U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For Fiscal Year Ended: September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934.
For the transition period from ____________ to ___________.
Commission file number 0-27580
AvTel Communications, Inc.
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(Name of Small Business Issuer in Its Charter)
Delaware 87-0378021
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
130 Cremona Drive, Suite C, Santa Barbara, CA 93117
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(Address of Principal Executive Offices) (Zip Code)
(805) 685-0355
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act:
Common Stock Par Value $0.01
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be con
tained, to the best of registrant's knowledge, in definitive proxy or informa
tion statements incorporated by reference in Part III of this Form 10-KSB or
any amendment to this form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $2,346,171
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The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $14,326,280, computed at
the average bid and asked price of such Common Stock as of January 7, 1998.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of December 15, 1997, there were 9,424,559 shares of the Registrant's
Common Stock, par value $0.01, issued and outstanding, excluding treasury
stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (C) of the Securities Act of
1933 ("Securities Act"): None.
-----
<PAGE>
TABLE OF CONTENTS
Item Number Page Number
PART I
1. Description of Business 4
2. Description of Property 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for Common Equity and Related Stockholder Matters 14
6. Management's Discussion and Analysis or Plan of
Operations 16
7. Financial Statements 19
8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 19
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 19
10. Executive Compensation 22
11. Security Ownership of Certain Beneficial Owners and
Management 26
12. Certain Relationships and Related Transactions 29
13. Exhibits, List and Reports on Form 8-K 30
<PAGE> PART I
ITEM 1. DESCRIPTION OF BUSINESS
Background.
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AvTel Communications, Inc. (the "Company" or "Registrant") is a non-
facilities based telecommunications carrier providing a comprehensive array of
broadband voice and data network services. The Company was formerly a Utah
corporation. On December 1, 1997, the Company merged with and into its
wholly-owned Delaware subsidiary, thus effecting the Company's reincorporation
in Delaware (the "Reincorporation Merger"). The conversion of the Company's
stock in the Reorganization Merger resulted in an effective one-for-four reverse
stock split, which was effective on December 1, 1997 (the "Reverse Stock
Split"). All share and option numbers and prices set forth herein have been
adjusted to reflect the Reverse Stock Split.
Also on December 1, 1997, the Company acquired Matrix Telecom, Inc., a
privately-held Texas corporation ("Matrix") by means of a share for share
exchange (the "Share Exchange"). Matrix is a non-facilities based provider of
long distance telephone services. See "Recent Developments; Acquisition of
Matrix" below. The Reorganization Merger and the Reverse Stock Split were
conditions to the closing of the Share Exchange.
The Company was incorporated on October 31, 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 65,000 shares of The Company's Common Stock,
options to purchase 18,750 shares of The Company's 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 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
connectionwith 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.
<PAGE>
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 1,063,127 shares of the Company Common Stock, represent
ing approximately 61% of the issued and outstanding Company Common Stock after
giving effect to the AI Merger, and 250,000 shares of newly authorized shares of
the Company's Series A Convertible Preferred Stock. For accounting purposes,
the acquisition was treated as a reverse acquisition with A.I. as the
acquirer.
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
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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 28,750 shares of the Company's 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 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
businesses, 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.
<PAGE>
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 Telecommunications 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 opportu
nity 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 require
ments 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 Micro
systems' Java . These Web applications are computer platform and operating
system independent but depend entirely upon connectivity and bandwidth for
successful deployment and execution.
<PAGE>
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 communi
cations
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 broad
band network services, providing complete internetworking solutions for small to
mid-size offices. As a result of the acquisition of Matrix, a non-facilities
based long distance service company, the Company can now add long distance
telephone services to the package of services it offers. 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:
<PAGE>
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.
Regulation.
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The services which the Company's newly-acquired subsidiary, 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 provi
sion, origination or termination of jurisdictionally interstate or international
communications. The state public service commissions ("PSCs") retain jurisdic
tion 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 the Company.
The Company's other businesses are not subject to substantial
governmental regulation.
Intellectual Property.
- ----------------------
The Company uses several unregistered trademarks as part of its networking
business, including PointStreamTM and FrameLinkTM, which it may seek to
register. 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
<PAGE>
trademark of Matrix. While the Company believes its trademarks are important to
its business, the Company does not believe that failure to register its trade
marks poses any material risk of infringement on its rights to use such trade
marks.
Employees.
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As of December 1, 1997, the Company (exclusive of Matrix) had approximately
45 full-time employees. On that date, Matrix utilized approximately 124 full-
time employees, including employees of Best, its wholly-owned subsidiary. The
majority of these employees were leased from United Group Service Center. None
of the employees of the Company or Matrix are represented by a union. Matrix
supplements its work force from time to time with contractors, administrative
personnel through employment agencies, and part time employees. The Company
believes that it has good relations with its employees.
Recent Developments; Acquisition of Matrix.
- -------------------------------------------
Completion of Share Exchange. As previously reported, the Registrant and
Matrix entered into a Stock Exchange Agreement dated April 29, 1997, and
subsequently amended (the "Exchange Agreement"), pursuant to which the persons
or entities who owned the issued and outstanding common stock of Matrix ("Matrix
Stockholders") would transfer to the Registrant all of their Matrix stock and,
in exchange, the Registrant would issue to the Matrix Stockholders shares of the
Registrant's Common Stock (the "Share Exchange"). The Share Exchange was
completed pursuant to the terms of the Exchange Agreement on December 1, 1997.
Following the Share Exchange, the former Matrix Stockholders now own approxi
mately 81% of the issued and outstanding Common Stock of the Registrant. The
consummation of the Share Exchange was subject to the satisfaction of several
conditions, including the completion of the Reincorporation Merger and the
Reverse Stock Split.
Matrix is a provider of domestic and international long distance telecommu
nication 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. See "Business of Matrix," below.
In connection with the completion of the Share Exchange, the Matrix Stock
Holders and the Registrant entered into a Registration Rights and Lockup
Agreement dated December 1, 1997 (the "Registration Rights and Lockup
Agreement"). Pursuant to the Registration Rights and Lockup Agreement, certain
persons and entities who hold an aggregate of 67.4% of the outstanding Matrix
Common Stock (85.2% of the outstanding Matrix Common Stock, excluding the shares
held by BestConnections Inc., a wholly-owned subsidiary of Matrix; "Best")
<PAGE>agreed, for a two-year period commencing on the closing of the Share
Exchange, not to offer, pledge, sell, or otherwise dispose of any shares of the
Registrant issued to them pursuant to the terms of the Exchange Agreement.
The Matrix Stockholders who have agreed to this two-year lockup period are
Ronald L. Jensen,his adult children (James J. Jensen, Jami J. Jensen, Janet
Jensen Krieger, Jeffrey J. Jensen, and Julie J. Jensen), and United Group
Association, Inc. and UA Plus, Inc. (which are controlled by Mr. Jensen and his
adult children).
The Registration Rights and Lockup Agreement requires that the Registrant
use its best efforts to become listed on the NASDAQ Small Cap System or the
NASDAQ National Market System and to file a shelf registration statement
providing for the sale by the Matrix Stockholders 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 Stockholders described above. Under
the Registration Rights and Lockup Agreement, the Registrant 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. If the Registrant's securities are not listed on the NASDAQ SmallCap
System or the NASDAQ NMS within six months following the Closing or if the
Registrant is unable to qualify for use of a shelf registration statement within
such period, the Matrix Stockholders (other than those subject to the two-year
restriction) are entitled to demand that the Registrant register the Registrant
Delaware Common Stock received by them in connection with the Share Exchange on
any registration statement then available to the Registrant. The Matrix
Stockholders may also require the Registrant to undertake up to two additional
demand 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 Stockholders) will be borne by the Registrant.
Pursuant to the terms of the Exchange Agreement, Barry A. Peters and Frank
Dziuba resigned as directors of the Registrant immediately prior to the comple
tion of the Share Exchange. Also pursuant to the terms of the Exchange
Agreement, on December 1, 1997, John E. Allen, Ronald W. Howard and Gregory T.
Mutz were appointed to fill vacancies on the Registrant's Board of Directors.
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."
<PAGE>
Matrix has invested in call rating, billing, and customer service infra
structure. In addition, Matrix has entered into billing and collection agree
ments 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 expand
ing.
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.
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 sub
scribers who place the majority of their long distance calls during "off peak"
periods.
<PAGE>
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.
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
<PAGE>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.
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 distrib
uting 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.
Recent Developments; Board of Directors
- ---------------------------------------
On January 5, 1998, Ronald W. Howard tendered his resignation from the
Company's Board of Directors. On January 9, 1998, the Board accepted Mr.
Howard's resignation and elected Jeffrey J. Jensen to fill the vacancy created
by Mr. Howard's resignation.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases facilities in four locations. The Company's corporate
headquarters 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. Matrix currently leases approximately 24,050 square feet of space for its
offices at 8721 Airport Freeway in Fort Worth, Texas, pursuant to a lease
agreement expiring on June 30, 2000. The monthly rent (not including electric
ity) as of September 30, 1997 is approximately $19,888. 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, expiring in
September 2001, 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
The Company is not aware of proceeding against the Company contemplated by any
governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the quarter ended
September 30, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the NASD's
Electronic Bulletin Board (the "Bulletin Board") under the trading symbol
"AVCO". There is no established public trading market for
the Company's Preferred Stock. The following high and low bid information for
the Company's Common Stock was provided by various market makers and the
Bulletin Board. The quotations provided reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual transac
tions. All prices have been adjusted to reflect the Reverse Stock Split.
<PAGE>
Year ending September 30, 1996 High Bid Low Bid
- ------------------------------ -------- -------
First Quarter $ 2.00 $ 2.00
Second Quarter $ 3.50 $ 2.00
Third Quarter $ 5.75 $ 3.00
Fourth Quarter $ 4.00 $ 4.00
Year ending September 30, 1997 High Bid Low Bid
- ------------------------------ -------- -------
First Quarter $ 5.50 $ 2.00
Second Quarter $ 3.50 $ 2.00
Third Quarter $18.00 $ 3.13
Fourth Quarter $19.00 $ 9.75
The number of shareholders of record of the Company Common Stock as of
December 15, 1997, was approximately 193. At that date there were two record
holders of the Company's Preferred Stock.
Management of the Registrant intends to submit an application to allow
trading of the Company's Common Stock on the NASDAQ National Market System
("NMS") or, if such application is for any reason rejected or not feasible, on
the NASDAQ SmallCap System ("SCS"). While management believes that the Company
size, shareholder base and other factors will enable it to be included on the
NMS or SCS, there are no assurances that this will occur, in which event the
trading in the Company's Common Stock will continue to be reported on the
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's Common Stock unless (i) all
cumulative dividends on the Series A Convertible Preferred Stock have been
fully paid, and (ii) the holders of at least 50% of the outstanding shares of
the Series A Convertible Preferred Stock have approved such dividend.
During the year ended September 30, 1997, the Registrant issued shares of
its Common Stock, which were not registered under the Securities Act, in
connection with the AI Merger, the acquisition of SBC and the acquisition of
WNI. The Company also issued shares of Series A Convertible Preferred Stock in
connection with the AI Merger. (Such shares are convertible into Common Stock
on a one for one basis.) No underwriters were used in these transactions and
none of such shares were issued publicly. In each case the Registrant relied on
the exemptions from registration provided by Section 4(2) of the Securities
Act
<PAGE>
and Rule 506 of Regulation D promulgated thereunder. In each case, the number
of individuals receiving shares of stock was very small, and such
individuals were and are believed by the Company to possess the requisite level
of financial sophistication and experience in order to qualify for such
exemptions. In each case, the Registrant made available to the recipients of
such Common Stock all material information with respect to the Registrant and
the respective transaction. The specific details of such issuances were
disclosed as part of relevant Form 8-K, Form 10-KSB or Form 10-QSB filings.
Certain summary information is set forth in the following
table. All share numbers have been adjusted to reflect the Reverse Stock
Split.
Date Shares Issued Entity Acquired Purchasers
----------------- ------------- --------------- ----------
October 23, 1996 1,063,127 AI Anthony E. Papa
(Common Stock) James P. Pisani
Barry A. Peters
250,000 Tommy Lin
(Preferred Stock) Patrick Lin
November 20, 1996 28,750 SBC Frank Dziuba
February 21, 1997 8,750 WNI Theodore E. Padova
Howard M. Tamaroff
Hallas Color Photo
Lab, Inc.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
General
- -------
The Company is a successor to A.I., which it acquired in October 1996
through the AI Merger. See "Description of Business - Background" above. As a
result of that transaction, the Company enhanced its business strategy to become
a national provider of data, voice and video services to individuals and
corporate customers. In November 1996, and February 1997, the Company acquired
100% of SBC and WNI, respectively.
Although the Company, then known as "Hi, Tiger International, Inc."
("HITI") was the legal acquirer in the AI Merger, the transaction was treated as
a reverse acquisition of HITI by A.I. Accordingly, the operations reflected in
the financial statements for periods prior to October 23, 1996, are those of
A.I. only and, subsequent to October 23, 1996, are those of the combined
operations of A.I. and HITI, together with those of SBC and WNI from their
respective dates of acquisition.
The following discusses the financial position and results of operations of
the Company and its consolidated subsidiaries, SBC, WNI and TFN.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
In prior years, the Company generally has needed working capital
principally to fund its current operations. Generally the Company has had
adequate funds for its activities and, from time to time in the past, has
relied on short-term borrowings and the issuance of restricted common stock
to fund current operations and acquisitions. The Company's acquisitions of SBC
and WNI have substantially increased current monthly revenues and provided the
Company with additional technical and other resources to allow the Company to
further expand future operations. The Company has concentrated on the develop
ment of its business strategies and the integration of its acquisitions since
inception and has generated operating losses in both 1997 and 1996. The Company
used cash in operations in 1997 and 1996 totaling $847,000 and $18,000, respec
tively. Since signing the Exchange Agreement with Matrix in April, 1997, the
Company relied on funds borrowed from Matrix totaling $750,000 through September
30, 1997 to fund its working capital needs.
The closing of the Share Exchange with Matrix has materially improved the
Company's liquidity and capital resources. For the nine months ended September
30, 1997, Matrix had net cash provided by operating activities of $4,300,312. On
September 30, 1997, Matrix had no long term debt. Consistent with management's
intentions to develop and execute the Company's business, sales and marketing
strategies, the Company's needs for capital may exceed funds generated from
operations in the next twelve months. To prepare for this possibility,
management is exploring a range of alternative solutions, including secured and
unsecured borrowing, capital equipment leases, issuance of the Company's debt or
equity securities, or any combination of the foregoing.
