As filed with the Securities and Exchange Commission on March 21, 2001
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AVERY COMMUNICATIONS, INC.
(Exact name of Small Business Issuer in its Charter)
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Delaware 4899 12-2227079
(State or Other Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number
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190 South LaSalle Street
Suite 1710
Chicago, Illinois 60603
(312) 419-0077
(Address and telephone number of Principal Executive Offices)
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Scot M. McCormick
Avery Communications, Inc.
190 South LaSalle Street
Suite 1710
Chicago, Illinois 60603
(312) 419-0077
(Name, Address and Telephone Number of Agent for Service)
With a copy to:
Bruce A. Cheatham
Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
(214) 745-5213
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Approximate Date of Proposed Sale to the Public: From time to time after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X].
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CALCULATION OF REGISTRATION FEE
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Number of Proposed Proposed
shares maximum maximum Amount of
Title of each class of securities to be offering price aggregate registration
to be registered registered per share* offering price fee
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Common Stock..................... 4,100,381 .8875 $3,639,088 $910
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* The proposed maximum offering price per share is calculated pursuant to
Rule 457(c) upon the basis of the average of the bid and asked price of the
common stock on March 16, 2001.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay the effective date of this amendment until
the Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
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PROSPECTUS
SUBJECT TO COMPLETION DATED MARCH 21, 2001
AVERY COMMUNICATIONS, INC.
4,100,381 Shares of Common Stock
This prospectus relates to the 4,100,381 shares of our common stock being
offered by certain of our securityholders. All of such shares are reserved for
issuance upon conversion of convertible securities held by these
securityholders. We will not receive any proceeds from the sale of the shares
by these selling securityholders.
Our common stock is traded on the OTC Bulletin Board under the trading
symbol "ATEX." On March 16, 2001, the closing bid price for our common stock
was $.90 and the closing asked price for our common stock was $.875.
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An investment in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
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The date of this prospectus is March , 2001
[This page has been intentionally left blank.]
2
AVERY
We are a telecommunications service company providing billing and collection
services for inter-exchange carriers and long-distance resellers. We provide
local exchange carrier billing services for approximately 29 long-distance
resellers and enhanced service providers and have the capability to bill and
collect through approximately 1,300 telephone companies, including the seven
regional Bell operating companies, GTE and Sprint.
On February 12, 2001, we completed the distribution of 100% of the
outstanding capital stock of our former subsidiary, Primal Solutions, Inc., to
Avery's securityholders. All financial information included in this prospectus
reflects the operations of Primal as a discontinued operation of Avery.
For more detailed information about the Primal distribution and related
transactions, prospective investors should read our Form 8-K dated August 31,
2000, as filed with the Securities and Exchange Commission.
Our principal executive offices are located at 190 South LaSalle Street,
Suite 1710, Chicago, Illinois 60603, and our telephone number at that address
is (312) 419-0077.
3
RISK FACTORS
Prospective purchasers of our common stock should consider carefully the
factors set forth below, as well as other information contained in this
prospectus, before making a decision to invest in our common stock.
Our ability to acquire other telecommunications services providers faces
substantial obstacles. Our failure to overcome any of these obstacles may
materially and adversely affect our planned growth.
A key element of our business strategy is to acquire other
telecommunications services providers. The success of our acquisition program
will depend on our ability to overcome substantial obstacles, such as the
availability of acquisition candidates, our ability to compete successfully
with other potential acquirors seeking similar acquisition candidates, the
availability of funds to finance acquisitions and the availability of
management resources to oversee the operation of acquired businesses. We have
limited resources and we can offer no assurance that we will succeed in
consummating any additional acquisitions or that we will be able to integrate
and manage any acquisitions successfully.
We have no present commitments, understandings or plans to acquire other
telecommunications service providers.
We will need substantial additional financing to fund future acquisitions.
We will need substantial additional financing to fund our planned
acquisition program and to market our new products and services aggressively.
If we are not able to obtain financing, or obtain financing on terms that we
consider acceptable, our acquisition program would be materially adversely
affected.
Our business at HBS Billing Services is largely dependent on two customers
that accounted for approximately 72% of our call records processed in 1999.
The loss of any one of these customers would materially and adversely affect
our results of operations.
One of the HBS Billing Services customers accounted for 46% of our call
records processed and the other accounted for 26% of our call records
processed between January 1, and December 31, 1999.
We face substantial competition in the billing clearinghouse industry, and
many of our competitors are larger and have more resources than we have. We
may not be able to compete successfully with existing or future competitors.
Our major competitors in the local exchange carrier billing clearinghouse
industry are Billing Concepts Corp. and OAN Services, Inc., a wholly owned
subsidiary of nTeleCom Holdings, Inc. Competition among the local exchange
carrier billing clearinghouses is based on the quality of information
reporting, collection history, the speed of collections, the ability to factor
a long-distance reseller's accounts, and the price of services. Our
competitors have greater name recognition and have, or have access to,
substantially greater financial and personnel resources than those available
to us.
HBS Billing Services is a billing clearinghouse. Therefore, its business is
dependent both on the local exchange carriers' continuing to accept its call
records, and continuing to do so on reasonable terms, and its customers'
continuing to need its billing services.
The success of our business to date has been largely attributable to our
having contracts with the regional Bell operating companies, Sprint, GTE and
other local exchange carriers. This permits us to bill for telecommunications
services provided by our customers throughout the United States. If the local
exchange carriers were not to renew our existing contracts, or were to
terminate our contracts, our ability to bill for our customers on a nation-
wide basis could be adversely affected. While we have not received any notice
of any local exchange carriers' intention to refuse renewal or to terminate,
the current regulatory environment has raised the visibility of third-party
billing in the local exchange carriers.
4
If the local exchange carriers were to increase the costs payable by our
customers for including our customers' charges on the local exchange carrier
bills, it could make our customers' operations less profitable or not
profitable. This could result in our customers seeking alternative billing
arrangements. Our customers could enter into billing arrangements with
companies, other than the local exchange carriers, that would bill their
customers directly, or, in some instances, our customers could begin billing
directly for their services without the use of any third party. It is also
possible that some of our customers could determine that it would be
financially beneficial to them to install a direct billing system.
