Form 10-Q SB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1996
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to _________
Commission File No. 0-27580
AVTEL COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
A Utah Corporation 87-0378021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 Cremona Drive, Suite C, Santa Barbara, California 93117
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 685-0355
(No Change)
Former name, former address and former fiscal year, if changed since last
report.
Check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 7,090,807 Shares of Common
Stock - January 24, 1997
Traditional Small Business Disclosure Forms Yes No X
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Unaudited
ASSETS Three Months Fiscal Year
Ended Ended
December 31, 1996 September 30, 1996
Current Assets
Cash $ 748,651 $ 985,237
Other Current Assets
1,902 -
Accounts Receivable
(Net of Allowance for Doubtful Accounts
of ($-0-) 95,456 8,785
TOTAL CURRENT ASSETS 846,009 994,022
Fixed Assets
Equipment 210,405 -
Equipment Leased 172,155 -
Furniture and Fixtures
12,750 -
Less Accumulated Depreciation (14,547) -
NET FIXED ASSETS 380,763 -
Intangible Assets
Goodwill 331,424 -
Organization Costs 19,209 6,698
TOTAL INTANGIBLE ASSETS 350,633 6,698
TOTAL ASSETS $ 1,577,405 $1,000,720
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued) - Unaudited
LIABILITIES AND STOCKHOLDERS' EQUITY
Three Months Ended Fiscal Year Ended
December 31, 1996 September 30, 1996
Current Liabilities
Accounts Payable Trade $ 235,469 $ 31,945
Accrued Liabilities 4,134 6,026
Income Tax Payable - -
Deferred Revenue 60,536 -
Notes Payable 90,569 -
Lease Obligations-Current Portion 32,368 -
Contingent Consideration 150,000 -
Accounts Payable - Related party 58,358 40,683
TOTAL CURRENT LIABILITIES 631,434 78,654
Long Term Liabilities
Lease Obligation - Long Term Portion 107,655 -
TOTAL LONG TERM LIABILITIES 107,655 -
TOTAL LIABILITIES 739,089 78,654
Minority Interest 19,048 -
Stockholder's Equity
Preferred Stock 1,000,000 1,000,000
5,000,000 authorized
1,000,000 shares of Series A
Convertible Preferred, $1.00 par
value, issued and outstanding
Common Stock (Par Value $.001) 7,091 3,000
50,000,000 shares authorized
7,090,807 issued and outstanding 12/31/96
Paid in Capital in Excess of Par Value 122,827 -
Retained Earnings/(Deficit) (310,650) (80,934)
TOTAL STOCKHOLDERS' EQUITY 819,268 922,066
TOTAL LIABILITY &
STOCKHOLDERS' EQUITY $ 1,577,405 $ 1,000,720
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Three Months Ending December 31, 1996 and 1995 - Unaudited
Three Months Ending
December 31, 1996 December 31, 1995
REVENUES
Sales $ 254,355 $ -
Cost of Sales (86,484) -
Gross Margin 167,871 -
EXPENSES
General and Administrative 410,862 -
Bad Debt Expense 2,235 -
TOTAL OPERATING EXPENSE 413,097 -
Income (Loss) from Operations (245,226) -
Other Income/(Expense)
Interest Income 9,552 -
Miscellaneous Income 7,040 -
Interest Expense (945) -
NET OTHER INCOME (LOSS) 15,647 -
Income/(Loss) Before Taxes (229,579) -
Minority Interest (137) -
NET INCOME (LOSS) (229,716) -
Earnings/(Loss) Per Common Share ( .04) -
Weighted Average Shares Outstanding 5,908,169 -
THE ACCOMPANY NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Three Months Ending December 31, 1996 and 1995 - Unaudited
Three Months Ending
December 31, 1996 December 31. 1995
Cash Flows from Operating Activities:
Net Loss $ (229,716) $ -
Adjustments to reconcile net loss net cash
provided by operating activities
Minority Interest 19,048 -
Depreciation Expense 14,547 -