Financing activities provided $723,503 in 1997 compared to $1,003,000
in 1996. The cash provided by financing activities in 1997 was
primarily from a bridge loan with Matrix, as required by the
Exchange Agreement. The Company incurred an additional $160,325 in
short term debt with a group of former WNI shareholders as a result of the
Company's acquisition of WNI.
Cash used in investing activities in 1997 included cash paid for capital
expenditures of $265,346 and cash paid for acquisitions of $357,726.
Results of Operations
- ---------------------
A.I., the Company's predecessor for accounting purposes, was in existence
only from its incorporation in July 1996 until it was acquired by the Company on
October 23, 1996. During its existence, A.I. did not engage in substantial
operations. The results of operations of the Company for the year ended
September 30, 1997, are compared with the results of operations of A.I. for the
period ended September 30, 1996, below.
<PAGE>
Revenues: Total revenues in 1997 were $2,346,171. Revenues resulted from
the acquisitions of HITI, SBC and WNI.
Selling, General and Administrative: Selling, general and administrative
expense totaled $2,456,327 in 1997, compared to $120,664 in 1996. This increase
was due primarily to increases in personnel necessary to execute the Company's
strategic plan.
Depreciation: Depreciation and amortization totaled $190,549 in 1997.
Depreciation resulted from the depreciation of backbone facilities, computers,
routers and office equipment acquired during 1997. Amortization related to the
amortization of goodwill resulting from certain of the Company's
acquisitions.
Impairment Loss: In connection with the HITI acquisition, substantial
goodwill resulted due to the market value of HITI common stock being
substantially higher than the underlying fair value of the net assets
acquired. Accordingly, such goodwill was written off as a charge to income
immediately after the transaction.
Interest: The Company had interest expense of $17,573 in 1997 compared to
interest income of $4,813 in 1996. This was a result of increased debt to
finance the Company's increased activities and acquisitions.
Inflation 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
and telecommunications services in its market areas. Many of these firms
have long standing customer relationships and are well-staffed and well
financed. The Company believes that competition in the telecommunications
service industry is based on competitive pricing, although the ability,
reputation and technical support of a concern is also significant.
The Company believes that recent changes in telecommunications
regulation has favorably impacted the Company's business. The Company has
initiated an expansion of operations to include a variety of voice and data
services requiring certain federal and state licenses and permits. The
Company is in the process of applying for various regulatory approvals and
permits and anticipates they will be granted on a timely basis. If they
are not granted, the Company may have to curtail or delay certain elements
of this strategy.
Ongoing Reporting
- ------------------
In connection with the consummation of the Share Exchange with Matrix on
<PAGE>
December 1, 1997, the Board of Directors of the Company determined to change its
fiscal year-end from September 30 to December 31. In addition, because the
transaction is treated as the reverse acquisition of the Company by Matrix,
future financial reporting by the Company will reflect the historical financial
information of Matrix rather than that of AvTel.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company and supplementary data are
included beginning immediately following the signature page to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 1, 1997, the Registrant engaged KPMG Peat Marwick LLP to audit
its financial statements for the year ended September 30, 1997. This and
certain other changes in the Registrant's accountants were previously reported
in Forms 8-K dated October 7, 1997, and December 1, 1997.
There are not and have not been any disagreements between the Company and
its accountants on any matter of accounting principles, practices or financial
statements disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers. The following table sets forth certain
information concerning the directors and executive officers of the
Registrant:
Name Age Director since Position
- --------------- --- ---------------- -----------------------------------
Anthony E. Papa 35 1996 Chairman of the Board,
President,
Chief Executive Officer and
Director
James P. Pisani 33 1996 Executive Vice President,
Chief
Operating Officer, Chief Financial
Officer, Secretary and Director
John E. Allen 61 1997 Director
Jeffrey J. Jensen 38 1998 Director
Gregory T. Mutz 51 1997 Director
Virginia A. Baker 49 - Controller, Chief Accounting Officer
D. Stephen DeWindt 42 - President - Business Network
Services Division
Frank Dziuba 39 - Senior Vice President - Software
Development
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. 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, and a director of ABC-Clio, Inc.,
an international publisher of historical reference materials for institutions of
higher education. 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. Prior to being
elected a Director of the Company in October 1996, he served as Vice President
of Sales and National Accounts 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 Boards of Amli Residential
Properties Trust and Amli Commercial Properties, LLC, and President of Amli
Realty Co. ("AMLI"), a commercial real estate firm, 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, and Excell Global Services, an owner and operator of telephone
call centers. 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.
<PAGE>
Jeffrey J. Jensen, age 38, is the President of CORE Marketing, Inc.,
("CORE") which sells Matrix long distance services using direct mail and
telemarketing facilities, a position he has held since 1996. From 1989 until
its acquisition by CORE in 1996, Mr. Jensen was the President of Specialized
Association Services, which was engaged in the same business as CORE. In
addition, from 1992 to 1995, Mr. Jensen was a founding partner of Association
Dental Plan, which provided discounted dental services to 40,000 members. Mr.
Jensen received degrees in Economics and Philosophy from Cornell College, in
Mount Vernon, Iowa.
Gregory T. Mutz, age 51, is chairman of the Boards of Amli Residential
Properties Trust, Amli Commercial Properties, LLC, Excell Global Services and
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.
Virginia A. Baker, age 49, is the Controller and Chief Accounting Officer
of the Company. Ms. Baker also serves as the Vice President and Treasurer of
Matrix. Ms. Baker joined Matrix in October 1993 as Controller, and became
Treasurer in January 1995, and Vice President in May 1996. From July 1990 to
October 1993, Ms. Baker served as Controller of VarTec Telecom, Inc., a large
facility based national long distance provider headquartered in Dallas, Texas.
Ms. Baker worked as a CPA from September 1987 to July 1990 for Deloitte and
Touche LLP. Ms. Baker joined the Company on December 1, 1997, as a result of
the acquisition of Matrix.
D. Stephen DeWindt, age 42, was appointed President of the Company's
Business Network Services Division in January 1997. From September 1995 to
September 1996, Mr. DeWindt served as Chairman of the Board and Chief Executive
Officer of Ameriquest Inc., a computer wholesale distributor listed on the New
York Stock Exchange. From March 1992 to August 1995, he was Co-President of
Computer 2000 AG, a computer wholesale distributor based in Germany. Mr.
DeWindt received a B.A. in Business Administration from Principia College,
Elsah, Illinois, and an M.B.A. from the University of California, Los Angeles.
Frank Dziuba, age 39, was appointed Senior Vice President, Software
Development of the Company in November, 1996, in connection with the
Company's acquisition of SBC, which Mr. Dziuba founded in 1995. Prior to 1995,
Mr. Dziuba served as senior engineer at various software development firms where
he had management responsibility for design and development of several complex
software and telecommunications products. Mr. Dziuba was also co-founder and a
principal shareholder of one or more of these firms.
<PAGE>
There are no family relationships among the directors or executive officers
of the Registrant.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Registrant's officers and directors, and persons who own more than ten percent
of a registered class of the Registrant's equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Registrant with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Registrant, and on written representations that no Forms 5 were required, the
Company believes that during the year ended September 30, 1997, the following
table reflects all such reports that were not filed on a timely basis:
Known
Number of Number of Type of Failures to file
Name of Person Late Reports Transactions Report(s) Required Report
- --------------- ------------- ------------ --------- -----------------
Anthony E. Papa 2 6 Form 3/4 None
James P. Pisani 2 2 Form 3/4 None
D. Stephen DeWindt 1 0 Form 3 None
Frank Dziuba 1 1 Form 3 None
Barry A. Peters(1) 2 2 Form 3/4 None
- ------------------
(1) Mr. Peters was formerly a director and 10% shareholder of the Registrant.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and each other executive officer whose total annual salary and
bonus exceeded $100,000 for the fiscal year ended September 30, 1997 (the "Named
Officers").
<PAGE>
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long-Term Compensation
------------------------------------ ----------------------
Other Awards Payouts
Name Annual --------- -------
and Compen- Securities All
Other
Principal Fiscal sation Underlying
Compensa-
Position Year Salary Bonus ($) Options (#) tion
($)
- ------------------------------------------------------------------------------
Anthony E. Papa 1997 $140,208 -- -- 31,250 --
President and Chief 1996 $ 15,625 -- -- -- --
Executive Officer 1995 -- -- -- -- --
James P. Pisani 1997 $138,780 -- -- 31,250 --
Executive Vice 1996 $ 15,625 -- -- -- --
President, Chief 1995 -- -- -- -- --
Operating Officer,
Chief Financial
Officer and Secretary
D. Stephen DeWindt 1997 $ 91,319 $ 1,736 -- 50,000 --
President - Business 1996 -- -- -- -- --
Network Services 1995 -- -- -- -- --
Division
Frank Dziuba 1997 $68,333 $39,300 -- 43,724 --
Senior Vice Presi- 1996 -- -- -- -- --
dent - Software Dev- 1995 -- -- -- -- --
elopment
The following table summarizes all option grants to the Named Officers
during the year ended September 30, 1997. No stock appreciation rights were
granted during such year.
<PAGE> OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
---------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted Fiscal Year Price Date
- ------------------- ------------ -------------- -------- --------------
Anthony E. Papa 31,250 14.2% $3.30 March 4, 2002
James P. Pisani 31,250 14.2% $3.30 March 4, 2002
D. Stephen DeWindt 12,500 5.6% $5.00 January 27, 2007
31,250 14.2% $2.50 February 19, 2007
6,250 2.8% $3.00 March 4, 2007
Frank Dziuba 2,274 1.0% $4.00 November 21, 2006
3,500 1.6% $8.00 November 21, 2006
6,700 3.0% $12.00 November 21, 2006
31,250 14.2% $3.00 March 4, 2007
The following table provides information with respect to the unexercised
stock options during held as of September 30, 1997 by the Named Officers. No
stock options were exercised by any of the Named Officers during the year
ended
September 30, 1997.
<PAGE> SEPTEMBER 30, 1997 OPTION VALUES
--------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
September 30, 1997 September 30, 1997 (1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------- ------------- ----------- -------------
Anthony E. Papa 0 31,250 $0 $490,625
James P. Pisani 0 31,250 $0 $490,625
D. Stephen DeWindt 6,250 43,750 $87,500 $704,125
Frank Dziuba 12,474 31,250 $119,510 $500,000
- -------------------
(1) Calculated on the basis of the fair market value of the Company's common
stock on September 30, 1997, minus the exercise price of the options. The
closing sale price of the common stock on September 30, 1997 was $19.00 per
share.
Compensation of Directors
- -------------------------
Members of the Board of Directors do not currently receive any compensation
for their services as directors, and did not receive such compensation during
the year ended September 30, 1997. The Company reimburses directors' expenses
in connection with their attendance at Board and committee meetings.
Employment Agreements
- ---------------------
During the year ended September 30, 1997, the Company had employment
agreements in place with each of Messrs. Papa and Pisani. Under these employment
agreements, generally, each executive was to be employed for a term commencing
in August 1996 and expiring July 31, 1999, subject to certain extension rights.
Under the employment agreements, the executives were to be paid an initial base
annual salary of $125,000. The agreements provided that this base salary would
be increased when the Company either (a) obtained additional debt or equity
capital in certain amounts and under certain terms or (b) achieved monthly
revenues exceeding certain objectives.
<PAGE>
The agreements provided for incentive bonuses based on the achievement of
performance objectives in each fiscal year, which performance objectives were to
be established by the Board of Directors at the beginning of each fiscal year.
The employment agreements also provided that bonuses of $50,000 would be paid to
each executive if, within twelve months following the A.I. Merger, the Company
completed a debt or equity financing in certain amounts and under certain terms.
Messrs. Papa and Pisani both waived their rights to receive both sets of
bonuses.
The employment agreements further provided that each of the executives
would be eligible to receive grants of stock options to acquire shares of Common
Stock. See "Option Grants in Last Fiscal Year," above.
In connection with the execution of the Exchange Agreement, Messrs. Papa
and Pisani agreed that, upon the closing of the Share Exchange, their respective
employment agreements would be terminated. Accordingly, both employment
agreements terminated on December 1, 1997, and Messrs. Papa and Pisani now serve
on an "at-will" basis.
In connection with its acquisition of SBC, the Company entered into an
employment agreement with Mr. Dziuba pursuant to which he is employed for a
three-year term ending November 21, 1999 at an initial base annual salary of
$80,000, subject to increase, if any, as may be determined by the Board of
Directors. This agreement also provides, among other things, for Mr. Dziuba to
serve as President of SBC, for stock option grants, and an "earn-out" bonus paid
to Mr. Dziuba upon satisfaction of certain operational performance objectives.
The amounts, if any, due under the special performance bonus, are subject to
certain set-off rights of the Company in the event of a breach of certain
representations, warranties and agreements relating to its acquisition of SBC.
The agreement does not call for any payments as a result of any change in
control of the Company.
The Company is also party to an employment agreement with Mr. DeWindt
pursuant to which he is employed for a two-year term ending January 31, 1999,
subject to extension. The agreement provides for an annual base salary of
$125,000, subject to increase, and for the payment of bonuses based on
performance objectives adopted by the Company's Board of Directors. Pursuant to
this agreement, Mr. DeWindt was awarded options to 50,000 shares of the
Company's common stock. See "Option Grants in Last Fiscal Year," above. The
agreement does not call for any payments as a result of any change in control of
the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Registrant's Common Stock as of December 1, 1997.
This information is set forth for (i) each person known to the Registrant to own
beneficially more than five percent (5%) of the Registrant's Common Stock, (ii)
each of the Registrant's directors and executive officers, and (iii) the
executive officers and directors of the Registrant as a group.
<PAGE>
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned (1) Percent of Class (1)
- -------------------- ---------------------- --------------------
Ronald L. Jensen(2)(3) 2,088,232 22.3%
4001 McEwen, Suite 200
Dallas, TX 75244
United Group Association,
Inc.(2)(3) 2,088,232 22.3%
4001 McEwen, Suite 200
Dallas, TX 75244
UA Plus, Inc.(2)(3) 2,088,232 22.3%
4001 McEwen, Suite 200
Dallas, TX 75244
Janet Jensen Krieger(3) 961,939 10.3%
9003 Airport Freeway
Fort Worth, TX 76180
Jeffrey J. Jensen(3) 851,738 9.1%
2121 Precinct Line Road
Hurst, TX 76054
James J. Jensen(3) 851,738 9.1%
6304 Alexandria Circle
Atlanta, GA 30326
Jami J. Jensen(3) 851,738 9.1%
1933 Swede Gulch
Golden, CO 80120
Julie J. Jensen(3) 851,738 9.1%
1023 15th Street N.W.