Substantially all of our outstanding common stock is freely tradable and may
be sold into the market at any time, and another approximately 5.9 million
shares not yet issued will be freely tradable immediately upon issuance. This
could cause the market price of our common stock to drop significantly, even
if our business is doing well.
The approximately 5.9 million shares that are not yet issued but which will
be freely tradable immediately upon issuance represent an increase in our
presently outstanding common stock of approximately 59%. The market price of
our common stock could drop significantly if the holders all our freely
tradable shares sell them or are perceived by the market as intending to sell
them.
Our common stock trades only sporadically and has experienced in the past, and
is expected to experience in the future, significant price and volume
volatility, which substantially increases the risk of loss to persons owning
our common stock.
Because of the limited trading market for our common stock, and because of
the possible price volatility, you may not be able to sell your shares of
common stock when you desire to do so. The inability to sell your shares in a
rapidly declining market may substantially increase your risk of loss because
of such illiquidity and because the price for our common stock may suffer
greater declines because of its price volatility.
We are not required to meet or maintain any listing standards for our common
stock to be traded on the OTC Bulletin Board.
The OTC Bulletin Board is separate and distinct from The Nasdaq Stock
Market. Although the OTCBB is a regulated quotation service operated by The
Nasdaq Stock Market that displays real-time quotes, last sale prices, and
volume information in over-the-counter equity securities like our common
stock, we are not required to meet or maintain any qualitative or quantitative
standards for our common stock to be traded on the OTCBB. Our common stock
does not presently meet the minimum listing standards for listing on The
Nasdaq Stock Market or any national securities exchange.
We are required to pay substantial preferential dividends to holders of our
preferred stock.
Holders of our preferred stock are entitled to preferential quarterly
dividends before any common stock dividends are declared or paid. The amount
of these dividends is presently approximately $287,000 annually. Upon our
liquidation, dissolution or winding-up, holders of our preferred stock are
each entitled to receive a liquidation distribution, plus any accumulated
dividends to date before the holders of common stock receive any
distributions.
5
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical fact, included in this
prospectus are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or
"believe." We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur. Our actual future performance could differ materially from such
statements. Factors that could cause or contribute to such differences include,
but are not limited to:
. our ability to acquire additional complementary businesses on terms
favorable to us;
. the passage of legislation or court decisions adversely affecting the
telecommunications industry;
. our ability to repay our outstanding indebtedness;
. competition in the telecommunications industry; and
. the advent of new technology.
You should not unduly rely on these forward-looking statements, which speak
only as of the date of this prospectus. Except as required by law, we are not
obligated to release publicly any revisions to these forward-looking statements
to reflect events or circumstances occurring after the date of this prospectus
or to reflect the occurrence of unanticipated events. Important factors that
could cause our actual results to differ materially from our expectations are
discussed under "Risk Factors" and elsewhere in this prospectus.
6
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock by the
selling securityholders.
PLAN OF DISTRIBUTION
We are registering the shares of our common stock described in this
prospectus for the selling securityholders named below under the caption
"Selling Securityholders." We are registering the common stock to satisfy our
obligations under agreements with the selling securityholders to register their
common stock so that their shares will be freely tradable. Subject to the
limitations on the use of this prospectus described below, the "selling
securityholders" also include persons selling shares received from a named
selling securityholder after the date of this prospectus who receive shares as
a gift from a selling securityholder, commonly known as donees, and persons who
receive shares from a selling securityholder as collateral to secure a loan,
commonly known as pledgees. All costs, expenses and fees in connection with the
registration of the shares offered by this prospectus will be borne by us.
Brokerage commissions and similar selling expenses, if any, attributable to the
sale of the shares will be borne by the selling securityholders. Sales of the
shares may be made by selling securityholders from time to time in one or more
types of transactions, which may include block transactions, transactions in
the over-the-counter market, in negotiated transactions, through put or call
options transactions relating to the shares, through short sales of the shares,
or a combination of such methods of sale, at market prices prevailing at the
time of sale, or at negotiated prices. Such transactions may or may not involve
brokers or dealers. The selling securityholders have advised us that they have
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their securities, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of the shares by the selling securityholders.
The selling securityholders may sell their shares directly to purchasers or
to or through broker-dealers, which may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the selling securityholders or the purchasers of the shares
for whom such broker-dealers may act as agents or to whom they sell as
principal, or both. Such compensation as to a particular broker-dealer might be
in excess of customary commissions.
The selling securityholders may enter into hedging transactions with broker-
dealers and the broker-dealers may engage in short sales of the common stock in
the course of hedging the positions they assume with such selling
securityholder, including in connection with distributions of the common stock
by such broker-dealers. The selling securityholders may enter into option or
other transactions with broker-dealers that involve the delivery of their
shares to the broker-dealers, who may then resell or otherwise transfer such
shares. The selling securityholders may also loan or pledge their shares to a
broker-dealer and the broker-dealer may sell the shares so loaned or, upon a
default, may sell or otherwise transfer the pledged shares.
The selling securityholders and any broker-dealers that act in connection
with the sale of their shares might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
such broker-dealers and any profit on the resale of the shares sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. We have agreed to indemnify some of the
selling securityholders for liabilities they incur for selling their shares
using this prospectus, including liabilities arising under the Securities Act.
The selling securityholders may agree to indemnify any agent, dealer or broker-
dealer that participates in transactions involving sales of their shares
against certain liabilities, including liabilities arising under the Securities
Act.
Because selling securityholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling securityholders
will be subject to the prospectus delivery requirements of the Securities Act.
We have informed the selling securityholders that the anti-manipulative rules
under the Securities Exchange Act, including Regulation M, may apply to their
sales in the market.
7
Selling securityholders also may resell all or a portion of their common
stock in open market transactions in reliance upon the SEC's Rule 144, provided
they meet the criteria and conform to the requirements of such Rule.
