[As adopted in Release No. 34-322131, April 28, 1993, 58 F.R. 26509] FORM 10-Q SB/A Amendment No. 1 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1997 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to _________ Commission File No. 0-27580 AVTEL COMMUNICATIONS, INC. (Exact name of small business issuer as specified in its charter) A Utah Corporation 87-0378021 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 130 Cremona Drive, Suite C, Santa Barbara, California 93117 (Address of principal executive offices) Registrant's telephone number, including area code: (805) 685-0355 (No Change) Former name, former address and former fiscal year, if changed since last report. Check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes X No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ____ No ____ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date: 7,135,807 Shares of Common Stock - April 28, 1997 Traditional Small Business Disclosure Forms Yes No X EXPLANATORY NOTE: The Registrant is amending its Form 10-QSB for the quarterly period ended March 31, 1997, solely to file the Financial Data Schedule attached hereto as Exhibit 27, which was inadvertently omitted form the original filing. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1996 and March 31, 1997 - (Unaudited) ASSETS Three Months Fiscal Year Ended Ended March 31, 1997 September 30, 1996 -------------- ------------------ Current Assets Cash $ 391,859 $ 985,237 Other Current Assets 20,008 -- Notes Receivable - Related Parties 75,000 -- Accounts Receivable (Net of Allowance for Doubtful Accounts of ($-0-) 114,130 8,785 ----------- ----------- Total Current Assets 600,997 994,022 ----------- ----------- Fixed Assets Equipment 539,346 -- Furniture and Fixtures 12,750 -- Less Accumulated Depreciation (42,590) -- ----------- ----------- Net Fixed Assets 509,506 -- ----------- ----------- Intangible Assets Goodwill 562,587 -- Organization Costs 19,209 6,698 Less Accumulated Amortization (4,697) -- ----------- ----------- Total Intangible Assets 577,099 -- ----------- ----------- Total Assets $ 1,687,602 $ 1,000,720 =========== =========== The accompanying notes are an integral part of these financial statements. - 2 - AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1996 and March 31, 1997 - (Unaudited) LIABILITIES AND STOCKHOLDERS EQUITY - - ----------------------------------- Three Months Fiscal Year Ended Ended March 31,1997 September 30, 1996 ------------- ------------------ Current Liabilities Accounts Payable - Trade $ 265,430 $ 31,945 Accounts Payable - Officers 58,358 40,683 Accrued Liabilities 64,334 6,024 Deferred Revenue 124,877 -- Line of Credit 9,000 -- Notes Payable 41,773 -- Notes Payable - WestNet Acquisition 188,325 -- Notes Payable - Employee 150,000 -- Lease Obligations-Current Portion 32,368 -- ----------- ----------- Total Current Liabilities 934,465 78,652 ----------- ----------- Long Term Liabilities Lease Obligation 94,842 -- ----------- ----------- Total Long Term Liabilities 94,842 -- ----------- ----------- Total Liabilities $ 1,029,307 $ 78,652 ----------- ----------- Stockholders Equity Preferred Stock - 5,000,000 authorized 1,000,000 1,000,000 Common Stock (Par Value $.001) 7,136 3,000 50,000,000 shares authorized 7,135,807 shares issued and outstanding 03/31/97 Paid in Capital in Excess of Par Value 135,475 -- Retained Earnings/(Deficit) (484,316) (80,932) Total Stockholders Equity 658,295 922,068 ----------- ----------- Total Liabilities and Stockholders Equity $ 1,687,602 $ 1,000,720 =========== =========== The accompanying notes are an integral part of these financial statements. - 3 - AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Operations For the Three Months and Six Months Ending March 31, 1997 and 1996 - (Unaudited) Predecessor Company For The Three For The Six For The Three For The Six Months Ended Months Ended Months Ended Months Ended March 31, 1997 March 31, 1997 March 31, 1996 March 31, 1996 -------------- -------------- -------------- -------------- REVENUES - - -------- Sales $ 611,517 $ 865,983 $ 69,057 $ 132,541 Cost of Sales 140,835 227,319 19,778 32,878 ----------- ----------- ----------- ----------- Gross Margin 470,682 638,553 49,279 99,663 EXPENSES - - -------- General and Admin 661,799 1,056,556 73,601 134,519 Bad Debt Expense -- 2,235 262 1,786 ----------- ----------- ----------- ----------- Total Operating Exp. 661,799 1,058,791 73,863 136,305 ----------- ----------- ----------- ----------- Income (Loss) from Oper. (191,117) (420,238) (24,584) (36,642) ---------- ----------- ----------- ----------- Other Income/(Expense) Interest Income 3,897 13,449 1,022 1,196 Miscellaneous Income 234 7,274 811 867 Interest Expense (2,787) (3,732) (1,177) (3,737) ----------- ----------- ----------- ----------- Net Other Income (Exp) 1,344 16,991 656 (1,674) ----------- ----------- ----------- ----------- Income/(Loss) Before Taxes (189,773) (403,247) (23,928) (38,316) Income Taxes -- -- -- -- Minority Interest -- (137) 1,764 1,764 ----------- ----------- ----------- ----------- Net Income (Loss) (189,773) (403,384) (22,178) (36,552) ======== ======== ======= ======== Weighted Average Shares Outstanding 7,123,751 6,513,072 2,294,955 2,293,614 