SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27580
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AVTEL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
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DELAWARE 87-0378021
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
501 BATH STREET
SANTA BARBARA, CALIFORNIA 93101
(805) 884-6300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of May 8, 1998, there were 9,524,747 shares of the Registrant's Common Stock,
par value $0.01 per share, issued and outstanding, excluding treasury stock.
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AVTEL COMMUNICATIONS, INC.
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31,
1998 (Unaudited) and December 31, 1997.................... 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 (Unaudited).... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (Unaudited).... 5
Notes to Consolidated Financial Statements
(Unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K............................ 13
Signature Page.............................................................. 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
-----------------------------------
(Unaudited)
Assets
CURRENT ASSETS
Cash and cash equivalents $ 3,994,945 4,807,441
Accounts receivable, net 7,423,082 6,961,953
Due from affiliates 1,903,805 2,127,771
Federal and state income tax receivable 605,846 598,970
Other current assets 627,198 861,950
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Total current assets 14,554,876 15,358,085
----------- ----------
Property and equipment, net 1,698,861 1,791,682
Other assets, net 1,477,467 1,575,083
----------- ----------
Total assets $17,731,204 18,724,850
=========== ==========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Accounts payable and other
accrued expenses $ 1,740,513 1,546,762
Accrued network services costs 4,229,479 4,319,198
Sales and excise tax payable 788,450 736,012
Due to affiliates 2,896,034 2,719,417
Other current liabilities 559,385 466,039
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Total current liabilities 10,213,861 9,787,428
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Deferred income taxes 498,712 498,712
Common stock subject to put option 578,880 578,880
Other liabilities 38,640 50,782
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Total liabilities $11,330,093 10,915,802
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STOCKHOLDERS' EQUITY
Series A convertible preferred stock,
cumulative as to 8% dividends.
Authorized 1,000,000 shares,
$0.01 par value, 147,700 shares
issued and outstanding. (Liquidation
preference of $665,635 including
dividends in arrears). 1,477 2,077
Common stock, authorized 20,000,000
shares, $0.01 par value, 11,524,744
and 11,437,056 shares issued March 31,
1998 and December 31, 1997 respectively,
including 385,920 shares subject to
put options. 111,388 110,511
Additional paid in capital 17,403,015 17,138,739
Retained earnings (accumulated deficit) (11,094,769) (9,422,279)
Treasury stock, 1,999,997 shares (20,000) (20,000)
------------ -----------
Total stockholders' equity 6,401,111 7,809,048
Commitments and contingencies - -
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Total liabilities and
stockholders' equity $17,731,204 18,724,850
============ ===========
See accompanying Notes to Consolidated Financial Statements.
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AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
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1998 1997
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REVENUES $12,444,839 13,970,761
COST OF REVENUES 9,287,995 9,477,191
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GROSS MARGIN 3,156,844 4,493,570
Operating expenses
Selling, general and administrative 4,582,446 3,716,752
Depreciation and amortization 278,868 184,851
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Total operating expenses 4,861,314 3,901,603
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OPERATING INCOME (LOSS) (1,704,470) 591,967
Interest expense (11,975) (5,056)
Other income, net 43,955 54,227
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Income (loss) before income taxes (1,672,490) 641,138
Income tax expense (benefit) 0 269,279
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NET INCOME (LOSS) $(1,672,490) 371,859
=========== =======
Net income (loss) per share -
basic and diluted $ (0.18) 0.04*
=========== ====
Weighted average number of common shares 9,477,489 8,647,498*
============ =========
* The 1997 amounts are presented on a pro forma basis.
See accompanying Notes to Consolidated Financial Statements.
