SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 1, 1997
-----------------
AvTel Communications, Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Commission File No. 0-27580
---------
Delaware 87-0378021
-------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 Cremona Drive, Santa Barbara, California 93117
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 805-685-0355
------------
==============================================================
(Former Name or Former Address, if changed since last report)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
This Form 8-K/A amends Item 7 of that certain Form 8-K filed with the
Securities and Exchange Commission on December 8, 1998 by including the
financial statements and pro forma financial information referred to below.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
The following financial statements, pro forma financial information and
exhibits are filed as part of this Report.
A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Registrant hereby files the following financial statements of Matrix Telecom,
Inc., a Texas corporation ("Matrix"):
For the year ended December 31, 1996:
(i) Independent auditors' report.
(ii) Balance sheets as of December 31, 1996 and 1995.
(iii) Statements of operations for the years ended December 31, 1996, 1995 and
1994.
(iv) Statements of stockholders' equity for the years ended December 31, 1996,
1995 and 1994.
(v) Statements of cash flows for the years ended December 31, 1996, 1995 and
1994.
(vi) Notes to Financial Statements December 31, 1996, 1995 and 1994.
For the nine months ended September 30, 1997 and 1996:
(i) Consolidated balance sheets as of September 30, 1997, and December 31,
1996 (unaudited).
(ii) Consolidated statements of income for the nine months ended September 30,
1997 and 1996 (unaudited).
(iii) Consolidated statements of stockholders' equity for the nine months ended
September 30, 1997.
(iv) Consolidated statements of cash flows for the nine months ended September
30, 1997 and 1996 (unaudited).
(v) Notes to consolidated financial statements September 30, 1997 and 1996.
<PAGE>
B. PRO FORMA FINANCIAL INFORMATION.
Registrant hereby files the following pro forma financial information reflecting
the combination of the Registrant and Matrix:
(i) Introduction
(ii) Unaudited pro forma condensed combined balance sheet as of September 30,
1997,
(iii) Unaudited pro forma condensed combined statement of operations for the
nine months ended September 30, 1997, and
(iv) Unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1996,
(v) Notes to unaudited pro forma condensed financial information.
C. EXHIBITS. Page Number
In Sequential
Numbering
System
(23.1) Consent of KPMG Peat Marwick LLP 36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Matrix Telecom, Inc.:
We have audited the accompanying balance sheets of Matrix Telecom, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matrix Telecom, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Dallas, Texas
January 24, 1997, except as to the
first paragraph of note 4 which
is as of March 10, 1997
<PAGE>
MATRIX TELECOM, INC.
BALANCE SHEETS
December 31, 1996 and 1995
Assets 1996 1995
Current assets:
Cash and cash equivalents $ 4,622,395 3,164,053
Accounts receivable, net 10,507,580 9,997,081
Due from affiliates 1,212,414 834,150
Other current assets 2,200,751 251,960
----------- -----------
Total current assets 18,543,140 14,247,244
Investment and advances to
DNS Communications, Inc. - 1,244,637
Property and equipment, net 1,621,355 1,796,398
Other assets, net 39,621 142,318
Deferred income taxes 134,288 150,097
--------- ----------
Total assets $20,338,404 17,580,694
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other
accrued expenses $ 1,888,026 1,872,373
Accrued network service costs 4,863,663 6,419,260
Sales and excise taxes payable 1,676,677 1,694,367
Due to affiliates 2,597,559 3,340,222
Income taxes payable 554,596 377,463
Deferred income taxes - 337,487
Other liabilities 896,000 -
----------- ----------
Total current liabilities 12,476,521 14,041,173
=========== ===========
Stockholders' equity:
Common stock, no par value;
authorized 10,000,000 shares,
3,484,260 and 2,769,228
shares issued at December 31,
1996 and 1995, respectively 7,532,026 5,336,815
Retained earnings
(accumulated deficit) 769,441 (1,797,293)
Treasury stock, 69,120
common shares, at cost (439,584) -
---------- ----------
Total stockholders' equity 7,861,883 3,539,522
Commitments and contingencies ---------- ----------
Total liabilities and
stockholders' equity $20,338,404 17,580,694
=========== ==========
See accompanying notes to financial statements.
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
Revenues $ 71,558,295 64,289,718 59,551,307
Cost of revenues 47,674,396 42,980,127 40,074,801
------------ ---------- ----------
Gross margin 23,883,899 21,309,591 19,476,506
------------ ---------- ----------
Operating expenses:
Selling, general and
administrative 18,798,925 17,888,856 18,057,296
Depreciation and amortization 993,940 998,342 815,101
------------ ---------- ----------
19,792,865 18,887,198 18,872,397
------------ ---------- ----------
Operating income 4,091,034 2,422,393 604,109
Interest expense (230,922) (6,299) (176,922)
Other income, net 271,171 165,616 88,514
----------- ---------- ---------
Income before income
tax expense 4,131,283 2,581,710 515,701
Income tax expense (benefit) 1,686,876 1,081,726 (127,499)
----------- ---------- ---------
2,444,407 1,499,984 643,200
----------- ---------- ---------
Equity in income (loss)
Of DNS 122,327 (3,940,477) -
----------- ---------- ---------
Net income (loss) $ 2,566,734 (2,440,493) 643,200
----------- ---------- ---------
Net income (loss) per share $ .88 (1.19) .36
==== ===== =====
See accompanying notes to financial statements.
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
Retained
Earnings Total
Partners' Common (accumulated Treasury Stockholders'
Capital Stock deficit) Stock Equity
-------- ------ ------------ -------- ------------
Balances at
December 31, 1993 $1,729,133 - - - 1,729,133
Dissolution of
partnership and
contribution of
assets to a
corporation (1,729,133) 1,729,133 - - -
Net income - - 643,200 - 643,200
----------- --------- ---------- --------- -----------
Balances at
December 31, 1994 - 1,729,133 643,200 - 2,372,333
Purchase of DNS
Communications, Inc.
(969,228 common
shares) - 3,607,682 - - 3,607,682
Net (loss) - - (2,440,493) - (2,440,493)
----------- --------- ---------- --------- ------------
Balances at
December 31, 1995 - 5,336,815 (1,797,293) - 3,539,522
Purchase of 69,120
common shares - - - (439,584) (439,584)
Issuance of 589,752
common shares - 2,195,211 - - 2,195,211
Net income - - 2,566,734 - 2,566,734
----------- --------- ---------- --------- -----------
Balances at
December 31, 1996 $ - 7,532,026 769,441 (439,584) 7,861,883
=========== ========= ========== ========== ==========
See accompanying notes to financial statements.
