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) February 21, 1997
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AvTel Communications, Inc.
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(Exact name of registrant as specified in its charter)
Commission File No. 0-27580
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Utah 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
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==============================================================
(Former Name or Former Address, if changed since last report)
1
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 March 6, 1997 by including the
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 Businesses Acquired.
(1) Audited financial statements of WestNet Communications, Inc., a
California corporation ("WNI"), for the year ending June 30, 1996.
(i) Independent auditors' report.
(ii) Balance Sheet at June 30, 1996.
(iii) Statement of Income and Retained Earnings for the Twelve
Months Ended June 30, 1996.
(iv) Statement of Cash Flows for the Twelve Months Ended June
30, 1996.
(v) Notes to the Financial Statements - June 30, 1996.
(2) Audited financial statements of WNI for the seven months ending
January 31, 1997.
(i) Independent auditors' report.
(ii) Balance Sheet at January 31, 1997.
(iii) Statement of Operations and Retained Earnings for the Seven
Months Ended January 31, 1997.
(iv) Statement of Cash Flows for the Seven Months Ended January
31, 1997.
(v) Notes to the Financial Statements - January 31, 1997.
(3) Audited financial statements of Silicon Beach Communications, Inc., a
California corporation ("SBC"), for the period from inception to
October 31, 1996.
(i) Independent auditors' report.
(ii) Balance Sheet at October 31, 1996.
(iii) Statement of Income and Retained Earnings for the period from
inception to October 31, 1996.
(iv) Statement of Cash Flows for the period from inception to
October 31, 1996.
(v) Notes to the Financial Statements - October 31, 1996.
(b) Pro Forma Financial Information.
(1) Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1996, reflecting the acquisition of WNI by the
Registrant (and certain other events). This item is
incorporated by reference to Note 2 of the Notes to Consolidated
Financial Statements of the Registrant contained in the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1996, which was filed with the Commission on February
20, 1997.
(2) Unaudited Pro Forma Condensed Combined Statement of Operations for
the three months ending December 31, 1996, reflecting the acquisition
of WNI by the Registrant (and certain other events). This item is
incorporated by reference to Note 2 of the Notes to Consolidated
Financial Statements of the Registrant contained in the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 1996,
which was filed with the Commission on February 20, 1997.
(3) Unaudited Pro Forma Condensed Combined Statement of Operations for
the year ending September 30, 1996 reflecting the acquisition of
WNI by the Registrant (and certain other events). Included in
this filing.
(c) Exhibits. Page Number
In Sequential
Numbering
System
(23.1) Consent of Cagianut & Grunewald. 33
(23.2) Consent of MacFarlane, Faletti & Co. LLP 34
(23.3) Consent of MacFarlane, Faletti & Co. LLP 35
3
FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
WESTNET COMMUNICATIONS, INC.
We have audited the accompanying balance sheet of WestNet
Communications, Inc. (a California corporation) as of June 30, 1996,
and the related statements of income and retained earnings, and cash
flows for the twelve months then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material aspects, the financial position of WestNet
Communications, Inc. as of June 30, 1996 and the results of its
operations and its cash flows for the twelve months then ended in
conformity with generally accepted accounting principles.
As addressed in Note 6 to the financial statements, the fiscal year end
of this Company is September 30, 1996; however, this audit is prepared
for the twelve months ended June 30, 1996.
/s/ CAGIANUT & GRUNEWALD
CAGIANUT & GRUNEWALD
Oak View, California
July 31, 1996
4
WESTNET COMMUNICATIONS, INC.
BALANCE SHEET
June 30, 1996
ASSETS
Current Assets
Cash in Banks $ 27,073
Trade Accounts Receivable 29,775
Less: Allowance for Non-Renewals (1,787)
Prepaid Income Taxes 8,459
Deferred Income Taxes 26,632
Prepaid Insurance 1,266
Prepaid Expenses 6,404
Supplies Inventory 987
-----------
Total Current Assets 98,809
-----------
Property and Equipment, at Cost
Furniture & Fixtures 2,170
Computer Software 2,361
Equipment 200,856
------------
205,387
Less Accumulated Depreciation (24,098)
------------
Net Property and Equipment 181,289
------------
Other Assets
Organizational Costs 15,000
Less: Amortization (3,250)
Rent Deposit 1,450
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TOTAL ASSETS $ 293,298
------------
The accompanying notes are an integral part of the financial
statements.