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AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
-------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,672,490) 371,859
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 278,868 184,853
Amortization of advanced commissions 173,919 425,945
Provision for bad debts 749,725 356,747
Stock compensation earned 234,098 0
Changes in assets and liabilities:
Accounts receivable (1,210,854) 794,478
Due from affiliates 223,966 (1,210,315)
Other current assets (321,100) 1,657,810
Accounts payable and accrued liabilities 214,681 50,279
Due to affiliate 176,617 (246,086)
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Net cash provided by (used in)
operating activities (1,152,570) 2,385,570
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (88,431) (51,336)
Loans to affiliates 0 (2,000,000)
Payments on loans to affiliates 410,192 12,874
Proceeds from sale of property and equipment 0 2,749
----------- -----------
Net cash provided by (used in)
investing activities 321,761 (2,035,713)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases (12,142) 0
Issuance of common stock for exercise
of options 30,455 0
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Net cash provided by financing activities 18,313 0
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Net increase (decrease) in cash and cash
equivalents (812,496) 349,857
Cash and cash equivalents at beginning of quarter 4,807,441 4,622,395
----------- -----------
Cash and cash equivalents at end of quarter $ 3,994,945 4,972,252
=========== =========
See accompanying Notes to Consolidated Financial Statements.
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AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998 and 1997
(1) Basis of Presentation
---------------------
The unaudited consolidated financial statements of AvTel Communications,
Inc. and Subsidiaries (the "Company") for the quarters ended March 31, 1998 and
1997, have been prepared in accordance with generally accepted accounting
principles for interim financial reporting. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Form 10-K for the year ended December 31, 1997. All significant
intercompany balances and transactions have been eliminated in consolidation. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of the interim
financial information have been included. The results of operations for any
interim period are not necessarily indicative of the results of operations for a
full year.
(2) Earnings Per Common Share
-------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), in the fourth quarter of
1997 which required companies to present basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. The Company has restated its
March 31, 1997 earnings per share calculation to reflect the adoption of SFAS
128.
(3) Stock Compensation
------------------
On January 1, 1998 the Company granted options to purchase 75,000 of the
Company's common shares at an exercise price of $1.50 per share. On March 1,
1998 the Company granted options to purchase 100,000 of the Company's common
shares at an exercise price of $1.50 per share. These options become exercisable
based on qualified billings of long distance customers generated by the
optionees from the respective dates of grant through December 31, 2000.
On February 24, 1998 the Company's Board of Directors approved the grant of
a total of 120,000 shares of restricted common stock to two board members
pursuant to the Company's 1997 Stock Incentive Plan. The restricted stock
provisions will lapse over four years or fully lapse in the event of death or
permanent disability of the grantee.
On February 26, 1998 the Company granted incentive stock options to
purchase 11,250 of the Company's common shares at an exercise price of $6.00 per
share. The options were granted pursuant to the Company's 1997 Stock Incentive
Plan and vest at the rate of 50% per year over two years.
(4) Comprehensive Income (Loss)
---------------------------
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") was issued. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in an annual financial statement that is displayed with the same
prominence as other annual financial statements. Reclassification of financial
statements for earlier periods, provided for comparative purposes, is required.
The statement also requires the accumulated balance of other comprehensive
income to be displayed separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Comprehensive income (loss) for the three months ended March 31, 1998 and 1997
is equal to net income (loss) reported for such periods.
(5) Conversion of Preferred Stock
-----------------------------
On January 22, 1998, and February 26, 1998, a total of 60,000 shares of
preferred stock was converted to 60,000 shares of common stock.
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(6) Pro Forma Results of Operations
-------------------------------
Pro forma results of operations of the Company as if the reverse acquisition
of AvTel by Matrix had occurred as of January 1, 1997, are as follows:
Revenue $14,698,811
Net loss (8,954,539)
Pro forma net loss
per share - basic and diluted (1.03)
(7) Contingencies
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The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a material adverse
effect on the Company's consolidated financial position or operating results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS DOCUMENT THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ARE BASED ON
INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES
NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL EVENTS AND
OUTCOMES COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THOSE DESCRIBED HEREIN AND
THOSE SET FORTH IN THE RISK FACTORS DESCRIBED IN ITEM 1 OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL
14, 1998.