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $2,566,734 (2,440,493) 643,200
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 993,940 998,342 815,101
Amortization of advanced commissions 618,791 - -
Provision for bad debts 1,461,471 1,955,842 1,974,903
Loss on disposition of assets - - 14,365
Deferred income taxes (321,678) 530,885 (343,494)
Equity in (income) loss of DNS (122,327) 3,940,477 -
Changes in assets and liabilities:
Accounts receivable (1,971,970) (2,170,807) (2,994,971)
Due from affiliate 345,336 630,395 (1,452,481)
Federal and state income
tax receivable - 631,183 (631,183)
Other current assets (393,781) (96,791) 161,967
Accounts payable, accrued and
other liabilities (1,397,160) 526,850 5,051,696
Due to affiliate (742,663) 591,889 1,293,631
---------- --------- ---------
Net cash provided by
operating activities 1,036,693 5,097,772 4,532,734
========== ========= =========
Cash flows from investing activities:
Purchase of property and equipment (701,718) (529,805) (1,125,444)
Payments for billing and
collection agreements (14,482) - (17,600)
Purchase of acquired customer bases - (103,970) (32,723)
Repayments (advances) to DNS, net 1,577,432 (1,577,432) -
Proceeds from sale of property
and equipment - 52,173 77,967
--------- ---------- ---------
Net cash provided by (used in)
investing activities 861,232 (2,159,034) (1,097,800)
--------- ---------- ----------
Cash flows from financing activities:
Net change in notes payable - - (3,230,121)
Purchase of common stock for
treasury (439,583) - -
--------- ---------- ----------
Net cash used in financing
activities (439,583) - (3,230,121)
--------- ---------- ----------
Net increase in cash and
cash equivalents 1,458,342 2,938,738 204,813
Cash and cash equivalents at
beginning of year 3,164,053 225,315 20,502
---------- --------- --------
Cash and cash equivalents at
end of year $4,622,395 3,164,053 225,315
========== ========= ========
<PAGE>
MATRIX TELECOM, INC.
STATEMENTS OF CASH FLOWS
(Continued)
1996 1995 1994
Cash paid (received) during
the year for:
Interest $ 212,404 6,300 175,134
=========== ======== =======
Income taxes, net of refunds $ 1,482,103 (475,177) 847,179
=========== ======== =======
Noncash financing activities:
Common stock issued for DNS
acquisition $ - 3,607,682 -
=========== ========= =======
Common stock issued for
advanced commissions $ 2,195,211 - -
=========== ========= =======
Common stock issued for
receivable from major
shareholder subject to
put options $ 723,600 - -
=========== ========= =======
See accompanying notes to financial statements.
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
(a) Business and Background
All references to the "Company" or "Matrix Telecom" refer to Matrix
Telecom, Inc. and its predecessors. The Company provides long distance
telephone service to its customers in forty-nine states over intercity
facilities provided by fully certified dominant domestic and international
carriers. Matrix resells to both residential and commercial customers;
however, the primary focus is to the small business owner with five or fewer
employees whose usage resembles that of the residential customer. The Company
is fully certified by the Federal Communications Commission and certified to
operate in all states requiring such certification. The Company holds billing
and collection agreements with all regional bell operating companies, GTE, and
other independent telephone companies.
The Company was originally formed May 29, 1990 as a Texas general
partnership. The partners consisted of Matrix Communications, Limited ("MCL")
a Texas limited liability partnership and Onward and Upward, Inc. ("OUI").
Effective January 1, 1994, the partnership was dissolved (see note 4). Prior
to the dissolution, cash distributions were made to OUI in satisfaction of its
partnership interest. Concurrent with the dissolution, all remaining tangible
and intangible assets and liabilities of the Company then owned by MCL were
transferred to Matrix Telecom, Inc., a Texas corporation. The transfer was a
tax free transaction and significant controlling interest in the company did
not change. Effective June 30, 1995, MCL was liquidated and its sole asset
(Matrix Telecom capital stock) was distributed to MCL's partners in proportion
to their ownership interests.
(b) Basis of Presentation
The Company includes the operations of DNS Communications, Inc. in
its financial statements using the equity method of accounting. The Company
utilized the equity method due to the temporary period of time that its
investment in the operations of DNS was retained (see note 7).
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all demand deposits, time deposits, and other investments with a remaining
maturity at date of purchase of less than ninety days to be cash equivalents.
(d) Commissions
Commissions to sales agents are paid and expensed based on a
percentage of billings as incurred.
Commissions paid in advance of $1,576,000 as of December 31, 1996,
included in other current assets, are being expensed over a period of eighteen
months based on estimated billings of the customers for which the commissions
were paid. (See note 4).
(e) Revenue Recognition
Long distance revenues are recognized as service is provided to
customers.
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(f) Property and Equipment
Property and equipment are recorded at cost. Maintenance and
repairs are charged against income as incurred, while renewals and major
replacements are capitalized. The cost and related accumulated depreciation
of assets sold or retired are removed from the accounts, and any resulting
gain or loss is reflected in operations. The Company provides depreciation on
fixed assets using the straight-line method over the estimated useful lives of
the respective assets.
(g) Income Taxes
Effective January 1, 1994 the Company began accounting for income
taxes under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Prior to January 1, 1994, the Company operated as a partnership.
Accordingly, the Company was not a taxable entity. Income taxes were the
responsibility of the individual partners.
(h) Use of Estimates
Management of the Company has made a number of estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
(i) Concentrations of Credit Risk
The Company's subscribers are primarily small business owners and
residential subscribers and are not concentrated in any specific geographic
region of the United States. The Company has agreements with LECs, which
provide billing and collection services to the majority of the Company's
subscribers. A significant portion of the Company's accounts receivable is
due from these Companies.
(j) Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts and
other provisions of $626,790 and $730,354 as of December 31, 1996 and 1995,
respectively. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of subscribers, historical
trends and other information.
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(k) Financial Instruments
The Company's financial instruments include cash, receivables,
payables and accrued expenses. The carrying amount of such financial
instruments approximates fair value because of the short maturity of these
instruments.
(l) Earnings (loss) per share
Earnings (loss) per share are computed based on average common shares
outstanding which were 2,919,978, 2,044,296, and 1,800,000 in 1996, 1995 and
1994, respectively.