Washington, D.C. 20005
Anthony E. Papa 512,963 5.5%
James P. Pisani 506,563 5.4%
John E. Allen -- *
Gregory T. Mutz -- *
Virginia A. Baker 53,608 *
<PAGE>
D. Stephen DeWindt (4) 9,375 *
Frank Dziuba(5) 38,724 *
All directors and executive
officers as a group (8
persons)(6) 1,972,971 21.0%
* Represents less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of the Registrant's Common Stock subject to options held by that person
that are exercisable within sixty (60) days following December 1, 1997 are
deemed outstanding. However, such shares of the Registrant's Common Stock are
not deemed outstanding for the purpose of computing the percentage ownership of
any other person. Unless otherwise indicated in the footnotes to this table, the
persons and entities named in the table have sole voting and sole investment
power with respect to the shares set forth opposite such shareholder's name. The
percentages of beneficial ownership shares in this table are based upon
9,368,584 shares of the Registrant's Common Stock outstanding.
(2) Includes 1,463,693 shares held by United Group Association, Inc., a
management company ("UGA"), 222,475 shares held by Ronald L. Jensen and 402,064
shares held by UA Plus, Inc. UGA is wholly-owned by Mr. Jensen. Mr. Jensen is
the majority shareholder in UA Plus, Inc. Excludes shares held by Mr. Jensen's
adult children, Janet Jensen Krieger, Julie J. Jensen, James J. Jensen, Jami J.
Jensen and Jeffrey J. Jensen, and certain employees of companies associated with
Mr. Jensen, as to all of which the Registrant understands that Mr. Jensen
disclaims beneficial ownership.
(3) Pursuant to the terms of the Registration Rights and Lockup Agreement dated
December 1, 1997, these shares may not be sold for two years after December 1,
1997.
(4) Represents shares that may be acquired under options that were
exercisable within 60 days of December 1, 1997.
(5) Includes 12,474 shares that may be acquired under options that were
exercisable within 60 days of December 1, 1997.
(6) Includes 21,849 shares that may be acquired under options that were
exercisable within 60 days of December 1, 1997.
<PAGE>
Of the 207,700 outstanding shares of the Registrant's non-voting Series A
Convertible Preferred Stock outstanding at December 1, 1997, 128,850 shares were
owned by Tommy Lin and 78,850 shares were owned by Patrick Lin. Tommy Lin and
Patrick Lin are brothers. The shares of the Series A Convertible Preferred
Stock are currently convertible into shares of the Registrant's Common Stock on
a one for one basis.
The Registrant is not aware of any agreements that could result in
any future change in the control of the Registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Transactions - Matrix
- -----------------------------
Dependence on Jensen-Controlled Companies for Marketing Services. Ronald L.
Jensen and his adult children (including Jeffrey J. Jensen) 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, Inc.("CORE"). Director Jeffrey J. Jensen is the President of 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 was subsequently 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. (Amounts shown
with respect to Matrix are on a calendar year basis.)
Network Services From Affiliate of Shareholders. Mr. Jensen and his adult
children (including Jeffrey J. Jensen), together with certain other shareholders
of the Company, 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 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.
<PAGE>
Employee Leasing. Matrix leases substantially all of its employees from
United Group Service Center, which is affiliated with other entities in which
Mr. Jensen and his adult children (including Jeffrey J. Jensen), have
controlling interests. Matrix paid United Group Service Center $4,542,007 for
such leased employees' services in 1996, and $3,655,712 and $2,442,442 in 1995
and 1994, respectively.
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 and his adult children (including Jeffrey J.
Jensen), 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, his adult children 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.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(a) The index to the exhibits filed as part of this report is set forth
immediately following the financial statements.
(b) During the quarter ended September 30, 1997, the Company filed a
Current Report on Form 8-K dated August 25, 1997. The Current Report contained
a description, under the heading of Items 2 and 5, of the amendment to the
Exchange Agreement between the Company and Matrix and a press release with
respect to the status of the Share Exchange and related transactions. No
financial statements were filed as part of the report.<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on it behalf by the
undersigned, thereunto duly authorized.
AVTEL COMMUNICATIONS, INC.
Dated: January 9, 1998 By /S/ ANTHONY E. PAPA
------------------------
Anthony E. Papa,
President and Chief Executive Officer
Dated: January 9, 1998 By /S/ JAMES P. PISANI
------------------------
James P. Pisani,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
Dated: January 9, 1998 By /S/ VIRGINIA A. BAKER
------------------------
Virginia A. Baker
Controller and Chief Accounting Officer
(Principal Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated on this 9th day of January, 1998.
AVTEL COMMUNICATIONS, INC.
By /S/ ANTHONY E. PAPA
------------------------
Anthony E. Papa,
President and Chief Executive Officer
By /S/ JAMES P. PISANI
------------------------
James P. Pisani,
Chief Operating Officer and
Chief Financial Officer, Director
<PAGE>
By /S/ VIRGINIA A. BAKER
-------------------------
Virginia A. Baker
Controller and Chief Accounting Officer
By /S/ JOHN E. ALLEN
-------------------------
John E. Allen
Director
By /S/ JEFFREY J. JENSEN
--------------------------
Jeffrey J. Jensen
Director
By /S/ GREGORY T. MUTZ
--------------------------
Gregory T. Mutz
Director
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Holdings, Inc.)
Consolidated Financial Statements
September 30, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AvTel Communications, Inc.
(Formerly AvTel Holdings, Inc.)
Page
Independent Auditors' Report 35
Consolidated Balance Sheets, September 30, 1997 and 1996 36
Consolidated Statements of Operations For the Year Ended
September 30, 1997 and the Period from Inception to
September 30, 1996 37
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended September 30, 1997 and the Period
from Inception to September 30, 1996 38
Consolidated Statements of Cash Flows For the Year Ended
September 30, 1997 and the Period from Inception to
September 30, 1996 39
Notes to Consolidated Financial Statements 40
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Avtel Communications, Inc.
(Formerly AvTel Holdings, Inc.):
We have audited the accompanying consolidated balance sheet of Avtel
Communications, Inc. and subsidiaries as of September 30, 1997, and the
related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Avtel
Communications, Inc. and subsidiaries as of September 30, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Dallas, Texas
December 5, 1997
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Holdings, Inc.)
Consolidated Balance Sheets
September 30, 1997 and 1996
Assets 1997 1996
Current assets:
Cash and cash equivalents $ 238,705 985,237
Accounts receivable (net of
allowance for doubtful accounts
of $86,002 in 1997) 183,008 -
Other current assets 38,595 -
Total current assets 460,308 985,237
Fixed assets:
Computer equipment 700,140 -
Office furniture and fixtures 27,549 -
727,689 -
Less accumulated depreciation (86,549) -
Net fixed assets 641,140 -
Intangible assets:
Goodwill (less accumulated
amortization of $104,000) 667,499 -
Total assets $ 1,768,947 985,237
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 313,082 92,064
Accrued liabilities 26,036 6,024
Deferred revenue 179,412 -
Notes payable 922,092 -
Lease obligations - current installments 57,970 -
Other liabilities 60,500 -
Total current liabilities 1,559,092 98,088
Lease obligations -
less current installments 66,106 -
Total liabilities 1,625,198 98,088
Stockholders' equity:
Series A convertible preferred stock,
cumulative as to 8% dividends; $.01
par value (250,000 shares issued and
outstanding) (liquidation preference
of $1,080,000 including dividends in
arrears) 2,500 1,000,000
Common stock $.01 par value (20,000,000
shares authorized, 1,780,582 shares
issued and outstanding in 1997) 17,805 3,000
Additional paid-in capital 2,655,021 -
Accumulated deficit (2,531,577) (115,851)
Total stockholders' equity 143,749 887,149
Total liabilities and
stockholders' equity $ 1,768,947 985,237
See accompanying notes to consolidated financial statements.
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Holdings, Inc.)
Consolidated Statements of Operations
Year ended September 30, 1997 and the period from July 16, 1996
(inception) to September 30, 1996
1997 1996
Revenues:
Sales $ 2,346,171 -
Expenses:
Cost of sales and operating expenses 557,554 -
General and administrative 2,456,327 120,664
Bad debt expense 70,364 -
Depreciation and amortization 190,549 -
Impairment loss 1,473,550 -
Total expense 4,748,344 120,664
Loss from operations (2,402,173) (120,664)
Other income (expense):
Interest income - 4,813
Interest expense (17,573) -
Other income 11,968 -
Minority interest (7,948) -
Net other income (expense) (13,553) 4,813
Net loss $ (2,415,726) (115,851)
Proforma net loss per share $ (1.44)
See accompanying notes to consolidated financial statements.
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Holdings, Inc.)
Consolidated Statements of Changes in Stockholders' Equity
Year Ended September 30, 1997 and the period from July 16, 1996
(inception) to September 30, 1996
Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
Balances at
July 16, 1996
(inception) $ - - - $ - - - -
Issuance of
common stock - - 4,000,000 3,000 - - 3,000
Issuance of
preferred
stock 1,000,000 1,000,000 - - - - 1,000,000
Net loss - - - - - (115,851)(115,851)
Balances at
September 30,
1996 1,000,000 $1,000,000 4,000,000 $ 3,000 - (115,851) 887,149
Retire AvTel
common and
preferred
stock due to
merger with a
subsidiary of
Hi, Tiger (1,000,000)(1,000,000)(4,000,000) (3,000) - -(1,003,000)
Reflect new
capitalization
as result of
merger with a
subsidiary of
Hi, Tiger 250,000 2,500 1,063,127 10,631 989,869 - 1,003,000
Acquisition of
Hi, Tiger - - 678,325 6,783 1,519,448 - 1,526,231
Issuance of
common stock
for exercise
of options - - 1,630 16 10,454 - 10,470
Issuance of
common stock
for acquisitions - - 37,500 375 135,250 - 135,625
Net loss - - - - - (2,415,726)(2,415,726)
Balances at
September 30,
1997 250,000 $ 2,500 1,780,582 $17,805 2,655,021 (2,531,577) 143,749
See accompanying notes to consolidated financial statements.
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Holdings, Inc.)
Consolidated Statements of Cash Flows
Year Ended September 30, 1997 and the period from July 16, 1996
(inception) to September 30, 1996
1997 1996
Cash flows from operating activities:
Net loss $ (2,415,726) (115,851)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 190,549 -
Impairment loss 1,473,550 -
Net change in accounts receivable (108,295) -
Net change in accounts payable and
accrued liabilities (39,252) 98,088
Net change in deferred revenue 52,202 -
Net change in other operating assets
and liabilities 9 -
Net cash used in
operating activities (846,963) (17,763)
Cash flows from investing activities:
Capital expenditures (265,346) -
Cash paid for acquisitions,
net of cash received (357,726) -
Net cash used in
investing activities (623,072) -
Cash flows from financing activities:
Issuance of preferred stock - 1,000,000
Issuance of common stock 10,470 3,000
Payment on notes payable (8,769) -
Proceeds from notes payable 750,000 -
Principal payments on capital leases (28,198) -
Net cash provided by financing activities 723,503 1,003,000
Increase (decrease) in cash (746,532) 985,237
Cash and cash equivalents at beginning of period 985,237 -
Cash and cash equivalents at end of period $ 238,705 985,237
Supplemental cash flow information:
Cash paid for interest $ 5,777 -
See accompanying notes to consolidated financial statements.
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(Formerly AvTel Holdings, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(1) Organization and Business
AvTel Holdings, Inc. (AvTel Holdings), was formed July 16, 1996.
On October 23, 1996, AvTel Holdings completed a merger transaction in
which it merged with a subsidiary of Hi, Tiger International, Inc.
(Hi, Tiger). For accounting purposes the merger
was treated as a reverse acquisition of Hi, Tiger by AvTel Holdings.
The merger was effected by the issuance by Hi, Tiger of 1,063,127 shares
of common stock and 250,000 shares of convertible preferred stock in
exchange for all of AvTel Holding's common and preferred stock then
outstanding. Hi, Tiger, the legal acquirer in the merger, changed its
name to AvTel Communications, Inc. For accounting purposes, AvTel
Communications, Inc. (the Company) is the successor to AvTel Holdings,
Inc.
The Company was formed to be a holding company of nonfacilities based
telecommunications carriers, providing an array of broadband network
services, focused primarily on the business customer. To date the
Company has primarily been an internet service provider.
(2) Summary of Significant Accounting Policies and Practices
(a) Principles of Consolidation
The consolidated financial statements include the financial
statements of Avtel Communications, Inc. and its three wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) 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.
(c) Revenue Recognition
Internet service revenue is recognized as service is provided to
customers. Amounts paid in advance are recorded as deferred
revenue.
<PAGE>
(d) Property and Equipment
Property and equipment are recorded 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 4 years
Office furniture and fixtures 5-10 years
Maintenance and repairs are charged against income as incurred,
while renewals and major replacements are capitalized. The costs
and related accumulated depreciation of assets sold or retired are
removed from the accounts, and any resulting gain or loss is
reflected in operations.
(e) Income Taxes
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 that
enactment date.
(f) 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.
(g) Accounts Receivable
Accounts receivable are net of allowances for doubtful
accounts. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of
subscribers, historical trends and other information.
(h) Financial Instruments
The Company's financial instruments include cash,
accounts receivable, accounts payable and accrued expenses.
The carrying amount of such financial instruments
approximates fair value because of the short maturity of
these instruments. Notes payable and lease
<PAGE>
obligations approximate fair value as interest rates for
these liabilities approximated market interest rates.
(i) Proforma Net Loss per Common Share
Proforma net loss per share applicable to common
shareholders is computed using the weighted average
number of shares outstanding of 1,729,448. For the
period prior to the reverse acquisition the number of
shares issued to AvTel shareholders in connection with
the reverse acquisition was used.
(j) Goodwill
Goodwill, which represents the excess of purchase price
over fair value of net assets acquired, is amortized on
a straight-line basis over 5 years. The Company assesses
the recoverability of this intangible asset by determining
whether the goodwill balance can be recovered through
undiscounted future operating cash flows of the acquired
operations. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating
cash flows. The assessment of the recoverability
of goodwill will be impacted if estimated future operating
cash flows are not achieved.
