defined below, prior to any increase for declared but
unpaid dividends) of the Series A Convertible Preferred Stock per annum per
share, on each outstanding share of Series A Convertible Preferred Stock, and no
more, payable prior and in preference to any payment of any dividend on, or
other distribution with respect to, Junior Shares and payable semi-annually,
commencing one hundred eighty (180) days from the Issuance Date, from funds
legally available therefor. Such dividends shall accrue from the date of
issuance whether or not earned so that no dividends (other than those payable
solely in Common Stock) shall be made with respect to Junior Shares until
cumulative dividends on the Series A Convertible Preferred Stock for all past
dividend periods and for the then current six-month dividend period shall have
been declared and paid or set apart. Such dividends shall be payable to holders
of record of shares of Series A Convertible Preferred Stock as of a record date,
determined by the Board of Directors, which shall be not more than thirty (30)
days prior to the dividend payment date. Other than with respect to the
dividends paid on the Series A Convertible Preferred Stock which represent
payment of cumulative dividends thereon for all past dividend periods and for
the then current six-month dividend period, no dividend shall be declared, paid
on or set apart for the outstanding shares of Series A Convertible Preferred
Stock. The holders of at least 50% of the Series A Convertible Preferred Stock
may at any time by written consent waive payment of any accumulated but unpaid
dividends with respect to such Series A Convertible Preferred Stock or eliminate
any requirement to declare, pay, set apart or accumulate any dividends with
respect to such Series A Convertible Preferred Stock.
3. RESTRICTION ON DIVIDEND RIGHTS OF JUNIOR SHARES. No dividend or other
-----------------------------------------------
Distribution (other than those payable solely in Common Stock) shall be declared
or paid with respect to Junior Shares while any shares of Series A Convertible
Preferred Stock are outstanding without the vote or written consent by the
holders of at least 50% of the outstanding shares of Series A Convertible
Preferred Stock.
4. LIQUIDATION RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK. In the event
----------------------------------------------------------
of any liquidation, dissolution or winding up of the Corporation, either
voluntary or involuntary, the holders of the Series A
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<PAGE>
Convertible Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of Junior Shares by reason of their ownership of such
stock, an amount (the "Liquidation Preference") equal to the sum of $4.00 for
each share of Series A Convertible Preferred Stock then held by them and, in
addition, an amount equal to all declared but unpaid dividends, if any, on the
Series A Convertible Preferred Stock. If the assets and funds thus distributed
among the holders of the Series A Convertible Preferred Stock shall be
insufficient to permit the payment to such holders of the aggregate Liquidation
Preference payable to such holders, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed among the
holders of the Series A Convertible Preferred Stock, pro rata among the holders
of such Series A Convertible Preferred Stock according to the number of shares
held by each such holder. After payment to the holders of Series A Convertible
Preferred Stock of the Liquidation Preference as aforesaid, the entire assets
and funds of the Corporation legally available for distribution, if any, shall
be distributed among the holders of the Junior Shares.
5. REDEMPTION. The Corporation may, from funds legally available therefore,
----------
redeem all or any part of the outstanding Series A Convertible Preferred Stock
as follows:
5.1 Redemption After Second Anniversary. After the second
-----------------------------------
anniversary of the Issuance Date, the Corporation may redeem, at any time, and
from time to time, after the second anniversary of the Issuance Date, all or any
part, but if less than all, not less than 25%, of the Series A Convertible
Preferred Stock outstanding. Any redemption effected pursuant to this Section 5
shall be made on a pro-rata basis among the holders of Series A Convertible
Preferred Stock in proportion to the Shares of Series A Convertible Preferred
Stock then held by them.
5.2 Redemption Price. The Corporation may redeem shares of Series A
----------------
Convertible Preferred Stock pursuant to Section 5.1 above by paying in cash
therefore an amount (the "Redemption Price") equal to the Liquidation Preference
per share of Series A Convertible Preferred Stock.
5.3 Redemption Notice. In order to effect a redemption pursuant to
-----------------
Section 5.1 above, the Corporation shall, by written notice (herein the
"Redemption Notice"), mailed first class postage prepaid, to each holder of
record (at the close of business on the Business Day immediately preceding the
day on which notice is given) of a Series A Convertible Preferred Stock to be
redeemed, at the address shown on the records of the Corporation for such
holder, notify such holder of the redemption to be effected. Such Redemption
Notice shall specify the number of shares of Series A Convertible Preferred
Stock to be redeemed from such holder, the Redemption Price, the place at which
payment may be obtained and calling upon such holder to surrender to the
Corporation, in the manner and at the place designated, and a date (herein the
"Delivery Date") which shall not be less than forty-five (45) days nor more than
sixty (60) days following the date of such Redemption Notice, his certificate or
certificates representing the shares to be redeemed. On or before the Delivery
Date, each holder of Series A Convertible Preferred Stock to be redeemed shall
surrender to the Corporation a certificate or certificates representing such
shares, in the manner and at the place designated in the Redemption Notice, and
thereupon the Redemption Price of such shares shall be payable to the order of
the Person whose name appears on such certificate or certificates as the owner
thereof, any surrendered certificate shall be canceled. In the event that less
than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
5.4 Continuing Rights of Series A Convertible Preferred Stock
---------------------------------------------------------
Following Redemption. From and after the Delivery Date, unless there shall have
- --------------------
been a defaulted payment of the Redemption Price, all rights of the holders of
shares of Series A Convertible Preferred Stock designated for redemption and the
Redemption Notice as holders of Series A Convertible Preferred Stock (except the
right to receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. If the funds of the
Corporation are legally available for redemption of shares of Series A
Convertible Preferred Stock on the Delivery Date and are not sufficient to
redeem the total number of shares of Series A Convertible Preferred Stock deemed
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares, ratably from the holders of
such shares to be redeemed, based upon their holdings of Series A Convertible
Preferred Stock. The shares of Series A Convertible Preferred Stock not redeemed
shall remain
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<PAGE>
outstanding and entitled to the rights and preferences provided herein and shall
no longer be considered as having been designated for redemption in the relevant
Redemption Notice.
5.5 Deposit of Redemption Price. On or prior to each Delivery Date,
---------------------------
the Corporation shall deposit the Redemption Price of all shares of Series A
Convertible Preferred Stock designated for redemption in the Redemption Notice
and not yet redeemed with a bank or trust corporation having aggregate capital
and surplus in excess of $10,000,000 as a trust fund for the benefit of the
respective holders in shares designated for redemption and not yet redeemed,
with irrevocable instructions and authority to the bank or trust corporation to
pay the redemption price for such shares to the respective holders on or after
the Delivery Date on receipt of notification from the Corporation that such
holder has surrendered his or her share certificates to the Corporation pursuant
to Subsection 5.3 above. As of the Delivery Date, the deposit shall constitute
full payment of the shares to their holders, and from and after the Delivery
Date shares so called for redemption shall be redeemed and shall be deemed to be
no longer outstanding, and holders thereof shall cease to be stockholders with
respect to such shares and shall have no rights with respect thereto, except for
rights to receive a bank or trust corporation payment of the Redemption Price of
the shares, without interest, upon surrender of their certificates therefore.
Such instructions shall also provide that any monies deposited by the
Corporation pursuant to this Subsection 5.5 for the redemption of shares
thereafter converted into shares of Common Stock pursuant to Section 6 hereof,
prior to the Delivery Date, shall be returned to the Corporation forthwith upon
such conversion. The balance of any monies deposited by the Corporation pursuant
to this Subsection 5.5 remaining unclaimed at the expiration of one (1) year
following the Delivery Date shall thereupon be returned to the Corporation upon
its request as expressed in the resolution adopted by its Board of Directors.
6. CONVERSION RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK. The holders
---------------------------------------------------------
of the Series A Convertible Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
6.1 Right to Convert. Subject to the terms and conditions hereof,
----------------
each share of Series A Convertible Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the first anniversary of the
Issuance Date, into such number of fully paid and nonassessable shares of Common
Stock, as determined by dividing $4.00 by the Conversion Price applicable to
such share, determined as hereinafter provided, in effect on the date the
certificate is surrendered for conversion. The price at which shares of Common
Stock shall be deliverable upon conversion of shares of the Series A Convertible
Preferred Stock (the "Conversion Price") shall initially be $4.00 per share of
Common Stock. The Conversion Price shall be subject to adjustment as hereinafter
provided in Section 6.4.