(2) Property and Equipment
Property and equipment consisted of the following:
Estimated December 31
useful life 1996 1995
----------- ----------------------
Communications system 2-5 years $1,328,679 1,328,679
Office furniture and equipment
software 1-7 years 2,815,451 2,449,746
Leasehold improvements lease term 416,220 256,412
----------- ---------- ---------
4,560,350 4,034,837
(2,938,995) (2,238,439)
---------- ----------
$1,621,355 1,796,398
========== ==========
Depreciation expense was $877,000, $882,000 and $683,000 for 1996, 1995 and
1994, respectively.
(3) Related Party Transactions
The Company has had transactions in the normal course of business with
various companies which are affiliated with shareholders of the Company.
Pacific Gateway Exchange, Inc. ("PGE"), an affiliated company, provides the
Company with significant domestic and international transmission services.
Common shareholders hold an interest in both PGE and the Company. Affiliates
of the Company also act as agents for the Company in the solicitation of new
customers. In addition, the Company's employees are leased from United Group
Service Center, an affiliate, who provides such services to a number of
affiliated companies. The Company provides long distance service to a number
of affiliated companies. Balances with affiliates are settled monthly.
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Due from affiliates consists of the following:
December 31
1996 1995
-----------------------------
Excell Agent Services (long distance services) $ 193,285 129,007
Interactive Media Works (IMW)
(long distance services) 525 336,345
Core Marketing (long distance services) 134,652 -
Other transactions with various affiliates 160,352 368,798
Receivable from major shareholder for
stock issued 723,600 -
---------- ---------
$1,212,414 $ 834,150
========== =========
The due to affiliates consists of the following:
1996 1995
PGE (network transmission services) $ 2,244,411 2,559,031
Group Association (UGA) and
Core Marketing (commission) 144,612 294,484
Other transactions with various affiliates 208,536 486,707
----------- ---------
$ 2,597,559 3,340,222
=========== =========
Significant services and transactions incurred in the normal course of
operations with affiliated companies are summarized as follows:
1996 1995 1994
Network transmission services - PGE $20,527,236 17,195,182 9,259,150
Expenses paid on behalf of PGE
for access services, for which
the Company was reimbursed 5,040,051 3,142,222 853,060
Expenses incurred for leasing
employees from United Group
Service Center 4,542,007 3,655,712 2,442,442
Consulting fees to United Group
Association ("UGA") - - 313,294
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Sales commissions to affiliates:
TravelCom 800, Core Marketing,
UICI, UGA and Best Connections 5,335,233 6,314,878 5,108,123
Long distance revenues from
affiliates: UGA, UICI IMW,
and Core Marketing 5,445,903 3,180,302 1,240,203
Advances to TravelCom 800 - 126,500 468,609
Overhead expenses reimbursed
to/from UGA Divisions 77,231 105,007 151,038
Interest paid to shareholder 173,380 6,299 175,134
During 1996, the Company obtained loans from a significant shareholder for
working capital and other purposes of $4,900,000. Such amount was repaid
during 1996.
(4) Stockholders' Equity
Matrix Telecom original stock issuance consisted of 100 common shares.
Effective December 31, 1994, a 10 for 1 stock split was declared. Concurrent
with the dissolution of MCL on June 30, 1995, the Company's then outstanding
1,000 shares of common stock were cancelled and 100,000 shares were
distributed to the prior MCL partners in proportion to their ownership
interest in MCL. In addition, effective March 10, 1997, an 18 for 1 stock
split was declared. All share amounts have been restated to reflect the stock
splits and share exchange.
In October 1995, the Company issued 969,228 shares of its no par value common
stock valued at $3,607,682 for 100% of the outstanding shares of DNS
Communications, Inc. ("DNS"), a Houston based long distance reseller. Matrix
Telecom is a private company and accordingly, its stock does not have a
readily determinable market value. For purposes of determining the cost of
DNS, the stock consideration of $3.72 per share was valued based on the price
paid by a shareholder of the Company to purchase the Company's common stock
issued to the former owners of DNS in the acquisition of DNS (see note 7).
In December 1996, the Company issued 589,752 shares of its no par value common
stock to its majority shareholder in settlement of future commissions due to
affiliates also owned by this majority shareholder as of October 31, 1996. A
value of $3.72 per share was used in determining the number of shares to issue
in settlement of the $2,195,211 obligation. Of this amount, $619,000 was
expensed as commission expense in 1996.
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Periodically the Board approves stock options for certain officers and
employees. Stock option transactions during 1995 and 1996 were as follows:
Weighted-average
Exercise
Options Price
Outstanding at December 31, 1994 - -
Granted 21,600 $5.56
-------
Outstanding at December 31, 1995 21,600 5.56
Granted 217,800 5.56
Cancelled 230,400 5.56
-------
Outstanding at December 31, 1996 9,000 5.56
=======
As of December 31, 1996 and 1995 all outstanding options were exercisable.
Outstanding options do not expire. The Company accounts for its stock options
in accordance with the provisions of APB Opinion No. 25 as allowed by SFAS No.
123 "Accounting for Stock Based Compensation." Options granted in 1996 were
cancelled shortly after grant and accordingly no value has been attributed to
such options. The fair value of options granted in 1995 is not material based
on the minimum value method.
In connection with the cancellation of 194,400 of the above options during
1996, the Company sold to such employees 194,400 shares of common stock at
$3.72 per share. As of December 31, 1996, the Company has recorded a $723,600
receivable for such shares, which was subsequently collected. Proceeds used
to pay for these shares were loaned to the employees by a major shareholder of
the Company. Also as a part of this transaction, the Company and the
employees entered into agreements whereby such shares could be put or called,
as applicable, under certain conditions. As of December 31, 1996, the shares
subject to this agreement could be put or called at a price per share of
approximately $4.61 totaling $896,000. Such amount has been included in other
liabilities as of December 31, 1996.
During May 1996 the Company purchased 69,120 shares of treasury stock for
$439,583.
5) Leasing Activities and Other Commitments
The Company has no significant capital lease liabilities; however, the
Company leases office space and various equipment under operating leases
expiring in various years through 2000. In the normal course of business,
operating leases are generally renewed or replaced by other leases. Total
rental expenses were $325,000 in 1996, $239,000 in 1995 and $156,000 in 1994.