Earnings/(Loss)Per Common Share $ (0.03) $ (0.06) $ (0.01) $ (0.02) ======== ======== ======= ======== The accompanying notes are an integral part of these financial statements. - 4 - AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows For the Six Months Ending March 31, 1997 and 1996 - Unaudited For The Six For The Six Months Ended Months Ended March 31, 1997 March 31, 1996 -------------- -------------- Cash Flows From Operating Activities: - - ------------------------------------- Net Loss $(403,384) $ (36,552) Adjustments to reconcile net loss net cash: Minority Interest -- (1,764) Depreciation Expense 42,590 24,767 Amortization Expense 4,697 -- (Increase)/decrease in: Accounts Receivable 9,159 (1,157) Other Assets 18,657 -- Interest Receivable -- 9,309 Increase/(Decrease) in: Accounts Payable (13,288) 9,505 Accounts Payable - Officers 17,675 -- Accrued Expenses 4,369 -- Deferred Income 38,152 -- Interest Payable -- (41,892) --------- --------- Net Cash Used in Operating Activities: (281,374) (37,784) --------- --------- Cash Flows From Investing Activities - - ------------------------------------ Cash Received from acquisition of subsidiaries 57,094 -- Purchase of fixed assets (19,306) (13,952) Purchase of intangible assets (177,360) -- --------- --------- Net Cash Provided (Used) By Investing Activities (139,572) (13,952) --------- --------- Cash Flows From Financing Activities: - - ------------------------------------- Cash paid for short term loan receivable (75,000) -- Cash paid on capital lease (23,038) (1,973) Borrowing on notes payable 7,500 46,000 Cash payments on notes payable (81,896) (26,900) Issuance of common stock -- 24,500 --------- --------- Net Cash Provided (Used) By Financing Activities (172,434) 41,627 --------- --------- Increase/(Decrease) in cash and cash equivalents (593,380) (10,109) Cash and Cash Equivalents at Beginning of Period 985,237 17,267 --------- --------- Cash and Cash Equivalents at End of Period $ 391,857 $ 7,158 ========= ========= - 5 - AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows For the Six Months Ending March 31, 1997 and 1996 - Unaudited (Continued) For The Six For The Six Months Ended Months Ended March 31, 1997 March 31, 1996 -------------- -------------- Supplemental Disclosures of Cash Flow Information - - ------------------------------------------------- Cash paid for: Interest expense $ 5,505 $ 45,077 Income taxes 0 200 Non-cash transactions: 115,000 Shares Common Stock Issued in Exchange for Interest in Silicon Beach 4,452,508 Shares of Common Stock and 1,000,000 Shares of $1.00 par value Series A Convertible Preferred Stock for acquisition of AvTel Holdings, Inc. 35,000 Shares of Common Stock for the acquisition of WestNet Communications, Inc. The accompanying notes are an integral part of these financial statements. - 6 - AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) Note 1 - INTERIM REPORTING - - ---------------------------- The unaudited consolidated financial statements included herein have been prepared by AvTel Communications, Inc. and its subsidiaries (the "Company") in accordance with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted. The unaudited consolidated financial statements and selected notes included herein should be read in conjunction with the audited consolidated financial statements and the notes hereto included in the Company's Annual Report on Form 10-KSB for the year ended September 30, 1996. Operating results for the three month and six month period ended March 31, 1997, are not necessarily indicative of the results that may be expected for the year ended September 30, 1997. The foregoing unaudited consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary to present fairly the consolidated financial position and results of operations for the periods presented. The financial statements have been presented reflecting the effects of a merger transaction involving the merger of a wholly owned subsidiary of the Company with and into AvTel Holdings, Inc., a California corporation ("AHI"), which transaction has been treated as a reverse merger for accounting purposes (see Note 2). The effects of the reverse merger are to report the financial statements of AHI as if it were the parent company. Accordingly, the balance sheets reflected in the consolidated financial statements are that of AHI. The statement of operations has been presented with the operating results of AHI and the historical operating results of Hi, Tiger International, Inc. ("HITI"), the predecessor company, a Utah corporation, which was renamed "AvTel Communications, Inc." pursuant to the merger transaction. This presentation has been made since AHI has only been in operation since April, 1996. Accordingly, the cash flow statement is presented reflecting the current changes of AHI as the parent company and the historical information for HITI. Note 2 - ACQUISITIONS - - ----------------------- In connection with its acquisition of all the issued and outstanding capital stock of AHI, on October 23, 1996, the Company amended and restated its Articles of Incorporation to, among other things, authorize 5,000,000 shares of preferred stock. The Company's Board of Directors is authorized to designate one or more