(Increase)/decrease in
Accounts Receivable (86,671) -
Prepaid Expenses (1,902) -
Increase/(Decrease) in
Accounts Payable 203,523 -
Interest Payable - -
Accrued Expenses ( 1,890) -
Deferred income 60,536 -
Accounts Payable - related party 17,675 -
NET CASH USED BY
OPERATING ACTIVITIES: (4,850) -
Cash flows from investing activities:
Purchase of fixed assets (395,310) -
Purchase of intangible assets (343,935) -
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (739,245) -
Cash flows from financing activities:
Proceeds from loans - -
notes payable 90,569 -
Cash payment on capital lease (6,963) -
Lease obligations 146,985 -
Contingent consideration 150,000 -
Issuance of common stock 126,918 -
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 507,509 -
Increase/(Decrease) in cash and
cash equivalents (236,586) -
CASH & CASH EQUIVALENTS AT
BEGINNING OF QUARTER 985,237 -
CASH & CASH EQUIVALENTS AT
END OF QUARTER $ 748,651 -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Three Months Ending December 31, 1996 and 1995 - Unaudited
(Continued)
Three Months Ending
December 31, 1996 December 31. 1995
Supplemental Disclosures of Cash Flow Information
Payment for interest expense $ - -
115,000 Shares Common Stock Issued
in Exchange for Interest in
Silicon Beach - -
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. - -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1.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 thereto included in
the Company's Annual Report on Form 10-KSB for the year ended September 30,
1996. Operating results for the three month period ended December 31, 1996,
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.
2.In connection with its acquisition of all the issued an outstanding capital
stock of AvTel Holdings, Inc., a California corporation ("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, are reflected at their fair market values.
In addition, as are the assets and liabilities of Silicon Beach
Communications, Inc., which was acquired in November, 1996 (See Note below).
The foregoing unaudited financial statements reflect, for the previous periods
noted, comparative data as to AHI only. AHI began operations in April, 1996.
3.In December, 1996, the Company entered into a letter of intent with WestNet
Communications, Inc., a California corporation ("WNC"), a regional Internet
Service Provider ("ISP"), to acquire, through one of the Company's
subsidiaries, all of the issued and outstanding capital stock of WNC for
consideration consisting of cash, promissory notes and shares of the Company's
$.001 par value common stock ("Common Stock"). A definitive agreement has not
yet been executed and there are no assurances that a transaction will be
completed. Nonetheless, management believes that it is probable that this
acquisition will be consummated during February, 1997. Under the proposed
transaction, the consideration will include $100,000 in cash, promissory notes
and deferred payments in an aggregate original principal amount of $165,000.00
(which will be secured by certain assets of WNC and by a pledge in the capital
stock of WNC being acquired) and 35,000 shares of Common Stock. 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 ISP and provides software development
services. The following unaudited pro forma balance sheets have been prepared
as if the WNC acquisition had been in effect as of December 31, 1996. The
following unaudited pro forma statements of operations have been prepared as
if the WNC and SBC acquisitions had been in effect as of October 1, 1996.