Upon our being notified by a selling securityholder that any material
arrangement has been entered into with a broker-dealer for the sale of such
selling securityholder's shares of common stock through a block trade, special
offering, exchange distribution or secondary distribution or a purchase by a
broker or dealer, we will, if required, file a supplement or an amendment to
this prospectus disclosing the name of each such selling securityholder and of
the participating broker-dealer(s), the number of shares involved, the price at
which such shares were sold, the commissions paid or discounts or concessions
allowed to such broker-dealer(s), where applicable, that such broker-dealer(s)
did not conduct any investigation to verify the information set out in this
prospectus, and the other facts material to the transaction. In addition, upon
our being notified by a selling securityholder that a donee or pledgee intends
to sell more than 500 shares, we will file a supplement to this prospectus.
Sales of a substantial number of shares of the common stock in the public
market by the selling securityholders or even the potential of such sales could
adversely affect the market price for our common stock, which could have a
direct impact on the value of the shares being offered by the selling
securityholder.
SELLING SECURITYHOLDERS
The following table sets forth the name, number of shares of common stock
and the number of shares underlying the warrants and convertible securities
owned by each selling securityholder. Since the selling securityholders may
sell all, a portion or none of their shares, no estimate can be made of the
aggregate number of shares that may actually be sold by any selling
securityholder or that may be owned by any selling securityholder upon
completion of this offering.
The shares offered by this prospectus may be offered from time to time by
the selling securityholders named below (based on the number of shares of
common stock, warrants and convertible securities held on March 20, 2001).
Name Total
- ---- Common Stock Underlying Common Shares to
Preferred Stock Stock be Sold
----------------------- ------ ---------
John Faltys........................... 731,785 0 731,785
Joseph R. Simrell..................... 518,481 0 518,481
David Haynes.......................... 518,481 0 518,481
Mark J. Nielsen....................... 395,987 0 395,987
Arun Anand............................ 78,549 0 78,549
Murari Cholappadi..................... 78,549 0 78,549
Sanjay Gupta.......................... 78,549 0 78,549
Waterside Capital Corporation......... 1,250,000 0 1,250,000
CapitalSouth Partners Fund I, L.P. ... 350,000 0 350,000
--------- --- ---------
4,000,381 0 4,000,381
========= === =========
8
PRICE RANGE OF COMMON STOCK
The common stock is quoted and traded on a limited and sporadic basis on the
OTC Bulletin Board operated by the NASDAQ Stock Market, Inc. under the trading
symbol "ATEX." The limited and sporadic trading does not constitute, nor should
it be considered, an established public trading market for the common stock.
The following table sets forth the high and low closing bid and asked prices
for our common stock for the periods indicated, as reported by the National
Quotation Bureau LLC. Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not necessarily represent
actual transactions.
Closing Bid Closing Asked
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High Low High Low
------ ------- ------- -------
Year Ended December 31, 1999
First Quarter................................... 2 1.3125 2.1875 1.50
Second Quarter.................................. 1.75 1.4375 2 1.53125
Third Quarter................................... 1.4375 0.25 1.53125 0.8125
Fourth Quarter.................................. 1.9375 0.75 2 0.9375
Year Ended December 31, 2000
First Quarter................................... 4.875 1.75 5 1.875
Second Quarter.................................. 3.125 1.34375 3.25 1.375
Third Quarter................................... 1.9375 0.90625 2.0625 0.96875
Fourth Quarter.................................. 1.6875 0.9375 1.75 1.00
Year Ending December 31, 2001
First Quarter (through March 16, 2001) 1.6875 .71875 1.8125 .78125
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. For
the foreseeable future, we expect to retain any earnings to finance the
operation and expansion of our business. We also presently have outstanding
preferred stock that requires us to accrue dividends in the amount of
approximately $71,500 every quarter. The holders of our outstanding preferred
stock are entitled to receive all accrued dividends before we can pay any
dividends on our common stock. In addition to the terms of our outstanding
preferred stock, it is anticipated that the terms of future debt and/or equity
financings may restrict the payment of cash dividends. Therefore, the payment
of any cash dividends on the common stock is unlikely.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with Avery's
Consolidated Financial Statements, the notes thereto and the other financial
information included elsewhere in this prospectus.
General
Avery was incorporated in 1977 under the name Fine Art Corporation of
America, Inc., and acquired all of the stock of Avery Texas in November 1994.
Prior to November 1994, Avery was the public shell Class, Inc., which had no
operating assets. Avery's current business was operated by Avery Texas prior to
November 1994.
As of November 1, 1996, we acquired 100% of HBS Billing Services. Effective
January 1, 1998, BorderComm and ATAC were sold to a group led by Mr. Thomas
Lyons, our former president, in exchange for cash and common stock of Avery.
Effective after the close of business on September 30, 1999, we acquired
Primal Systems, Inc. and changed its name to Primal Solutions, Inc. Primal
provides computer software programming, customization, program maintenance and
product marketing for a variety of software languages and platforms. Primal
also designs, develops, and supports an integrated suite of client/server and
browser-based software solutions focusing on customer acquisition and retention
in the telecommunications industry, primarily utilizing decision support
software and internet technologies.
In August 2000, the Board of Directors of Avery approved the distribution of
Primal to our securityholders. Each common shareholder of Avery on the payment
date of the distribution will receive one share of Primal common stock for each
share of Avery's common stock held on that date. In addition, owners of shares
of Avery's series a, b, c, d, and e convertible preferred stock will receive
Primal common stock, in the amount of the preferred stock's common stock
equivalent for each share of Avery preferred stock held on the payment date of
the distribution. The distribution will be accounted for at historical cost.
Subsequent to the distribution, our only business will be providing billing and
collection services to inter-exchange carriers and long distance resellers.
Selected Financial Information Line Item Explanations
The following is a discussion of our consolidated financial condition and
unaudited results of operations for the nine months ended September 30, 2000
and 1999, and the fiscal years ended December 31, 1999 and 1998. It should be
read in conjunction with our Consolidated Financial Statements, the notes
thereto and other financial information included elsewhere in this prospectus.
For purposes of the following discussion, references to year periods refer to
our fiscal year ended December 31 and references to quarterly periods refer to
our fiscal nine month periods ended September 30, 2000 and 1999.
The results on the "Discontinued operations" lines represent the results of
operations for the respective periods for Primal. Prior filed financial
statements reflect HBS Billing Services as discontinued operations. See Note 3
to Consolidated Financial Statements for further explanation. Revenue, cost of
revenues, and operating expenses presented in the statements of operations
pertain only to continuing operations, which consist of Avery and HBS Billing
Services.
