-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ndn2T9m7rOz3BshlMDS2sZsDeBbOCmIMQRnuBSW/7plQFf8YvC0CbMvnAP7MIC1w Ol2ZBqBg1XhbXd9x+CUJTw== 0000939802-98-000014.txt : 19980317 0000939802-98-000014.hdr.sgml : 19980317 ACCESSION NUMBER: 0000939802-98-000014 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971201 ITEM INFORMATION: FILED AS OF DATE: 19980313 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVTEL COMMUNICATIONS INC/UT CENTRAL INDEX KEY: 0001005974 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 870378021 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-27580 FILM NUMBER: 98565590 BUSINESS ADDRESS: STREET 1: 130 CREMONA DRIVE STE C CITY: SANTA BARBARA STATE: CA ZIP: 93117 BUSINESS PHONE: 8056850355 MAIL ADDRESS: STREET 1: 130 CREMONA DRIVE STE C CITY: SANTA BARBARA STATE: CA ZIP: 93117 FORMER COMPANY: FORMER CONFORMED NAME: HI TIGER INTERNATIONAL INC DATE OF NAME CHANGE: 19960119 8-K/A 1 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) 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. 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 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 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. 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. 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. 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 ========== ========= ======== 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. 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. 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. 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. 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 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. 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 ========== 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) ========= ======== 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. (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. 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 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 EX-27 2
5 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. 1000 9-MOS DEC-31-1997 SEP-30-1997 5188 0 7853 0 0 17634 1316 0 19111 10277 0 0 0 10893 (2954) 19111 39244 39244 27304 27304 11982 0 0 (51) (21) 0 0 0 0 (29) (0.01) 0
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