5
WESTNET COMMUNICATIONS, INC.
BALANCE SHEET
June 30, 1996
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Current Liabilities
Accounts Payable $ 13,465
Accrued Wages & Benefits 5,822
Deferred Revenue 161,768
Payroll Taxes 9,893
-----------
Total Current Liabilities $ 190,948
-----------
Long Term Debt $ 76,000
-----------
Total Liabilities $ 266,948
-----------
STOCKHOLDER'S EQUITY
Common Stock, 100,000 shares
authorized, and 20,000
shares issued 20,000
Retained Earnings 6,350
-----------
Total Stockholder's Equity 26,350
-----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 293,298
-----------
The accompanying notes are an integral part of the financial
statements.
6
WESTNET COMMUNICATIONS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the Twelve Months Ended June 30, 1996
OPERATING REVENUES
Sales $ 492,210
----------
OPERATING EXPENSES
Advertising 56,530
Commissions 4,200
Computer 6,194
Credit Card Fees 10,853
Depreciation & Amortization 26,382
Insurance 3,388
Interest 5,857
Miscellaneous 12,084
News Feeds 3,325
Office, Printing & Postage 16,524
Penalties 497
Professional and Consulting 15,975
Purchase for Resale 3,564
Rent 15,321
Salaries, Taxes & Benefits 167,280
Telephone 120,942
Utilities 2,256
---------
Total Expenses $ 471,172
NET INCOME (LOSS) BEFORE TAXES 21,038
INCOME TAXES 2,030
---------
NET INCOME (LOSS) 19,008
BEGINNING RETAINED EARNINGS (12,658)
---------
ENDING RETAINED EARNINGS $ 6,350
---------
The accompanying notes are an integral part of the financial
statements.
7
WESTNET COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
For the Twelve Months Ended June 30, 1996
Cash Flows from Operating Activities:
Cash Received from Customers $ 618,041
Cash Paid for Products and Services (433,445)
Interest Paid (5,857)
Taxes Paid (37,618)
-----------
Net Cash Used by Operating Activities 141,121
-----------
Cash Flows from Investing Activities:
Purchase of Equipment (163,018)
Net Cash Used by Investing Activities (163,018)
-----------
Cash Flows from Financing Activities:
Sale of Capital Stock 1,000
Borrowing on Long-Term Loans 1,500
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Net Cash Provided by Financing Activities 2,500
-----------
Net Increase (Decrease) in Cash (19,397)
Cash at the Beginning of the Year 46,470
-----------
Cash at the End of the Year $ 27,073
-----------
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net Income (Loss) $ 19,505
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation & Amortization 26,382
Increase in Accounts Receivable (26,768)
Increase in Other Current Assets (44,245)
Increase in Other Assets (15,200)
Increase in Deferred Revenues 152,599
Increase in Other Liabilities 28,848
-----------
Net Cash Used by Operating Activities: $ 141,121
-----------
The accompanying notes are an integral part of the financial
statements.
8
WESTNET COMMUNICATIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1996
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General:
WestNet Communications, Inc. was incorporated in the State of
California on May 2, 1995. It is an internet service provider
providing services to individuals and businesses in the Santa Barbara,
Ventura and Simi Valley areas.
Fiscal Year:
The Company had adopted the fiscal year end of September 30.
Property and Depreciation:
Property and equipment are recorded at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of the
respective assets.
Accounts Receivable:
Accounts receivable at the balance sheet date represents fees due from
customers. All fees are paid in advance. Service is discontinued if
payment is not received by the beginning of the service period. The
Company uses the allowance method to account for uncollectible accounts
receivable and non-renewing accounts.
Organizational Costs:
Attorney costs associated with the organization of the Company are
capitalized and amortized over sixty months.
Deferred Revenues:
Amounts received in advance from customers is recorded as deferred
revenue.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requirements management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
9
NOTE 2 - PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
lives are summarized below:
Furniture $ 2,170 7 Years
Computer Software 2,361 5 Years
Equipment 200,856 5-7 Years
--------
Accumulated Depreciation (24,098)
--------
Net Property and Equipment $181,289
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NOTE 3 - LONG TERM DEBT
Long term debt consists of loans from stockholders with an annual
interest rate of 7% simple interest compounded annually. Interest only
payments are due each year. The principal amounts are unsecured and
will be repaid at the discretion of the Company.