Our revenues are derived primarily from the provision of billing
clearinghouse and information management services to direct dial long distance
resellers and operator services providers, commonly referred to as "local
exchange carrier billing" or "LEC billing." Revenues are also derived from
enhanced billing services provided to companies that offer voice mail, paging
and internet services or other non-regulated telecommunications equipment and
services. LEC billing fees charged by us include processing and customer
10
service inquiry fees. Processing fees are assessed to customers either as a fee
charged for each telephone call record or other transaction processed or as a
percentage of the customer's revenue that is submitted by us to local telephone
companies for billing and collection. Processing fees also include any charges
assessed to us by local telephone companies for billing and collection services
that are passed through to the customer. Customer service inquiry fees are
assessed to customers either as a fee charged for each record processed by us
or as a fee charged for each billing inquiry made by end users.
Cost of revenues includes billing and collection fees charged to us by local
telephone companies and related transmission costs, as well as all costs
associated with the customer service organization, including staffing expenses
and costs associated with telecommunications services. Billing and collection
fees charged by the local telephone companies include fees that are assessed
for each record submitted and for each bill rendered to its end-user customers.
We achieve discounted billing costs due to our aggregated volumes and can pass
these discounts on to our customers.
Operating expenses are comprised of sales and marketing costs and general
and administrative costs. Sales and marketing costs include salaries and
benefits, commissions, advertising and promotional and presentation materials.
General and administrative costs consist of general management and support
personnel salaries and benefits, information systems costs, legal and
accounting fees, travel and entertainment costs and other support costs.
Advance funding program income and expense consist of income and expenses
related to our financing certain customers' accounts receivable. Typically, 50%
to 75% of the amount receivable from the local exchange carrier, or LEC, is
advanced to the customer upon acceptance of its call records. When the LEC
remits payment of the receivable, we are repaid the advance and receive a
financing fee, which generates the "Advance funding program income." Avery
maintains a line of credit to provide the funds to finance the advance-funding
program. The costs associated with this line of credit produce the "Advance
funding program expenses."
Depreciation and amortization expenses are incurred with respect to certain
assets, including computer hardware, software, office equipment, furniture,
costs incurred in securing contracts with local telephone companies, goodwill
and other intangibles. Asset lives range between three and fifteen years.
Since the components of "Other income net" change on a period-to-period
basis, the items included in this line are explained in the analysis below.
The results on the "Discontinued operations" represent the results of
operations for Primal for the three months ended December 31, 1999 and for the
nine months ended September 30, 2000.
11
Results of Operations for the Nine Months Ended September 30, 2000 and 1999
The following table sets forth selected statement of operations lines in
thousands of actual dollars. The Statement of Operations Data is derived from
our unaudited September 30, 2000 and September 30, 1999 financial statements.
Statement of Operations Data:
Nine Months Ended
September 30,
------------------
1999 2000
-------- --------
(In Thousands)
Revenues.................................................. $ 16,336 $ 27,443
Cost of revenues.......................................... (12,158) (19,763)
-------- --------
Gross profit.............................................. 4,178 7,680
-------- --------
Operating expenses (excluding DD&A)....................... (3,581) (4,040)
Advance funding program income............................ 452 227
Advance funding program costs............................. (193) (130)
Depreciation and amortization (DD&A)...................... (379) (416)
-------- --------
Total................................................... (3,701) (4,359)
-------- --------
Operating income.......................................... 477 3,321
Other income (expense).................................... (475) 248
-------- --------
Income (loss) from continuing operations before provision
for income taxes......................................... 2 3,569
Income tax expense........................................ -- 1,095
-------- --------
Income (loss) from continuing operations.................. 2 2,474
Loss from discontinued operations......................... -- (2,655)
-------- --------
Net income (loss)....................................... $ 2 $ (181)
======== ========
Operating Revenues
For the first nine months of 2000, billing service revenues increased 71.3%
to $26.7 million, from $15.6 million in the first nine months of 1999. The
remaining revenue in each period is primarily related to customer service
operations. The billing service revenue increase is attributable primarily to
an increase in the number of telephone call records processed and billed on
behalf of direct dial long distance customers. Revenues derived from year-to-
date enhanced billing services customers decreased from the comparable prior
year period due to Avery canceling billing contracts with most of its enhanced
services customers effective the end of February, 1999. Telephone call record
volumes were as follows:
Nine Months Ended
September 30,
-----------------
1999 2000
-------- --------
(In Thousands)
Direct dial long distance.................................. 155,619 265,079
Enhanced billing........................................... 586 530
Cost of Revenues
The gross profit margin also increased from 25.5% to 28.0% from the prior
year to date period to the current period ended September 30, 2000. The
increase in gross profit is primarily due to lower LEC billing costs as a
percent of sales and higher margins in the customer service department.
12
Operating Expenses
Operating expenses, excluding depreciation and amortization, for the first
nine months of 2000 increased to $4.0 million, or 14.7% of revenues, from $3.6
million, or 21.9% of revenues, in the comparable period of 1999. The higher
operating expenses were primarily due to professional fees, and insurance costs
somewhat offset by reduced personnel costs that resulted from lower levels of
employment.
Advance Funding Program Income and Expense
Management has made significant policy changes in regards to the advance
funding program. In an effort to reduce the inherent risk involved in advancing
customer receivables, HBS Billing Services encouraged and participated in
placing current customers with significant financing needs with third party
financing companies. HBS Billing Services plans to assist future customers in a
similar manner. Although internal advance funding is still available, its scope
has been reduced primarily to start up companies and those requiring reduced
funding as a percent of gross billable revenue with the LEC. As a result,
advance funding program income for the first nine months of 2000 decreased
49.8% to $227,000 from $452,000 in the first nine months of 1999.
Advance funding program costs for the first nine months of 2000 decreased
32.6% to $130,000 from $193,000 in the comparable period of 1999. The decrease
results from our policy decision discussed above.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended September
1999 and September 2000 was $379,000 and $416,000, respectively. The increase
was due to the addition of equipment at HBS Billing Services.