The following discussion and analysis should be read in connection with the
unaudited consolidated financial statements for the quarters ended March 31,
1998 and 1997 of the Registrant and related notes included elsewhere in this
report and the consolidated financial statements and related management
discussion and analysis included in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
Overview
AvTel Communications, Inc. (the "Company," the "Registrant" or
"AvTel") 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 Reincorporation 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.
On December 1, 1997, the Company acquired Matrix Telecom, Inc., a
privately-held Texas corporation ("Matrix Telecom") by means of a share for
share exchange (the "Share Exchange"). Matrix Telecom is a provider of long
distance telephone services. The Reincorporation Merger and the Reverse Stock
Split were conditions to the closing of the Share Exchange.
The Share Exchange was effected pursuant to a Stock Exchange Agreement
dated April 29, 1997, and subsequently amended, pursuant to which the persons
and entities who owned the issued and outstanding common stock of Matrix Telecom
("Matrix Telecom Stockholders") transferred to AvTel all of their Matrix Telecom
stock and, in exchange, AvTel issued to the Matrix Telecom Stockholders shares
of AvTel's Common Stock. Following the Share Exchange, the former Matrix Telecom
Stockholders owned approximately 81% of the issued and outstanding Common Stock
of the Company.
For accounting purposes, the Share Exchange was treated as a reverse
acquisition of AvTel by Matrix Telecom. AvTel was the legal acquirer and
accordingly, the Share Exchange was effected by the issuance of AvTel Common
Stock in exchange for all of the common stock then outstanding of Matrix
Telecom. In addition, holders of Matrix Telecom outstanding stock options
received non-qualified stock options of AvTel. The following discussion of
results of operations reflects the operations of Matrix Telecom prior to
December 1, 1997 and reflects the combined operations of AvTel and Matrix
Telecom subsequent to December 1, 1997. Accordingly, references to the Company
refer to operations of Matrix Telecom prior to the Share Exchange and the
combined operations of AvTel and Matrix Telecom subsequent to the Share
Exchange. The reverse acquisition of AvTel by Matrix Telecom was accounted for
using the purchase method of accounting.
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Results of Operations
Consolidated Statement of Operations as a Percent of Revenue
(Unaudited)
Three Months
Ended March 31,
------------------------
1998 1997
-------- ---------
REVENUES 100.00% 100.00%
COST OF REVENUES 74.63% 67.84%
GROSS MARGIN 25.37% 32.16%
Operating expenses
Selling, general and administrative 36.82% 26.60%
Depreciation and amortization 2.24% 1.32%
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Total operating expenses 39.06% 27.93%
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OPERATING INCOME (LOSS) (13.70%) 4.24%
Interest expense (0.10%) (0.04%)
Other income, net 0.35% 0.39%
--------- --------
Income (loss) before income taxes (13.44%) 4.59%
Income tax expense (benefit) 0.00% 1.93%
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NET INCOME (LOSS) (13.44%) 2.66%
========= ========
Quarter Ended March 31, 1998 compared with Quarter Ended March 31, 1997
Revenue
Revenue for the quarter ended March 31, 1998 was $12.4 million a decline of
10.7% or $1.5 million from $13.9 million for the quarter ended March 31, 1997.
However, revenue increased 2.47% or $300,000 from $12.1 million for the fourth
quarter ending December 31, 1997. Management believes that this increase over
the prior calendar quarter is significant and a result of certain changes
implemented in the Company's wholly-owned subsidiary, Matrix Telecom, after the
completion of the Share Exchange on December 1, 1997.
Significant contributing factors to the decrease in consolidated revenues
for the quarter ended March 31, 1998 compared to the quarter ended March 31,
1997 included competitive pricing practices and management's decision to
discontinue or reduce certain distribution channels of the Company's
wholly-owned subsidiary, Matrix Telecom. These factors were driven by
competitive demands in the telecommunications industry. The primary source of
revenues of the Company in the first quarter of 1998 have continued to be long
distance products sold through Matrix Telecom which are purchased from a major
underlying carrier and resold to the end user. Prior to the Share Exchange,
Matrix Telecom was unable to effectively reduce its retail pricing in order to
meet a reduction in retail pricing by the major carriers, resulting in
increasing rates of attrition. The combined effect of these factors resulted in
a decline in the Company's revenue base. The Company has recently completed
lower rate negotiations with the Company's major underlying carrier, the effects
of which should begin to be realized in the latter part of the second quarter of
1998. Future plans of the Company include the implementation of a switching
facility which management believes will significantly reduce current cost
structures.