Minimum future rental payments at December 31, 1996 are as follows:
1997 $ 253,587
1998 265,552
1999 276,575
2000 253,527
----------
$1,049,241
==========
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
Substantially all of the Company's switching and transmission facilities
have been provided by two suppliers under negotiated contractual agreements.
The Company purchases long distance services at certain per-minute rates,
which vary depending on the time and type of call. At December 31, 1996,
there are outstanding contractual agreements committing the Company to minimum
usage requirements for the duration of the contracts as set forth below:
1997 $ 14,925,000
1998 1,050,000
------------
$ 15,975,000
============
(6) Federal and State Income Taxes
The Company was originally organized as a partnership and continued to
operate as a partnership until December 31, 1993. Effective January 1, 1994,
the Company became a C corporation for federal income tax purposes.
Deferred income taxes for 1996 and 1995 reflect the impact of temporary
differences between financial statement carrying amounts and tax bases of
assets and liabilities. The tax effects of temporary differences that give
rise to significant portions of the net deferred tax assets at December 31,
1996 and 1995 are presented below:
December 31
1996 1995
---- ----
Deferred tax assets:
Financial over tax amortization
of purchased customer base $ 134,288 150,097
Less valuation allowance - -
--------- --------
Net deferred tax asset 134,288 150,097
Deferred tax liabilities:
Tax versus financial
recognition of expenses - (337,487)
--------- --------
Net deferred tax asset
(liability) $ 134,288 (187,390)
========= ========
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and prior taxes paid in making this assessment. Based upon its
evaluation of these factors, management believes that the deferred tax asset
is realizable.
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income as a result of the
following:
1996 1995 1994
Computed "expected" tax expense (benefit) $1,404,637 870,502 175,338
State and local taxes, net of
federal income tax benefit 125,518 116,346 43,835
Deferred tax asset recorded at
conversion of partnership - - (346,672)
Other differences 156,721 94,878 -
---------- ------- --------
$1,686,876 1,081,726 (127,499)
The provision for income taxes consisted of the following:
1996 1995 1994
Current tax expense:
Federal $1,751,047 480,736 172,770
State and local 257,507 70,105 43,225
---------- ------- --------
2,008,554 550,841 215,995
1996 1995 1994
Deferred tax expense (benefit):
Federal (254,350) 424,708 (274,794)
State and local (67,328) 106,177 (68,700)
-------- ------- -------
(321,678) 530,885 (343,494)
-------- ------- -------
$1,686,876 1,081,726 (127,499)
========== ========= =======
The difference between the tax and book bases of the assets and liabilities of
the partnership upon dissolution and contribution to Matrix Telecom was
recorded as a deferred tax benefit as of January 1, 1994, the effective date
of the dissolution of the partnership.
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(7) Acquisition
In October 1995, the Company issued 969,228 shares of its common stock
valued at $3,607,682 in exchange for all of the outstanding common stock of
DNS Communications, Inc., a Houston based long distance reseller. The
transaction was accounted for under the purchase method. The purchase price
in excess of the book value of DNS net assets was pushed down to DNS and was
allocated based upon the estimated fair value of the assets and liabilities
acquired at the date of acquisition and included the following:
Current assets $1,978,262
Acquired customer base 6,351,131
Other noncurrent assets 114,384
Accounts payable and accrued expenses (2,346,102)
Deferred tax liability (2,489,993)
----------
Value assigned to common stock issued $3,607,682
==========
Summarized financial information
related to DNS is as follows:
December 31, 1995
Current assets $2,461,961
Noncurrent assets 555,739
----------
$3,017,700
==========
Current liabilities
(includes $1,577,432 payable to Matrix) $3,350,495
Shareholder's deficit (332,795)
----------
$3,017,700
==========
Period from
Year Ended October 1, 1995 to
December 31, 1996 December 31, 1995
----------------- ------------------
Revenue $11,027,000 $4,277,000
Gain on sale of
acquired customer bases 3,221,000 -
Net income (loss) 122,000 (3,940,000)
Subsequent to the acquisition, the operations of DNS generated substantial
losses. DNS's customer churn rate and bad debts as well as projected cash
flows were evaluated and as of December 31, 1995 it was determined that the
remaining investment in the DNS acquired customer base totaling approximately
$4,462,000 should be written off. Such amount net of related deferred taxes
is included in the loss of DNS reflected above for 1995.
In June 1996, the Company sold the customer base acquired in the DNS
acquisition in addition to certain blocks of customers acquired during 1995
and 1996 together with related assets to a former officer of the Company and a
former shareholder of DNS for approximately $5,270,000. The Company recorded
a gain on this sale of approximately $3,221,000. This gain is recorded in
equity in net income (loss) of DNS in the 1996 statement of operations.
<PAGE>
MATRIX TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
(8) Contingencies
The Company presently has contingent liabilities relating to various
lawsuits and other matters related to the conduct of its business. On the
basis of information furnished by counsel and others, management believes
these contingencies upon resolution will not materially affect the financial
condition of the Company.
<PAGE>
MATRIX TELECOM, INC.
Consolidated Balance Sheets
As of September 30, 1997 and December 31, 1996
September 30, December 31,
1997 1996
Assets ------------- ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,187,994 4,622,395
Accounts receivable, net 7,853,456 10,507,580
Due from affiliates 3,170,908 1,212,414
Income tax receivable 300,418 0
Other current assets 1,121,050 2,200,751
------------ -----------
17,633,826 18,543,140
Property and equipment, net 1,315,735 1,621,355
Other assets, net 1,005 39,621
Deferred income taxes 160,747 134,288
----------- -----------
$19,111,313 20,338,404
=========== ===========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable and other
accrued expenses $ 1,270,900 1,888,026
Accrued network service costs 4,464,914 4,863,663
Sales and excise tax payable 1,547,007 1,676,677
Due to affiliates 2,993,767 2,597,559
Income tax payable 0 554,596
----------- -----------
$10,276,588 11,580,521
=========== ===========
LONG TERM LIABILITIES 896,000 896,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock $10,893,234 7,532,026
Paid in capital 63,000 0
Retained earnings
(accumulated deficit) 740,014 769,441
Treasury stock (3,757,523) (439,584)
----------- -----------
$ 7,938,725 7,861,883
----------- -----------
$19,111,313 20,338,404
=========== ===========
See accompanying notes to financial statements.
<PAGE>
MATRIX TELECOM, INC.