Income from Continuing Operations
Operating income from continuing operations in the first nine months of 2000
increased to $3,321,000 or 12.1% of revenues, from $477,000 or 2.9% of
revenues, in the first nine months of 1999. The increases in operating income
from continuing operations is directly attributable to the significant
increases in the volume of call records processed in 2000.
Other Income (Expense), Net
Other income (expense), net for the nine month period ended September 30,
2000 increased to $248,000 of net income from $475,000 of net expense in 1999.
The increase was due to the reduction of interest expense due to lower levels
of debt, the elimination of warrant buy back costs incurred in 1999 but not in
2000, and higher interest income associated with higher cash balances.
Income Taxes
An income tax provision of $1,095,000 was recorded for the nine month period
ended September 30, 2000, and none was recorded in the same period in 1999.
Income taxes were recorded for continuing operations but are effectively offset
on a consolidated basis by the income tax benefit recorded for discontinued
operations.
Discontinued Operations
Loss from discontinued operations was $2,655,000 for the nine months ended
September 30, 2000, net of tax benefit of $1,314,000. The income tax benefit is
effectively offset on a consolidated basis by the income tax provision from
continuing operations. Revenues from discontinued operations were $6,254,000
for the nine months ended September 30, 2000. There were no discontinued
operations during the nine months ended September 30, 1999, as Primal was not
acquired until after close of business on September 30, 1999.
13
Primal designs, develops and supports an integrated suite of client/server
and browser-based software solutions focusing on customer acquisition and
retention in the telecommunications industry primarily utilizing decision
support software and internet technologies. In addition, Primal provides
billing and customer care software to the wireless communications, Internet
telephone and Internet service provider industries.
Results of Operations for the Twelve Months Ended December 31, 1999 and 1998
The following table sets forth selected statement of operations lines in
thousands of actual dollars. The Statement of Operations Data is derived from
our audited calendar 1999 and 1998 financial statements.
Statement of Operations Data:
Years Ended
December 31,
------------------
1998 1999
-------- --------
(In Thousands)
Revenues.................................................. $ 19,634 $ 23,703
Cost of revenues.......................................... (13,044) (17,386)
-------- --------
Gross profit............................................ 6,590 6,317
-------- --------
Operating expenses (excluding DD&A)....................... (3,337) (4,776)
Charge in connection with terminated customers............ (4,271) 226
Advance funding program income............................ 1,418 610
Advance funding program costs............................. (726) (269)
Depreciation and amortization (DD&A)...................... (501) (553)
-------- --------
Total................................................... (7,417) (4,762)
-------- --------
Operating income (expense)................................ (827) 1,555
Other expense............................................. (496) (485)
-------- --------
Income (loss) from continuing operations before income
taxes.................................................... (1,323) 1,070
Income tax benefit........................................ -- 648
-------- --------
Income (loss) from continuing operations.................. (1,323) 1,718
Income from discontinued operations....................... -- 959
-------- --------
Net income (loss)....................................... $ (1,323) $ 2,677
======== ========
Operating Revenues
Revenues for 1999 increased $4.1 million or 20.7% compared to calendar 1998.
The revenue increase is primarily attributable to an increase in the number of
telephone call records processed and billed on behalf of direct dial long
distance customers offset by a decrease in volumes by higher risk customers
(see "Charge in Connection with Terminated Customers" below). Revenues derived
from enhanced billing services customers decreased from the comparable prior
year due to Avery canceling billing contracts with most of its enhanced
services customers effective in the first quarter of 1999. Telephone call
record volumes were as follows:
Year Ended
December 31,
---------------
1998 1999
------- -------
(In Thousands)
Direct dial long distance.................................... 110,780 230,006
Enhanced billing............................................. 2,261 758
14
Cost of Revenues
Gross profit margin of 26.7% was achieved for calendar 1999 versus 33.6% for
1998. The decrease in gross profit margin was principally due to the higher
level of quantity discounts granted as longer-term customers became eligible
for larger discounts and from the decrease in volumes by higher margin/higher
risk customers. We currently believe that our gross profit margin could
continue to decrease in subsequent periods as larger volume customers are added
and as current customers continue to become eligible for larger discounts.
Operating Expenses
Operating expenses, excluding depreciation and amortization expense,
increased $1,439,000, from $3,337,000 in calendar 1998 to $4,776,000 in
calendar 1999 primarily due to warrant repurchases classified as compensation,
an increase in executive salaries and an increase in the provision for bad
debts.
Charge in Connection with Terminated Customers
Charge in connection with terminated customers was $4,271,000 and $(226,000)
in calendar 1998 and calendar 1999, respectively. During 1998, we charged
operations with $4,271,000 to reflect our estimate of future refunds required
to be paid to the local exchange carriers to cover their refunds to terminated
customers for inappropriate charges placed on customers' local phone bills by
our customers. Under our billing contracts with the local exchange carriers, we
are obligated to repay the local exchange carrier if we are unable to collect
from our customers. The inappropriate charges stem from unauthorized switching
of long distance service from a consumer's incumbent provider to our customer
and placing unauthorized charges for service such as voice mail, internet
access and paging on a consumer's local telephone bills. We do not believe that
these amounts can be collected from the four customers that generated most of
the charges since they are out of business with no material surviving assets.
During calendar 1999, we were was able to reduce the reserve for charges in
connection with terminated customers, which resulted in a credit of $(226,000).
The actual costs associated with the total charge relate to actual cash refunds
made in calendar 1999 and 1998 of $1,663,000 and $1,471,000, respectively, a
$250,000 settlement paid to the FTC, legal fees and other costs.
We have instituted a series of controls to limit our exposure to this type
of refund in the future. The controls include the following:
. Instituting a system for offsite management to view a wide variety of
customer history data over the Internet including the "Pipeline Report,"
last shipment date, customer dilution rates, credits issued and the
"Watch List" discussed below;
. Including in the customer approval process background checks on
principals for all new customers;
. Requiring advance funding customers to present third party verification
bills to us periodically to insure that third party verification is
being used for telemarketing customers;
. Reviewing last shipment date in relation to shipment patterns at each
funding of a customer;
. Reviewing customer dilution rates (in relation to advance rate for
funded customers);
. Reviewing trend of number of calls passing through the IVR system for
each customer (The IVR system automatically transfers calls from our
customer service department to our customer's customer service
department if the customer has its own department);
. Reviewing the trend of credits issued for all customers;
. Reviewing complaints from local exchange carriers and regulatory bodies
before each funding;
15
. Reviewing the "Pipeline Report" before each funding which shows the net
amounts due from the local exchange carriers plus reserves less
advances, if any;
. Placing customers on the "Watch List" if their credits are greater than
5% of their gross revenues for 1+ business or greater that 10% of their
gross revenues for enhanced services; and
. Requiring our chief financial officer's approval for funding to
customers on the Watch List and for any terms extended beyond normal
terms.