(3) Leases
The Company is obligated under various capital leases for equipment
that expire at various dates during the next three years. Amortization
of assets held under capital leases of $33,400 in 1997 is included with
depreciation expense. The Company also has several noncancelable
operating leases, primarily for office and equipment space, that
expire over the next four years.
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) and
future minimum capital lease payments as of September 30, 1997 are:
Capital Operating
Leases Leases
Year ending September 30,
1998 $ 73,808 92,559
1999 64,026 76,579
2000 8,615 76,059
2001 - 12,276
Total minimum lease payments 146,449 $ 257,473
Less amount representing interest 22,373
Present value of minimum lease
payments 124,076
Less current installments of
obligations under capital leases 57,970
Obligations under capital leases,
excluding current installments $ 66,106
<PAGE>
Fixed assets include $168,740 of assets under capital leases.
(4) Preferred Stock
The preferred shareholders are entitled to receive preferred and
cumulative annual dividends at a rate of $.32 per share and are
entitled to a preference, in liquidation in the amount of $4 per
share plus accrued and unpaid dividends declared. There were
$80,000 and $0 cumulative preferred stock dividends in arrears
at September 30, 1997 and 1996, respectively. The preferred stock
is convertible, on a one-for-one basis, into shares of Company common
stock. The Company has 1,000,000 preferred shares authorized.
(5) Income Taxes
The Company has incurred net operating losses for both financial
reporting and income tax purposes since inception. As of
September 30, 1997, the Company has net operating loss
carry forwards for income tax purposes totaling $1,278,000. The
net deferred tax asset arising from such net operating loss carry
forward and other temporary differences aggregates $554,000 at
September 30, 1997. A valuation allowance equal to the deferred
tax asset amount has been provided as it cannot be concluded that
future realization is more likely than not. Accordingly, the
Company incurred no income tax expense or benefit for
1997 and 1996.
(6) Related Party Transactions
At September 30, 1997 and 1996, the Company is indebted to
shareholders/officers of the Company for the reimbursement of
operating expenses and accrued wages totaling $36,458
and $40,883, respectively.
(7) Contracts
As of September 30, 1997, the Company had executed employment
agreements with its two executive officers. The term of employment
is from August 1, 1996 to July 31, 1999 and may be extended at
that time. The agreements set forth the executives' compensation and
incentive packages. See note 12 for subsequent event affecting
such agreements.
<PAGE>
(8) Notes payable
Notes payable at September 30, 1997 and 1996 consists of the
following:
1997 1996
8.0% (through October 31, 1997
and 12% thereafter) note
payable to Matrix Telecom,
Inc. with principal and
interest due December 1,
1997, secured by all Company
assets $ 761,767 -
Unsecured note payable due to
former shareholders of
WestNet Communications, Inc.
in installments of $71,674
on October 15, 1997 and
$88,651 on February 15, 1998 160,325 -
$ 922,092
(9) Stock Option Plan
At the time of the merger of the Company with Hi, Tiger, Hi,
Tiger had 75,611 options to purchase its common stock outstanding
all of which were 100% vested. As Hi, Tiger was the legal
acquirer in the merger such options remained outstanding as of the
date of the merger. The Company has succeeded to these stock options.
During fiscal 1997, the Company adopted its 1997 Incentive Stock
Option Plan (the "1997 Plan") pursuant to which the Company's
Board of Directors may grant stock options to officers and
key employees. The 1997 Plan authorizes grants of options to
purchase up to 250,000 shares of authorized but unissued common
stock and 125,000 shares of restricted common stock. Stock
options are to be granted with an exercise price greater than
or equal to the stock's fair market value at the date of grant.
Options generally vest 25% after one year and 25% each year
thereafter until fully vested. Such options typically expire
after ten years.
The Company's Board of Directors granted, pursuant to its 1997
Plan a total of 219,875 stock options which are exercisable at
$2.48 to $12.00 per share.
<PAGE>
Stock option activity is as follows:
Number of Average
Options Price
Outstanding at date of merger 75,611 2.44
Granted during year 219,875 4.00
Canceled (18,238) 4.52
Exercised (1,630) 6.44
Outstanding as of September 30, 1997 275,618 3.48
The per share weighted-average fair value of stock options
granted during 1997 was $0.61 on the date of grant using the
Black Scholes option-pricing model with the following weighted-
average assumptions: expected volatility of 53.5%, risk-free
interest rate of 5.98%, and an expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its
stock options issued to employees in the financial statements.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options issued to employees
under SFAS No. 123, the Company's net loss would have been increased
to the pro forma amounts indicated below:
September 30,
1997
Net loss - as reported (2,415,726)
Net loss - Pro form (2,516,077)
Pro forma net loss reflects only options granted in 1997.
Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma
net income amounts presented above because compensation cost is
reflected over the options' vesting period and compensation cost
for options granted prior to January 1, 1995 is not considered.
At September 30, 1997, the range of exercise prices and
weighted-average remaining contractual life of outstanding options
was $.04 to $12.00 and 6.9 years, respectively.
<PAGE>
(10) Non-Cash Financing Activities
A capital lease obligation of $5,289 was incurred in 1997 when
the Company entered into a lease for computer equipment.
(11) Acquisitions
As indicated in note 1, on October 23, 1996, the Company
effectively acquired Hi, Tiger through a reverse acquisition.
The transaction has been accounted for as a purchase. Accordingly,
assets and liabilities of Hi, Tiger were reflected at their fair
value at the date of the merger. Values assigned to the net assets
of Hi, Tiger at date of acquisition were based on the market
value of Hi, Tiger common stock at that date. The underlying fair
value of Hi, Tiger net assets including goodwill was substantially
less than the indicated market value of Hi, Tiger common stock
and accordingly the resulting goodwill was immediately written off as a
charge to income.
On November 22, 1996, the Company completed the acquisition of
Silicon Beach Communications, Inc. ("SBC"). The acquisition was
structured as a purchase in which the Company acquired all of the
issued and outstanding stock in SBC in exchange for 28,750
shares of its Common Stock. In addition a total of $237,500 in
contingent consideration is to be paid if certain conditions exist.
All such consideration was recorded at acquisition date
as it was probable that such consideration would be paid. This
transaction has been accounted for as a purchase. Accordingly,
assets and liabilities of SBC were reflected at their fair values.
On February 2, 1997, the Company completed, through a subsidiary,
the acquisition of WestNet Communications, Inc. ("WNC"). The
acquisition was structured as a stock purchase in which the
Company acquired all of the issued and outstanding stock
of WNC in exchange for $140,226, 8,750 shares of the Company's
common stock and promissory note of $160,325. The transaction
has been accounted for as a purchase. Accordingly, assets and
liabilities of WNC were reflected at their fair value.
In March, 1997, the Company acquired the 20% minority interest in
The Friendly Net LLC. from Tree of Stars, Inc. ("TOSI"). The
acquisition was facilitated by a payment of $10,000 by
the Company and a $20,000 short term loan. In addition, a loan
payable to TOSI's president and principal shareholder in the
amount of $40,900 was discounted to zero. The note payable was
in consideration for previous consulting services
performed by the TOSI's president.
<PAGE>
In connection with the above acquisitions, the following assets
were acquired, liabilities assumed, and common stock issued:
Accounts receivable and
other current assets $ 114,051
Fixed assets 443,881
Goodwill 2,261,988
Current liabilities (653,353)
Long-term liabilities (146,985)
Common stock issued (1,661,856)
$357,726
On a pro forma basis revenues for the Company as if
each acquisition had been combined with the
Company as of October 1, 1996 would be $2,868,931 (unaudited).
Results of operations would not have been significantly
different from historical results.
(12) Subsequent Events
On December 1, 1997, the Company and Matrix Telecom, Inc.
(Matrix) completed a share for share exchange pursuant to a
stock exchange agreement, dated April 29, 1997 as subsequently
amended (the "Share Exchange"). For accounting purposes the Share
Exchange was treated as a reverse acquisition of the Company by
Matrix. The Company was the legal acquirer and accordingly, the
Share Exchange was effected by the issuance of Company common
stock in exchange for all of the common stock then outstanding of
Matrix. In addition, holders of outstanding Matrix stock options
received non-qualified stock options of the Company.
The consummation of the Share Exchange was subject to the
satisfaction of several conditions. These included the reincorporation
of the Company (then a Utah corporation; "AvTel Utah")
in Delaware by way of a merger (the "Reincorporation Merger") with
and into AvTel Communications, Inc., a Delaware corporation, a
wholly-owned subsidiary formed for the sole purpose of this merger.
As part of the merger, the Company (the surviving Delaware
corporation) issued to its stockholders one share of new Delaware
Common Stock for each four shares of AvTel-Utah's Common Stock
outstanding immediately prior to the Reincorporation Merger.
The Company's Series A Convertible Preferred Stock and its
outstanding options were similarly adjusted. Accordingly, the
Reincorporation Merger essentially effected a one to four reverse
stock split of the Company's shares (the "Reverse Stock Split").
All share and option numbers and prices set forth herein have been
adjusted to reflect the Reverse Stock Split.
<PAGE>
In connection with the execution of the Share Agreement, the
Company's two executive officers agreed that their respective
employment agreements would be terminated and would
no longer be in force. Additionally, both executive officers agreed
that they will not be entitled to receive guaranteed bonuses.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Title of Document Page Number
- ------- -------------------------------------------- -----------
2.1 Acquisition Agreement, dated as of August 30, 1996, by
and among Hi-Tiger International, Inc., a Utah
corporation, AvTel Communications, Inc., a Utah
corporation, and AvTel Holdings, Inc., a California
corporation. (Incorporated by reference to Exhibit A to
Registrant's Information Statement on Schedule 14C dated
October 2, 1996).
2.2 Amendment No. 1 to Acquisition Agreement, dated October
22, 1996, among Hi-Tiger International, Inc., AvTel
Communications, Inc. and AvTel Holdings, Inc.
(Incorporated by reference to Exhibit 2.2 to Registrant's
Current Report on Form 8-K dated October 23, 1996).
2.3 Agreement and Plan of Reorganization, dated November 20,
1996 between the Registrant and Silicon Beach
Communications, Inc. (Incorporated by reference to
Exhibit 10.04 to Registrant's Annual Report on Form 10-KSB
for the year ended September 30, 1996).
2.4 Stock Purchase Agreement, dated as of February 1, 1997,
by and among the Registrant, Hi, Tiger, Inc., WestNet
Communications, Inc., Theodore E. Padova, Howard M.
Tamaroff and Christiana G. Bryson, Hallas Color Photo
Lab, Inc., dba Image Source, Inc., Joseph P. and Lisa
Gerardin, James D. Hennigan, Kathleen Sweeney Jonsson
and Alan J. Noelle. (Incorporated by reference to
Exhibit 2.1 to Registrant's Current Report on Form 8-K
dated February 21, 1997).
2.5 Stock Exchange Agreement, dated as of April 29, 1997, by
and between the Registrant and Matrix Telecom, Inc.
(Incorporated by reference to Exhibit 2 to Registrant's
Current Report on Form 8-K dated April 30, 1997).
2.6 Amendment to Stock Exchange Agreement, dated as of August
25, 1997, by and between AvTel Communications, Inc. and
Matrix Telecom, Inc. (Incorporated by reference to
Exhibit 2 to Registrant's Current Report on Form 8-K dated
August 25, 1997).
2.7 Agreement and Plan of Merger, dated as of October 3, 51
1997, between Avtel Communications, Inc., a Delaware
corporation and Avtel Communications, Inc., a Utah
corporation.
<PAGE>
3.1 Certificate of Incorporation of the Registrant. 58
3.2 Bylaws of the Registrant. 70
10.1 Rights Agreements dated October 23, 1996, between
the Registrant and holders of the Registrant's Series
A Convertible Preferred Stock. (Incorporated by
reference to Exhibit 4.2 to Registrant's Current
Report on Form 8-K dated October 23, 1996).
10.2 Employment Agreement, dated as of August 1, 1996, between
the Registrant and Anthony E. Papa. (Incorporated
by reference to Exhibit 10.01 to Registrant's Annual
Report on Form 10-KSB for the year ended September
30, 1996).
10.3 Employment Agreement, dated as of August 1, 1996, between
the Registrant and James P. Pisani. (Incorporated
by reference to Exhibit 10.01 to Registrant's Annual
Report on Form 10-KSB for the year ended September
30, 1996).
10.4 Employment Agreement, dated as of November 20, 1996, 97
between the Registrant and Frank Dziuba.
10.5 Employment Agreement, dated as of January 27, 1997, 102
between the Registrant and D. Stephen DeWindt, as
amended.
10.6 1997 Stock Incentive Plan. (Incorporated by
reference to Exhibit A to the Registrant's definitive
Proxy Statement on Schedule 14A dated January 8, 1997.)
10.7 Registration Rights and Lockup Agreement dated dated
December 1, 1997, between the Registrant and Matrix
Telecom, Inc., on behalf of the stockholders of Matrix,
(Incorporated by reference to Exhibit 4 to Registrant's
Current Report on Form 8-K dated December 1, 1997).
23.1 Consent of KMPG Peat Marwick LLP. 117
23.2 Consent of MacFarlane, Faletti & Co. LLP. 118
27 Financial Data Schedule. 119
<PAGE>
EXHIBIT 2.7
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 October 3, 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 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 the date of this Agreement, 7,142,327
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 <PAGE>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:
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
<PAGE>
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.
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
<PAGE>
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 unissuedshares.
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
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
By /s/ ANTHONY E. PAPA
------------------------------
Anthony E. Papa, President
ATTEST:
/s/ JAMES P. PISANI
- ----------------------------
James P. Pisani, Secretary
AVTEL COMMUNICATIONS, INC.,
a Utah corporation
By /s/ ANTHONY E. PAPA
------------------------------
Anthony E. Papa, President
ATTEST:
/s/ JAMES P. PISANI
- ----------------------------
James P. Pisani, Secretary
<PAGE>
EXHIBIT 3.1
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
<PAGE>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:
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.
<PAGE>
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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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
<PAGE>
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
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
<PAGE>
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
<PAGE>
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.
(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.
<PAGE>
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
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.
<PAGE>
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.
<PAGE>
ARTICLE IX.
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 31st day
of August, 1997.