series of such preferred stock and to designate the rights, preferences and privileges of each such series. The AHI acquisition was completed in accordance with an Acquisition Agreement dated August 30, 1996 ("Acquisition Agreement"). The transaction was accomplished by way of a merger (the "Merger") in which a wholly owned subsidiary of the Company was merged with and into AHI which was the surviving entity and became a wholly owned subsidiary of the Company. Pursuant to the Merger, the Company authorized and issued 1,000,000 shares of Series A Convertible Preferred Stock which have certain liquidation preferences, bear a cumulative dividend, payable semi-annually, at 8% and are convertible, upon the happening of certain events, into shares of the Company's $.001 par value common stock. The Merger has been accounted for as a reverse purchase by AHI of the Company whereby the holders of AHI's Common Stock acquired, after giving effect to the Merger, a controlling interest in the Company. Accordingly, the assets and liabilities of the Company and its subsidiary, The Friendly Net, LLC, are reflected at their fair market values, as are the assets and liabilities of Silicon Beach Communications, Inc., which was acquired in November, 1996. The foregoing unaudited financial statements reflect, for the previous periods noted, comparative data as to AHI only. AHI began operations in April, 1996. - 7 - In November, 1996, the Company, through a subsidiary, acquired all the issued and outstanding capital stock of Silicon Beach Communications, Inc., a California corporation ("SBC") that serves as an Internet Serv ice Provider ("ISP") and provides software development services. In February, 1997, the Company, through a subsidiary, acquired all of the issued and outstanding capital stock of WestNet Communications, Inc., a California corporation ("WNC") that serves as an ISP in certain regions of southern California. In March , 1997, the Company, acquired the 20% minority interest in The Friendly Net, LLC, a Utah limited liability company held by Tree of Stars, Inc. (TOSI), a Nevada corporation of which Paul G. Begum is President and a principle shareholder. Mr. Begum is the former President and Chief Executive Officer of the Company who, together with TOSI owns directly or indirectly approximately 9.8% of the issued and outstanding common stock of the Company. The acquisition was facilitated through a payment of cash in the amount of $10,000 and the issuance of $20,000 of short term loans. In addition, a loan payable to Mr. Begum has been discounted from $40, 900 to zero. The note payable was in consideration of consulting services performed by Mr. Begum prior to the Merger. This amount has been set aside in a reserve account that will be used to offset any unexpected expenses that may arise relating to the Company's operation prior to the Merger. At the end of the period a total of $12,500 had been applied to the reserve account. The Company expects to recognize a gain on the note discount in the third quarter of 1997. Note 3 - RECENT DEVELOPMENTS - - ------------------------------ In April, 1997, the Company entered into a Stock Exchange Agreement (the "Stock Exchange Agreement") with Matrix Telecom, Inc., a Texas corporation ("Matrix") pursuant to which the Company will issue to persons who own 100% of the issued and outstanding common stock of Matrix (the "Matrix Stockholders") an aggregate of 34,590,049 of the Company's $.001 par value common stock in exchange for 100% of the issued and outstanding capital stock of Matrix. As a result of the transaction, the Matrix Stockholders will, after giving effect to the exchange, acquire and hold approximately 79% of the issued and outstanding common stock of the Company on a fully diluted basis. The consummation of the transaction under the Stock Exchange Agreement is subject to the satisfaction of a number of terms and conditions, including a condition that prior to the exchange, the Company's shareholders shall have approved the transaction as well as a proposal to reincorporate the Company in the state of Delaware. The Stock Exchange Agreement also provides for the Company to effect either a reverse stock split prior to the reincorporation or reduce the number of the Company's common stock (or other securities convertible into common stock) that will be issued to the Company's shareholders in the reincorporation to such lesser number of common stock (or such other securities) as the Company and Matrix shall agree. The Stock Exchange Agreement additionally provides for Matrix to provide to the Company a secured loan in the maximum aggregate amount of $500,000, that the transaction is to be treated as a pooling of interest for financial reporting purposes and that it is intended to be a tax free reorganization. - 8 - AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Unaudited (Continued) ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION GENERAL The following discusses the financial position and results of operations of the Company and its consolidated subsidiaries, The Friendly Net LLC, a Utah Limited Liability Company ("TFN"), Silicon Beach Communications, Inc., a California corporation ("SBC"), WestNet Communications, Inc. ("WNC"), and