New business areas of the Company posted revenue increases in the first
quarter of 1998 compared to the first quarter of 1997 of approximately $1.2
million. Two international distributors for the Company experienced growth of
over 120%. Furthermore,
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the Company reported a net increase of 5,200 customers for the quarter ending
March 31, 1998. Additionally, the Company experienced revenue growth of $872,000
in its Business Network Services division and Internet services subsidiaries in
the first quarter of 1998. The Company's future focus includes continued growth
in corporate sales by incorporating voice and data networking solutions into the
construction of corporate Intranets and Wide Area Networks. Management
anticipates this strategy to increase revenue in traditional long distance
telephone services and data networking services and to continue to reduce the
Company's dependency on residential customers. Additionally, the Company's
wholly-owned subsidiary, Matrix Telecom, will continue to pursue niche
international opportunities and home-based businesses.
Explanations of significant changes in certain distribution channels of the
Company's wholly-owned subsidiary, Matrix Telecom, prior to the Share Exchange,
follow.
A major marketing channel of the Company's wholly-owned subsidiary, Matrix
Telecom, in the first quarter of 1997 was a distributor of the casual calling or
dial-around long distance products. Sales from this channel in the first quarter
of 1998 have decreased $1.4 million compared to sales in the first quarter of
1997. To maintain this particular customer base, the Company, at its sole
expense must continue marketing through direct mail and other costly means.
Additionally, fraud and bad debt cost associated with this customer base are
significantly higher since the Company is dependent upon billing arrangements
through the Local Exchange Carrier ("LEC"). The LEC collection percentages are
typically lower than those of the Company. Management chose to decrease its
dependence on the casual customer, and marketing of new casual customers was
significantly curtailed late in 1997 and in 1998.
A second major marketing channel of the Company's wholly-owned subsidiary,
Matrix Telecom in the first quarter of 1997 was telemarketing. Sales from a
telemarketing distributor in the first quarter of 1998 have decreased
approximately $1.1 million compared to sales in the first quarter of 1997. The
distributor of this product faces significant competition for the typical
residential long distance customer. Sales per hour as measured by the
telemarketing distributor continued to decline as the major first tier carriers
aggressively reduced their pricing and solicited the customer with cash awards
for changing carriers. Attrition of the customer solicited by telemarketing
continued increasing, as the customers were enticed to the major carriers with
substantial advertising budgets. Management chose to discontinue the use of
telemarketing as a primary marketing channel to increase its residential
customer base, while increasing the use of niche focused independent
distributors. Revenues from this customer base are anticipated to continue to
decline.
Billings from a distributor approximating $600,000 in the first quarter of
1997 were discontinued in May 1997 due to losses incurred from the distributor's
required products. Additional billings from another distributor declined
$509,000 in the first quarter of 1998 from $795,000 in the first quarter of
1997. Matrix Telecom, prior to the Share Exchange, had terminated the
relationship with the distributor due to discontinued operations of its
wholly-owned subsidiary for which the distributor was selling.
Gross Margin
Gross margin decreased $1.3 million to $3.1 million for the quarter ended
March 31, 1998 from $4.4 million for the quarter ended March 31, 1997. As a
percentage of revenues, gross margin decreased 6.8% to 25.3% for the quarter
ended March 31, 1998 from 32.1% for the quarter ended March 31, 1997. Two
factors primarily contributed to the decease.
Network cost as a percentage of revenue increased 3.1%, to 68.2% for the
quarter ended March 31, 1998 from 65.1% for the quarter ended March 31, 1997.