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited (Continued)
Note 2. Recent Developments (Continued)
Condensed Consolidated Pro Forma Balance Sheets
(unaudited)
As Reported WestNet for the
In the Accompanying 3 Months Ending Pro Forma Pro Forma
Financial Statements 12/31/96 Adjustments Balance
(Unaudited)
ASSETS
Current Assets
Cash $ 748,651 $ 46,589 $ (100,000) $ 695,240
Other Current Assets 1,902 6,839 - 8,741
Accounts Receivable
(Net of Allowance for
Doubtful Accounts
of $-0-) 95,456 84,134 - 179,590
Total Current Assets 846,009 137,562 (100,000)C 883,571
Fixed Assets
Equipment 210,405 257,853 - 468,258
Equipment Leased 172,155 - - 172,155
Furniture & Fixtures 12,750 2,619 - 15,369
Less Accumulated
Depreciation ( 14,547) (78,825) - (93,372)
Net Fixed Assets 380,763 181,647 - 562,410
Intangible Assets
Goodwill 331,424 60,380 - 391,804
Organization Costs 19,209 14,400 - 33,609
Accumulated
Amortization (4,200) - (4,200)
Total Intangible Assets 350,633 70,580 - 421,213
Other Assets
Deposits - 1,250 - 1,250
- 1,250 - 1,250
Total Assets $ 1,577,405 $ 391,039 $ (100,000) $ 1,868,444
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Unaudited (Continued)
Note 2. Recent Developments (Continued)
Consolidated Pro Forma Balance Sheets
(unaudited)
As Reported WestNet for the
In the Accompanying 3 Months Ending Pro Forma Pro Forma
Financial Statements 12/31/96 Adjustments Balance
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts Payable
Trade $ 235,469 $ 186 $ - $ 235,655
Accrued Liabilities 4,134 14,853 - 18,987
Deferred Revenue 60,536 - - 60,536
Notes Payable 90,569 76,000 C 157,000 323,569
Lease Obligations 140,023 - - 140,023
Contingent Consideration 150,000 - - 150,000
Accounts Payable-
Related Party 58,358 - - 58,358
Total Liabilities 739,089 91,039 157,000 987,128
Minority Interest 19,048 - - 19,048
Stockholders' Equity
Preferred Stock 1,000,000 - - 1,000,000
Common Stock 7,091 19,000 A (19,000) 7,126
B 35
Paid in Capital in
Excess of Par Value 122,827 60,380 A 19,000 165,792
B (35)
C (257,000)
D 220,620
Retained
Earnings/(Deficit) (310,650) 220,620 D (220,620) (310,650)
Total Stockholders' Equity 819,268 300,000 (257,000) 862,268
Total Liability &
Stockholders' Equity $ 1,577,405 $ 391,039 $ (100,000)$1,868,444
Notes:
A Cancellation of all authorized, issued and outstanding shares of all common
shares of WNC
B Issuance of 35,000 shares of $.001 par value common stock of the Company in
accordance with the contemplated acquisition of WNC
C Payment of cash and issuance of promissory notes in accordance with the
contemplated acquisition of WNC
D Elimination of current period earnings of WNC from retained earnings due to
purchase accounting.
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheets - Unaudited
Note 2. Recent Developments (Continued)
Consolidated Pro Forma Statement of Operations
(unaudited)
As Reported WestNet for the Silicon Beach
In the Accompanying 3 Months Ending for the period Pro Forma Pro Forma
Financial Statements 12/31/96 10/1-11/23/96 Adjustments Balance
(Unaudited) (Unaudited)
REVENUES
Sales $ 254,355 $ 243,247 $ 141,219 $ - $ 638,821
Cost of Sales (86,484) (30,915) (104,445) - (221,844)
Gross Margin 167,871 212,332 36,774 - 416,977
EXPENSES
General &
Administrative 410,862 159,770 159,131 - 729,763
Bad Debt
Expense 2,235 - - - 2,235
Total Operating
Expense 413,097 159,770 159,131 - 731,998
Income/(Loss) from
Operations (245,226) 52,562 (122,357) - (315,021)
Other Income (Expense)
Interest Income 9,552 - - - 9,552
Miscellaneous
Income 7,040 - 6,684 - 13,724
Interest Expense (945) - (1,773) - (2,718)
Net Other
Income/(Loss) 15,647 - 4,911 - 20,558
Income/(Loss)
Before Taxes (229,579) 52,562 (117,446) - (294,463)
Income Taxes - (23,375) - - (23,375)
Minority Interest (137) - - - (137)
Net Income
(Loss) $ (229,716) $ 29,187 $ (117,446) $ - $ (317,975)
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation
General
The following discusses the financial position and results of operations
of the Company and its consolidated subsidiaries, The Friendly Net LLC, a Utah
Limited Liability Company ("TFN"), Silicon Beach Communications, Inc., a
California corporation ("SBC"), and AvTel Holdings, Inc., a California
corporation ("AHI").