Statements of Income
For the Nine Months Ended September 30, 1997 and 1996
1997 1996
---------- -----------
REVENUES $39,244,448 55,731,784
COST OF REVENUES 27,304,366 37,184,249
----------- -----------
GROSS MARGIN $11,940,082 18,547,535
Operating Expenses:
Selling, general and administrative $11,685,850 14,375,100
Depreciation and amortization 515,037 783,654
----------- -----------
Total Operating Expenses $12,200,887 15,158,754
----------- -----------
NET OPERATING INCOME (LOSS) $ (260,805) 3,388,781
Income expense $ (9,026) (200,814)
Other income (expense), net 219,099 116,036
----------- -----------
Income (loss) before income taxes $ (50,732) 3,304,003
Income tax expense (benefit) (21,307) 1,453,761
----------- -----------
$ (29,425) 1,850,242
Equity in net income (loss) of DNS 0 175,363
----------- -----------
NET INCOME (LOSS) $ (29,425) 2,025,605
=========== ===========
Net income (loss) per share (0.01) 0.74
=========== ===========
Weighted average shares outstanding 3,596,128 2,735,928
=========== ===========
See accompanying notes to financial statements.
<PAGE>
MATRIX TELECOM, INC.
Consolidated Statements of Stockholders' Equity
For the Period Ending September 30, 1997
(Unaudited)
Retained
earnings Total
Common Paid in (accumulated Treasury Stockholders'
stock capital deficit) stock equity
------ ------- ------------ -------- -------------
BALANCES,
December 31, 1996 7,532,026 - 769,439 (439,584) 7,861,881
Purchase of Best
Connections, Inc. 3,361,208 - - (3,317,939) 43,269
Deferred compensation
earned - 63,000 - - 63,000
Net loss - - (29,425) - (29,425)
--------- ------- ------------ -------- ------------
BALANCES,
September 30, 1997 10,893,234 63,000 740,014 (3,757,523) 7,938,725
========== ====== ======= =========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
MATRIX TELECOM, INC.
Consolidated Statements of Cash Flows
For the Nine Month Period Ended September 30, 1997 and 1996
(Unaudited)
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ (29,425) $ 2,025,605
Adjustments to reconcile net income
(loss) to cash provided by
operating activities:
Depreciation and amortization 515,037 783,654
Provision for bad debts 1,220,265 1,133,529
Deferred income taxes (26,459) 0
Deferred compensation 63,000 0
Equity in (income) loss of DNS 0 (175,363)
Changes in assets and liabilities:
Accounts receivable 1,433,859 (1,412,025)
Due from affiliates 620,072 (291,921)
Other current assets 779,283 (900,892)
Accounts payable and accrued
liabilities (1,700,143) 1,577,630
Due to affiliates 213,167 888,431
----------- -----------
Net cash provided by
operating activities 3,088,656 3,628,650
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (158,412) (653,979)
Sale of property and equipment 2,748 0
Net cash received in acquisition 211,172 0
Advances to affiliates, net (1,828,566) 0
Advances to AvTel (750,000) 0
Repayments (advances) to DNS, net 0 1,420,001
----------- -----------
Net cash provided by
investing activities 55,508 766,022
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury 0 (439,583)
----------- -----------
Net cash used in investing activities 0 (439,583)
----------- -----------
Net increase in cash and cash
equivalents 565,598 3,955,089
Cash and cash equivalents at
beginning of period 4,622,396 3,164,053
----------- -----------
Cash and cash equivalents at
end of period 5,187,994 7,119,142
=========== ===========
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest 9,694 201,684
----------- -----------
Income taxes, net of refunds 906,658 841,043
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
MATRIX TELECOM, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
(Unaudited)
(1) Basis of Financial Reporting
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission; however, Matrix Telecom, Inc.
("Matrix") believes the disclosures which are made are adequate to make the
information presented not misleading. These financial statements
and footnotes should be read in conjunction with the financial statements and
notes thereto of Matrix for the three year period ended December 31, 1996
included elsewhere herein.
The unaudited financial information for the nine-months ended September 30,
1997 and 1996 has not been audited by independent public accountants; however,
in the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of operations
for the nine-month periods have been included therein. The results of
operations for the first nine months of the year are not necessarily
indicative of the results of operations which might be expected for the entire
year.
The balance sheet as of December 31, 1996, has been taken from the audited
financial statements as of that date.
(2) Subsequent Event - Share Exchange
On December 1, 1997, Matrix and AvTel Communications, Inc. ("AvTel") completed
a share exchange pursuant to a stock exchange agreement dated April 29, 1997
as subsequently amended (the "Share Exchange"). Matrix shareholders received
2.4819 shares of AvTel common stock for each share of Matrix Telecom stock.
For accounting purposes, the Share Exchange was treated as a reverse
acquisition of AvTel by Matrix. In addition, holders of outstanding Matrix
stock options received nonqualified stock options of AvTel. After the share
exchange, the former shareholders of Matrix will hold approximately 81% of the
then-outstanding common stock of AvTel.
(3) Loans made to affiliates
As of September 30, 1997, Matrix had loaned approximately $1,901,000 to Core
Marketing, L.L.C., an affiliated company, with no interest, due September
1998. As of September 30, 1997, Matrix had loaned AvTel Communications, Inc.
$750,000 at rates ranging from eight to fifteen percent, due by December 1997
or 180 days after the termination of the Exchange Agreement. In February
1997, a major shareholder repaid Matrix the $723,600 outstanding balance due
for the purchase of common stock.
<PAGE>
MATRIX TELECOM, INC.
Notes to Consolidated Financial Statements
(Continued)
(4) Sale of DNS
In July 1996, Matrix sold the customer base acquired in the DNS acquisition
(in addition to certain blocks of customers acquired during 1995 and 1996),
together with related assets, to a former officer of Matrix and a former
shareholder of DNS for approximately $5,270,000. Matrix recorded a gain on
this sale of approximately $3,221,000. This gain is recorded in the equity in
net income (loss) of DNS in the July 1996 statement of operations.
(5) Best Connections, Inc. Acquisition
Effective July 1, 1997, shareholders of BestConnections, Inc. ("Best"), an
affiliate of Matrix through substantially common ownership, contributed their
ownership of Best to Matrix in exchange for 376,727 shares of Matrix common
stock. Best's primary assets were it's ownership of 805,804 shares of Matrix
common stock and cash of $211,000. The assets and liabilities of Best were
recorded at their historical cost as of July 1, 1997.