Advance Funding Program Income and Expense
Advance funding program income was $610,000 in calendar 1999 compared with
$1,418,000 in calendar 1998. The period-to-period decrease was primarily the
result of financing a lower level of customer receivables under our advance
funding program.
Advance funding program expense was $269,000 in calendar 1999 compared with
$726,000 in calendar 1998. In addition to declining in gross dollars between
calendar 1998 and calendar 1999, advance funding expense as a percentage of
advance funding income dropped from 51% in calendar 1998 to 44% in calendar
1999. This decrease was primarily attributable to declining factoring volumes
and our financing more customers' receivables with internally generated funds
rather than with funds borrowed through our revolving credit facility.
Depreciation and Amortization
Depreciation and amortization expense was $553,000 in calendar 1999, and
$501,000 in calendar 1998. The increase was due to capital expenditures in late
1998 and early 1999 partially offset by local exchange carrier contracts
becoming fully amortized in calendar 1998.
Income (Loss) from Operations
Operating income for calendar 1999 was $1,555,000 as compared to an
operating loss of $827,000 in calendar 1998. The increase results from the 110%
increase in call records volumes and the result of the terminated customer
charge in calendar 1998.
Other Expense, Net
Other expense, net was $496,000 during calendar 1998 compared to other
expense, net of $485,000 for calendar 1999. These amounts consist of interest
income, interest expense and financing costs. Other expense, net was $11,000
and $129,000 in calendar 1998 and calendar 1999, respectively. The increase is
due to larger cash balances on hand in 1999 resulting from a decrease in the
amount of advance payments to customers and the increase in operating volumes.
Interest expense was $388,000 and $292,000 for calendar 1998 and calendar 1999,
respectively. Financing costs were $119,000 and $322,000 for calendar 1998 and
calendar 1999, respectively. Financing costs primarily consist of warrant
exercise price reductions and the non-cash charges associated with issuing
warrants with below market value exercise prices and amortization of debt
discount.
Income Taxes
We generated a loss in calendar 1998. Since the utilization of this loss in
future periods cannot be assured, no income tax benefit was recorded. We
recorded an income tax expense from continuing operations of $648,573 for
calendar 1999, which is offset by an income benefit in discontinued operations.
Discontinued Operations
Income from discontinued operations was $959,000 for the three months ended
1999, net of tax provision of $668,000. Revenues from discontinued operations
were $4,548,000 for the three months ended
16
December 31, 1999. Since Primal was acquired effective as of the close of
business on September 30, 1999, there were only three months of operation in
1999 and none in 1998.
Primal designs, develops and supports an integrated suite of client/server
and browser-based software solutions focusing on customer acquisition and
retention in the telecommunications industry and primarily utilizing decision
support software and internet technologies. In addition, Primal provides
billing and customer care software to the wireless communications, Internet
telephone and Internet service provider industries.
Liquidity
Our cash balance increased to $12.7 million at September 30, 2000, from $5.7
million at December 31, 1999. Large fluctuations in daily cash balances are
normal due to the large amount of customer receivables that we collect on
behalf of our customers and the increased processing volume at HBS Billing
Services. Timing of these payments also produces large movements in day-to-day
cash balances. Our working capital position at September 30, 2000 was a
negative $7.7 million compared to a negative $3.4 million as of December 31,
1999. The $4.3 million decline in working capital was due to a $6.2 million
increase in current liabilities, offset by a $1.9 million increase in current
assets. The $6.2 million increase in current liabilities is primarily
attributable to a $6.4 million increase in deposits and other payables
associated with increased volume, a $1.2 million increase in accrued
liabilities and income taxes offset by a $1.5 million decline in accounts
payable. The $1.9 million increase in current assets is primarily attributable
to a $7.0 million increase in cash offset by a $4.8 million decrease in
advanced payment receivables due to our change in direction for financing
receivables.
Our cash balance increased to $5.7 million at December 31, 1999, from $1.1
million at December 31, 1998. Large fluctuations in daily cash balances are
normal due to the large amount of customer receivables that we collect on
behalf of our customers. Timing of these payments also produces large movements
in day-to-day cash balances. Our working capital position at December 31, 1998
was a negative $7.0 million compared to a $3.4 million deficit as of December
31, 1999. The improvement in the negative working capital is primarily
attributable to a $3.5 million decline in current liabilities. The decline in
current liabilities is primarily related to a $5.8 million decline in the line
of credit offset by a $1.4 million increase in deposits and other payables and
a $0.9 million increase in accounts payable, accrued expenses and income taxes.
In March of 1997, we obtained a $7.5 million revolving line of credit
facility with a certain lender primarily to draw upon to advance funds to our
billing customers prior to collection of the funds from the local telephone
companies. This credit facility was extended through September 30, 2000.
Borrowings under the credit facility are limited to a portion of our eligible
receivables. We believe that the capacity of the lender will be sufficient to
fund advances to our billing customers for the foreseeable future and that the
amount of the line will be increased as volume dictates. Effective March 20,
1998, the line was increased to $10.0 million. The amount borrowed by us under
the credit facility to finance the advance-funding program was $0 at December
31, 1999, and $5.8 million at December 31, 1998. At December 31, 1999 and
December 31, 1998, the amounts available under our credit facility were $5.0
million and $4.2 million, respectively.