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 AHI, in exchange for 4,252,508 shares of the Company's $.001 par
value common stock ("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 reverse acquisition for
accounting purposes. Accordingly, the assets and liabilities of AHI are
reflected at their fair market value 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 TFN are
reflected at their fair market values. (See Note 2 to Consolidated Financial
Statements - Unaudited)
On November 22, 1996, the Company completed the acquisition of SBC. 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. This transaction has
been accounted for as a purchase. Accordingly, assets and liabilities of SBC
are reflected at their fair market values.
Financial Condition and Results of Operations
The decrease in total current assets from the fiscal year ended September
30, 1996, to the three months ended December 31, 1996, relates, primarily, to
the use of cash for operating activities relating to the integration of the
Company and AHI following the Merger, the integration of SBC and increased
general administrative expenses.. The increase in net fixed assets over the
periods resulted primarily from the acquisition of SBC in November, 1996.
The increase in total liabilities from the year ended September 30, 1996,
to the quarter ended December 31, 1996, arose, primarily, from the increase in
trade payables arising from the Merger and the acquisition of SBC; the
increase in deferred revenue associated with the acquisition of SBC which, in
the course of its business, is paid in advance by certain customers for ISP
services; the increase in notes payable relating to a deferred payment
agreement between the Company and Mr. Paul Begum, a principal shareholder and
former officer and director of the Company, and certain promissory notes
issued in connection with the Merger; and certain deferred compensation
arrangements and accounts payable with certain officers and directors.
Stockholders' equity decreased from September 30, to December 31, 1996,
as a result of the operating losses experienced during the quarter due,
primarily, to substantial costs and expenses incurred in connection with the
Merger with AHI, the acquisition of SBC and increased management and other
costs relating to the development and implementation of the Company's
marketing strategies. The Merger involving the Company and AHI is treated,
for accounting purposes, as a reverse purchase whereby the holders of AHI's
Common Stock acquired, after giving effect to the Merger, a controlling
interest in the Company. For financial reporting purposes, comparative data
for periods prior to the quarter ended December 31, 1996, reflects the
financial condition and results of operation of AHI only. Since AHI did not
begin operations until April, 1996, no comparative financial analysis is
available for AHI, with respect to the quarter ended December 31, 1995, as
compared to similar data for the Company, for the same quarter in 1995, 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.
The Company has entered into a letter of intent to purchase 100% of
WestNet Communications, Inc., a California corporation ("WNC") and intends to
close the transaction in February, 1997. The purchase of WNC will be
achieved using the issuance of the Company's Common Stock, notes payable and
cash. See "Recent Developments, Note 3 - to Consolidated Financial
Statements."
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
In December, 1996, the Company entered into a letter of intent with
WestNet Communications, Inc., a California corporation ("WNC"), a regional
Internet Service Provider ("ISP"), to acquire, through one of the Company's
subsidiaries, all of the issued and outstanding capital stock of WNC for
consideration consisting of cash, promissory notes and shares of the Company's
$.001 par value common stock ("Commons Stock"). A definitive agreement has
not been executed and there are no assurances that a transaction will be
completed. Nonetheless, management believes that it is probable that this
acquisition will be consummated during February, 1997. Under the proposed
transaction, the consideration will include $100,000 in cash, promissory notes
in an aggregate original principal amount of $157,000 (which will be secured
by certain assets of WNC and by a pledge in the capital stock of WNC being
acquired) and 35,000 shares of Common Stock.
In January, 1997, the Company appointed Mr. Steve DeWindt to the position
of President, Business Network Services. Mr. DeWindt has over 15 years
experience in various executive sales and management positions in the
information technology distribution industry. He most recently served as
Chairman and CEO of Ameriquest, Inc., a distributor of information technology
products and services.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (none)
(b) Reports on Form 8-K. On October 23, 1996, the Company filed a
Report on Form 8-K to report the consummation of the transactions pursuant to
which the Company merged with and acquired AvTel Holdings, Inc.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AvTel Communications, Inc.
(Registrant)
DATE: February 19, 1997 By: /s/
James P. Pisani
Its Principal Financial & Accounting
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF AVTEL COMMUNICATIONS, INC. AS OF DECEMBER 31, 1996 AND THE RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE MONTHS THEN ENDED AN IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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