The increase resulted primarily from the decrease in revenues. As retail pricing
was lowered in response to competitive industry forces, the Company's
contractual cost related to the underlying provider of its long distance
services did not change; therefore, as retail prices decreased, cost as a
percentage of revenue increased. Similarly, the attrition of a maturing customer
base subscribing to higher-margin products along with the addition of new
customers at lower, more competitive products, impacted gross margins as network
cost as a percentage of revenue continued to rise. The Company expects that the
trend described above will change. New contractual rates were negotiated during
the first quarter of 1998 with its primary underlying carrier, and the full
effect of decreased carrier rates will not begin to be realized until the latter
part of the second quarter of 1998.
Bad debt expense increased $413,000 to $800,000 in the first quarter of
1998 from $387,000 in the first quarter of 1997. As a percentage of revenue, bad
debts increased 3.7% to 6.4% in the first quarter of 1998 from 2.7% in the first
quarter of 1997. The increased bad debt expense
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primarily resulted from decreased collection percentages from LECs in certain
geographical regions. The majority of the Company's revenues are billed by the
LEC, and collection policies and aggressiveness in collection procedures among
the LECs vary. The Company therefore, experiences lower collection percentages
depending upon the LEC. The Company experienced the majority of its sales growth
in a geographical location in which the LEC collection percentages were
significantly lower than other areas of the country. The majority of new
products being sold by the Company have been designed as a direct billed
product. The Company's internal collection percentages are greater than 97%;
therefore, as the number of customers being billed by the LEC decreases, the
Company expects bad debt expense as a percentage of revenue to decrease.
Selling, General, and Administrative Costs
Selling, general, and administrative costs increased 22.3% or $830,000 to
$4.5 million for the quarter ended March 31, 1998 from $3.7 million for the
quarter ended March 31, 1997. Descriptions of the more significant changes
follow.
Salaries and wages increased $890,000 to $1.9 million for the quarter ended
March 31, 1998 from $1.1 million for the quarter ended March 31, 1997. The
majority of the increase resulted from the addition of personnel as a result of
the Share Exchange and the Company's increased deployment of sales and marketing
personnel. For the first quarter of 1998, $428,000 of salary and wage expense
was associated with the increase in the number of employees. Approximately
$146,000 of increased salary and wage expense in the first quarter of 1998
compared to the first quarter of 1997 is attributed to the increase in certain
sales and marketing personnel in the Company's "Win Back and Retention" (WAR)
initiative. Approximately $83,000 in increased salary and wage expense for the
first quarter of 1998 over the first quarter of 1997 resulted from contract fees
associated with programming for increased information systems. Approximately
$64,000 in sales incentives were paid in the first quarter of 1998, which were
previously supported by the sales distributor. Approximately $169,000 of
increased salary and wage expense for the quarter ended March 31, 1998 compared
to the quarter ended March 31, 1997 resulted from normal employee compensation
and benefit increases and certain operating personnel increases not mentioned
above.
Advertising and promotion expense increased approximately $179,000 for the
quarter ended March 31, 1998 over the quarter ended March 31, 1997.
Billing and collection fees decreased approximately $149,000 for the
quarter ended March 31, 1998 compared to the quarter ended March 31, 1997.
Billing and collection fees normally move in the same direction as revenue and
remain constant as a percentage of revenues; however, the cost as a percentage
of revenue decreased 0.63% primarily from the following. First, new products
have been designed to be direct billed by the Company, a method of billing which
is lower in cost than billing through the LEC. Second, a significant number of
customers billing through smaller LECs by a third party having contracts with
those LECs were moved to direct bill status by the Company. The combination of
the two factors effected a reduction in billing and collection fees as a
percentage of revenue.
Commission expense decreased by $32,000 for the quarter ended March 31,
1998 compared to the quarter ended March 31, 1997. Commissions normally move in
the same direction as revenue and remain constant as a percentage of revenues;
however, the cost as a percentage of revenue increased 0.72%. Primarily, the
increased percentage resulted from stock compensation expense incurred in the
first quarter of 1998 but not in the first quarter of 1997. The expense was
classified in commission expense since the stock will be issued to sales
distributors in a manner that is determined by billings generated by the sales
distributor for the Company.