6.2 Automatic Conversion on Public Offering. Each share of Series A
---------------------------------------
Convertible Preferred Stock shall automatically be converted into the number of
fully paid and nonassessable shares of Common Stock upon the closing of a Public
Offering pursuant to an effective Registration Statement under the Securities
Act, covering the offer and sale of Common Stock to the public at a public
offering price (prior to underwriters' discounts and expenses) equal to or
exceeding $10.00 per share of Common Stock (as adjusted for stock dividends,
combinations or splits with respect to such shares) and the proceeds to the
Corporation of not less than $15 million (net only of underwriters' commissions
and expenses relating to the issuance, including without limitation expenses of
the Corporation's counsel). In the event of a Public Offering, the person(s)
entitled to receive the Common Stock issuable upon such conversion of Series A
Convertible Preferred Stock shall not be deemed to have converted such Series A
Convertible Preferred Stock until the date of the closing of such sale of Common
Stock. The Conversion Price of shares of Series A Convertible Preferred Stock
which are converted pursuant to this Section 6.2 shall be the lower of $4.00 per
share or a price determined by multiplying .80 times the price per share of the
Common Stock issued in such Public Offering.
6.3 Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of Series A Convertible Preferred Stock. In lieu
of any fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by a fair and
reasonable conversion price to be determined by the Board of Directors solely
for calculating payments due for fractional shares. No shares of Common Stock
will be issued in respect of accrued or declared and unpaid dividends on the
Series A Convertible Preferred Stock; however, except in the case of an
Automatic Conversion on Public Offering as set forth in subparagraph 6.2 above,
the Corporation shall remain liable after conversion of any Series A Convertible
Preferred Stock for cumulative unpaid dividends accrued on
C-4
<PAGE>
such Series A Convertible Preferred Stock prior to the time of conversion.
Before any holder of Series A Convertible Preferred Stock shall be entitled to
convert the same into full shares of Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation and, except for the automatic conversion pursuant to subparagraph
6.2 above, shall give written notice (the "Conversion Notice") to the
Corporation, at such office that he elects to convert the same. The Corporation
shall, as soon as practicable thereafter issue and deliver or cause to be issued
and delivered to such holder of Series A Convertible Preferred Stock, at such
office or at such other place as the holder shall specify in the Conversion
Notice, a certificate or certificates for the number of shares of Common Stock,
to which he shall be entitled as aforesaid, registered in the name of such
holder or in such other name as the holder shall specify in the aforementioned
written notice. Except as set forth in subparagraph 6.2 above, such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Convertible Preferred Stock
to be converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
6.4 Adjustments for Diluting Issues.
-------------------------------
(a) Adjustment for Stock Splits and Combinations. If the Corporation
at any time or from time to time after the Issuance Date effects a subdivision
of the outstanding Common Stock (meaning to increase the number of shares of
Common Stock into which each share of Series A Convertible Preferred Stock is
convertible), the Conversion Price then in effect immediately before that
subdivision shall be proportionately decreased, and conversely, if the
Corporation at any time or from time to time after the Issuance Date combines
the outstanding shares of Common Stock (meaning to decrease the number of shares
of Common Stock into which each share of Series A Convertible Preferred Stock is
convertible), the Conversion Price then in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
subparagraph (a) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(b) Adjustment for Certain Dividends and Disbursements. In the event
the Corporation at any time, or from time to time, after the Issuance Date,
makes or fixes a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event, the Conversion Price then
in effect shall be decreased as of the time of such issuance or, in the event
such record date is fixed, as of the close of business on such record date, by
multiplying the Conversion Price then in effect by a fraction (a) the numerator
of which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date (but excluding shares of Common Stock previously
issued by the Corporation upon conversion of Series A Convertible Preferred
Stock), and (b) the denominator of which is the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such issuance or
the close of business on such record date (but excluding shares of Common Stock
previously issued by the Corporation upon conversion of Series A Convertible
Preferred Stock) plus the number of shares of Common Stock issuable in payment
of such dividend or distribution; provided, however, that if such record date is
fixed and such dividend is not fully paid or if such distribution is not fully
made on the date fixed thereof, the Conversion Price shall be recomputed
accordingly as of the close of business on such record date and thereafter the
Conversion Price shall be adjusted such that the number of shares of Common
Stock into which each share of Series A Convertible Preferred Stock is
convertible pursuant to this subsection as of the time of actual payment of such
dividends or distributions.
(c) Adjustments for Other Dividends and Distributions. In the event
the Corporation at any time or from time to time after the Issuance Date makes,
or fixes a record date for the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in securities of the
Corporation other than shares of Common Stock, then in each such event a
provision shall be made so that the holders of Series A Convertible Preferred
Stock shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Series A Convertible
Preferred Stock been converted into Common Stock on the date of such event and
had they thereafter, during the period from the date of such event to and
including the date of conversion, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 6 with respect to the rights of the holders of
the Series A Convertible Preferred Stock.
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<PAGE>
(d) Adjustment for Reclassification, Exchange and Substitution. If
the Common Stock issuable upon the conversion of the Series A Convertible
Preferred Stock is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
or a reorganization, merger, consolidation or sale of assets, provided for
elsewhere in this Section 6) then and in any such event each holder of Series A
Convertible Preferred Stock shall have the right thereafter to convert such
stock into the kind and amount of stock and other securities and property
receivable upon such reorganization, reclassification or other change, by
holders of the number of shares of Common Stock into which such shares of Series
A Convertible Preferred Stock might have been converted immediately prior to
such reorganization, reclassification or change, all subject to further
adjustment as provided herein.
(e) Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time there is a capital reorganization of the Common
Stock (other than either a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Section 6)
or a merger or consolidation of the Corporation with or into another
corporation, or the sale of all or substantially all of the Corporation's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the holders of the Series A Convertible Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series A Convertible Preferred Stock,
the number of shares of stock or other securities or property of the
Corporation, or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such capital reorganization, merger,
consolidation or sale. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 6 with respect to the rights
of the holders of the Series A Convertible Preferred Stock after the
reorganization, merger, consolidation or sale to the end that the provisions of
this Section 6 (including adjustment of the Conversion Price then in effect)
shall be applicable after that event and be as nearly equivalent to the
provisions hereof as may be practicable.
6.5 No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 7 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Convertible Preferred Stock against dilution or other impairment.
6.6 Notices of Record Date. In the event of any taking by the Corporation
----------------------
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend which is the same as cash dividends paid in previous
quarters) or other distribution, the Corporation shall mail to each holder of
Series A Convertible Preferred Stock at least twenty (20) days prior to the date
specified herein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution.
7. VOTING. The shares of Series A Convertible Preferred Stock shall not have
------
any voting power, either general or special.
ARTICLE V.
The name and mailing address of the Incorporator is:
Janis St. Marie
1332 Anacapa Street, Suite 200
Santa Barbara, California 93101
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<PAGE>
ARTICLE VI.
The number of directors which constitute the whole Board of Directors of the
Corporation shall be determined as set forth in the Bylaws of the Corporation.
Subject to the rights of the holders of any series of Preferred Stock, no
director shall be removed without cause. Subject to any limitations imposed by
law, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the voting power of all the then-outstanding shares of voting stock
of the Corporation entitled to vote at an election of directors.
The election of directors need not be by written ballot unless the Bylaws of the
Corporation shall so provide.
ARTICLE VII.
In furtherance and not in limitation of the powers confirmed by statute, the
Board of Directors of the Corporation is expressly authorized to make, alter,
repeal, amend and rescind any or all of the Bylaws of the Corporation; to fix
the amount to be reserved as working capital, and to authorize and cause to be
executed, mortgages and liens without limit as to the amount, upon the property
and franchise of this Corporation.