NOTE 4 - RELATED PARTY TRANSACTIONS
A stockholder in the Company is an attorney who provided services
during the year. The amount paid to the stockholder in the current
year was approximately $20,000.
During the current year, the Company subleased office space from an
officer/stockholder for $1,000 per month increasing to $1,200 per
month. The monthly rent was less than the officer/stockholder's
underlying lease with the building owner. The underlying lease is for
$2,700 per month. WestNet's monthly lease payments will increase
incrementally until it reaches that amount. This lease is on a month-
to-month lease.
NOTE 5 - LONG TERM LEASES
The Company leases office space for the Santa Barbara offices with a
lease term of five years beginning May, 1995. The monthly lease amount
is $625.00. Minimum future obligations of this operating lease for the
remaining four years on the lease are as follows:
6/30/97 $ 7,650
6/30/98 7,803
6/30/99 7,959
6/30/00 8,118
10
The Company leased office space for the Simi Valley office with a lease
term of five years beginning December, 1995. The monthly lease amount
is $200.00. Minimum future obligations of this operating lease for the
next five years are as follows:
6/30/97 $ 2,496
6/30/98 2,596
6/30/99 2,700
6/30/00 2,808
6/30/01 2,920
NOTE 6 - AUDIT PERIOD
This audit covers the time period of July 1, 1995 to June 30, 1996
which is not the Company's fiscal year.
NOTE 7 - INCOME TAXES
The provision for income taxes includes deferred taxes, current expense
and prepaid income taxes as shown on the financial statements.
11
INDEPENDENT AUDITORS' REPORT
Board of Directors
WestNet Communications, Inc.
We have audited the Balance Sheet of WestNet Communications, Inc. (a
California corporation) as of January 31, 1997 and the related
Statements of Operations and Retained Earnings and Cash Flows for the
seven months then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of WestNet
Communications, Inc. as of January 31, 1997, and the results of its
operations and its cash flows for the period then ended, in conformity
with generally accepted accounting principles.
As addressed in Note 6 to the financial statements, the fiscal year end
of this Company is September 30, 1996; however, this audit is prepared
for the seven months ended January 31, 1997.
/s/ MACFARLANE, FALETTI & CO. LLP
MACFARLANE, FALETTI & CO. LLP
Santa Barbara, California
April 21,1997
12
WESTNET COMMUNICATIONS, INC.
BALANCE SHEET
January 31,1997
ASSETS
Current Assets:
Cash and cash equivalents $ 43,687
Accounts receivable (net of allowance for doubtful
accounts of $15,000) (Note 3) 15,691
Prepaid expenses 3,079
Prepaid income taxes 8,990
Total Current Assets 71,447
---------
Property and equipment:
Computer equipment 257,505
Furniture and equipment 2,536
Less accumulated depreciation <74,744>
-----------
Total Property and Equipment 185,297
-----------
Other:
Organizational costs (less accumulated
amortization of $5,200) 9,800
------------
Total Assets 266,544
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 14,328
Payroll and payroll taxes payable 19,833
Deferred income taxes 6,791
Payments received in advance 44,410
Loans payable (Note 5) 76,000
----------
Total Current Liabilities 161,362
----------
Total Liabilities 161,362
13
Stockholder's Equity:
Common Stock (100,000 shares authorized,
20,000 shares issued and outstanding, $1 par value) 20,000
Retained earnings 85,182
Total Stockholders' Equity 105,182
-----------
Total Liabilities and Stockholders' Equity $266,544
See accompanying notes
14
WESTNET COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE SEVEN MONTHS ENDED JANUARY 31, 1997
Operating Revenues:
Sales $ 662,329
Operating Expenses:
Payroll $ 185,437
Payroll taxes 16,533
Employee benefits 2,583
Consultants 31,414
Telephone 120,699
Depreciation and amortization 52,597
Advertising 32,419
Rent 17,216
Bad debts 13,214
Insurance 12,130
Repairs and maintenance 6,360
Bank and credit card charges 5,528
Utilities 4,439
Computer supplies 4,349
Office supplies 3,789
Postage 3,017
Other expenses 2,745
Interest expense 1,484
Commissions 1,195
Printing 1,092
Total expenses 518,240
---------
Net income before income taxes 144,089
Income taxes (65,257)
---------
Net income 78,832
Retained earnings at July 1, 1996 6,350
---------
Retained Earnings at January 31, 1997 $ 85,182
See accompanying notes
15
WESTNET COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED JANUARY 31, 1997
Cash flows from operating activities:
Cash received from customers $ 544,055
Cash paid to suppliers and employees (438,938)
Interest paid (1,484)
Income taxes paid (32,365)
-----------
Net cash and cash equivalents provided by
operating activities 71,268