Net cash provided by operating activities, excluding discontinued
operations, was $2.7 million and $11.6 million for the years ended December 31,
1998 and 1999, respectively. The cash flows provided by operations for 1999
results primarily from a $5.1 million decrease in advance payment receivables
due to timing of cash receipts, a $1.4 million decrease in customer deposits
and other receivables and a $1.6 million increase in deposits by local exchange
carriers. The cash flows provided by operations for 1998 results primarily from
a $3.8 increase in net income from continuing operations, a $1.7 million
decrease in advance payment receivables due to timing of cash receipts, offset
by a $1.3 million decrease in customer deposits and other payables and a $1.0
million decrease in deposits.
17
During the year ended December 31, 1998, we spent $683,000 on capital
expenditures, $469,000 in the acquisition of treasury stock, $846,000 in the
net reduction of notes payable, $1,460,000 in the redemption of preferred
stock, $500,000 in the issuance of a notes receivable and the payment of
$446,000 of preferred dividends. This use of cash was partially offset by
$227,000 from the issuance of shares of stock. During the year ended December
31, 1999, we spent $174,000 on capital expenditures, $116,000 in the
acquisition of treasury stock, $468,000 in preferred stock dividends and a net
reduction of notes payable of $5,765,000.
Net cash provided by operating activities, excluding discontinued
operations, was $11.4 million for the nine months ending September 30, 2000,
compared to $7.5 million for the same period in 1999. The $11.4 million of cash
flows provided by operations for 2000 results primarily from $2.9 million net
income and non-cash items from continuing operations, $6.4 million increase in
deposits and other payables related to customers, a $4.8 million decrease in
advance payment receivables offset by a $2.4 million increase in customer
deposits. The $7.5 million cash flows provided by operations for 1999 results
primarily from a $5.5 million decrease in advance payment receivables, a $1.5
million increase in accounts payable and accrued liabilities, a $1.0 million
increase in customer deposits, and $0.6 million of net income and non-cash
items from continuing operations, offset by a $1.6 million decrease in deposits
and other payables to customers.
During the period ended September 30, 2000, we issued $2.3 million of notes
receivable to former Primal stockholders and a related company, purchased
$71,000 of property and equipment and paid preferred dividends of $247,000,
offset by proceeds generated from the sale of preferred and common stock of
$134,000. During the comparable period in 1999, we spent $168,000 on capital
expenditures, $267,000 of costs associated with the Primal acquisition,
$253,000 in preferred dividends, $116,000 in the purchase of treasury stock,
and $5.7 million to pay off our line of credit with a financial institution.
Our operating cash requirements consist principally of working capital
requirements, requirements under our advance-funding program, scheduled
payments of preferred dividends and capital expenditures. In accordance with
the distribution agreement, we advanced an additional $2,000,000 of cash to
Primal during the quarter ending December 31, 2000. We believe cash flows
generated from operations, the exercise of warrants and options and future
borrowings, if required, will be sufficient to fund capital expenditures,
advance funding requirements, working capital needs and funding requirements in
the foreseeable future.
18
BUSINESS
General
Avery is a telecommunications service company which, through its operating
subsidiary, HBS Billing Services Company, is engaged in providing billing and
collection services for inter-exchange carriers and long-distance resellers.
HBS Billing Services Company
General
HBS Billing Services Company is a third-party billing clearinghouse for the
telecommunications industry. HBS Billing Services' customers consist primarily
of direct dial long distance telephone companies. HBS Billing Services
maintains billing arrangements with approximately 1,300 telephone companies
that provide access lines to, and collect for services from, end-users of
telecommunication services. HBS Billing Services processes transaction records
and collects the related end-user charges from these telephone companies for
its customers.
HBS Billing Services' customers use HBS Billing Services as a billing
clearinghouse for processing records generated by their end-users. Although
such carriers can bill end-users directly, HBS Billing Services provides these
carriers with a cost-effective means of billing and collecting residential and
small commercial accounts.
HBS Billing Services acts as an aggregator of telephone call records and
other transactions from various sources, and, due to its large volume, receives
discounted billing costs from the telephone companies and can pass on these
discounts to its customers. Additionally, HBS Billing Services can provide its
services to those long distance resellers that would otherwise not be able to
make the investments necessary to meet the minimum fees, systems,
infrastructure and volume commitments required to establish and maintain
relationships with the telephone companies.
HBS Billing Services is obligated to pay minimum usage charges over the
lifetime of most local exchange carrier billing contracts. Each contract has a
minimum usage amount which relates to HBS Billing Services' customers' sales
volume to be processed through the local exchange carrier. The remaining
minimum usage for significant contracts at December 31, 1999, totaled $6.1
million through 2003. As a frame of reference, customers' sales processed by
HBS Billing Services relating to all contracts in January, 2000 were
approximately $35.6 million. A portion of this amount applies to the minimum
usage requirements. The billing and collection agreements do not provide for
any penalties other than payment of the obligation should the usage levels not
be met. HBS Billing Services has met all such volume commitments in the past
and anticipates exceeding the minimum usage volumes with all of these vendors.
HBS Billing Services also provides enhanced billing services for
transactions related to providers of premium services or products that can be
billed through the local telephone companies, such as Internet access, voice
mail services, and other telecommunications charges, although this business was
significantly reduced in 1999.
Industry Background
Billing clearinghouses in the telecommunications industry developed out of
the 1984 breakup of AT&T and the Bell System. In connection with the breakup,
the local telephone companies that make up the regional Bell operating
companies, Southern New England Telephone, Cincinnati Bell and GTE, were
required to provide billing and collection services on a nondiscriminatory
basis to all carriers that provided telecommunication services to their end-
user customers. Due to both the cost of acquiring and the minimum
19
charges associated with many of the local telephone company billing and
collection agreements, only the largest long distance carriers, including AT&T,
MCI and Sprint, could afford the option of billing directly through the local
telephone companies. Several companies, including HBS Billing Services, entered
into these billing and collection agreements and became aggregators of
telephone call records of third-tier long distance companies, thereby becoming
"third-party clearinghouses." Today, HBS Billing Services provides billing
clearinghouse services to approximately 29 customers in the telecommunications
industry.
Third-party clearinghouses such as HBS Billing Services process these
telephone call records and other transactions and submit them to the local
telephone companies for inclusion in their monthly bills to end-users.
Generally, as the local telephone companies collect payments from end-users,
they remit them to the third-party clearinghouses who, in turn, remit payments
to their customers.