The Bylaws shall determine whether and to what extent the accounts and books of
this Corporation, or any of them, shall be open to the inspection of the
stockholders; and no stockholders shall have any right of inspecting any
account, or book, or document of this Corporation, except as conferred by the
law or the Bylaws, or by resolution of the stockholders.
The stockholders and directors shall have power to hold their meetings and keep
the books, documents and papers of the Corporation outside of the State of
Delaware, at such places as may be from time to time designated by the Bylaws or
by resolution of the stockholders or directors, except as otherwise required by
the laws of Delaware.
ARTICLE VIII.
A director of the Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended after the filing of
this Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law as so amended. No
amendment to the Delaware General Corporation Law that further limits the acts
or omissions for which elimination of liability is permitted shall affect the
liability of a director for any act or omission which occurs prior to the
effective date of the amendment.
Any repeal or modification of the foregoing provisions of this Article VIII by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE IX.
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<PAGE>
The Corporation reserves the right to repeal, alter or amend this Certificate of
Incorporation in the manner prescribed herein or now or hereafter prescribed by
statute. No repeal, alteration or amendment of this Certificate of Incorporation
shall be made unless the same is first approved by the Board of Directors of the
Corporation pursuant to a resolution adopted by the directors then in office in
accordance with the By-laws and applicable law and thereafter approved by the
stockholders.
IN WITNESS WHEREOF, I have hereunto set my hand on this _____ of August, 1997.
------------------------------
Janis St. Marie, Incorporator
AVTEL COMMUNICATIONS, INC.,
a Utah corporation
By____________________________
Anthony E. Papa, President
ATTEST:
- ---------------------------
James P. Pisani, Secretary
C-8
<PAGE>
EXHIBIT D
=========
BYLAWS OF AVTEL DELAWARE
<PAGE>
BYLAWS OF
---------
AVTEL COMMUNICATIONS, INC.,
--------------------------
A DELAWARE CORPORATION
----------------------
ARTICLE I
---------
STOCKHOLDERS' MEETINGS
----------------------
Section 1. Place of Meetings.
-----------------
All meetings of the stockholders of this corporation ("Corporation")
shall be held at the principal executive office of the Corporation in the State
of Delaware, or such other place within or without the State as may be
designated from time to time by the Board of Directors or as may be consented to
in writing by all of the persons entitled to vote thereat and not present at the
meeting.
Section 2. Annual Meeting.
--------------
The annual meeting of the stockholders shall be held within one
hundred twenty (120) days after the closing of the accounting year, at which
time the stockholders shall elect a Board of Directors, consider reports of the
affairs of the Corporation, and transact such other business as may properly be
brought before the meeting. In the event the annual meeting of stockholders is
not held within the time above specified, the Board of Directors shall cause a
meeting in lieu thereof to be held as soon thereafter as is convenient, and any
business transacted or election held at such meeting shall be as valid as if the
meeting had been held on the date above specified.
Section 3. Special Meetings.
----------------
Unless otherwise required by law, special meetings of the
stockholders, for the purpose of taking any action permitted to be taken by the
stockholders under the Delaware General Corporation Law and the Certificate of
Incorporation, may be called at any time only by the Chairman of the Board, the
President or the Board of Directors. Only those matters set forth in the notice
of special meeting may be considered or acted upon at such special meeting,
except as otherwise provided by law.
Section 4. Notice of Meetings.
------------------
Notice of meetings, annual or special, shall be given in writing to
each stockholder entitled to vote at that meeting by the Secretary or Assistant
Secretary, or, if there be no such officers, by the Chairman of the Board or the
President, or in the case of neglect or refusal, by any person or persons
entitled to call a meeting, not less than ten (10) nor more than sixty (60) days
before such meeting.
Such written notice shall be given either personally or by other
means of written communication, addressed to the stockholder at the address of
the stockholder appearing on the books of the Corporation or given by the
stockholder to the Corporation for the purpose of notice; or if no such address
appears or is given, at the place where the principal office of the Corporation
is located or by publication at least once in a newspaper of general circulation
in the county in which the principal executive office is located. The giving of
notice as provided by these Bylaws may be omitted only to the extent and in the
manner expressly permitted by the Delaware General Corporation Law.
Section 5. Notice of Adjournment.
---------------------
When a meeting is adjourned for more than forty-five (45) days or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given as in the case of an original
meeting. Except as stated above, it shall not be necessary to give any notice
of the adjourned meeting, other than by announcement of the time and place
thereof at the meeting at which such adjournment is taken, and the Corporation
may transact at the adjourned meeting any business which might have been
transacted at the original meeting.
Section 6. Contents of Notice.
------------------
Notice of any meeting of stockholders shall specify:
a. The place, the date and the time of the meeting;
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b. Those matters which the Board, at the time of the mailing of the
notice, intends to present for action by the stockholders;
c. If directors are to be elected, the names of nominees intended at
the time of the notice to be presented by management for election;
d. The general nature of any proposal to take action with respect to
the approval of (i) a contract or other transaction with an interested director,
(ii) an amendment of the Certificate of Incorporation, (iii) the reorganization
of the Corporation within the meaning of the Delaware General Corporation Law,
(iv) the voluntary dissolution of the Corporation, or (v) a distribution in
dissolution other than in accordance with the rights of any outstanding
preferred shares; and
e. Such other matters, if any, as may be expressly required by
statute.
Section 7. Consent to Stockholder's Meeting.
--------------------------------
The transactions of any meeting of stockholders, however called and
noticed, shall be valid as those had at a meeting duly held after regular call
and notice, if a quorum is present either in person or by proxy, and if, either
before or after the meeting, each of the persons entitled to vote, not present
in person or by proxy, signs a written waiver of notice or a consent to the
holding of the meeting or an approval of the minutes of the meeting. All such
waivers, consents and approvals shall be filed with the corporate records or
made a part of the minutes of the meeting. A waiver of notice or a consent to
the holding of any meeting of stockholders need not specify the business
transacted at or the purpose of any regular or special meeting, other than any
proposal approved or to be approved at such meeting, the general nature of which
was required by Section 6.d. of these Bylaws to be stated in the notice of the
meeting.
Section 8. Action Without a Meeting.
------------------------
Unless otherwise provided in the Certificate of Incorporation, any
action which may be taken at any annual or special meeting of the stockholders
may be taken without a meeting and without prior notice, if a consent in
writing, setting forth the action so taken shall be signed by the holders of
outstanding shares having not less than the minimum number of votes necessary to
authorize or take such action at a meeting at which all stockholders entitled to
vote were present and voted.
Unless the consents of all stockholders entitled to vote have been
solicited in writing, prompt notice shall be given of the taking of any
corporate action approved by stockholders without a meeting by less than
unanimous written consent to those stockholders entitled to vote who have not
consented in writing.
Section 9. Quorum; Adjournment.
-------------------
The holders of a majority of the shares entitled to vote,
represented in person or by proxy, shall be required and shall constitute a
quorum at all meetings of the stockholders for the transaction of business,
except as otherwise provided by the Certificate of Incorporation. The
stockholders present at a duly called or held meeting at which a quorum is
present may continue to do business until adjournment notwithstanding the
withdrawal of enough stockholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum. If a quorum shall not be present or represented
at any meeting of the stockholders, the meeting may be adjourned from time to
time by majority vote of the shares entitled to vote at the meeting who are
present in person or represented by proxy, until the requisite number of voting
shares shall be present.
Section 10. Voting Rights; Cumulative Voting.
--------------------------------
Subject to the provisions of Sections 212 through 218, inclusive, of
the Delaware General Corporation Law, only persons in whose names shares
entitled to vote stand on the stock records of the Corporation on the record
date shall be entitled to vote at meetings of the stockholders. Every
stockholder entitled to vote shall be entitled to one vote for each of such
shares, and the affirmative vote of a majority of the shares represented at the
meeting and entitled to vote on any matter shall be the act of the stockholders,
unless the vote of a greater number or voting by classes is required by the
Delaware General Corporation Law or by the Certificate of Incorporation.
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Unless otherwise provided by the Certificate of Incorporation, no
stockholder shall be entitled to cumulate his votes in the election of
directors.
Section 11. Proxies.