Cash flows from investing activities:
Purchase of fixed assets (54,654)
-----------
Net cash and cash equivalents used in
investing activities (54,654)
-----------
Net increase in cash and cash equivalents 16,614
Cash and cash equivalents, July 1, 1996 27,073
-----------
Cash and cash equivalents, January 31, 1997 $ 43,687
-----------
Reconciliation of Net Income to
Net Cash Provided by Operating Activities:
Net Income $ 78,832
Adjustments to reconcile net income
to net cash provided by Operating Activities:
Bad debt expense 13,213
Depreciation and amortization 52,596
Net increase or decrease in:
Accounts receivable (916)
Prepaid income taxes (531)
Prepaid expenses 7,028
Accounts payable 863
Payroll and payroll taxes payable 4,118
Payments received in advance (117,358)
Deferred income taxes 33,423
--------
Net cash and cash equivalents provided by
operating activities $ 71,268
See accompanying notes
16
WESTNET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: GENERAL
WestNet Communications, Inc. was formed May 2, 1995. WestNet is an
Internet service provider and software development company providing
services to individuals and businesses in the Santa Barbara, Ventura
and Simi Valley areas. The Company s fiscal year ends on September 30.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
All cash on hand and in bank checking accounts is considered to be cash
and cash equivalents.
Property and depreciation
Computer equipment, furniture and other equipment are recorded at cost.
Depreciation is provided on the straight line method over the estimated
useful lives of the assets which range from three to five years. This
is a change in the estimated useful lives used in the prior period
which had been a range of five to seven years. This change is being
accounted for prospectively.
Organizational costs
Legal fees associated with the organization of the Company are
capitalized and amortized over sixty months
Revenue recognition
Revenue is recognized as the services are provided. Payments from
customers received in advance of when the service is to be provided are
recorded as "payments received in advance". When the time period for
which the payment was received passes, it is recognized as revenue.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates used
in the preparation of these financial statements are as follows:
17
Depreciable lives and estimated residual value of property and
equipment
Collectibility of accounts receivable
Payments received in advance
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due to the Company for services
already provided. An allowance of $15,000 has been made to provide for
amounts which may not be collected. Management believes that the
remaining balances will be fully collected within the coming year.
NOTE 4: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the Balance Sheet for cash and cash
equivalents, accounts receivable, prepaid expenses, prepaid income
taxes, accounts payable, payroll and payroll taxes payable, deferred
income taxes, payments received in advance, and loans approximate their
respective fair market values due to the short maturities of those
instruments.
NOTE 5: LOANS PAYABLE
Loans payable to stockholders with an annual interest rate of 7% simple
interest compounded annually. Interest only payments are due each
year. The principal amounts are unsecured and will be repaid at the
discretion of the Company: $ 76,000
NOTE 6: AUDIT PERIOD
This audit covers the time period of July 1, 1996 to January 31, 1997
which is not the Company's fiscal year.
NOTE 7: CONCENTRATIONS
Most of the Company's customers are based in the Santa Barbara, Ventura
and Simi Valley areas. Based on revenues, the Company's major service
is being an Internet service provider. The Company has only one
primary provider of its telephone lines at each location.
NOTE 8: INCOME TAXES
The net deferred tax liability consists of the following components:
18Deferred tax assets relating to
payments received in advance $ 14,047
Deferred tax liabilities relating to
Allowance for doubtful accounts (4,745)
Property and equipment (16,093)
---------
Net deferred tax liability $ (6,791)
---------
The provision for income taxes for the period
ending January 31, 1997 consisted of the following:
Current income taxes $ 31,834
Deferred income tax expense 33,423
---------
$ 65,257
NOTE 9: RELATED PARTY TRANSACTIONS
A stockholder in the Company is an attorney who provided services
during the seven months. The amount paid to the stockholder in the
current period was approximately $12,000.
Another stockholder in the Company provided consulting services to the
Company during the seven months and was paid approximately $10,000.