As a result of the combination, Matrix assumes the obligation to issue stock
options to Best's agents under Best's Agent Option Plan. As of July 1, 1997,
up to 60% of the 805,804 shares owned by Best were reserved for such options.
The option price per share was $3.72 prior to the share exchange with AvTel.
Subsequent to the share exchange (2.4819 AvTel shares for each Matrix share)
1,200,000 AvTel shares are subject to options at $1.50 per AvTel share. The
options become exercisable based on performance measures over time.
(6) Stockholders' Equity
Effective March 10, 1997, an 18 for 1 stock split was declared. All share
amounts have been restated to reflect the stock split.
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements present (i) the
transactions contemplated by a Share Exchange Agreement between AvTel
Comunications, Inc. ("AvTel") and Matrix Telecom, Inc. ("Matrix") as a reverse
acquisition of AvTel by Matrix using the purchase method of accounting, and (ii)
the combined acquisitions of Hi, Tiger International, Inc. ("HTI"), WestNet
Communications, Inc. ("WNI") and Silicon Beach Communications, Inc. ("SBC") by
AvTel ("Combined Acquisitions") using the purchase method of accounting, all as
if these transactions had been consummated, with respect to the statements of
operations, at the beginning of the earliest period presented, or, with respect
to the balance sheet, as of the date presented for the AvTel and Matrix Share
Exchange. Such information is derived from and should be read in conjunction
with, the separate historical financial statements of AvTel and Matrix and other
financial information appearing elsewhere in this document previously filed with
the Commission as to the AvTel historical financial statements. The unaudited
pro forma condensed combined financial statements do not purport to be
indicative of the results of operations or financial position which actually
would have been obtained if the transaction contemplated by the Exchange
Agreement and the Combined Acquisitions had been consummated at the beginning of
the earliest period presented or as of the date presented or of the results of
operations or financial position which may be obtained in the future.
In connection with the reverse acquisition, AvTel will change its fiscal year
end from September 30 to December 31. For purposes of these pro forma financial
statements, the financial information of AvTel has been presented based on a
fiscal year end of December 31 by combining appropriate historical periods of
AvTel.
Because the purchase price is determined based on the market trading price of
AvTel shares immediately prior to the public announcement of the reverse
acquisition, which results in a significantly higher value than the total value
of the underlying tangible and intangible net assets, a significant amount of
goodwill results. The operations of AvTel do not support the carrying value of
such goodwill. Accordingly, immediately following the transaction, and as a
result of the transaction, a portion of resulting goodwill will be written off
to operations.
<PAGE>
AVTEL COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
SEPTEMBER 30, 1997
Pro Forma
Matrix AvTel Adjustments Combined
------ ----- ----------- ---------
[Note B]
Assets
Current assets
Cash and cash equivalents $ 5,187,994 238,705 0 5,426,699
Accounts receivable, net 7,853,456 183,008 0 8,036,464
Due from affiliates 3,170,908 0 (750,000)(1) 2,420,908
Other current assets 1,421,468 38,595 0 1,460,063
----------- ------- -------- ---------
17,633,826 460,308 (750,000) 17,344,134
Property and equipment, net 1,315,735 641,140 0 1,956,875
Goodwill, net 0 667,499 8,927,206 (2) 950,000
(8,644,705)(5)
Other assets, net 1,005 0 0 1,005
Deferred income taxes 160,748 0 0 160,748
----------- ------- --------- ---------
$19,111,314 1,768,947 (467,499) 20,412,762
=========== ========= ========= ==========
Liabilities and Stockholders' Equity:
Current liabilities
Accounts payable and other
accrued expenses $ 1,270,900 339,118 0 1,610,018
Accrued network services
costs 4,464,914 0 0 4,464,914
Deferred revenue 0 179,412 0 179,412
Sales and excise tax
payable 1,547,007 0 0 1,547,007
Due to affiliates 2,993,767 0 0 2,993,767
Lease obligations -
current portion 0 57,970 0 57,970
Note payable 0 922,092 (750,000)(1) 172,092
Other liabilities 0 60,500 0 60,500
----------- ------- -------- ---------
10,276,588 1,559,092 (750,000) 11,085,680
Lease obligation, less
current portion 0 66,106 0 66,106
Other liabilities 896,000 0 0 896,000
Stockholders' Equity
Preferred stock 0 2,500 0 2,500
Common stock 10,893,234 17,805 (10,797,417)(4) 113,622
Paid in capital 63,000 2,655,021 6,395,629 (2)16,173,544
7,059,894 (4)
Retained earnings
(accumulated deficit) 740,015 (2,531,577) 2,531,577 (2)(7,904,690)
(8,644,705)(5)
Treasury Stock (3,757,523) 0 3,737,523 (4) (20,000)
----------- ---------- ---------- ----------
7,938,726 143,749 282,501 8,364,976
----------- ---------- ---------- ----------
$ 19,111,314 1,768,947 (467,499) 20,412,762
============ =========== ========== ==========
See accompanying notes to unaudited proforma condensed financial information.
<PAGE>
AVTEL COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
Matrix/Best
Proforma Pro Forma
Matrix Best Adjustments Combined AvTel
------ ---- ----------- ----------- -----
[Note C]
Revenues $ 39,244,448 497,300 (497,300) (2) 39,244,448 2,091,816
Cost of revenues 27,304,366 0 0 27,304,366 541,434
------------- ------- -------- ---------- ---------
Gross margins 11,940,082 497,300 (497,300) 11,940,082 1,550,382
Operating expenses
Selling, general and
administrative 11,685,850 471,542 (497,300) (2) 11,660,092 2,050,530
Depreciation and
amortization 515,037 2,890 517,927 183,249
------------ ------- -------- ---------- ---------
Total operating
expenses 12,200,887 474,432 (497,300) 12,178,019 2,233,779
------------- ------- -------- ---------- ---------
Operating income
(loss) (260,805) 22,868 0 (237,937) (683,397)
Interest expense (9,026) 0 0 (9,026) (16,628)
Other income, net 219,099 35 0 219,134 (12,435)
----------- ------- -------- ---------- ---------
Income (loss) before
income taxes (50,732) 22,903 0 (27,829) (712,460)
Income tax
expense (benefit) (21,307) 0 9,619 (3) (11,688) 0
----------- ------- -------- --------- --------
Net income(loss) $ (29,425) 22,903 (9,619) (16,141) (712,460)
========= ====== ====== ======= ========
Net income (loss) per
common share $ (0.01) (0.00) (0.40)
========= ======= =======
Weighted average shares
outstanding 3,596,128 3,310,053 1,776,693
========= ========= =========
See accompanying notes to unaudited proforma condensed financial information.