/s/ JANIS ST. MARIE
----------------------------
Janis St. Marie, Incorporator
<PAGE>
EXHIBIT 3.2
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.
<PAGE>
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 pro-
vided 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;
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.
<PAGE>
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
<PAGE>
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.
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.
<PAGE>
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 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
<PAGE>
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 controlled 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.
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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.
<PAGE>
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
(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.
<PAGE>
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.
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,
<PAGE>
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
<PAGE>
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.
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
<PAGE>
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.
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."
<PAGE>
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.
<PAGE>
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 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
<PAGE>
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.
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 by the Written Consent of the Board of Directors dated as
of October 3, 1997.
IN WITNESS WHEREOF, the undersigned has subscribed his name
and affixed the seal of the Corporation on the date set forth below.
/s/ JAMES P. PISANI
---------------------------
Date: October 3, 1997 James P. Pisani, Secretary
<PAGE> EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is executed this 20th day
of November, 1996, by and between AvTel Communications, Inc., a Utah
corporation ("AvTel" or "Company") and Frank Dziuba ("Employee" or
"Shareholder"). This Agreement is subject to and shall be effective
upon the Closing of the transactions contemplated in the Agreement
and Plan of Reorganization among Silicon Beach Communications, Inc.
("SBC"), AvTel and Employee dated as of November 20, 1996 (the
"Acquisition Agreement"). Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to them in the
Acquisition Agreement (the "Merger").
RECITALS
A. SBC, the Company and Shareholder have entered into the
Acquisition Agreement;
B. The Company desires to assure continuance of the Shareholder's
employment for a period of three (3) years following the Closing
Date; and
C. Capitalized terms used herein have the same meanings as those
used in the Acquisition Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Term and Locale
A. The Company hereby employs Employee for an initial term (the
"Term") commencing on the day immediately following the Closing Date
("Effective Date") and ending on the third anniversary of the
Effective Date, unless otherwise earlier terminated as hereinafter
set forth, and Employee hereby accepts such employment upon the terms
and conditions set forth herein.
B. The Term may be extended for two (2) consecutive one (1) year
terms (each an "Extension Term"), at the sole option of the Company,
by written notice to Employee to be delivered no later than three (3)
months prior to the expiration of the Term, or the succeeding
Extension Term, as the case may be.
C. During the Term and any Extension Term, Employee shall be based
at the Company's executive offices at such location as may be
<PAGE>
determined by the Board of Directors; provided, however, that
Employee will travel as reasonably required in the performance of his
duties (and as determined by the Company's Chief Executive Officer
and President or Executive Vice President and Chief Operating
Officer) and consistent with reasonable business practices.
2. Office, Title and Duties
A. During the Term and any Extension Term, Employee shall serve,
at the pleasure of the Board of Directors, as Senior Vice President-
Software Development of AvTel and, in such capacity, shall report to
the Chief Executive Officer of AvTel and perform such duties
consistent therewith and as may be designated from time to time by
the Chief Executive Officer of SBC or such other executive officer as
is designated by the Board of Directors of the Company. Employee
shall also serve, at the pleasure of the Board and shareholders of
SBC, as a Director and as President of SBC and in such other
capacities as a Director or as an officer or employee of one or more
subsidiaries or affiliates as may be determined by the Board of
Directors of the Company or of such subsidiary or affiliate.
Employee shall not, by virtue of his service on behalf of such
subsidiaries or affiliates, be entitled to additional compensation or
remuneration. Employee shall also be appointed by the Board of
Directors to become a member of the Board to fill a vacancy that
currently exists and shall serve as a director at the pleasure of the
shareholders of AvTel. Employee's continued service as a Director
shall be subject to the applicable provisions of the law of the
jurisdiction in which AvTel is incorporated, the Articles of
Incorporation and Bylaws of AvTel and election by the shareholders of
AvTel at annual meetings thereof.
B. Employee shall devote his best efforts and his business time,
attention and energies to the performance of his duties hereunder,
except that nothing contained herein shall prevent Employee from
making personal investments or from being a shareholder of, or
partner in, or, subject to the prior approval of the Board, from
serving as director of, other corporations or entities which are not
engaged in the business of providing communications,
telecommunications, cable television, telephone, wireless satellite,
cellular, data, computer and television service ("Company Business"),
subject to the conditions set forth in Section 5 hereof and provided
that such activities do not interfere with Employee's obligations
hereunder or represent a conflict of interests with the Company.
Employee shall perform his duties hereunder faithfully, diligently
and at least with such proficiency as is customary in the industry.
For purposes hereof, ownership of stock by Employee in any
corporation whose stock is listed for trading on a national
securities exchange or on the NASDAQ National Market System shall not
violate provisions of this Section 2B so long as such stock is less
than one percent (1 of the issued and outstanding voting securities
of such corporation.
<PAGE>
3. Salary and Benefits
A. Base Salary. As compensation for the services to be rendered by
Employee pursuant to this Agreement, the Company shall pay Employee a
base compensation of $6,666.66 per month ("Base Salary") through
March 31, 1997. Effective the first day of the first month
immediately following the closing of, and the Company's receipt of
the proceeds relating to, a private placement or secondary offering
of the Company's debt or equity securities for net proceeds of not
less than $2,000,000. Employee's Base Salary shall be increased to
$8,333.33 per month. Base Salary shall be paid in bi-monthly
installments during the course of each calendar year and such Base
Salary and other forms of compensation payable to Employee shall be
subject to such withholdings and deductions as may be required by law
or as otherwise may be in accordance with the normal payroll
practices of the Company.
B. Base Salary, Periodic Review. Employee's Base Salary, after
April 1, 1997, shall be reviewed, periodically by the Board of
Directors or its compensation committee and shall be subject to
possible increases, based on such factors as may be considered
appropriate including then prevailing practices for executive
salaries in the Company and the industry that it serves, the
Company's overall performance and the performance of the specific
functions and operations over which the Shareholder has management
responsibility, all as determined by the Board of Directors (or such
compensation committee).
C. Bonuses. The Board of Directors or, at its election, its
Compensation Committee, may, from time to time, adopt and implement
one or more incentive bonus plans for managers, executives or other
employees. It is currently anticipated that Employee will I be
eligible for participation in such bonus plans if, as and when they
are adopted by the Board or such committee. Employee's eligibility
for and participation in any such plans and the amount, form and
manner and timing of payment or distribution of benefits under such
plans shall be subject to the terms and conditions of such plans if,
as and when they are adopted by the Board and such committee.
D. Earn Out Bonus. Following the conclusion of the six (6) full
calendar months beginning December 1, 1996 (the "Earn Out Period"),
AvTel shall be obliged to pay to Employee an Earn Out Bonus which
shall become payable, without interest, if and only if the aggregate
Net Growth in Accounts in any month exceeds 2,600 (the "Base Level").
The determination of whether Net Growth in Accounts for the Earn Out
Period exceeds the Base Level shall be made by the Board of
Directors, based on the unaudited, internal financial and accounting
records maintained by AvTel. In no event shall the aggregate Earn Out
Bonus payable hereunder exceed $375,000. The Earn Out Bonus will be
<PAGE>
based on the average billing rate charged by SBC to Accounts over the
Earn Out Period and shall be calculated by reference to the formula
set forth in Schedule I attached during the Earn Out period and the
total number of new Accounts obtained during such month as follows:
No. of Accounts Earn Out Consideration Amount
Base Level - 2600 Accounts/Month None
2601-7600 Accounts/Month
Average Billing Rate/Month
$21.00/Month $50.00/Account
7601-12600
Average Billing Rate/Month
$21.00/Month $25.00/Account
The manner of payment and resolution of any controversy regarding the
amount of Earn Out Bonus payable shall be as follows:
(a) The Company shall, on the basis of the Board of Director's
determination, notify Employee of the calculation and
amount of the Earn Out Bonus within thirty (30) days
following the expiration of the Earn Out Period. Employee
shall have thirty (30) days after receipt of such notice to
object to the calculation and amount of the Earn Out Bonus.
If he fails to do so, the amount determined by the Company
shall be deemed conclusive and agreed in all respects,
Employee shall have waived all further rights to object to
such amount and the Company shall pay such amount not later
than thirty days following the end of the first thirty day
period.
(b) If Employee objects to the determination made by the
Company in its notice to Employee, Employee must do so by
written notice delivered to the Company within twenty-one
(21) days following receipt by Employee of the Company's
notice as provided above.
(c) Such objection notice must state with reasonable
particularity the reasons for the objection. Promptly
following the Company's receipt of a proper and timely
objection notice, Employee and the Company shall proceed
diligently to attempt to reach a compromisive resolution of
the amount of Earn Out Bonus payable. Within thirty days
following the date on which the parties have I reached a
compromise agreement the Company shall remit to Employee
the amount reflected in this compromise.
<PAGE>
(d) In the event that the parties fail to reach a compromise
resolution of the amount of Earn Out Bonus payable, either
party may upon written notice to the other demand that the
controversy be submitted to arbitration in Santa Barbara,
California, upon initiation by a party hereto by a written
notice to the party demanding arbitration and specifying
the controversy or claim to be arbitrated. The controversy
shall be settled and finally determined by a single
arbitrator selected in accordance with the following
procedure: Within five (5) business days of the date of
delivery of the foregoing notice, the parties shall each
provide the other with a list of five (5) retired judges
from the Santa Barbara County Superior Court in order of
preference and if one or more judge appears on each such
lists, the parties shall designate the duplicated judge who
is highest in order of preference on both lists to settle
and finally determine the controversy or dispute arising
hereunder. If no judge is named on both of such lists, then
the parties shall have a period of two (2) business days to
agree to the designation of a retired judge from the Santa
Barbara County Superior Court (who shall not have any
conflicts of interest with respect to the subject matter
of, or the parties to, such dispute), failing which a
retired judge shall be chosen by the Presiding Judge of the
Superior Court of Santa Barbara, State of California. The
judge ultimately selected to hear the controversy hereunder
is herein referred to as the "Arbitrator". The Arbitrator
shall have the power to award any and all remedies and
relief whatsoever deemed appropriate under the
circumstances, including, without limitation, money damages
and equitable relief. The procedure whereby the evidence
(oral/written) relating to the controversy or claim is
presented in the arbitration shall be agreed to by the
Arbitrator. The written decisions of the Arbitrator shall
be binding and conclusive on the parties thereto and
enforceable as provided by the laws of the State of
California, and judgment on such arbitration decision may
be entered by any courts having jurisdiction thereof.
(e) So long as Employee is not in default hereunder or under
any other agreement contemplated by the Acquisition
Agreement, the Company hereby grants to Employee a security
interest and lien in 100 shares of the issued and
outstanding common stock of SBC as security for the payment
obligations of the Company set forth in subparagraph (a)
and (b) above.
<PAGE>
E. Compensation Deferral. The Company and Employee may from time
to time agree to defer all or any part of Employee's Salary or
bonuses. Any such arrangements shall be the subject of a written
agreement, in form and content approved by the Board or its
Compensation Committee, between Employee and the Company.
F. Business Expense. The Company will reimburse Employee for such
actual and reasonable business, travel, automobile (mileage expenses
but not car allowance) and entertainment expenses as may be incurred
by him from time to time during the Term in the performance of his
duties and responsibilities hereunder and in accordance with
applicable provisions of the Internal Revenue Code. Such
reimbursements will be made upon the presentation by Employee of an
itemized account of such expenditures, setting forth the date, the
purpose for which incurred, and the amounts thereof, together with
such receipts showing payment as may be required by the Company's
policies.
G. Benefit Plans. Employee shall be entitled to participate in
such employee benefit plans, including health and medical insurance,
401(k) plans, employee stock purchase plans, vacation, sick leave and
leave of absence plans and policies, and the like as may, from time
to time, be adopted by AvTel; subject, however, to such approvals as
may be required by the Board of Directors and shareholders of AvTel,
regulatory filings and approvals and the terms, conditions and
provisions of such plans.
H. Stock Options. Subject to adoption and approval by the Board of
Directors and shareholders of AvTel of employee stock option plans
("Option Plan(s)") on such terms and conditions as may be so adopted
and approved, Employee shall be eligible for a grant of stock options
to purchase, upon exercise of option, shares of authorized but
unissued common stock of AvTel, to have an effective grant date at or
as soon as practicable following the Closing Date, with respect to an
aggregate of 175,000 shares of such common stock with exercise prices
as follows:
12,500 at $2.00 per share
25,000 at $3.00 per share
50,000 at $5.00 per share
The options will have such vesting periods and expiration dates as
are determined in accordance with the terms and conditions of the
Option Plan(s).
4. Termination. Salary, and other consideration and benefits, and
the employment of Employee by the Company may be terminated by the
Company as provided in this Section 4 as follows:
A. Death. In the event of Employee's death, the Company shall pay
<PAGE>
to the persons designated by Employee or, in the event Employee fails
to designate such persons, to Employee's estate any accrued, but
unpaid, Base Salary to the date of death and the Company shall pay
for any accrued but unused vacation through the date of death. This
Agreement shall be deemed to terminate upon the death of Employee as
though it had expired by its own terms.
B. Termination for Cause. Employee's employment hereunder may be
terminate by the Company at any time during the Term or any Extension
Term for Cause (as hereinafter defined). for purposes hereof, the
term "Cause" shall mean any of the foregoing:
1. The failure of Employee to perform any of his material
obligations under this Agreement and such failure shall not be cured
within 30 days after notice to Employee; or
2. Willful misconduct, dishonesty, conviction of a felony,
insubordination or other deliberate act or omission by the Employee
materially detrimental or damaging in a significant way to the good
will of the Company or materially damaging to the Company's
relationships with its customers, suppliers or employees, including,
without limitation, any violation of the applicable policies of AvTel
and its subsidiaries. In the event this Agreement is terminated for
Cause, the Company shall pay Employee any accrued but unpaid Base
Salary to the date of termination and shall pay Employee for any
accrued but unused vacation through termination.
C. Termination Other than for Cause. Should the Employee's
services be terminated by the Company for any reason during the Term
of this Agreement other than for Cause, the Company shall continue to
pay the Employee's Base Salary for the remaining balance of the Term.