During the period, the Company subleased office space from an
officer/stockholder for $1,200 per month. The monthly rent was equal
to the officer/stockholder's underlying lease with the building owner.
This lease is on a month to month basis.
NOTE 10: OPERATING LEASE OBLIGATIONS
The Company leases office space for the Santa Barbara offices with a
lease term of five years beginning May, 1995. The monthly lease amount
is $625.
The Company leases office space for the Simi Valley office with a lease
term of five years beginning December, 1995. The monthly lease amount
is $200.
The future minimum lease payments for the current lease agreements are
as follows:
Year ended September 30,
1997 $ 9,900
1998 10,153
1999 10,413
2000 10,926
2001 700
Rental expense for the period ended January 31, 1997 was $17,216.
19
INDEPENDENT AUDITORS' REPORT
Board of Directors
Silicon Beach Communications, Inc.
We have audited the balance sheet of Silicon Beach Communications, Inc. (a
California corporation) as of October 31, 1996 and the related statements
of operations and retained earnings and cash flows for the period then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Silicon Beach
Communications, Inc. as of October 31, 1996, and the results of its
operations and its cash flows for the period then ended, in conformity with
generally accepted accounting principles.
/s/ MACFARLANE, FALETTI & CO. LLP
MACFARLANE, FALETTI & CO. LLP
Santa Barbara, California
January 2, 1997
20
SILICON BEACH COMMUNICATIONS, INC.
BALANCE SHEET
OCTOBER 31, 1996
ASSETS
Current Assets:
Cash and cash equivalents $ 5,685
Accounts receivable (net of allowance for doubtful
accounts of $6,118) (Note 3) 43,359
Other receivables (due from landlord) 14,962
Prepaid expenses 11,613
--------
Total Current Assets: 75,619
--------
Property and equipment:
Computer equipment 270,721
Furniture and equipment 12,970
Less accumulated depreciation (12,687)
--------
Total Property and Equipment 271,004
--------
Other:
Deferred income taxes (net of allowance of $8,000)
(Note 6) 6,800
--------
Total Assets $ 353,423
--------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 105,977
Payroll payable 26,054
Trade payable 5,658
Taxes payable 800
Payments received in advance 42,315
Line of credit 25,000
Current portion - capital lease 40,677
Loans payable (Note 5) 58,821
--------
Total Current Liabilities 305,302
Other Liabilities:
Capital lease 103,766
--------
Total Liabilities 409,068
--------
Stockholder's Equity:
Common Stock (1,000,000 shares authorized,
1,000 shares issued and outstanding, no par value) 1,000
Additional paid in capital 10,833
Retained earnings / (deficit) (67,478)
--------
Total Stockholder's Equity: (55,645)
Total Liabilities and Stockholder's Equity $353,423
--------
See accompanying notes
21
SILICON BEACH COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FROM INCEPTION TO OCTOBER 31, 1996
Operating Revenues
Sales $427,547
Operating Expenses
Advertising $ 20,380
Bad debts 6,118
Bank and credit card charges 6,122
Commissions 11,018
Computer software 2,304
Consultants 19,221
Depreciation and amortization 12,687
Dues and subscriptions 2,642
Equipment rental 4,155
Insurance 11,171
Interest expense 4,871
Loss on retirement of assets 6,370
Office supplies 9,507
Other expenses 9,144
Payroll and payroll taxes 221,437
Postage 3,308
Printing 1,068
Rent 14,198
Taxes 1,189
Telephone 133,778
Travel and meals 1,137
--------
Total expenses 501,825
--------
Net loss before income taxes (74,278)
Deferred income tax benefit 6,800
--------
Net loss (67,478)
Retained earnings at inception -
--------
Retained Earnings / (Deficit) at October 31, 1996 $ (67,478)
--------
See accompanying notes
22
SILICON BEACH COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
FROM INCEPTION TO OCTOBER 31, 1996
Cash flows from operating activities:
Cash received from customers $ 426,503
Cash paid to suppliers and employees
(350,421)
Interest paid (4,871)
---------
Net cash and cash equivalents provided by operating activities 71,211
----------
Cash flows from investing activities:
Purchase of fixed assets (39,515)
Payments on leasehold improvements which will be reimbursed (14,962)
----------
Net cash and cash equivalents used in investing activities (54,477)
---------
Cash flows from financing activities:
Borrowing on line of credit 25,000
Payments made on capital lease (21,812)
Borrowing on notes payable 9,107
Payments made on notes payable (24,387)
----------
Net cash and cash equivalents used in financing activities (12,092)
----------
Net increase in cash and cash equivalents 4,642
Cash and cash equivalents contributed at inception 1,043
-----------
Cash and cash equivalents, October 31, 1996 $ 5,685
-----------