-------
Every stockholder entitled to vote or to execute consents may do so
either in person or by written proxy executed in accordance with the provisions
of the Delaware General Corporation Law and filed with the Secretary or
Assistant Secretary of the Corporation.
Section 12. Notice of Stockholder Business.
------------------------------
At a meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting in a accordance
with the Bylaws. To be properly brought before a meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (c) otherwise
(i) properly be requested to be brought before the meeting by a stockholder of
record entitled to vote in the election of directors generally, and (ii)
constitute a proper subject to be brought before such meeting. For business to
be properly brought before a meeting of stockholders, any stockholder who
intends to bring any matter (other than the election of directors) before a
meeting of stockholders and is entitled to vote on such matter must deliver
written notice of such stockholder's intent to bring such matter before the
meeting of stockholders either by personal delivery or by United States mail,
postage prepaid, to the Secretary of the Corporation. Such notice must be
received by the Secretary not later than the following dates: (i) with respect
to a meeting of stockholders, 60 days in advance of such meeting if such meeting
is to be held on a day which is within 30 days preceding the anniversary of the
previous year's meeting, or 90 days in advance of such meeting if such meeting
is to be held on or after the anniversary of the previous year's meeting; and
(ii) with respect to any other meeting of stockholders or a special meeting of
stockholders, the close of business on the tenth day following the date of
public disclosure of the date of such meeting. For purposes of this Section 12,
notice shall be deemed to first be given to stockholders when disclosure of such
date if first made in a press release reported by the Dow Jones New Services,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the meeting of stockholders (a)
a brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the Corporation's books, of the stockholder intending
to propose such business, (c) the class and number of shares of capital stock of
the Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. No business shall be
conducted at a meeting of stockholders except in accordance with the procedure
set forth in Section 13 of this Article. The chairman of a meeting may, if the
facts warrant, determine and declare to the meeting that the business was not
properly brought before the meeting and in accordance with the provisions hereof
and, if the chairman should so determine, the chairman may so declare to the
meeting that any such business not properly brought before the meeting shall not
be transacted.
Section 13. Conduct of Meetings.
-------------------
The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting by the person presiding over the meeting. The Board of
Directors of the Corporation may adopt by resolution such rules and regulations
for the conduct of the meeting of stockholders as it shall deem appropriate.
Except to the extent inconsistent with such rules and regulations as adopted by
the Board of Directors, the chairman of any meeting of stockholders shall have
the right and authority to prescribe such rules, regulations and procedures and
to do all such acts as, in the judgment of such chairman, are appropriate for
the proper conduct of the meeting. Such rules, regulations or procedures,
whether adopted by the Board of Directors or prescribed by the chairman of the
meeting, may include, without limitation, the following: (i) the establishment
of an agenda or order of business for the meeting; (ii) rules and procedures or
maintaining order at the meeting and the safety of those present; (iii)
limitations on attendance at or participation in the meeting to stockholders of
record of the Corporation, their duly authorized and constituted proxies or such
other persons as the chairman of the meeting shall determine; (iv) restrictions
on entry to the meeting after the time fixed for
D-3
<PAGE>
the commencement thereof; and (v) limitations on the time allotted to questions
or comments by participants. Unless and to the extent determined by the Board of
Directors or the chairman of the meeting, meetings of stockholders shall not be
required to be held in accordance with the rules of parliamentary procedure.
Section 14. Inspectors of Election.
----------------------
Before any meeting of stockholders, the Board of Directors may
appoint any persons other than nominees for office to act as Inspectors of
Election at such meeting or any adjournment thereof. If no Inspectors of
Election are appointed, or if an appointment is vacated by an Inspector who
fails to appear or fails or refuses to act, the Chairman of any such meeting
may, and on the request of any stockholder or his proxy shall, make such
appointment or fill such vacancy at the meeting.
ARTICLE II
----------
DIRECTORS
---------
Section 1. Powers.
------
Subject to the limitations of the Certificate of Incorporation, the
Bylaws, and of the Delaware General Corporation Law as to action to be
authorized or approved by the stockholders, all corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
Corporation shall be con trolled by, the Board of Directors.
Section 2. Number and Qualification of Directors.
-------------------------------------
The authorized number of directors shall be no less than five (5)
and no more than nine (9). Within such range, the number of directors shall be
determined from time to time by resolution of the Board of Directors. Any such
determination made by the Board of Directors shall continue in effect unless and
until changed by the Board of Directors, but no such changes shall affect the
term of any directors then in office. A director shall hold office until the
annual meeting next succeeding his or her election or appointment and until his
or her successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office.
Directors need not be residents of Delaware or stockholders of the Corporation.
Section 3. Election of Directors; Resignations.
-----------------------------------
The Board of Directors shall initially consist of the persons named
as directors by the incorporator, and each director so elected shall hold office
until the first annual meeting of stockholders or until his successor is elected
and qualified. At the first annual meeting of stockholders and at each annual
meeting thereafter, the stockholders shall elect directors each of whom shall
hold office for a term of one year or until his successor is elected and
qualified. Any director may resign at any time upon written notice to the
corporation.
Section 4. Vacancies.
---------
A vacancy in the Board of Directors shall be deemed to exist in the
case of the death, resignation or removal of any director, if a director has
been declared of unsound mind by order of Court or convicted of a felony, if the
authorized number of directors is increased, or if the stockholders shall fail,
either at a meeting at which an increase in the number of directors is
authorized, or at an adjournment thereof, or at any other time, to elect the
full number of authorized directors.
Vacancies in the Board of Directors for any cause may be filled by a
majority of the remaining directors, although such majority is less than a
quorum, or by a plurality of the votes cast at a meeting of the stockholders,
and each director so elected shall hold office until the expiration of the term
of office of the director whom he has replaced or until his successor is elected
and qualified.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
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<PAGE>
Section 5. Removal of Directors.
--------------------
Subject to the rights of the holders of any series of Preferred
Stock, no director shall be removed without cause. Subject to any limitations
imposed by law or the Certificate of Incorporation, the Board of Directors, or
any individual director, may be removed from office at any time with cause by
the affirmative vote of holders of at least a majority of the voting power of
all the then-outstanding shares of voting stock of the corporation entitled to
vote at an election of directors.
Section 6. Place of Meeting.
----------------
Meetings of the Board of Directors shall be held at the principal
executive office of the Corporation, or as designated from time to time by
resolution of the Board of Directors or written consent of all of the members of
the Board. Any meeting shall be valid wherever held if held with the written
consent of all members of the Board of Directors, given either before or after
the meeting and filed with the Secretary or Assistant Secretary of the
Corporation.
Section 7. Annual Meeting.
--------------
A regular annual meeting of the Board of Directors shall be held
without notice at the place of the annual meeting of stockholders immediately
following the adjournment thereof, for the purpose of organization, election of
officers, and the transaction of such other business as may properly come before
the meeting.
Section 8. Other Regular Meetings.
----------------------
Other regular meetings of the Board of Directors shall be held in
the discretion of the Board of Directors, and if so held, at such times, dates
and places as the Board of Directors may determine.
Section 9. Special Meetings; Notices.
-------------------------
Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Chairman of the Board, the President,
any Vice-President, the Secretary, or by any two (2) directors.
Written notice of the time and place of special meetings shall be
delivered or communicated personally to each director by telephone, or by
telecopy or mail, charges prepaid, addressed to him at his address as it is
shown upon the records of the Corporation, or if such address is not readily
ascertainable, at the place in which the meetings of the directors are regularly
held. If such notice is mailed or telecopied, it shall be deposited in the
United States mail or delivered at least forty-eight (48) hours prior to the
time of the holding of the meeting. In case such notice is delivered personally
or by telephone, it shall be so delivered at least twenty-four (24) hours prior
to the time of holding the meeting. Such mailing, telecopying or delivery,
personally or by telephone, as above provided shall be due, legal and personal
notice to such director.
Section 10. Waiver of Notice.