AvTel Holdings, Inc., a California corporation ("AHI"). On October 23, 1996, the Company completed a merger transaction (the "Merger") in which it acquired 100% of the issued and outstanding capital stock of AHI, in exchange for 4,252,508 shares of the Company's $.001 par value common stock ("Common Stock"), comprising approximately 61% of the Company's issued and outstanding Common Stock after giving effect to the Merger, and 1,000,000 shares of newly authorized shares of the Company's Series A Convertible Preferred Stock. The Merger, which was consummated in accordance with the terms of an Acquisition Agreement dated August 30, 1996, was approved by the Company's shareholders at a special meeting held October 23, 1996. The transaction has been accounted for as a reverse acquisition for accounting purposes. Accordingly, the assets and liabilities of AHI are reflected at their fair market value whereby the holders of AHI's Common Stock acquired, after giving effect to the Merger, a controlling interest in the Company. Accordingly, the assets and liabilities of the Company and TFN are reflected at their fair market values. (See Note 2 to Consolidated Financial Statements - Unaudited) On November 22, 1996, the Company completed the acquisition of SBC. The acquisition was structured as a stock for stock transaction in which the Company issued an aggregate of 115,000 shares of its Common Stock in exchange for all the issued and outstanding capital stock of SBC. This transaction has been accounted for as a purchase. Accordingly, assets and liabilities of SBC are reflected at their fair market values. On February 2, 1997, the Company completed, through a subsidiary, the acquisition of WNC. The acquisition was structured as a stock purchase in which the Company acquired all of the issued and outstanding stock of WNC in exchange for $100,000, 35,000 shares of the Company's $0.001 common stock and promissory notes secured by the Company's subsidiary in aggregate of $177,000 which notes are secured by certain assets of WNC and by a pledge in the capital stock of WNC being acquired. In February, 1997, the Company, entered into an agreement to acquire directly or indirectly, through a subsidiary, the 20% minority interest in TFN from Tree of Stars, Inc. FINANCIAL CONDITION AND RESULTS OF OPERATIONS The decrease in total current assets from the fiscal year ended September 30, 1996, to the three months ended March 31, 1997, relates, primarily, to the use of cash for operating activities relating to the integration of the Company and AHI following the Merger, the integration of SBC and increased general administrative expenses. The increase in net fixed assets over the periods resulted primarily from the acquisitions of SBC and WNC in November, 1996 and February, 1997 respectively. The increase in notes receivable-related party is due to a short term loan to the Company's Senior Vice President of Software Development. The Company anticipates the repayment of the note in full by October 31, 1997. The increase in total liabilities from the year ended September 30, 1996, to the quarter ended March 31, 1997, arose, primarily, from the increase in trade payables arising from the Merger and the acquisition of SBC and WNC; the increase in deferred revenue associated with the acquisition of SBC and WNC which, - 9 - in the course of its business, is paid in advance by certain customers for ISP services; the increase in notes payable relating to certain promissory notes issued in connection with the Merger and acquisitions of SBC and WNC; and certain deferred compensation arrangements and accounts payable with certain officers and directors. Stockholders' equity decreased from September 30, to March 31, 1997, as a result of the operating losses experienced during the quarter due, primarily, to substantial costs and expenses incurred in connection with the Merger with AHI, the acquisitions of SBC and WNC, and increased management and other costs relating to the development and implementation of the Company's marketing strategies. The Merger involving the Company and AHI is treated, for accounting purposes, as a reverse purchase whereby the holders of AHI's Common Stock acquired, after giving effect to the Merger, a controlling interest in the Company. For financial reporting purposes, comparative data for periods prior to the quarter ended March 31, 1997, reflects the financial condition and results of operation of AHI only. Since AHI did not begin operations until April, 1996, no comparative financial analysis is available for AHI, with respect to the quarter ended December 31, 1995, as compared to similar data for the Company, for the same quarter in 1995, as to revenues, operating income and expenses, net income, cash and other topics that would normally be addressed in statements of operations and cash flows. LIQUIDITY AND CAPITAL RESOURCES Consistent with management's intentions to develop and execute the Company's business sales and marketing strategies, it is anticipated that the Company's needs for capital will in the near term exceed funds generated from operations. The Company has, as a result of the Merger with AHI acquired access to the capital resources of AHI. While these funds