Reconciliation of Net Loss to Net Cash Provided by
Operating Activities:
Net Loss $ (67,478)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Bad debt expense 6,718
Depreciation and amortization 12,687
Loss on retirement of assets 6,370
Increase in:
Accounts receivable (49,477)
Prepaid expenses (11,613)
Accounts payable 105,977
Payroll payable 26,054
Trade payable 5,658
Taxes payable 800
Payments received in advance 42,315
Deferred income taxes (14,800)
Deferred income tax valuation allowance 8,000
---------
Net cash and cash equivalents provided by operating activities $ 71,211
---------
See accompanying notes
23
SILICON BEACH COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: GENERAL
Silicon Beach Communications, Inc. was formed May 3, 1996. It is the
successor organization to Silicon Beach Communications, LLC which
was dissolved effective May 16, 1996. The remaining member of Silicon Beach
Communications, LLC contributed all of the LLC's assets and liabilities to the
newly formed corporation. Silicon Beach Communications, Inc. is an Internet
service provider and software development company providing services to
individuals, businesses and non-profit organizations primarily in Santa Barbara
County.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents:
All cash in banks in checking accounts is considered to be cash and
cash equivalents.
Property and depreciation:
Computer equipment, furniture and other equipment are recorded at
cost. Depreciation is provided on the double declining balance method
over the estimated useful lives of the assets which ranges from five to
seven years.
Revenue recognition:
Revenue is recognized as the services are provided. Payments from
customers received in advance of when the service is to be provided
are recorded as "payments received in advance". When the time
period for which the payment was received passes, it is recognized as
revenue.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Significant estimates used in the preparation of these
financial statements are as follows:
Interest rate used to determine present value of assets held under capital
lease agreements
Depreciable lives and estimated residual value of property and equipment
Allowance for doubtful accounts
Payments received in advance
24
SILICON BEACH COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due to the corporation for
services already provided. An allowance of $6,118 has been made to
provide for amounts which may not be collected. Management
believes that the remaining balances will be fully collected within the
coming years.
NOTE 4: CAPITAL LEASES
The Company is the lessee of computer equipment under several capital
leases. The assets and liabilities under the capital leases are recorded
at the lower of the present value of the minimum lease payments or the fair
value of the assets. The assets are amortized (or depreciated) over the
lesser of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases of $4,262 is included in
depreciation and amortization expense. The computer equipment's book value
is $148,222 less accumulated depreciation of $4,262.
At October 31, 1996 obligations under capital leases were as follows:
An equipment lease payable in monthly installments
of $1,130 inclusive of interest at 19% per annum.
The lease expires in May, 1999 and is secured by
equipment with an approximate cost of $30,752. $27,003
An equipment lease payable in monthly installments
of $1,447 inclusive of interest at 29.6% per annum.
The lease expires in October 1999 and is secured by
equipment with an approximate cost of $37,484. $34,365
An equipment lease payable in monthly installments
of $682 inclusive of interest at 18% per annum.
The lease expires in June 1999 and is secured
by equipment with an approximate cost of $ 19,422. $17,230
An equipment lease payable in monthly installments
of $593 inclusive of interest at 18% per annum.
The lease expires in June 1999 and is secured by
equipment with an approximate cost of $16,985. $14,984
An equipment lease payable in monthly installments
of $472 inclusive of interest at 18% per annum.
The lease expires in August 1999 and is secured
by equipment with an approximate cost of $13,057. $12,501
An equipment lease payable in monthly installments
of $369 inclusive of interest at 18.5% per annum.
The lease expires in July 1998 and is secured by
equipment with an approximate cost of $9,277. $ 8,061
25
An equipment lease payable in monthly installments
of $660 inclusive of interest at 19% per annum.
The lease expires in August, 2000 and is secured
by equipment with an approximate cost of $24,451. $ 21,432
An equipment lease payable in monthly installments
of $360 inclusive of interest at 18% per annum.