----------------
The transactions of any meeting of the Board of Directors, however
called and noticed or wherever held, are as valid as though had at a meeting
regularly called and noticed if all the directors are present and sign a consent
to the holding of the meeting on the records of the meeting, or if a majority of
the directors are present and each of those not present, either before or after
the meeting, signs a written waiver of notice, or a consent to holding the
meeting, or an approval of the minutes of the meeting. All such waivers,
consents, or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Section 11. Action of Directors Without Meeting.
-----------------------------------
Any action required or permitted to be taken by the Board of
Directors may be taken without a meeting, if all members of the Board shall
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board, and shall have the same force and effect as a unanimous vote of the
directors.
Section 12. Action at a Meeting; Quorum.
---------------------------
A majority of the number of directors fixed in accordance with
Section 2 of this Article shall be necessary to constitute a quorum for the
transaction of business, and the action of a majority of the directors present
at a meeting duly held at which a quorum is present, when duly assembled, is
valid as a corporate act unless a greater number is required by the Certificate
of Incorporation, these Bylaws, or the Delaware
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General Corporation Law. Directors may participate in a meeting through the use
of conference telephone or similar communications equipment as long as all
members participating in the meeting can hear one another, and such
participation shall constitute the presence in person at the meeting.
Section 13. Adjournment.
-----------
A majority of the directors present, whether or not a quorum, may
adjourn from time to time by fixing a new time and place prior to taking
adjournment, but if any meeting is adjourned for more than twenty-four (24)
hours, notice of any adjournment to another time or place shall be given prior
to the time of the adjourned meeting to any directors not present at the time
the adjournment was taken.
Section 14. Committees.
----------
The Board of Directors may, by resolutions adopted by a majority of
the authorized number of directors, establish one or more committees, including
an Executive Committee, each consisting of two or more directors, to serve at
the pleasure of the Board. The Board of Directors may delegate to any such
committee any of the powers and authority of the Board of Directors in the
business and affairs of the Corporation, except those powers specifically
reserved to the Board of Directors by the provisions of Section 141 of the
Delaware General Corporation Law. The Board shall prescribe the manner in which
the proceedings of the Executive Committee or any other Committee shall be
conducted, and may designate one or more alternate directors to replace any
absent committee members at any meeting of the Committee.
Section 15. Notification of Nominations.
---------------------------
Except for directors elected pursuant to provisions of Section 4 of
this Article, only individuals nominated for election to the Board of Directors
pursuant to and in accordance with the provision of this Section 15 may be
elected to and may serve upon the Board of Directors of the Corporation.
Nominations for the election of directors may be made by the Board of Directors,
a Committee thereof or by any stockholder entitled to vote in the election of
directors generally. Subject to the foregoing, only a stockholder of record
entitled to vote in the election of directors generally may nominate one or more
persons for election as directors at a meeting of stockholders and only if
written notice of such stockholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation and has been received
by the Secretary not later than the following dates: (i) with respect to an
election to be held at an annual meeting of stockholders, 60 days in advance of
such meeting if such meeting is to be held on a day which is within 30 days
preceding the anniversary of the previous year's annual meeting, or 90 days in
advance of such meeting if such meeting is to be held on or after the
anniversary of the previous year's annual meeting; and (ii) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, the close of business on the tenth day following the date on which
notice of such meeting is first given to stockholders. For purposes of this
Section 15, notice shall be deemed to first be given to stockholders when
disclosure of such date is first made in a press release reported by the Dow
Jones News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act
of 1934, as amended.
Each such notice shall set forth:
(a) the name and address of the stockholder who intends to make the nomination
and of the person or persons to be nominated;
(b) a representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice.
(c) a description of all arrangements or understandings between the stockholder
and each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; and
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(d) such other information regarding each nominee proposed by such stockholder
as would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission, had the nominee been
nominated, or intended to be nominated, by the Board of Directors.
To be effective, each notice of intent to make a nomination given hereunder
shall be accompanied by the written consent of each nominee to serve as a
director of the Corporation if elected.
The chairman of the meeting may, if the facts warrant, determine and declare to
the meeting that a nomination was not properly brought before the meeting in
accordance with the provisions hereof and, if the chairman should so determine,
declare to the meeting that such nomination was not properly brought before the
meeting and shall not be considered.
ARTICLE III
-----------
OFFICERS
--------
Section l. Officers.
--------
The officers of the Corporation shall be elected by and shall hold
office at the pleasure of the Board of Directors. These officers shall include
a President, one or more Vice Presidents, a Secretary and a Chief Financial
Officer, and may include a Chairman of the Board of Directors.
Section 2. Election.
--------
After their election, the Board of Directors shall meet and organize
by electing a President, one or more Vice Presidents, a Secretary and a Chief
Financial Officer, who may be, but need not be, members of the Board of
Directors, and such additional officers provided by these Bylaws as the Board of
Directors shall determine to be appropriate. Any two or more offices may be
held by the same person.
Section 3. Compensation and Tenure of Office.
---------------------------------
The compensation and tenure of office of all of the officers of the
Corporation shall be fixed by the Board of Directors.
Section 4. Removal and Resignation.
-----------------------
Any officer may be removed, either with or without cause, by a
majority of the directors at the time in office, at any regular or special
meeting of the Board, or except in the case of an officer chosen by the Board of
Directors, by any officer upon whom such power of removal may be conferred by
the Board of Directors, subject in each case, however, to any rights of an
officer under any contract of employment.
Any officer may resign at any time by giving written notice to the
Board of Directors or to the President, or to the Secretary or an Assistant
Secretary of the Corporation without prejudice, however, to any rights of the
Corporation under any contract to which such officer is a party.
Any such resignation shall take effect at the date of receipt of
such notice or at any later time specified in the notice; and unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 5. Vacancies.
---------
Any vacancy in an office occurring because of death, resignation,
removal, disqualification or any other cause may be filled by the Board of
Directors at any regular or special meeting of the Board, or in such manner as
may otherwise be prescribed in the Bylaws for appointment to such office.
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Section 6. Chairman of the Board.
---------------------
The Chairman of the Board, if there be one, shall, when present,
preside at all meetings of the stockholders and of the Board of Directors, and
shall have such other powers and duties as from time to time shall be prescribed
by the Board of Directors.
Section 7. President.
---------
The President shall be the general manager of the Corporation and,
subject to the control of the Board of Directors, shall be chief executive
officer of the Corporation and shall have general supervision, direction and
control of the business and affairs of the Corporation. If the Corporation has
no Chairman of the Board, the President shall also have the duties prescribed
above for the Chairman of the Board.
Section 8. Vice Presidents.
---------------
In the absence or the disability of the President, the Vice
Presidents, in order of their rank as fixed by the Board of Directors, or if not
ranked, the Vice President designated by the directors, or if no such
designation is made by the Board of Directors, the Vice President designated by
the President, shall perform the duties and exercise the powers of the
President, and shall perform such other duties and have such other powers as the
Board of Directors shall prescribe.
Section 9. Secretary.
---------
The Secretary shall keep, or cause to be kept, a book of Minutes at
the principal executive office or such other place as the Board of Directors may
order, of all the proceedings of its stockholders and the Board of Directors and
Committees of the Board, with the time and place of holding of meetings, whether
regular or special, and if special, how authorized, the notice thereof given,
the names of those present at directors' meetings, the number of shares present
or represented at stockholders' meetings, and the proceedings of these meetings.
The Secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the Corporation's transfer agent, a share
register or a duplicate share register, showing the names of the stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the
meetings of the stockholders and of the Board of Directors required by the
Bylaws or by law to be given; he shall keep the seal of the Corporation and
affix the seal to all documents requiring a seal; and he shall have such other
powers and perform such other duties as may be prescribed by the Board of
Directors or the Bylaws.
Section 10. Assistant Secretary.
-------------------
The Assistant Secretary, if there is one, shall have all the same
rights, duties, powers and privileges as the Secretary and may act in his place
and stead whenever necessary or desirable.
Section 11. Chief Financial Officer.
-----------------------
The Chief Financial Officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct accounts of the properties and
business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, surplus and
shares. The books of account shall at all reasonable times be open to
inspection by any director.