Professional services decreased $74,000 for the quarter ended March 31,
1998 compared to the quarter ended March 31, 1997 primarily from decreasing on
site EDS personnel to maintain the rating and billing software utilized by the
Company to direct bill its customers.
Regulatory compliance fees decreased $114,000 for the quarter ended March
31, 1998 compared to the quarter ended March 31, 1997. Certain mandated fees
passed through to the end user are passed through at a cost high enough to cover
costs of administration. The revenues from those fees netted against their
direct cost are now classified in net revenues.
Other selling, general and administrative expense increased approximately
$130,000 in the first quarter of 1998 compared to the first quarter of 1997,
primarily as a result of changes resulting from the Share Exchange. The increase
in cost resulted from maintaining corporate and branch locations.
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Depreciation and Amortization
Depreciation and amortization increased $94,000 to $278,000 for the quarter
ended March 31, 1998 from $184,000 for the quarter ended March 31, 1997. The
increase primarily resulted from the acquisition of assets as a result of the
Share Exchange and the related increases in fixed and non-current assets and
their related depreciation and amortization expense.
Interest Expense and Other Income, Net
Interest expense and other income net of other expenses changed by
immaterial amounts for the quarter ended March 31, 1998 compared to the quarter
ended March 31, 1997. Interest expense continued to be insignificant in amount
since the Company has had sufficient cash to meet operations and capital
expenditures. Interest income was slightly higher in the first quarter of 1997
compared to the first quarter of 1998 primarily from a decrease in cash
reserves.
Income Taxes
Income tax expense has not been recorded for the quarter ended March 31,
1998 compared to the quarter ended March 31, 1997 since there has been a loss
from operations for the quarter ended March 31, 1998.
Liquidity and Capital Resources
The primary sources of operating cash flow for the Company are revenues
derived from the resale of domestic and international telecommunications
services. Minor sources of revenues are received for the provision of back
office support and earnings from investment income. The primary uses of cash are
payments to underlying network vendors for provisioning long distance
facilities, commission payments to sales distributors, and payments to the major
LECs for billing and collecting directly from the long distance end user.
Net cash provided by operating activities was $2.3 million for the three
months ended March 31, 1997 compared to a net use of cash provided by operating
activities amounting to $1.1 million for the three months ended March 31, 1998.
Primarily, the change resulted from the Company's net loss of $1.6 million
reported for the quarter ended March 31, 1998 compared to net income of $371,000
reported for the quarter ended March 31, 1997.
For reasons more fully described above under the heading "Results of
Operations," the Company's net loss resulted from declining revenues of the
Company's wholly-owned subsidiary, Matrix Telecom, decreasing gross margins and
increased expenditures in sales and marketing. Declining revenues have been
caused in part by industry competition, changes in certain marketing channels
and management's decision to discontinue relationships with certain sales
distributors, which have in the past contributed a significant share of
revenues. Similarly, the continuing market decreases in retail pricing without a
corresponding decrease in the Company's underlying cost structure resulted in
decreasing margins.
Working capital at December 31, 1997 was $5.5 million compared to $4.3
million at March 31, 1998, a decrease of $1.2 million or 21.8%. Cash balances at
December 31, 1997 were $4.8 million compared to $3.9 million at March 31, 1998,
a decrease of approximately $813,000 or 16.9%, resulting from the use of prior
cash balances for operations.
The Company's net accounts receivable increased approximately $500,000 from
$6.9 million at December 31, 1997 to $7.4 million at March 31, 1998. The
increase primarily resulted from a pass through of certain mandated federal
regulatory fees to the end user.
Net cash provided by investing activities for the quarter ended March 31,
1998 was $321,000 compared to net cash used in investing activities of
approximately $2.0 million for the quarter ended March 31, 1997. In the first
quarter of 1997, the Company loaned $2.0 million to an affiliated company, Core
Marketing, LLC. Approximately $410,000 was paid prior to the end of the first
quarter of 1998. Approximately $88,000 was used to purchase property and
equipment prior to the end of the first quarter of 1998.