The lease expires in May, 1999 and is secured by
equipment with an approximate cost of $10,389. $ 8,867
--------
$144,443
Minimum future lease payments under the capital leases are as
follows:
Year ended October 31:
1997 $ 67,377
1998 67,377
1999 51,122
2000 6,602
---------
Total minimum lease payments 192,478
Less amount representing interest (48,035)
---------
Present value of minimum lease
payments $ 144,443
---------
The interest rates on the capital leases were imputed based on the
lessor's implicit rate of return.
NOTE 5: LOANS PAYABLE
Loan payable to an individual in monthly installments
of $3,928 including interest at 4% per annum, final
payment due 1997. The loan is secured by all of the
assets of the corporation and is personally
guaranteed by the shareholder. $ 49,624
Loans payable to individuals; due on demand. 9,197
--------
$ 58,821
- --------
NOTE 6: INCOME TAXES
The Corporation assumed the Limited Liability Corporation's liability
to the California Franchise Tax Board for $1,300 upon inception.
The deferred tax benefit consists of a temporary difference for the
allowance for doubtful accounts and the operating loss carryforward.
The Corporation will have a net operating loss carryforward of
approximately $75,000 which will expire in 15 years.
26
SILICON BEACH COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6: INCOME TAXES (Continued)
Income tax benefit consists of the following:
Current income tax $ 0
Deferred tax benefit 14,800
Less: Valuation allowance (8,000)
--------
$ 6,800
--------
NOTE 7: CONCENTRATIONS
Most of the Corporation's customers are based in Santa Barbara and
accounts receivable are not secured by collateral. Based on revenues,
the Corporation's major service is being an Internet service provider.
The Company has one primary provider of its telephone lines, GTE.
NOTE 8: CONTRIBUTED CAPITAL
As of May 16, 1996, the Corporation took over the operations of Silicon
Beach Communications, LLC. All of the assets of the Limited Liability
Company were contributed to the Corporation and the Corporation
assumed the liabilities of the LLC. This resulted in the following assets
and liabilities being recorded on the Corporation's books as of May 16,
1996:
Cash $ 1,043
Computer, furniture and equipment 83,488
Accounts receivable 3,290
Accounts payable 3,772
Taxes payable 1,300
Loans payable 68,000
Loan payable to stockholder 2,916
Common stock 1,000
Additional paid in capital 10,833
NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the Balance Sheet for cash and cash
equivalents, accounts receivable, other receivables, prepaid expenses,
accounts payable, payroll payable, trade payable, taxes payable,
payments received in advance, and line of credit and current portion
of loans payable approximate their respective fair market values due
to the short maturities of those instruments.
27
SILICON BEACH COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 10: LINE OF CREDIT
The corporation has a line of credit of $25,000 available to it through
a local bank at an interest rate of 12.25% per annum. The line of credit
agreement expires on May 1, 1997. This line is secured by all assets
of the Corporation.
NOTE 11: OPERATING LEASE OBLIGATIONS
Subsequent to October 31, 1996, the corporation entered into an
agreement to lease office facilities. The future minimum lease
payments for the current lease agreements are as follows:
NNN
Rental Cost Total
Year ended October 31:
1997 $55,740 $16,103 $71,843
1998 55,740 16,103 71,843
1999 55,740 16,103 71,843
2000 55,740 16,103 71,843
2001 55,740 16,103 71,843
Rental expense for the period ended October 31, 1996 was $14,198.
NOTE 12: NON-CASH ACTIVITIES
On May 16, 1996, the following asset and liabilities were contributed
to the Corporation:
Contributed cash $ 1,043
Contributed furniture and equipment 83,488
Net payables assumed by the Corporation 1,782
Loans assumed by the Corporation upon inception 70,916
Stock issued - par value 1,000
- additional paid in capital 10,833
Other transactions not requiring the use of cash:
Computer equipment purchased through capital leases 160,688
28
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statements set forth below
or incorporated herein by reference present (i) the acquisition by the
Registrant (then known as Hi, Tiger International, Inc.) of all of the
outstanding capital stock of AvTel Holdings, Inc., a California corporation
("AHI"), on the terms previously disclosed, which acquisition is treated as a
reverse acquisition of the Registrant by AHI using the purchase method of
accounting, (ii) the acquisition by the Registrant of all of the outstanding
capital stock of WestNet Communications, Inc.("WNI"), on the terms previously
disclosed, using the purchase method of accounting, and (iii) the acquisition
by the Registrant of all of the outstanding capital stock of Silicon Beach
Communications,Inc.("SBC"), on the terms previously disclosed, 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. Such information is derived from and should be read in
conjunction with, the separate historical financial statements of the Registrant
and AHI on file with the Commission and the separate historical financial
statements of WNI and SBC included in this filing. 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 transactions 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.