<PAGE>
AVTEL COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
AvTel/HTI
WNI/SBC
Combined Pro Forma Pro Forma Pro Forma Pro Forma
HTI/WNI/SBC Adjustments Combined Adjustments Combined
----------- ----------- ---------- ----------- ----------
[Note D] [Note E]
Revenues $ 108,583 0 2,200,399 0 41,444,847
Cost of revenues 18,526 0 559,960 0 27,864,326
----------- -------- ---------- ---------- -----------
Gross margins 90,057 0 1,640,439 0 13,580,521
Operating expenses
Selling, general and
administrative 84,726 0 2,135,256 0 13,795,348
Depreciation and
amortization 7,000 3,000 193,249 (28,450)(2) 682,726
----------- ------- ---------- ---------- ----------
Total operating
expenses 91,726 3,000 2,328,505 (28,450) 14,478,074
----------- ------- ---------- ---------- ----------
Operating income
(loss) (1,669) (3,000) (688,066) 28,450 (897,553)
Interest expense 0 0 (16,628) 0 (25,654)
Other income, net (8,990) 0 (21,425) 0 197,709
----------- ------- ----------- ---------- ----------
Income (loss) before
income taxes (10,659) (3,000) (726,119) 28,450 (725,498)
Income tax expense
(benefit) 0 0 0 0 (11,688)
----------- ------- ---------- --------- -----------
Net income (loss) $ (10,659) (3,000) (726,119) 28,450 (713,810)
========= ====== ========= ======= ========
Net income (loss) per
common share (0.41) (0.08)
====== =======
Weighted average shares
outstanding 1,777,665 9,992,885
========= ==========
See accompanying notes to unaudited proforma condensed financial information.
<PAGE>
AVTEL COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
Matrix/Best
Proforma Pro Forma
Matrix Best Adjustments Combined AvTel
------- ----- ------------ ----------- -----
[Note C]
Revenues $ 71,558,295 1,280,273 (1,280,273)(2) 71,558,295 263,139
Cost of revenues 47,674,396 0 0 47,674,396 89,121
----------- --------- ---------- ---------- -------
Gross margins 23,883,899 1,280,273 (1,280,273) 23,883,899 174,018
Operating expenses
Selling, general and
administrative 18,798,926 1,193,332 (1,280,273)(2) 18,711,985 504,991
Depreciation and
amortization 993,940 10,021 0 1,003,961 0
------------ --------- --------- ---------- -------
Total operating
expenses 19,792,866 1,203,353 (1,280,273) 19,715,946 504,991
------------ --------- --------- ----------- -------
Operating income
(loss) 4,091,033 76,920 0 4,167,953 (330,973)
Interest expense (230,922) 0 0 (230,922) (945)
Other income, net 271,172 18,699 0 289,871 21,268
------------ --------- --------- ----------- --------
Income (loss) before
income taxes 4,131,283 95,619 0 4,226,902 (310,650)
Income tax expense
(benefit) 1,686,878 0 40,160(3) 1,727,038 0
----------- --------- --------- ---------- --------
2,444,405 95,619 (40,160) 2,499,864 (310,650)
Equity in net income (loss)
of DNS 122,327 0 0 122,327 0
---------- --------- --------- ---------- -------
Net income (loss) $2,566,732 95,619 (40,160) 2,622,191 (310,650)
========== ======= ======= ========= ========
Net income (loss) per
common share $ 0.88 1.05 (0.37)
========== ======= =======
Weighted average shares
outstanding 2,919,978 2,490,865 840,504
========= ========= =========
See accompanying notes to unaudited proforma condensed financial information.
<PAGE>
AVTEL COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
AvTel/HTI
WNI/SBC
Combined Pro Forma Pro Forma Pro Forma Pro Forma
HTI/WNI/SBC Adjustments Combined Adjustments Combined
----------- ----------- ---------- ----------- ----------
[Note D] [Note E]
Revenues $ 1,619,520 0 1,954,659 0 73,512,954
Cost of revenues 329,861 0 418,982 0 48,093,378
----------- -------- --------- -------- -----------
Gross margins 1,361,659 0 1,535,677 0 25,419,576
Operating expenses
Selling, general and
administrative 1,155,561 0 1,660,552 0 20,372,537
Depreciation and
amortization 96,687 112,500(2) 209,187 (17,500)(2) 1,195,648
----------- ------- --------- -------- -----------
Total operating
expenses 1,252,248 112,500 1,869,739 (17,500) 21,568,185
----------- ------- --------- -------- -----------
Operating income
(loss) 109,411 (112,500) (334,062) 17,500 3,851,391
Interest expense (11,870) 0 (12,815) 0 (243,737)
Other income, net 63,819 0 85,087 0 374,958
----------- -------- ---------- -------- -----------
Income (loss) before
income taxes 161,360 (112,500) (261,790) 17,500 3,982,612
Income tax expense
(benefit) (6,594) 0 (6,594) 0 1,720,444
----------- -------- ---------- -------- -----------
167,954 (112,500) (255,196) 17,500 2,262,168
Equity in net income (loss)
of DNS 0 0 0 0 122,327
----------- -------- ---------- -------- -----------
Net income (loss) 167,954 (112,500) (255,196) 17,500 2,384,495
========= ======= ========= ======= =========
Net income (loss) per
common share (0.14) 0.29
====== =====
Weighted average shares
outstanding 1,761,547 7,943,625
========= =========
See accompanying notes to unaudited proforma condensed financial information.
<PAGE>
AvTel Communications, Inc.
Notes to Unaudited Pro Forma Condensed Financial Information
(A) Basis of Presentation
The unaudited pro forma condensed financial information reflects as to the
September 30, 1997 unaudited Pro forma condensed combined balance sheet the
reverse acquisition of AvTel by Matrix in a share exchange of 2.4819 shares
of AvTel common stock for each share of Matrix common stock. Although AvTel
common stock is being used in the share exchange, for accounting purposes the
share exchange is being treated as a reverse acquisition of AvTel by Matrix.
After the share exchange, the former shareholders of Matrix will own 81% of
AvTel. This transaction is being accounted for using the purchase method of
accounting.