In addition, for the balance of the Term, the Employee shall be
entitled to continued medical and dental benefits, under applicable
COBRA provisions, if any, as then in effect for similarly situated
active employees. The foregoing are the sole and exclusive
obligations of the Company in the event of such termination. In the
event of the Employee's death or disability or termination other than
for Cause, continued payment of Base Salary under this subparagraph C
is conditioned upon (i) the Employee not engaging in any deliberate
act or omission which would be detrimental or damaging in a
significant way to the good will of AvTel or any of its subsidiaries
or materially damaging to the relationships with its customers,
suppliers or employees and (ii) the continued full and faithful
performance by executive of his obligation under paragraph 5 of this
Agreement and under the Non-Competition Agreement.
D. Disability. The Company may terminate this Agreement upon
written notice to Employee by reason of Employee's disability. For
the purpose of this Agreement, "Disability" shall be defined as
inability by Employee, due to illness (other than the use/abuse of
illegal narcotics, alcohol or other intoxicating substances),
<PAGE>
accident, mental deficiency or similar incapacity or legal
requirements, to render his regular duties for the Company required
pursuant to this Agreement for a period of one hundred twenty (120)
days in any twelve (12) month period. Any termination of employment
pursuant to this Section 4.1) shall not be deemed to be for "Cause"
within the meaning of Section 4.13 hereof. In the event that the
Company exercises its right to terminate Employee's employment
pursuant to this Section 4.C, the Company shall pay Employee any
accrued but unpaid Salary through the date of termination and shall
pay Employee any accrued but unused vacation through the date of
termination. Any payments of Salary provided for hereunder shall be
proportionally reduced by any payments which Employee may be entitled
to under any existing disability insurance policy maintained by the
Company. In the event this Agreement is terminated in accordance with
this Section 4.13, the Company shall not be obligated to pay Employee
any amounts, except al expressly set forth in this Section 4.D or by
law.
E. Expiration Term or Extension Terms. Upon expiration of the Term
or any Extension Term, any continued employment by the Employee shall
be on an "at-will" employment basis and either the Company or the
Employee may terminate the employment relationship with or without
cause or notice.
5. Employee Covenants
A. Non-Competition and Non-Solicitation. During Employee's
employment by the Company, Employee shall not own or have any
material interest directly in, or act as an officer, director, agent
or consultant of, or assist in any way or in any capacity, any
person, firm, association, partnership, corporation, or entity which
shall be competitive with the Company Business or any other business
then engaged in by the Company, in any area where the Company engages
or plans to engage in business. Employee shall not, for a period of
two (2) years from the expiration of the Term, any Extension Term or
earlier termination of this Agreement, solicit any employees or
customers of the Company.
B. Non-Disclosure of Confidential Information. The Shareholder
acknowledges and agrees that during the course of, and incident to:
(a) his employment by or affiliation with AvTel or its Affiliates
pursuant to the Employment Agreement and (b) his previous employment
by or affiliation with SBC, the Shareholder has been or will be
provided, or the Shareholder has or will become exposed to,
Confidential Information (as defined herein). For purposes hereof,
"Confidential Information" shall mean (i) proprietary or confidential
information concerning the business, products, prospects, properties
and operations of SBC, AvTel or AvTel's Affiliates, including,
<PAGE>
without limitation, customer and supplier lists, know-how, trade
secrets, business and discoveries, improvements, models, strategies,
forecasts, projections, budgets, unpublished financial statements,
price lists, costs, computer programs, source and object codes,
algorithms, data, logic flow diagrams and other original works of
authorship, executive and employee information and data (including
salaries, performance, history, skills and experience), capital
formation and financing plans and strategies, merger, acquisition,
strategic alliance, licensing and other similar plans and objectives,
along with all information received from third parties and held in
confidence by SBC, AvTel or AvTel's Affiliates; (ii) matters of a
technical nature, including without. limitation, trade secrets,
systems, software and hardware, features, specifications, techniques,
copyrighted matters, patented or patentable inventions, plans,
methods, drawings, data, tables, calculations, documents or other
paperwork, computer programs, narratives, flow charts, formulae and
devices; and (iii) matters of a business nature, including without
limitation, business and marketing plans, financial statements and
projections, dealings and distribution arrangements, objectives,
locations, customer information, customer needs and formulations,
plans for future development, information about costs, profits,
pricing policies, markets or sales information reporting actual or
prospective strategic alliances, mergers, acquisitions, divestitures
or other forms of business combinations, new products or service
introduction plans, information concerning salaries, compensation and
skills, experience and capabilities of the Company's employees, and
any other information of similar nature not available to the public.
C. Use of Confidential Information. Employee acknowledges that any
disclosure or use by him of Confidential Information other than on
behalf of the Company will cause irreparable harm and injury to the
Company and, therefore, agrees that the Confidential Information will
be used solely in connection with the performance of Employee's
duties under this Agreement, will not be used by Employee for
commercial purposes and will be kept confidential by Employee.
Without limiting the generality of the foregoing, Employee will not
utilize any Confidential Information in the rendering of services to
any other employer or person. Following the termination of Employee's
employment with the Company, Employee shall not solicit any employee
of the Company possessing Confidential Information regarding the
Company. The Company may, in its sole discretion, disclose to any
subsequent employer of Employee, or any person having a business
relationship with Employee, the contents of this Section 5.
D. Exclusions. The term "Confidential Information" does not
include any information which meets any of the following criteria:
(i) at the time of disclosure is a matter of public record or is
available to or known by the public other than as a result of a
<PAGE>
disclosure, directly or indirectly, by Employee in violation of this
Agreement), (ii) had been publicly disclosed by the Company (other
than as a result of a disclosure, directly or indirectly, by Employee
in violation of this Agreement) or (iii) has been independently
acquired or developed by Employee without violating any of Employee's
obligations under this Agreement or otherwise.
E. Invention Assignment and Other Agreements. The Employee agrees,
upon the request of the Company, and without further or additional
consideration, to execute and deliver to the Company such other
agreements, documents, disclosures and certificates as may be
reasonably necessary or appropriate as determined by the Company in
its sole discretion exercised in good faith to confirm the
nondisclosure and non-use restrictions and limitations imposed on
Employee with respect to the Company's Confidential Information and,
with respect to any inventions conceived or reduced to practice by
Employee during the Term or any Extension Term, or otherwise during
the course and in the scope of the Employee's employment relationship
with the Company, to disclose such inventions to the Company and to
assign, transfer and convey to the Company any and all patent, trade
secret, copyright, maskrights or other intellectual or industrial
property rights associated therewith.
F. Delivery of Property. Upon termination of Employee's employment
with the Company, Employee shall deliver to the Company all books,
records, lists of customers and other property belonging to the
Company or developed in connection with the business of the Company
and all copies thereof, whether or not such constitutes Confidential
Information.
G. Reasonableness. In the event any court shall finally hold that
any provision of this Section 5 constitutes an unreasonable
restriction against Employee, the provision hereof shall not be
rendered void but shall apply as to such provision to such extent as
such court may judicially determine or indicate constitutes a
reasonable restriction under the circumstances involved.
H. Survival. The provision of Section 5.13 shall survive the
termination of this Agreement for a period of two (2) years from the
date of termination and shall run to and inure to the benefit of the
Company, its successors and assigns.
I. Company Policies; Securities Laws. The Employee acknowledges to
adhere to any and all policies and procedures that are adopted from
time to time by the Company by action of its Board of Directors or
senior executive officers with respect to corporate governance and
business conduct matters or otherwise required in order to comply
with applicable laws and regulations, including, for example, not by
way of limitation, policies and procedure with respect to compliance
<PAGE>
with insider trading laws and regulations, employment and labor
matters and other similar regulatory or legal provisions. Without
limiting the generality of the foregoing, Employee acknowledges that
the Confidential Information may include material non-public
information and that the disclosure and/or use of which in connection
with trading (by Employee or by persons to whom Employee may have
disclosed, whether intentionally or unintentionally, such
information) in the securities of AvTel or of others may violate
federal and state securities laws and regulations. Accordingly,
Employee covenants and agrees to fully comply, at all times, with
federal and state securities laws and regulations in connection with
any Confidential Information known to him or to which he may have
access and to indemnify and hold the Company harmless from any an all
loss, damage, costs and expenses arising from, in connection with. or
relating to any actual or alleged violation by Employee of such laws
and regulations. The foregoing obligations are in addition to any
other obligations under common law, statutory or regulatory
provisions, that may be imposed on Employee in his capacity as an
officer, director or employee of AvTel.
6. Indemnification and Insurance. The Company shall indemnify
Employee to the fullest extent permitted by applicable law and the
Company's Bylaws for acts or omissions relating to Employee's
services to the Company, provided that Employee was acting in good
faith and in a manner he reasonably believed to be in the best
interest of the Company. Nothing contained herein shall oblige the
Company to purchase or maintain any insurance or other form of
financial assurance with respect to this obligation.
7. Miscellaneous
A. Succession. This Agreement shall inure to the benefit of and be
binding upon the Company, its successors and assigns, and inure to
the benefit of and be binding upon Employee and his heirs and
personal representatives. The Company shall have the right to assign
this Agreement and to delegate all rights, duties and obligations
hereunder, in whole or in part, to any subsidiary, subsidiary or
parent company of the Company or to any other persons, firm or
corporation which acquires either the Company or any subsidiary
thereof, or a substantial part of its or their assets, or into which
the Company or any subsidiary may merge. The obligations and duties
of Employee hereunder are personal and not assignable.
B. California Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the state of California,
without regard to choice of law provisions.
C. Waiver. No failure or delay on the part of any party to this
Agreement in exercising any right, power or remedy hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise
<PAGE>
of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any right, power or remedy
hereunder.
D. Notices. All notices and demands among the parties shall be in
writing and shall be served (i) in person, (ii) by registered or
certified mail, return receipt requested or (iii) by overnight
courier service. All notice and demands to the parties hereto shall,
if mailed, be addressed to the following addresses:
To the Company: AvTel Communications, Inc.
130 Cremona Drive
Goleta, CA 93117
Fax No. 805\685-9685,
To Employee: Frank Dziuba
253 Daytona
Goleta, CA 93117
The parties may designate in writing, from time to time, such other
place or places that such notices and demands may be given.
E. Arbitration. The exclusive method for resolving any controversy
or claim concerning or arising out of, or related to, this Agreement,
including, without limitation, the interpretation thereof, any
alleged breach thereof and the enforcement thereof, shall be by
arbitration in Santa Barbara, California, upon initiation by a party
hereto by a written notice to the party demanding arbitration and
specifying the controversy or claim to be arbitrated. Any controversy
or claim shall be settled and finally determined by a single
arbitrator selected in accordance with the following procedure:
Within five (5) business days of the date of delivery of the
foregoing notice, the parties shall each provide the other with a
list of five (5) retired judges from the Santa Barbara County
Superior Court in order of preference and if one or more judge
appears on each such lists, the parties shall designate the
duplicated judge who is highest in order of preference on both lists
to settle and finally determine the controversy or dispute arising
hereunder. If no judge is named on both of such lists, then the
parties shall have a period of two (2) business days to agree to the
designation of a retired judge from the Santa Barbara County Superior
Court (who shall not have any conflicts of interest with respect to
the subject matter of, or the parties to, such dispute), shall be
chosen by the Presiding Judge of the Superior Court of Santa Barbara,
State of California. The judge ultimately selected to hear the
controversy or dispute hereunder is herein referred to as the
"Arbitrator". The Arbitrator shall have the power to award any and
all remedies and relief whatsoever deemed appropriate under the
circumstances, including, without limitation, money damages and
equitable relief. The procedure whereby the evidence (oral/written)
<PAGE>
relating to the controversy or claim is presented in the arbitration
shall be as agreed to by the Arbitrator. The written decision of the
Arbitrator shall be binding and conclusive on the parties thereto and
enforceable as provided by the laws of the State of California, and
judgment on such arbitration decision may be entered by any courts
having jurisdiction thereof.
F. Entire Agreement. This Agreement sets forth the entire
understanding between the parties with respect to the subject matter
hereof, and there are no terms, conditions, representations,
warranties or covenants other than those contained herein. This
Agreement supersedes any previous agreements or understandings
between the parties with respect to the subject matter hereof,
whether written or oral.
G. Captions. The section captions inserted in this Agreement are
for convenience of reference and are not intended to be part of the
Agreement.
H. Severability. If any term of provision of this Agreement or
the application thereof to any person or circumstances shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement
or the application of such term or provision to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and each term and
provision of this Agreement shall be valid and be enforced to the
fullest extent permitted by law.
I. Amendment and Modification. No term or provision of this
Agreement may be amended, waived, released, discharged or modified in
any respect except in writing signed by the parties hereto.
J. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this
Agreement by signing any such counterpart.
K. Cost of Enforcement. The prevailing party in any proceeding
brought to interpret or enforce any provision of this Agreement or to
recover for breach thereof shall be entitled to recover the
reasonable fees, expenses and costs of his counsel, plus all other
costs and expenses of such proceeding. For purposes of this
Agreement, the prevailing party shall be considered to be the party
whose final written settlement offer shall be closest to the award of
the Arbitrator.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
AVTEL COMMUNICATIONS, INC. ,
a Utah Corporation
By /s/ ANTHONY E. PAPA
----------------
Anthony E. Papa
President & Chief Executive Officer
/s/ FRANK DZIUBA
-------------
Employee
<PAGE>
Schedule I
Earn Out Formula
No. of Accounts = (A+B+C+D)-(Adjustments for Prepaid Accounts)+E
21
Where A is defined as 1/2 (Fastnet Monthly Accounts - Gross Revenue);
adjusted for prepaids;
Where B is defined as 1/2(San Luis Obispo Monthly Accounts - Gross
Revenue); adjusted for prepaids;
Where C is defined as Santa Maria Accounts - Gross Revenue; adjusted
for prepaids;
Where D is all other Dial-Up Accounts - Revenue (net); adjusted for
prepaids;
Where E is all Dedicated Accounts - Signed up from 12/1/96 thru
5/30/96
Additional Notes
1. Accounts must be valid, active accounts for which payments are
being received on a current basis (or as to which prepayments have
been made during the Earn out Period) and shall not include
reinstatements of previously expired accounts or renewals.
2. Prepayments will be adjusted to include valid, active accounts,
for which prepays have been made, on the basis of the amounts
attributable to such accounts during the Earn Out Period (e.g. if a
six month prepayment is made three months prior to end of the Earn
Out Period, only three months of prepayments will be considered)
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is effective as of this 27th
day of January, 1997, ("Effective Date") by AvTel Communications,
Inc., a Utah corporation (the "Company") and Steve DeWindt
("Employee"),
WHEREAS, the Company wishes to employ Employee, and Employee wishes
to be employed by the Company, on the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged. the parties hereto agree as follows:
1. Term and Locale
A. The Company hereby employs Employee for an initial term
commencing on the Effective Date and ending on January 31, 1999 (the
"Term"), unless otherwise earlier terminated as hereinafter set
forth, and Employee hereby accepts such employment upon the terms and
conditions set forth herein.