The Company in the past has been able to finance its operations from net
cash provided by operating activities without the need to borrow on a long-term
basis. Since December 31, 1997, the Company has continued to be able to finance
its operations and capital expenditures, which have consisted primarily of
property and equipment, from cash
11
<PAGE>
and cash equivalents at the beginning of the year. The Company anticipates that
future operations and growth strategies (including possible acquisitions) of the
Company will require funding from other sources. The Company continues to
evaluate its financing alternatives. In addition to debt financing, the Company
may utilize its capital stock as a source of financing.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re Computation of Per Share Earnings 27.1 Financial
Data Schedule - Quarter ended March 31, 1998 27.2 Restated
Financial Data Schedule - Quarter ended March 31, 1997
(b) Reports on Form 8-K
The Registrant filed an Amendment to Current Report on Form 8-K/A filed on
February 9, 1998 (refiled on March 13, 1998), amending a Current Report on Form
8-K filed on December 9, 1997. Amending Item 7 to file financial statements and
pro forma financial information with respect to the share-for-share exchange
with Matrix Telecom, Inc.
The registrant filed no other reports on Form 8-K during the quarter
ended March 31, 1998.
13
<PAGE>
SIGNATURE
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 thereunto duly authorized.
AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ JAMES P. PISANI
------------------------------------
JAMES P. PISANI
PRESIDENT, CHIEF OPERATING OFFICER,
CHIEF FINANCIAL OFFICER AND
SECRETARY (Duly Authorized Officer and
Principal Financial Officer)
May 14, 1998
14
<PAGE>
Exhibit Index
Exhibit
Number Exhibit Description
- ------- -------------------
11 Statement re Computation of Per Share Earnings
27.1 Financial Data Schedule - Quarter ended March 31, 1998
27.2 Restated Financial Data Schedule - Quarter ended March 31, 1997
Exhibit 11
AvTel Communications, Inc. and Subsidiaries
Computation of Per Share Earnings
(Unaudited)
Three Months
Ended March 31,
------------------------
1998 1997
---------- ----------
Net Income (Loss) (1,672,490) 371,859
Less preferred dividends 11,816 20,000
----------- ---------
Income (Loss) applicable
to common shareholders (1,684,306) 351,859
========== =========
Weighted average number of common shares 9,477,489 8,647,498*
========== =========
Net income (loss) per common share -
basic and diluted (0.18) 0.04*
========== =========
* The 1997 amounts are presented on a pro forma basis.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.1
Financial Data Schedule - Quarter ended March 31, 1998
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE OF AVTEL COMMUNICATIONS, INC. AS OF MARCH 31, 1998 AND THE RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3995
<SECURITIES> 0
<RECEIVABLES> 7423
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14555
<PP&E> 4769
<DEPRECIATION> 3070
<TOTAL-ASSETS> 17731
<CURRENT-LIABILITIES> 10214
<BONDS> 0
1
0
<COMMON> 111
<OTHER-SE> 6289
<TOTAL-LIABILITY-AND-EQUITY> 17731
<SALES> 12445
<TOTAL-REVENUES> 12445
<CGS> 9288
<TOTAL-COSTS> 9288
<OTHER-EXPENSES> 4861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (1672)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1672)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.2
Restated Financial Data Schedule - Quarter ended March 31, 1997
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE OF AVTEL COMMUNICATIONS, INC. AS OF MARCH 31, 1997 AND THE RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE THREE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4972
<SECURITIES> 0
<RECEIVABLES> 9356
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18855
<PP&E> 1502
<DEPRECIATION> 0
<TOTAL-ASSETS> 20514
<CURRENT-LIABILITIES> 11385
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 8150
<TOTAL-LIABILITY-AND-EQUITY> 20514
<SALES> 13971
<TOTAL-REVENUES> 13971
<CGS> 9477
<TOTAL-COSTS> 9477
<OTHER-EXPENSES> 3902
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 641
<INCOME-TAX> 269
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 372
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