29
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Registrant AHI SBC
For the Twelve From Inception For the Five
Months Ending (July 16, 1996) to Months Ending
September 30, 1996 September 30, 1996 September 30,1996
------------------ ----------------- -----------------
REVENUES
Sales $ 299,315 -- 367,081
Cost of Sales 67,034 -- 111,109
---------- ---------- ----------
Gross Margin 232,281 -- 255,972
---------- ---------- ----------
EXPENSES
General & Administrative 276,485 120,664 239,708
Bad Debt Expense 4,842 - 11,887
---------- ---------- ----------
Total Operating
Expense 281,327 120,664 251,595
---------- ---------- ----------
Income (Loss) from
Operations (49,046) (120,664) 4,377
---------- ---------- ----------
Other Income (Expenses)
Interest Income 2,450 4,813 --
Miscellaneous Income 811 -- --
Interest Expense (6,999) -- (3,549)
Gain on Sale of
Equipment 383 -- --
---------- ---------- ----------
Net Other Income (Loss) (3,355) 4,813 (3,549)
---------- ---------- ----------
Income/(Loss)
Before Taxes (52,401) (115,851) 828
Income Taxes 206 -- 800
Minority Interest (2,727) -- --
---------- ---------- ----------
Net Income (Loss) $ (55,334) $ (115,851) $ 28
---------- ---------- ----------
30
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
WNI
For the Twelve
Months Ended Pro Forma Pro Forma
September 30, 1996 Adjustments Balance
------------------ ------------ ----------
REVENUES
Sales 828,617 -- 1,495,013
Cost of Sales 105,441 -- 283,584
--------- --------- ---------
Gross Margin 723,176 -- 1,211,429
--------- --------- ---------
EXPENSES
General & Administrative 521,262 A 112,518 1,270,637
Bad Debt Expense -- -- 16,729
--------- ---------- ---------
Total Operating
Expense 521,262 112,518 1,287,366
--------- ---------- ---------
Income (Loss) from
Operations 201,914 (112,518) (75,937)
--------- ---------- ---------
Other Income (Expenses)
Interest Income -- -- 7,263
Miscellaneous Income -- -- 811
Interest Expense -- -- (10,548)
Gain on Sale of
Equipment -- -- 383
--------- ---------- ---------
Net Other Income (Loss) -- -- (2,091)
--------- ---------- ---------
Income/(Loss)
Before Taxes 201,914 (112,518) (78,028)
Income Taxes 37,618 -- 38,624
Minority Interest -- -- (2,727)
--------- ---------- ---------
Net Income (Loss) $ 164,296 $ (112,518) $ (119,379)
--------- ---------- ---------
A - Amortization of goodwill over sixty months for the year
ended September 30, 1996.
31
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: October 22, 1997
------------------------- ---------------
Anthony E. Papa
President and Chief Executive Officer
By: /s/ JAMES P. PISANI Date: October 22, 1997
------------------------- ---------------
James P. Pisani
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
32
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (Registration No. 333-30725) filed
by AvTel Communications, Inc. of our report dated July 31, 1996, with
respect to the financial statements of WestNet Communications, Inc. for
the year ended June 30, 1996.
/s/ CAGIANUT & GRUNEWALD
CAGIANUT & GRUNEWALD
Oak View, California
October 7, 1997
33
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (Registration No. 333-30725) filed
by AvTel Communications, Inc. of our report dated April 21, 1997, with
respect to the financial statements of WestNet Communications, Inc. at
and for the seven months ended January 31, 1997.
/s/ MACFARLANE, FALETTI & CO. LLP
MACFARLANE, FALETTI & CO. LLP
Santa Barbara, California
October 7, 1997
34
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (Registration No. 333-30725) filed
by AvTel Communications, Inc. of our report dated January 2, 1997, with
respect to the financial statements of Silicon Beach Communications, Inc.
at
and for the period from inception (May 3, 1996) to October 31, 1996.
/s/ MACFARLANE, FALETTI & CO. LLP
MACFARLANE, FALETTI & CO. LLP
Santa Barbara, California
October 16, 1997
35