The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors, shall
render to the President and directors, whenever they so request, an account of
all his transactions as Chief Financial Officer and of the financial condition
of the Corporation, and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or the Bylaws.
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Section 12. Subordinate Officers.
--------------------
Subordinate Officers, including but not limited to, Assistant
Secretaries, Treasurers and Assistant Treasurers, or agents, as the business of
the Corporation may require, may from time to time be appointed by the Board of
Directors, the President, or by any officer empowered to do so by the Board of
Directors, and shall have such authority and shall perform such duties as are
provided in the Bylaws or as the Board of Directors may from time to time
determine.
ARTICLE IV
----------
GENERAL PROVISIONS
------------------
Section l. Certificates for Shares.
-----------------------
Every holder of shares in the Corporation shall be entitled to have
a certificate, in such form and device as the Board of Directors may designate,
certifying the number of shares and the classes or series of shares owned by the
stockholder, and containing a statement setting forth the office or agency of
the Corporation from which the stockholder may obtain, upon request and without
charge, a copy of the statement of any rights, preferences, privileges, and
restrictions granted to or imposed upon each class or series of shares
authorized to be issued and upon the holders of those shares, and any other
legend or statement as may be required under the Delaware General Corporation
Law and federal and state corporate securities laws.
Every certificate for shares shall be signed in the name of the
Corporation by the President or Vice President and the Secretary or an Assistant
Secretary. Any signature on the certificate may be by facsimile, provided that
at least one signature, which may but need not be that of the Corporation's
registrar or transfer agent, if any, shall be manually signed.
Section 2. Transfer on the Books.
---------------------
Upon surrender to the Secretary or Assistant Secretary or to the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 3. Lost or Destroyed Certificates.
------------------------------
A new certificate may be issued without the surrender and
cancellation of an old certificate that is lost, apparently destroyed or
wrongfully taken when: (a) the request for the issuance of a new certificate is
made within a reasonable time after the owner of the old certificate has notice
of its loss, destruction or theft; and (b) such request is received by the
Corporation prior to its receipt of notice that the old certificate has been
acquired by a bona fide purchaser; and (c) the owner of the old certificate
gives an indemnity bond or other adequate security sufficient in the judgment of
the Corporation to indemnify it against any claim, expense or liability
resulting from the issuance of a new certificate. In the event of the issuance
of a new certificate, the rights and liabilities of the Corporation, and of the
holders of the old and new certificates, shall be governed by the provisions of
the Delaware General Corporation Law.
Section 4. Transfer Agents and Registrars.
------------------------------
The Board of Directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, which shall be banks or trust
companies, either domestic or foreign, at such times and places as the
requirements of the Corporation may necessitate and the Board of Directors may
designate.
Section 5. Record Date.
-----------
The Board of Directors may fix, in advance, a record date for the
purpose of determining stockholders entitled to notice of and to vote at any
meeting of stockholders, to consent to corporate action in writing without a
meeting, to receive any report, to receive any dividend or other distribution or
allotment of any right or to exercise rights with respect to any change,
conversion or exchange of shares. The record date so fixed shall not be more
than sixty (60) days prior to any event for the purpose for which it is fixed,
and shall not be less than ten (10) days prior to the date of any meeting of the
stockholders. If no such record date is fixed by the Board of Directors, then
the record date shall be that date prescribed by Section 213 of the Delaware
General Corporation Law.
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Section 6. Voting Shares in Name of Corporation.
------------------------------------
Shares standing in the name of this Corporation may be voted or
represented and all rights incident to those shares may be exercised on behalf
of the Corporation by the President, or if he is unable or refuses to act, by a
Vice President or by such other person as the Board of Directors may determine.
Section 7. Corporate Seal.
--------------
The corporate seal shall be circular in form, and shall have
inscribed thereon the name of the Corporation, the date of its incorporation,
and the words "INCORPORATED DELAWARE."
ARTICLE V
---------
AMENDMENTS
----------
Section l. By Stockholders.
---------------
The Bylaws may be repealed or amended, or new Bylaws may be adopted,
by the affirmative vote of a majority of the outstanding shares entitled to vote
or by the written consent of stockholders entitled to vote such shares, except
as otherwise provided by the Delaware General Corporation Law or by the
Certificate of Incorporation.
Section 2. By Directors.
------------
Subject to the right of stockholders as provided in Section l of
this Article VII to adopt, amend or repeal Bylaws, the Board of Directors may
adopt, amend or repeal Bylaws.
Section 3. Records of Amendments.
---------------------
Any amendment or new Bylaw adopted by the stockholders or Board of
Directors shall be copied in the appropriate place in the Minute book with the
original Bylaws, and the repeal of any Bylaw shall be entered on the original
Bylaws together with the date and manner of such repeal. The original or a copy
of the Bylaws as amended to date shall be open to inspection by the stockholders
at the Corporation's principal executive office at all reasonable times during
office hours.
ARTICLE VI
----------
INDEMNIFICATION OF OFFICERS, DIRECTORS, AND AGENTS
--------------------------------------------------
Section 1. Indemnification of Directors, Officers, Employees and other Agents.
------------------------------------------------------------------
The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of Delaware, as that Section may be amended
and supplemented from time to time, indemnify any current or former director or
officer which it shall have power to indemnify under that Section against any
expenses, liabilities or other matters referred to in or covered by that
Section. The indemnification provided for in this Article (i) shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any bylaw, agreement or vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
another capacity while holding such office, (ii) shall continue as to a person
who has ceased to be a director or officer and (iii) shall inure to the benefit
of the heirs, executors and administrators of such a person. The Corporation's
obligation to provide indemnification under this Article shall be offset to the
extent of any other source of indemnification or any otherwise applicable
insurance coverage under a policy maintained by the corporation or any other
person.
Expenses incurred by a director of the Corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he or
she is or was a director of the Corporation (or was serving at the Corporation's
request as a director or officer of another corporation) shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Corporation as authorized by relevant sections
of the General Corporation Law of Delaware. Notwithstanding the foregoing, the
Corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the Corporation and approved
by a majority of the Board of Directors of the Corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's
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fiduciary or contractual obligations to the Corporation or any other willful and
deliberate breach in bad faith of such agent's duty to the Corporation or its
stockholders.
The foregoing provisions of this Section 1 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this Bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf
of the Corporation to indemnify any person, other than a director, made a party
to any action, suit or proceeding by reason of the fact that such person, his or
her testator or intestate, is or was an officer or employee of the Corporation.
To assure indemnification under this Article of all such persons who
are determined by the Corporation or otherwise to be or to have been
"fiduciaries" of any employee benefit plan of the Corporation which may exist
from time to time, such Section 145 shall, for the purposes of this Article, be
interpreted as follows: an "other enterprise" shall be deemed to include such
an employee benefit plan, including, without limitation, any plan of the
Corporation which is governed by the Act of Congress entitled "Employee
Retirement Income Security Act of 1974," as amended from time to time; the
Corporation shall be deemed to have requested a person to serve an employee
benefit plan where the performance by such person of his or her duties to the
Corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to such
Act of Congress shall be deemed "fines;" and action taken or omitted by a person
with respect to an employee benefit plan in the performance of such person's
duties for a purpose reasonably believed by such person to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the Corporation.
Section 2. Insurance.
---------
The Corporation may purchase and maintain insurance on behalf of any
person whois or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of or her status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
Section 3. Indemnification Contracts.
-------------------------
The Board of Directors is authorized to cause the Corporation to
enter into indemnification contracts with any director, officer, employee or
agent of the Corporation or any person serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including employee benefit plans,
providing indemnification rights to such person. Such rights may be greater than
those provided in this Article VI.
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CERTIFICATE OF SECRETARY
------------------------
KNOW ALL PERSONS BY THESE PRESENTS:
The undersigned, Secretary of AVTEL COMMUNICATIONS, INC., a Delaware
corporation (the "Corporation"), does hereby certify that the above and
foregoing Bylaws were duly adopted as the Bylaws of the Corporation at a meeting
of the Board of Directors held on _________________, 1997.
IN WITNESS WHEREOF, the undersigned has subscribed his name and
affixed the seal of the Corporation on the date set forth below.