B. The Term may be extended for two (2) consecutive one (1)
year terms (each an "Extension Term"), by mutual agreement of the
Company and the Employee, Q entered into by no later than three (3)
months prior to the expiration of the Term or of the first Extension
Term, immediately following the term as the case may be.
C. During the Term and any Extension Term, Employee shall be
based at the Company's executive offices or at such other location as
may be reasonably determined by the Employee and the Company's Chief
Operating Officer provided, however, that Employee will travel as
reasonably required in the performance of his duties hereunder (and
as determined by the Company's Chief Operating Officer) and
consistent with reasonable business practices.
2. Office, Title and Duties
A. During the Term and any Extension Term, Employee shall
have the title of President, Business Network Services and, in such
capacity, shall perform such duties consistent therewith and as may
be designated from time to time by the Chief Operating Officer.
<PAGE>
B. Employee shall devote his best efforts and his full bus s
time, at energies to the performance of his duties hereunder, except
that nothing
contained herein shall prevent Employee from making personal
investments or from being a shareholder of, or partner in, or,
subject to the prior approval of the Board, from serving as director
of, other corporations or entities which are not engaged in the
business of providing communications, telecommunications, cable
television, telephone, wireless satellite, cellular, data, computer
and television service ("Company Business"), subject to the
conditions set forth in Section 5 hereof and provided that such
activities do not interfere with Employee's obligations hereunder or
represent a conflict of interests with the Company. Employee shall
perform his duties hereunder faithfully, diligently and at least with
such proficiency as is customary in the industry. For purposes
hereof, ownership of stock by Employee in any corporation whose stock
is listed for trading on a national securities exchange or on the
NASDAQ National Market System shall not violate the provisions of
this Section 2.B so long as such stock is less than five percent (5
%) of the issued and outstanding voting securities of such
corporation.
3. Salary and Benefits
A. Base Salary - Term. As compensation for the services to
be rendered by Employee pursuant to this Agreement, during the Term,
the Company shall pay Employee an annual base compensation of
$125,000 ("Base Salary"). When the Company completes an offering of
its common stock or any preferred stock convertible into such common
stock pursuant to which the net proceeds to the Company are at least
$1,000,000, the Base Salary shall be increased, effective as to the
first day of the month immediately following the closing of such
offering, to $150,000.
Salary shall be paid in bi-monthly installments during the
course of each calendar year during the Term and such salary as well
as all bonuses and other remuneration shall be subject to such
withholdings and deductions as may be required by law or as otherwise
may be in accordance with the normal payroll practices of the
Company.
B. Base Salary and Bonus - Extension Terms. Employee's Base
Salary and incentive or other bonuses during each Extension Term
shall be determined by the Board of Directors or its Compensation
Committee based on such factors as may be considered appropriate
including then prevailing practices for executive salaries in the
Company and the industry that it serves, the Company's overall
performance and the performance of the specific functions and
operations over which the Employee has management responsibility.
<PAGE>
C. Quarterly Bonus - Term. Prior to the Effective Date, the
Board of Directors will have approved a business plan (the "BNS
Annual Plan") for the Company's Business Network Services Division
(the "Division") for the calendar year ended December 31, 1997. A
copy of the BNS Annual Plan will be promptly furnished to Employee.
The BNS Annual Plan establishes or will establish certain performance
objectives for the Division based on, among other things the number
of customers, sites, Value Added Resellers (WAR's"), revenues and
staffing. Employee shall be entitled to receive a bonus (the
"Quarterly Bonus") based on the Division's achievement of quarterly
objectives, expressed in terms of number of installed sites, set
forth in the BNS Annual Plan. For these purposes, the number of
installed sites will be based on sites with monthly recurring
revenues of at least $500 per month and a term of at least twelve
(12) months. The amount of such Quarterly Bonus for the first year of
the Term shall be $25,000 if 100% of the performance objective is
achieved. Actual amounts will depend on the extent to which such
performances objectives are achieved. for example:
Achievement Level Quarterly Bonus Amount
(% of Performance Objective)
80% $20,000
100% 25,000
120% 30,000
The Quarterly Bonus for the quarter ending March 31, 1997 and the
applicable performance objectives will be adjusted to reflect
Employee's commencement of employment as of the Effective Date. No
Quarterly Bonus shall be due if the Achievement Level is less than
80% of the Performance Objective. In no event shall the Quarterly
Bonuses for the first and second quarters of CY 1997 exceed $30,000
and $37,500, respectively. The determination of whether and to what
extent the performance objectives have been achieved for any
particular quarter and the amount of Quarterly Bonus payable shall be
made by the Board of Directors from the Company's financial and other
books and records as promptly as practicable following end of each
quarter. Prior to December 3 1, 1997, the Board of Directors will
adopt, approve and provide to Employee a BNS Annual Plan for the year
ended December 31, 1998 which shall set forth performance objectives
and provisions for Quarterly Bonuses to be calculated and determined
in a manner similar to that described for CY 1997. Quarterly Bonuses
shall be payable within thirty (30) days following the end of each
quarter.
D. Annual Bonus - Term The Employee shall be eligible to
receive an annual bonus ("Annual Bonus") for each calendar year
ending during the Term on the basis of a combination of performances
objectives including (i) performance objectives established for the
Division under the BNS Annual Plan for such year, (ii) the
<PAGE>
achievement, by the Company on an overall basis, of the goals and
objectives established under the Company's Annual Plan, as described
in Section 31, below, and (iii) such other factors as may be
determined by the Board or the Compensation Committee. The amount of
this Annual Bonus payable shall depend on the extent to which
performance objectives are actually achieved, in substantially the
same manner as described in Section 3C above, with up to $50,000 and
up to $100,000 being payable as Annual Bonuses for the years ended
December 31, 1997 and 1998, respectively, based on achieving 100% of
the combined performance objectives for each year. The combined
performance objectives for the 1997 Annual Bonus and the weighting
assigned to each component are as follows:
* achievement of performance objectives under the BNS Annual
Plan expressed in terms of the number of VARs and
customers (30%)
* the Company's achievement of EBITDA objectives set forth
in the Annual Plan (50%)
* establishment and continuation of vendor relationships of
significant benefit to the Company as determined by the
Board or its Compensation Committee (20 %).
E. Restricted Stock and Stock Option Grants. Reference is
made to the Company's 1997 Stock Incentive Plan (the "1997 Plan), a
copy of which has been provided to the Employee. The Employee and
Company acknowledge the Company has submitted the 1997 Plan to its
shareholders for approval at the Annual Meeting of Shareholders
scheduled for February 27, 1997. Subject to approval by the
shareholders of the 1997 Plan, and in accordance with the terms of
the 1997 Plan and provided Employee continues to be employed by the
Company, the Company agrees to grant Restricted Stock Awards and
Stock Options (as defined in the 1997 Plan) as follows:
(1) Signing Bonus.
* A Restricted Stock Award for 25,000 shares shall be
issued to the employee effective as of the Effective
Date, one half of which will Vest on the first
anniversary of the Effective Date and the remaining
one half shall Vest on the second anniversary of the
Effective Date subject to the terms and conditions of
the 1997 Plan; and
* A Stock Option for the purchase of 25,000 shares of
the Company's common stock at a purchase price of
$1.25 per share shall be granted to the Employee as
of the Effective Date exercisable to the extent of
<PAGE>
50% of such option on the first anniversary of the
Effective Date and the remaining 50% on the second
anniversary of the Effective Date subject to the
terms and conditions of the 1997 Plan.
(2) Stock Grant/Options.
* Restricted Stock Awards of 50,000 shares each will be
granted to Employee as of the Effective Date and as
of the first anniversary of the Effective Date. In
each case these grants will Vest one year after the
date of grant provided the Employee is still employed
on such date.
* Stock Options for the purchase of an aggregate of
100,000 shares hall be granted in four (4)
installments of 25,000 shares each with the first
grant to be issued as of the Effective Date and each
subsequent grant to be issued every six (6) months
thereafter. The price at which such Stock Options
will be granted shall be the Fair Market Value (as
defined in the 1997 Plan) as of the Date of Grant.
Such Stock Options may be exercised (purchased) six
(6) months following the Date of Grant. The first
option installment shall be priced at $1.25 per
share.
F. Adoption of Annual Plan The Board of Directors or, at its
election, its Compensation Committee, shall, from time to time, and
on or before such date during each calendar year as shall be
determined by the Board or such Committee, adopt and approve a
business plan with respect to financial, operating and other
performance expectations and objectives for each fiscal year ("Annual
Plan").
G. Business Expense. The Company will reimburse Employee for
such actual and reasonable business, travel, automobile (mileage
expenses but not car allowance) home-office expenses (telephone
service, Internet connections, fax lines and the like) relating to
the performance of his duties, and entertainment expenses as may be
incurred by him from time to time during the Term in the performance
of his duties and responsibilities hereunder and in accordance with
(a) policies, procedures and practices established from time to time
by the Company and (b) applicable provisions of the Internal Revenue
Code. Such reimbursements will be made upon the presentation by
Employee of an itemized account of such expenditures, setting forth
the date, the purpose for which incurred, and the amounts thereof,
together with such receipts showing payment as may be required by the
<PAGE>
Company's policies. Employee will exercise his best efforts to not
undertake any business, travel or other reimbursable expenses in
excess of $1,000 (or such higher limits as may from time to time be
established by the Company without the prior consent of the Chief
Operating Officer.
H. Benefits. Employee shall be entitled to customary and
usual employee benefits including a 401 (K) Plan, group medical and
health insurance and other benefits if, as and when obtained by the
Company, subject to the terms of these plans including co-pays,
deductibles and Employee-paid portions or premiums. The Company shall
reimburse Employee for that portion, if any, of medical and health
insurance premiums, if any, that Employee continues to pay as his
share of such premium expense in connection with continuation of
benefits provided by a prior employer under COBRA. During the Term,
the Company shall also reimburse Employee for premium expenses, not
exceeding $150 per mouth, for the purchase by Employee of term life
insurance with a total aggregate death benefit not exceeding
$750,000.
I. Vacations, Sick Leave and Leave of Absence- Employee shall
be entitled to take five (5) weeks of paid vacation which shall
accrue monthly during each calendar year of the Term, and which
vacation shall be taken at times determined by Employee and
acceptable to the Chief Operating Officer of the Company, which do
not unreasonably interfere with the performance of his duties
hereunder. During the first six (6) months of the Term, it is
anticipated that Employee will not use more than two (2) weeks of
vacation. Any such vacation shall otherwise be in accordance with
such policies as the Company may from time to time establish
including policies with respect to maximum limits on vacation
accruals.
J. Stock Options. In addition to the stock option provisions
described above, the Board of Directors or its Compensation Committee
will, as part of the Company's overall executive compensation plan,
allocate a number of options for possible under the 1997 Plan to
various executive positions within the Company, including the
position to be held by Employee. Employee will be eligible to
participate in the 1997 Plan with respect to the options to be
allocated to his position provided that the actual grant of Stock
Options with respect to such allocation and the terms, including
exercise price the number of shares subject to such options, the date
of grant and other conditions, of such options shall be determined by
the Board or the Committee in its sole discretion.
4. Termination. Salary, and other consideration and benefits, and
the employment of Employee by the Company may be terminated by the
Company as provided in this Section 4 as follows:
<PAGE>
A. Death. In the event of Employee's death, the Company
shall pay to the persons designated by Employee or, in the event
Employee fails to designate such persons, to Employee's estate any
accrued, but unpaid, Base Salary to the date of death and the Company
shall pay for any accrued but unused vacation through the date of
death. This Agreement shall be deemed to terminate upon the death of
Employee as though it had expired by its own terms.
B. Cause. Employee's employment hereunder may be terminate by
the Company at any time during the Term or any Extension Term for
Cause (as hereinafter defined). For purposes hereof, the term "Cause"
shall mean any of the foregoing:
1. The failure of Employee to perform any of his
material obligations under this Agreement and such
failure shall not be cured within 30 days of notice
to Employee;
2. The failure of Employee to achieve at least 60% of
the quarterly objective set forth in the BNS Annual
Plans during any two consecutive quarters;
3. Employee has been dishonest or has committed willful
misconduct or fraud in any matter materially
affecting the Company; or
4. Employee has misrepresented any material fact to the
Company or been convicted of a felony.
In the event this Agreement is terminated for Cause, the Company's
sole liability shall be to pay Employee any accrued but unpaid Salary
to the date of termination and shall pay Employee for any accrued but
unused vacation through termination.
C. Disability. The Company may terminate this Agreement upon
written notice to Employee by reason of Employee's disability. For
the purpose of this Agreement, "Disability" shall be defined as
inability by Employee, due to illness (other than the use/abuse of
illegal narcotics, alcohol or other intoxicating substances),
accident, mental deficiency or similar incapacity or legal
requirements, to render his regular duties for the Company required
pursuant to this Agreement for a period of one hundred twenty (120)
days in any twelve (12) month period. Any termination of employment
pursuant to this Section 4.C shall not be deemed to be for "Cause"
within the meaning of Section 4.B hereof. In the event that the
Company exercises its right to terminate Employee's employment
pursuant to this Section 4.C, the Company's sole liability shall be
to pay Employee any accrued but unpaid Salary through the date of
termination and shall pay Employee any accrued but unused vacation
through the date of termination. Any payments of Salary provided for
<PAGE>
hereunder shall be proportionally reduced by any payments which
Employee may be entitled to under any existing disability insurance
policy maintained by the Company. In the event this Agreement is
terminated in accordance with this Section 4.C, the Company shall not
be obligated to pay Employee any amounts, except as expressly set
forth in this Section 4.C or by law.
D. Expiration Term or Extension Terms. Upon expiration of the
Term or any Extension Term, any continued employment by the Employee
shall be on an "at-will" employment basis and either the Company or
the Employee may terminate the employment relationship with or
without cause or notice.