During October 1996, AvTel acquired Hi, Tiger International, Inc. ("HTI")
through the issuance by HTI of 4,252,508 shares of HTI common stock and
1,000,000 shares of HTI preferred stock which was treated as a reverse
acquisition of HTI by AvTel for financial accounting purposes. Also in
November, 1996, AvTel acquired Silicon Beach Communications ("SBC") in
exchange of 115,000 shares of AvTel common stock for 100% of the outstanding
shares of SBC and in February, 1997, AvTel acquired WestNet Communications, Inc.
("WNI") in exchange of 35,000 shares of AvTel common stock, $140,226 and secured
promissory notes of $160,325 for 100% of the outstanding shares of WNI. All
acquisitions were accounted for as purchases.
Effective July 1, 1997 the shareholders of Best Connections, Inc. ("Best"),
an affiliate of Matrix through substantially common ownership, contributed their
ownership of Best to Matrix in exchange for 376,727 shares of Matrix common
stock. Best's primary asset was its ownership of 805,840 shares of Matrix
common stock.
As to the statements of operations the unaudited pro forma condensed combined
financial information reflects (1) the combination of Matrix and Best, (2) the
combinations of AvTel, HTI, SBC and WNI and (3) the combination of AvTel and
Matrix all as if the combinations had occurred on January 1, 1996.
On December 1, 1997, in connection with the AvTel and Matrix share exchange and
reincorporation merger of AvTel a one for four reverse stock split of AvTel's
common and preferred stock was effected. All share numbers and prices set forth
herein as to AvTel historical have been adjusted to reflect the reverse stock
split.
(B) Balance Sheet - Matrix/AvTel
The pro forma adjustments applicable to the September 30, 1997 balance sheet
assume the AvTel and Matrix share exchange took place as of September 30, 1997,
and reflect a preliminary purchase price allocation.
(1) To eliminate $750,000 advance to AvTel by Matrix.
(2) This adjustment reflects recording of the purchase price of AvTel by Matrix
using the market trading value of the AvTel shares immediately prior to the
public announcement of the share exchange.
<PAGE>
The preliminary allocation of the purchase price is as follows:
Carrying Fair Pro Forma
Value Value Adjustment
-------- ----- ----------
Current assets $460,308 460,308
Property and equipment 641,140 641,140
Goodwill 667,499 8,927,206 8,259,707
Current liabilities (1,559,092) (1,559,092)
Lease obligation,
less current portion (66,106) (66,106)
---------
8,403,456
=========
The purchase price is comprised of the following:
Preferred stock $1,000,000
Common stock 7,122,328
Options (treasury stock method) 281,128
----------
$8,403,456
==========
(3) For purposes of the determination of the purchase price, the trading value
of AvTel common shares for a period immediately prior to the public announcement
of the Share Exchange was used. This resulted in a price per share of $1.00
pre-reverse split and a total purchase price of $8,403,456. AvTel shares were
generally thinly traded up to the announcement of the merger.
(4) This adjustment recapitalizes Matrix based on the par value of AvTel
preferred and common stock.
(5) Goodwill recorded in the acquisition results from recording the reverse
purchase acquisition utilizing the market trading price of AvTel common stock
which significantly exceeds the fair value of the underlying net tangible and
intangible assets of AvTel. Accordingly, immediately following the share
exchange goodwill in an amount estimated to be approximately $8,644,705 will
be charged to operations of AvTel. Such amount represents the preliminary
write down necessary to reflect the goodwill of AvTel based on preliminary
estimates of value. The actual amount of the write down could vary from this
amount when the estimates of value are finalized.
(C) Statements of Operations - Matrix and Best nine months ended September 30,
1997 and year ended December 31, 1996 pro forma adjustments.
(1) For purposes of the Unaudited Pro Forma Condensed statements of operations
presented the acquisition of Best is assumed to have been completed as of
January 1,1996.
(2) To eliminate commission revenue at Best and commission expense at Matrix.
<PAGE>
(3) This adjustment reflects the tax impact of Best's income at 42% (the
combined federal and state rate). Best was a limited liability company prior to
June 30, 1997.
(D) Statements of Operations - AvTel, HTI, WNI and SBC's nine months ended
September 30, 1997 and year ended December 31, 1996 pro forma adjustments.
(1) For purposes of the Unaudited Pro Forma Condensed Statements of Operations
presented the acquisitions of HTI, WNI and SBC, which were as of October 1996,
February 1997 and November 1996, are assumed to have been completed as of
January 1, 1996. The acquisition by AvTel of the 20% minority interest of the
Friendly Net, LLC in March 1997 has not been included in these pro forma
financial statements due to its not being material for these purposes.
(2) To amortize additional amounts of goodwill related to the HTI, WNI and SBC
acquisitions.
(E) Statements of Operations - Matrix and AvTel's nine months ended September
30, 1997 and year ended December 31, 1996 pro forma adjustments.
(1) For purposes of the Unaudited Pro Forma Condensed Statements of Operations
presented the share exchange is assumed to have been completed as of January 1,
1996.
(2) To adjust amortization of goodwill previously recorded by AvTel to the
amount to be recognized by AvTel. Resulting goodwill will be amortized over 120
months.
(3) For purposes of determining the purchase price, the trading value of AvTel
shares was used for a period immediately preceding the announcement of the Share
Exchange. However, the net asset values of AvTel including goodwill cannot be
supported by the operations of AvTel. Accordingly, immediately following the
Share Exchange, goodwill in an amount estimated to be approximately $8,644,705
will be charged to operations. Since this is a one time charge resulting from
the Share Exchange, it is not reflected in the pro forma statements of
operations. This amount is subject to adjustment after preliminary estimates of
value are finalized.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
AVTEL COMMUNICATIONS, INC.
By: /s/ ANTHONY E. PAPA Date: February 5, 1998
------------------------- ----------------
Anthony E. Papa
President and Chief Executive Officer
<PAGE>
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Matrix Telecom, 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
January 24, 1997, except as to the first paragraph of note 4 which is as of
March 10, 1997, relating to the consolidated balance sheets of Matrix Telecom,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in
the three year period ended December 31, 1996 included in Form 8 K/A to be
filed by AvTel Communications, Inc. on or about February 5, 1998.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Dallas, Texas
February 4, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF MATRIX TELECOM, INC. AS OF SEPTEMBER, 30 1997 AND THE RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE NINE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
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