- -------------------- ------------------------------------------
Date James P. Pisani, Secretary
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EXHIBIT E
=========
UTAH REVISED BUSINESS CORPORATIONS ACT
SECTIONS 16-10A-1301 THROUGH 16-10A-1331
(DISSENTERS RIGHTS)
<PAGE>
16-10a-1301 DEFINITIONS. For purposes of Part 13:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 16-10a-1302 and who exercises that right
when and in the manner required by Sections 16-10a-1320 through 16-10a-
1328.
(4) "Fair value" with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the statutory rate set forth in
Section 15-1-1, compounded annually.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares that are registered in the name of a nominee to the extent the
beneficial owner is recognized by the corporation as the shareholder as
provided in Section 16-10a-723.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
16-10a-1302. RIGHT TO DISSENT. (1) A shareholder, whether or not entitled to
vote, is entitled to dissent from, and obtain payment of the fair value of
shares held by him in the event of, any of the following corporate actions:
(a) consummation of a plan of merger to which the corporation is a party
if:
(i) shareholder approval is required for the merger by Section 16-10a-1103
or the articles of incorporation; or
(ii) the corporation is a subsidiary that is merged with its parent under
Section 16-10a-1104;
(b) consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired;
(c) consummation of a sale, lease, exchange, or other disposition of all,
or substantially all, of the property of the corporation for which a
shareholder vote is required under Subsection 16-10a-1202(1), but not
including a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale; and
(d) consummation of a sale, lease, exchange, or other disposition of all,
or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote
upon the consent of the corporation to the disposition pursuant to
Subsection 16-10a-1202(2).
(2) A shareholder is entitled to dissent and obtain payment of the fair
value of his shares in the event of any other corporate action to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors so provides.
(3) Notwithstanding the other provisions of this part, except to the
extent otherwise provided in the articles of incorporation, bylaws, or a
resolution of the board of directors, and subject to the limitations set
forth in Subsection (4), a shareholder is not entitled to dissent and
obtain payment under Subsection (1) of the fair value of the shares of any
class or series of shares which either were listed on a national securities
exchange registered under the federal Securities Exchange Act of 1934, as
amended, or on the National Market System of the National Association of
Securities Dealers Automated Quotation System, or were held of record by
more than 2,000 shareholders, at the time of:
(a) the record date fixed under Section 16-10a-707 to determine the
shareholders entitled to receive notice of the shareholders' meeting at
which the corporate action is submitted to a vote;
(b) the record date fixed under Section 16-10a-704 to determine
shareholders entitled to sign writings consenting to the proposed corporate
action; or
(c) the effective date of the corporate action if the corporate action is
authorized other than by a vote of shareholders.
(4) The limitation set forth in Subsection (3) does not apply if the
shareholder will receive for his shares, pursuant to the corporate action,
anything except:
(a) shares of the corporation surviving the consummation of the plan of
merger or share exchange;
(b) shares of a corporation which at the effective date of the plan of
merger or share exchange either will be listed on a national securities
exchange registered under the federal Securities Exchange Act of 1934, as
amended, or on the National Market System of the National Association of
Securities Dealers Automated Quotation System, or will be held of record by
more than 2,000 shareholders;
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(c) cash in lieu of fractional shares; or
(d) any combination of the shares described in Subsection (4), or cash in
lieu of fractional shares.
(5) A shareholder entitled to dissent and obtain payment for his shares
under this part may not challenge the corporate action creating the
entitlement unless the action is unlawful or fraudulent with respect to him
or to the corporation.
16-10a-1303. DISSENT BY NOMINEES AND BENEFICIAL OWNERS. (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if the shareholder dissents with respect to all
shares beneficially owned by any one person and causes the corporation to
receive written notice which states the dissent and the name and address of
each person on whose behalf dissenters' rights are being asserted. The
rights of a partial dissenter under this subsection are determined as if
the shares as to which the shareholder dissents and the other shares held
of record by him were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(a) the beneficial shareholder causes the corporation to receive the
record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) the beneficial shareholder dissents with respect to all shares of
which he is the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders,
each beneficial shareholder must certify to the corporation that both he
and the record shareholders of all shares owned beneficially by him have
asserted, or will timely assert, dissenters' rights as to all the shares
unlimited on the ability to exercise dissenters' rights. The certification
requirement must be stated in the dissenters' notice given pursuant to
Section 16-10a-1322.
16-10a-1320. NOTICE OF DISSENTERS' RIGHTS. (1) If a proposed corporate
action creating dissenters' rights under Section 16-10a-1302 is submitted
to a vote at a shareholders' meeting, the meeting notice must be sent to
all shareholders of the corporation as of the applicable record date,
whether or not they are entitled to vote at the meeting. The notice shall
state that shareholders are or may be entitled to assert dissenters' rights
under this part. The notice must be accompanied by a copy of this part and
the materials, if any, that under this chapter are required to be given the
shareholders entitled to vote on the proposed action at the meeting.
Failure to give notice as required by this subsection does not affect any
action taken at the shareholders' meeting for which the notice was to have
been given.
(2) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is authorized without a meeting of shareholders
pursuant to Section 16-10a-704, any written or oral solicitation of a
shareholder to execute a written consent to the action contemplated by
Section 16-10a-704 must be accompanied or preceded by a written notice
stating that shareholders are or may be entitled to assert dissenters'
rights under this part, by a copy of this part, and by the materials, if
any, that under this chapter would have been required to be given to
shareholders entitled to vote on the proposed action if the proposed action
were submitted to a vote at a shareholders' meeting. Failure to give
written notice as provided by this subsection does not affect any action
taken pursuant to Section 16-10a-704 for which the notice was to have been
given.
16-10a-1321. DEMAND FOR PAYMENT -- ELIGIBILITY AND NOTICE OF INTENT. (1) If
a proposed corporate action creating dissenters' rights under Section 16-
10a-1302 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights:
(a) must cause the corporation to receive, before the vote is taken,
written notice of his intent to demand payment for shares if the proposed
action is effectuated; and
(b) may not vote any of his shares in favor of the proposed action.
(2) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is authorized without a meeting of shareholders
pursuant to Section 16-10a-704, a shareholder who wishes to assert
dissenters' rights may not execute a writing consenting to the proposed
corporate action.
(3) In order to be entitled to payment for shares under this part, unless
otherwise provided in the articles of incorporation, bylaws, or a
resolution adopted by the board of directors, a shareholder must have been
a shareholder with respect to the shares for which payment is demanded as
of the date the proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is approved by the shareholders, if shareholder
approval is required, or as of the effective date of the corporate action
if the corporate action is authorized other than by a vote of shareholders.
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(4) A shareholder who does not satisfy the requirements of Subsections (1)
through (3) is not entitled to payment for shares under this part.
16-10a-1322. DISSENTERS' NOTICE. (1) If proposed corporate action creating
dissenters' rights under Section 16-10a-1302 is authorized, the corporation
shall give a written dissenters' notice to all shareholders who are
entitled to demand payment for their shares under this part.
(2) The dissenters' notice required by Subsection (1) must be sent no
later than ten days after the effective date of the corporate action
creating dissenters' rights under Section 16-10a-1302, and shall:
(a) state that the corporate action was authorized and the effective date
or proposed effective date of the corporate action;
(b) state an address at which the corporation will receive payment demands
and an address at which certificates for certificated shares must be
deposited;
(c) inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(d) supply a form for demanding payment, which form requests a dissenter
to state an address to which payment is to be made;
(e) set a date by which the corporation must receive the payment demand
and by which certificates for certificated shares must be deposited at the
address indicated in the dissenters' notice, which dates may not be fewer
than 30 nor more than 70 days after the date the dissenters' notice
required by Subsection (1) is given;
(f) state the requirement contemplated by Subsection 16-10a-1303(3), if
the requirement is imposed; and
(g) be accompanied by a copy of this part.