5. Employee Covenants
A. Non-Competition and Non-Solicitation. During Employee's
employment by the Company, Employee shall not own or have any
material interest directly in, or act as an officer, director (unless
approved by the Board of Directors, at its sole discretion), agent or
consultant of, or assist in any way or in any capacity, any person,
firm, association, partnership, corporation, or entity which shall be
competitive with the Company Business or any other business then
engaged in by the Company, in any area where the Company engages or
plans to engage in business. Employee shall not, for a period of one
(1) year from the expiration of the Term, any Extension Term or
earlier termination of this Agreement, solicit any employees or
customers of the Company, provided however that this restrictive
covenant shall not prevent advertising employment openings in
newspapers and trade journals of general circulation. During such one
(1) year period, Employee shall not solicit any customers of the
Company provided however that this restrictive covenant shall not
apply to Employee if his termination of employment was for reasons
other than Cause. In no event may Employee's solicitation activities
use any Company confidential or proprietary information.
B. Non-Disclosure of Confidential Information. Employee
acknowledges that any disclosure of confidential and proprietary
information or trade secrets of substantial value to the Company or
its customers (collectively the "Confidential Information") would do
great harm to the Company and agrees as follows:
(1) Confidential Information. As used in this Agreement,
the term "Confidential Information" without limitation, refers to and
includes any and all (i) matters of a technical nature, including
without limitation, trade secrets, systems, software and hardware,
features, specifications, techniques, copyrighted matters, patented
or patentable inventions, plans, methods, drawings, data, tables,
calculations, documents or other paperwork, computer programs,
narratives, flow charts, formulae and devices, and (ii) matters of a
<PAGE>
business nature, including without limitation, business and marketing
plans, financial statements and projections, dealings and
distribution arrangements, objectives, locations, customer
information, customer needs and formulations, plans for future
development, information about costs, profits, pricing policies,
markets or sales information reporting actual or prospective
strategic alliances, mergers, acquisitions, divestitures or other
forms of business combinations, new products or service introduction
plans, information concerning salaries, compensation and skills,
experience and capabilities of the Company's employees, and any other
information of similar nature not available to the public. This
Agreement covers the Confidential Information of the Company and its
customers.
(2) Use of Confidential Information. Employee
acknowledges that any disclosure or use by him of Confidential
Information other than on behalf of the Company will cause
irreparable harm and injury to the Company and, therefore, agrees
that the Confidential Information will. be used solely in connection
with the performance of Employee's duties under this Agreement, will
not be used by Employee for commercial purposes and will be kept
confidential by Employee. Without limiting the generality of the
foregoing, Employee will not utilize any Confidential Information in
the rendering of services to any other employer or person. Following
the termination of Employee's employment with the Company, Employee
shall not solicit any employee of the Company possessing Confidential
Information regarding the Company. The Company may, in its sole
discretion, disclose to any subsequent employer of Employee, or any
person having a business relationship with Employee, the contents of
this Section 5.
(3) Exclusions. The term "Confidential Information" does
not include any information which meets any of the following
criteria: (i) at the time of disclosure is a matter of public record
or is available to or known by The public other than as a result of a
disclosure, directly or indirectly, by Employee in violation of this
Agreement), (ii) had been publicly disclosed by the Company (other
than as a result of a disclosure, directly or indirectly, by Employee
in violation of this Agreement), (iii) has been independently
acquired or developed by Employee without violating any of Employee's
obligations under this Agreement or otherwise, or (iv) at the time of
disclosure is not identified or characterized as being confidential
or proprietary to the Company (either by appropriate markings or
legends, by oral admonitions as to the confidential or sensitive
nature thereof, or by reference to the circumstances under which such
disclosure is made which, by the nature of the information or the
fiduciary or other confidential nature of the relationships between
the Company and the persons to whom such disclosure is made, may
reasonably be expected to create the inference that such information
is confidential or proprietary to the Company).
<PAGE>
(4) Invention Assignment and Other Agreements. The
Employee agrees, upon the request of the Company, and without further
or additional consideration, to execute and deliver to the Company
such other agreements, documents, disclosures and certificates as may
be reasonably necessary or appropriate as determined by the Company
in its sole discretion exercised in good faith to confirm the
nondisclosure and non-use restrictions and limitations imposed on
Employee with respect to the Company's Confidential Information and,
with respect to any inventions conceived or reduced to practice by
Employee during the Term or any Extension Term, or otherwise during
the course and in the scope of the Employee's employment relationship
with the Company, to disclose such inventions to the Company and to
assign, transfer and convey to the Company any and all patent, trade
secret, copyright, mark rights or other intellectual or industrial
property rights associated therewith.
C. Delivery of Property. Upon termination of Employee's
employment with the Company, Employee shall deliver to the Company
all books, records, lists of customers and other property belonging
to the Company or developed in connection with the business of the
Company and all copies thereof, whether or not such constitutes
Confidential Information.
D. Reasonableness. In the event any court shall finally hold
that any provision of this Section 5 constitutes an unreasonable
restriction against Employee, the provision hereof shall not be
rendered void but shall apply as to such provision to such extent as
such court may judicially determine or indicate constitutes a
reasonable restriction under the circumstances involved.
E. Survival. The provision of this Section shall survive the
termination of this Agreement and shall run to and inure to the
benefit of the Company, its successors and assigns.
F. Company Policies. The Employee agrees to adhere to any and
all policies and procedures that are adopted from time to time by the
Company by action of its Board of Directors or senior executive
officers with respect to corporate governance and business conduct
matters or otherwise required in order to comply with applicable laws
and regulations, including, for example, not by way of limitation,
policies and procedure with respect to compliance with insider
trading laws and regulations, employment and labor matters and other
similar regulatory or legal provisions.
6. Indemnification and Insurance. The Company shall indemnify
Employee to the fullest extent permitted by applicable law for acts
or omissions relating to Employee's services to the Company, provided
that Employee was acting in good faith and in a manner he reasonably
believed to be in the best interest of the Company
<PAGE>
7. Miscellaneous
A. Succession. This Agreement shall inure to the benefit of
and be binding upon the Company, its successors and assigns, and
inure to the benefit of and be binding upon Employee and his heirs
and personal representatives. The Company shall have the right to
assign this Agreement and to delegate all rights, duties and
obligations hereunder, in whole or in part, to any subsidiary,
subsidiary or parent company of the Company or to any other persons,
firm or corporation which acquires either the Company or any
subsidiary thereof, or a substantial part of its or their assets, or
into which the Company or any subsidiary may merge. The obligations
and duties of Employee hereunder are personal and not assignable.
B. California Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the state of California,
without regard to choice of law provisions.
C. Waiver. No failure or delay on the part of any party to
this Agreement in exercising any right, power or remedy hereunder
shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any right, power or
remedy hereunder.
D. Notices. All notices and demands among the parties shall
be in writing and shall be served (i) in person, (ii) by registered
or certified mail, return receipt requested or (W) by overnight
courier service. All notice and demands to the parties hereto shall,
if mailed, be addressed to the following addresses:
To the Company: AvTel Communications, Inc.
130 Cremona Drive, Suite C
Santa Barbara, CA 93117
Fax No. 805\685-9685
To Employee: Mr. Steve DeWindt
2 Shelter Cove
Laguna Niguel, CA 92677
Fax No. 714\488-3731
The parties may designate in writing, from time to time, such other
place or places that such notices and demands may be given.
E. Arbitration. The exclusive method for resolving any
controversy or claim concerning or arising out of, or related to,
this Agreement, including, without limitation, the interpretation
thereof, any alleged breach thereof and the enforcement thereof,
<PAGE>
shall be by arbitration in Los Angeles, California, upon initiation
by a party hereto by a written notice to the party demanding
arbitration and specifying the controversy or claim to be arbitrated.
Any controversy or claim shall be settled and finally determined by a
single arbitrator selected in accordance with the following
procedure: Within five (5) business days of the date of delivery of
the foregoing notice, the parties shall each provide the other with a
list of ten (10) retired judges from the Los Angeles County Superior
Court in order of preference and if one or more judge appears on each
such lists, the parties shall designate the duplicated judge who is
highest in order of preference on both lists to settle and finally
determine the controversy or dispute arising hereunder. If no judge
is named on both of such lists, then the parties shall have a period
of two (2) business days to agree to the designation of a retired
judge from the Los Angeles County Superior Court (who shall not have
any conflicts; of interest with respect to the subject matter of, or
the parties to, such dispute), shall be chosen by the Presiding Judge
of the Superior Court of Los Angeles, State of California. The judge
ultimately selected to hear the controversy or dispute hereunder is
herein referred to as the "Arbitrator". The Arbitrator shall have the
power to award any and all remedies and relief whatsoever deemed
appropriate under the circumstances, including, without limitation,
money damages and equitable relief. The procedure whereby the
evidence (oral/written) relating to the controversy or claim is
presented in the arbitration shall be as agreed to by the Arbitrator.
The written decision of the Arbitrator shall be binding and
conclusive on the parties thereto and enforceable as provided by the
laws of the State of California, and judgment on such arbitration
decision may be entered by any courts having jurisdiction thereof.
F. Entire Agreement. This Agreement sets forth the entire
understanding between the parties with respect to the subject matter
hereof, and there are no terms, conditions, representations,
warranties or covenant other than those contained herein. This
Agreement supersedes any previous agreements or understandings
between the parties with respect to the subject matter hereof,
whether written or
G. Captions. The section captions inserted in this Agreement
are for convenience of reference and are not intended to be part of
the Agreement.
H. Severability. If any term of provision of this Agreement
or the application thereof to any person or circumstances shall, to
any extent, be invalid or unenforceable, the remainder of this
Agreement or the application of such term or provision to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and each term and
provision of this Agreement shall be valid and be enforced to the
fullest extent permitted by law.
<PAGE>
I. Amendment and Modification. No term or provision of this
Agreement may be amended, waived, released, discharged or modified in
any respect except in writing signed by the parties hereto.
J. Counterparts. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this
Agreement by signing any such counterpart.
K. Cost of Enforcement. The prevailing party in any
proceeding brought to interpret or enforce any provision of this
Agreement or to recover for breach thereof shall be entitled to
recover the reasonable fees, expenses and costs of his counsel, plus
all other costs and expenses of such proceeding. For purposes of this
Agreement, the prevailing party shall be considered to be the party
whose final written settlement offer shall be closest to the award of
the Arbitrator.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
AVTEL COMMUNICATIONS, INC.
A Utah Corporation
By: /s/ JAMES P. PISANI
-------------------
James Pisani
Chief Operating Officer
/s/ D. STEPHEN DEWINDT
----------------------
Steve DeWindt, Employee
<PAGE>
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 to Employment Agreement ("Amendment") is
effective as of the 28th day of February, 1997 ("Amendment Date") and
is entered into by and between AvTel Communications, Inc., a Utah
corporation (the "Company"), and Steve DeWindt ("Employee") for the
purposes of amending that certain Employment Agreement, effective as
of January 27, 1997, by and between the Company and Employee
("Agreement").
RECITALS
A. The Company and Employee previously entered into the
Agreement; and
B. The Company and Employee wish to amend and revise certain
provisions of the Agreement, effective as of the Amendment Date, all
in accordance with the terms no conditions of this Amendment.
NOW, THEREFORE, in consideration of the premises, the promises
and covenants contained herein and for good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Salary and Benefits. Subsection E of Section 3, "Salary and
Benefits", of the Agreement is hereby deleted in its entirety and the
following substituted in lieu thereof:
"E. Restricted Stock and Stock Option Grants. Reference is made
to the Company's 1997 Stock Incentive Plan (the "1997 Plan"), a copy
of which has been provided to the Employee and which was approved by
the Company's shareholders at the Annual Meeting of Shareholders on
February 27, 1997. Subject to the terms of the 1997 Plan and provided
Employee continues to be employed by the Company, the Company agrees
to grant Stock Options (as defined in the 1997 Plan) as follows:
(1) Signing Bonus. A Stock Option for the purchase of
50,000 shares of the Company's common stock at a purchase price of
$1.25 per share (1) shall be granted to the Employee as of the
Effective Date exercisable to the extent of 50% of such option on the
first anniversary of the Effective Date and the remaining 50% on the
second anniversary of the Effective Date subject to the terms and
conditions of the 1997 Plan.
(2) Stock Options. Stock Options for the purchase of an
additional 50,000 shares shall be awarded as of the Effective Date.
The price at which such Stock Options will be granted shall be the
$1.25 per share, the Fair Market Value (as defined in the 1997 Plan)
as of the Date of Grant. Such Stock Options may be exercised
(purchased) six (6) months following the Date of Grant.
<PAGE>
2. No Other Amendments. Except as expressly provided herein, there
are no other amendments, changes, revisions or alterations to the
Agreement and all the terms and conditions of the Agreement remain in
full force and effect, except as expressly set forth herein.
IN WITNESS WHEREOF, the parties have executed this Amendment as of
the Amendment Date.
AVTEL COMMUNICATIONS, INC.,
By: /s/ JAMES PISANI
-------------------
James Pisani
Chief Operating Officer
/s/ STEVE DEWINDT
----------------------
Steve DeWindt, Employee
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Avtel Communications, Inc.
We consent to incorporation by reference in the Registration Statement (No.
333-30725) on Form S-8 of Avtel Communications, Inc. of our report dated
December 5, 1997, relating to the consolidated balance sheet of Avtel
Communications, Inc. as of September 30, 1997, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended, which report appears in the annual report on Form 10-KSB of
Avtel Communications, Inc. for the fiscal year ended September 30, 1997.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Shreveport, Louisiana
January 9, 1998
<PAGE>
EXHIBIT 23.2
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 333-30725) filed by AvTel
Communications, Inc. of our report dated October 14, 1997, with respect to the
financial statements of AvTel Holdings, Inc. at and for the period from
inception (July 16, 1996) to September 30, 1996.
/s/ MACFARLANE, FALETTI & CO. LLP
MACFARLANE, FALETTI & CO. LLP
Santa Barbara, California
January 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF AVTEL COMMUNICATIONS, INC. AS OF SEPTEMBER, 30 1997 AND THE RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 239
<SECURITIES> 0
<RECEIVABLES> 269
<ALLOWANCES> 86
<INVENTORY> 0
<CURRENT-ASSETS> 460
<PP&E> 728
<DEPRECIATION> 87
<TOTAL-ASSETS> 1769
<CURRENT-LIABILITIES> 1559
<BONDS> 0
0
3
<COMMON> 18
<OTHER-SE> 123
<TOTAL-LIABILITY-AND-EQUITY> 1769
<SALES> 2346
<TOTAL-REVENUES> 2346
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4748
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (2416)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2416)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> 0
</TABLE>