have been employed to support the recent implementation of the Company's business and other strategies, other capital resources will continue to be explored. Accordingly, management has evaluated a number of alternative solutions to the Company's capital needs, including secured and unsecured debt, capital equipment leases to facilitate the anticipated growth of sales, marketing and technical development, issuance of debt or equity securities, strategic alliances, or any combination of the foregoing. In connection with the contemplated acquisition by the Company of all of the issued and outstanding capital stock of Matrix Telecom, Inc., a Texas corporation ("Matrix"), the Company has entered into a Stock Exchange Agreement with Matrix which provides, among other things, for Matrix to provide to the Company a secured loan (the "Matrix Loan") in the maximum aggregate amount of $500,000. The loan is in the form of a revolving credit facility under which the Company may draw down up to two increments of $250,000 each. Subsequent to the quarter ended March 31, 1997 and pursuant to the terms of the Stock Exchange Agreement, the Company has availed itself of an aggregate of $250,000 under the Matrix Loan. All amounts of principal and interest outstanding under the Matrix Loan are due and payable on the earlier to occur of one hundred eighty (180) days after termination of the Stock Exchange Agreement or December 1, 1997. Management expects that, following consummation of the transactions contemplated by the Stock Exchange Agreement, the Company will be able to avail itself of the additional capital resources of Matrix. While these additional resources should be sufficient to support the near term business development and other strategies of the combined companies, other capital resources may from time to time be required by the Company. There are no assurances that such other capital resources will be available to implement management's objectives with respect to the combined companies assuming that the transactions contemplated by the Stock Exchange Agreement are consummated. Further, if for some reason the transactions contemplated by the Stock Exchange Agreement are not consummated, the amounts outstanding under the Matrix loan would become due and payable as early as December 1, 1997. In such a - 10 - case, management would be required to explore alternative solutions to fulfill the Company's capital requirements, including, payment of the indebtedness under the Matrix Loan. Under the circumstances, there are no assurances that the additional funds necessary to satisfy the Company's repayment obligations and future capital needs will be available, or, if available, that they will be in sufficient amounts and under terms and conditions acceptable to the Company. If these additional funds are not available in sufficient amounts or at the times and under term acceptable to the Company, management may be required to significantly curtail, restrict or delay the execution of some parts of the Company's business strategy and such actions could have a material adverse effect on the Company's ability to execute its business plan and strategy. - 11 - PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's Annual Meeting of Shareholders held February 27, 1997, the Company's shareholders voted on three proposals that had been submitted to the shareholders in the Company's combined form of Notice of Annual Meeting and Proxy Statement dated January 8, 1997 (the "Proxy Statement") as filed with the Securities and Exchange Commission in definitive form on or about January, 1997. The proposals submitted to the shareholders in the Proxy and approved by the requisite number of shares outstanding and entitled to vote therein as of record date, December 30, 1996, were as follows: (a) Election of Messrs. Anthony E. Papa, James P. Pisani, Barry Peters and Frank Dzuiba as members of the Board of Directors for the ensuing year. The number of vote cast for, against or withheld or abstentions as to each directors were as follows: Director Votes For Votes Against Abstentions or Withheld - -------- --------- ------------ ----------- Anthony E. Papa 4,571,863 -0- 24,860 James P. Pisani 4,571,863 -0- 24,860 Barry Peters 4,571,863 -0- 24,860 Frank Dziuba 4,571,863 -0- 24,860 (b) Approval of the Company's 1997 Incentive Stock Plan. Votes "for", 4,422,780 shares, "against" or "withheld", 149,081 shares, "abstentions", 24,860 shares. (c) Ratification of the selection of Ernst & Young LLP, independent certified public accountants, as auditors for the fiscal year ended September 30, 1997. Votes "for", 4,594,225 shares, "against" or "withheld", none and "abstentions", 2,498 shares. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (none) (b) Reports on Form 8-K. On March 6, 1997 the Company filed a Report on Form 8-K to report the consummation of the transaction pursuant to which the Company acquired all of the outstanding capital stock of WestNet Communications, Inc. (WNC). SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AvTel Communications, Inc. (Registrant) DATE: October 9, 1997 By: /s/ JAMES P. PISANI -------------------------------- James P. Pisani Its Principal Financial & Accounting Officer - 13 -