16-10a-1323. PROCEDURE TO DEMAND PAYMENT. (1) A shareholder who is given a
dissenters' notice described in Section 16-10a-1322, who meets the
requirements of Section 16-10a-1321, and wishes to assert dissenters'
rights must, in accordance with the terms of the dissenters' notice:
(a) cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in Subsection 16-10a-1322(2)(d), duly
completed, or may be stated in another writing;
(b) deposit certificates for his certificated shares in accordance with
the terms of the dissenters' notice; and
(c) if required by the corporation in the dissenters' notice described in
Section 16-10a-1322, as contemplated by Section 16-10a-1327, certify in
writing, in or with the payment demand, whether or not he or the person on
whose behalf he asserts dissenters' rights acquired beneficial ownership of
the shares before the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action creating
dissenters' rights under Section 16-10a-1302.
(2) A shareholder who demands payment in accordance with Subsection (1)
retains all rights of a shareholder except the right to transfer the shares
until the effective date of the proposed corporate action giving rise to
the exercise of dissenters' rights and has only the right to receive
payment for the shares after the effective date of the corporate action.
(3) A shareholder who does not demand payment and deposit share
certificates as required, by the date or dates set in the dissenters'
notice, is not entitled to payment for shares under this part.
16-10a-1324. UNCERTIFICATED SHARES. (1) Upon receipt of a demand for payment
under Section 16-10a-1323 from a shareholder holding uncertificated shares,
and in lieu of the deposit of certificates representing the shares, the
corporation may restrict the transfer of the shares until the proposed
corporate action is taken or the restrictions are released under Section
16-10a-1326.
(2) In all other respects, the provisions of Section 16-10a-1323 apply to
shareholders who own uncertificated shares.
16-10a-1325. PAYMENT. (1) Except as provided in Section 16-10a-1327, upon
the later of the effective date of the corporate action creating
dissenters' rights under Section 16-10a-1302, and receipt by the
corporation of each payment demand pursuant to Section 16-10a-1323, the
corporation shall pay the amount the corporation estimates to be the fair
value of the dissenter's shares, plus interest to each dissenter who has
complied with Section 16-10a-1323, and who meets the requirements of
Section 16-10a-1321, and who has not yet received payment.
(2) Each payment made pursuant to Subsection (1) must be accompanied by:
(a) (i) (A) the corporation's balance sheet as of the end of its most
recent fiscal year, or if not available, a fiscal year ending not more than
16 months before the date of payment;
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(B) an income statement for that year;
(C) a statement of changes in shareholders' equity for that year and a
statement of cash flow for that year, if the corporation customarily
provides such statements to shareholders; and
(D) the latest available interim financial statements, if any;
(ii) the balance sheet and statements referred to in Subsection (i) must
be audited if the corporation customarily provides audited financial
statements to shareholders;
(b) a statement of the corporation's estimate of the fair value of the
shares and the amount of interest payable with respect to the shares;
(c) a statement of the dissenter's right to demand payment under Section
16-10a-1328; and
(d) a copy of this part.
16-10a-1326. FAILURE TO TAKE ACTION. (1) If the effective date of the
corporate action creating dissenters' rights under Section 16-10a-1302 does
not occur within 60 days after the date set by the corporation as the date
by which the corporation must receive payment demands as provided in
Section 16-10a-1322, the corporation shall return all deposited
certificates and release the transfer restrictions imposed on
uncertificated shares, and all shareholders who submitted a demand for
payment pursuant to Section 16-10a-1323 shall thereafter have all rights of
a shareholder as if no demand for payment had been made.
(2) If the effective date of the corporate action creating dissenters'
rights under Section 16-10a-1302 occurs more than 60 days after the date
set by the corporation as the date by which the corporation must receive
payment demands as provided in Section 16-10a-1322, then the corporation
shall send a new dissenters' notice, as provided in Section 16-10a-1322,
and the provisions of Sections 16-10a-1323 through 16-10a-1328 shall again
be applicable.
16-10a-1327. SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER ANNOUNCEMENT
OF PROPOSED CORPORATE ACTION. (1) A corporation may, with the dissenters'
notice given pursuant to Section 16-10a-1322, state the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action creating dissenters' rights under Section 16-10a-1302 and
state that a shareholder who asserts dissenters' rights must certify in
writing, in or with the payment demand, whether or not he or the person on
whose behalf he asserts dissenters' rights acquired beneficial ownership of
the shares before that date. With respect to any dissenter who does not
certify in writing, in or with the payment demand that he or the person on
whose behalf the dissenters' rights are being asserted, acquired beneficial
ownership of the shares before that date, the corporation may, in lieu of
making the payment provided in Section 16-10a-1325, offer to make payment
if the dissenter agrees to accept it in full satisfaction of his demand.
(2) An offer to make payment under Subsection (1) shall include or be
accompanied by the information required by Subsection 16-10a-1325(2).
16-10a-1328. PROCEDURE FOR SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter who has not accepted an offer made by a corporation under
Section 16-10a-1327 may notify the corporation in writing of his own
estimate of the fair value of his shares and demand payment of the
estimated amount, plus interest, less any payment made under Section
16-10a-1325, if:
(a) the dissenter believes that the amount paid under Section 16-10a-1325
or offered under Section 16-10a-1327 is less than the fair value of the
shares;
(b) the corporation fails to make payment under Section 16-10a-1325 within
60 days after the date set by the corporation as the date by which it must
receive the payment demand; or
(c) the corporation, having failed to take the proposed corporate action
creating dissenters' rights, does not return the deposited certificates or
release the transfer restrictions imposed on uncertificated shares as
required by Section 16-10a-1326.
(2) A dissenter waives the right to demand payment under this section
unless he causes the corporation to receive the notice required by
Subsection (1) within 30 days after the corporation made or offered payment
for his shares.
16-10a-1330. JUDICIAL APPRAISAL OF SHARES -- COURT ACTION. (1) If a demand
for payment under Section 16-10a-1328 remains unresolved, the corporation
shall commence a proceeding within 60 days after receiving the payment
demand contemplated by Section 16-10a-1328, and petition the court to
determine the fair value of the shares and the amount of interest. If the
corporation does not commence the proceeding within the 60-day period, it
shall pay each dissenter whose demand remains unresolved the amount
demanded.
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(2) The corporation shall commence the proceeding described in Subsection
(1) in the district court of the county in this state where the
corporation's principal office, or if it has no principal office in this
state, the county where its registered office is located. If the
corporation is a foreign corporation without a registered office in this
state, it shall commence the proceeding in the county in this state where
the registered office of the domestic corporation merged with, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters who have satisfied the
requirements of Sections 16-10a-1321, 16-10a-1323, and 16-10a-1328, whether
or not they are residents of this state whose demands remain unresolved,
parties to the proceeding commenced under Subsection (2) as an action
against their shares. All such dissenters who are named as parties must be
served with a copy of the petition. Service on each dissenter may be by
registered or certified mail to the address stated in his payment demand
made pursuant to Section 16-10a-1328. If no address is stated in the
payment demand, service may be made at the address stated in the payment
demand given pursuant to Section 16-10a-1323. If no address is stated in
the payment demand, service may be made at the address shown on the
corporation's current record of shareholders for the record shareholder
holding the dissenter's shares. Service may also be made otherwise as
provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under Subsection (2) is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil
proceedings.
(5) Each dissenter made a party to the proceeding commenced under
Subsection (2) is entitled to judgment:
(a) for the amount, if any, by which the court finds that the fair value
of his shares, plus interest, exceeds the amount paid by the corporation
pursuant to Section 16-10a-1325; or
(b) for the fair value, plus interest, of the dissenter's after-acquired
shares for which the corporation elected to withhold payment under Section
16-10a-1327.
16-10a-1331. COURT COSTS AND COUNSEL FEES. (1) The court in an appraisal
proceeding commenced under Section 16-10a-1330 shall determine all costs of
the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against
the corporation, except that the court may assess costs against all or some
of the dissenters, in amounts the court finds equitable, to the extent the
court finds that the dissenters acted arbitrarily, vexatiously, or not in
good faith in demanding payment under Section 16-10a-1328.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of Sections 16-10a-1320 through 16-10a-1328; or
(b) against either the corporation or one or more dissenters, in favor of
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this part.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to those counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
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