Billing Clearinghouse Services
In general, HBS Billing Services performs billing clearinghouse services
under billing and collection agreements with local telephone companies. HBS
Billing Services performs direct dial long distance billing, which is the
billing of "1+" long distance telephone calls to individual residential
customers and small commercial accounts. In addition, HBS Billing Services
performs enhanced billing clearinghouse services for other telecommunication
services, such as Internet access, paging services, and voice mail services.
Billing Process
Local telephone company billing relates to billing for transactions that are
included in the monthly local telephone bill of the end-user as opposed to a
direct bill that the end-user would receive directly from the
telecommunications or other services provider.
HBS Billing Services' customers submit telephone call record data in batches
on a daily to monthly basis, but typically in weekly intervals. The data is
submitted electronically.
HBS Billing Services, through its proprietary software, sets up an account
receivable for each batch of call records that it processes and processes the
record to determine its validity. HBS Billing Services then submits the
relevant billable telephone call records and other transactions to the
appropriate local telephone company for billing and collection. HBS Billing
Services monitors and tracks each account receivable by customer and by batch
throughout the billing and collection process.
The local telephone companies then include the charges for these telephone
call records and other transactions in their monthly local telephone bills,
collect the payments and remit the collected funds to HBS Billing Services for
payment to its customers.
The complete cycle can take up to 18 months from the time the records are
submitted for billing until all bad debt reserves are "trued up" with actual
bad debt experience. However, the billing and collection agreements provide for
the local telephone companies to purchase the accounts receivable, with
recourse, within a 42- to 90-day period. The payment cycle from the time call
records are transmitted to the local telephone companies to the initial receipt
of funds by HBS Billing Services is, on average, approximately 50 days.
HBS Billing Services accrues for end-user customer service refunds, holdback
reserves and certain adjustments charged to HBS Billing Services by the local
telephone companies. HBS Billing Services reviews the activity of its customer
base to detect potential losses. If there is uncertainty with respect to an
account in an amount which exceeds its holdback reserve, HBS Billing Services
can discontinue paying the customer in order to hold funds to cover future end-
user customer service refunds, bad debt and unbillable adjustments. If a
customer discontinues doing business with HBS Billing Services and there are
insufficient funds being held to cover future refunds and adjustments, HBS
Billing Services' only recourse is through legal action.
20
HBS Billing Services processes the tax records associated with each
customer's submitted telephone call records and other transactions and files
certain federal excise and state and local telecommunications-related tax
returns covering such records and transactions for its customers. HBS Billing
Services currently submits state and local tax returns for its customers in
over 500 taxing jurisdictions.
HBS Billing Services provides end-user customer service for billed telephone
records. This service allows end-users to make inquiries regarding transactions
for which they were billed directly to HBS Billing Services' customer service
call center. HBS Billing Services' customer service telephone number is
included in the local telephone company bill to the end-user, and HBS Billing
Services' customer service representatives are authorized to resolve end-user
disputes regarding such transactions.
HBS Billing Services' operating revenues consist of a processing fee that is
assessed to customers either as a fee charged for each telephone call record or
other transaction processed, and a customer service inquiry fee that is
assessed to customers as a fee charged for each billing inquiry made by end-
users. Any fees charged to HBS Billing Services by local telephone companies
for billing and collection services are also included in revenues and are
passed through to the customer.
Operations
HBS Billing Services' billing clearinghouse services are highly automated
through HBS Billing Services' proprietary computer software. The staff required
to provide HBS Billing Services' billing clearinghouse and information
management services is largely administrative and the number of employees is
not directly volume sensitive. All of HBS Billing Services' customers submit
their records to HBS Billing Services using electronic transmission protocols
directly into HBS Billing Services' electronic bulletin board or over the
Internet. These records are automatically accessed by HBS Billing Services'
proprietary software, processed, and submitted to the local telephone
companies. Upon completion of the billing process, HBS Billing Services
provides reports relating to billable records and returns any unbillable
records to its customers electronically through the bulletin board or through
the Internet.
HBS Billing Services has made a significant investment in computer systems
so that its customers' call records are processed and ready to be submitted to
the local telephone companies in a timely manner, generally within 24 hours of
receipt by HBS Billing Services.
HBS Billing Services' contracts with its customers provide for the billing
services required by the customer, specifying, among other things, the services
to be provided and the cost and term of the services. Once the customer
executes an agreement, HBS Billing Services updates tables within each of the
local telephone companies' billing systems to control the type of records
processed, the products or services allowed by the local telephone companies,
and the printing of the customer's name on the end-user's monthly bill. While
these local telephone company tables are being updated, HBS Billing Services'
technical support staff tests the customer's records through its proprietary
software to ensure that the records can be transmitted to the local telephone
companies.
HBS Billing Services maintains a relatively small direct sales force and
accomplishes most of its marketing efforts through active participation in
telecommunications industry trade shows and advertising in trade journals and
other industry publications.
Customers
HBS Billing Services provides billing and information management services to
the following categories of telecommunications services providers:
. Inter-exchange Carriers or Long Distance Companies: Facilities-based
carriers that possess their own telecommunications switching equipment
and networks and that provide traditional land line direct dial
telecommunications services.
21
. Switchless Resellers: Marketing organizations, affinity groups, and
aggregator operations that buy direct dial long distance services in
volume at wholesale rates from a facilities-based long distance company
and sell it back to individual customers at market rates.
. Information Providers: Companies that provide various forms of
information or voice mail services to subscribers.
Other customers include suppliers of various forms of telecommunications
equipment, Internet services and paging companies.
HBS Billing Services has two material customers which represented 46% and
26%, respectively, of total call records processed in calendar 1999.
Competition
HBS Billing Services operates in a highly competitive segment of the
telecommunications industry. Competition among the clearinghouses is based on
the quality of information reporting, program flexibility, collection history,
the speed of collections, the price of services and availability of an advanced
funding program. Except for Billing Concepts Corp., all other third-party
clearinghouses are either privately held or are part of a larger parent
company. Management believes, based on publicly available independent industry
research reports, that Billing Concepts is presently the largest participant in
the third-party clearinghouse industry in the United States, followed by OAN
Services, Inc. These competitors and other third-party clearinghouses have
greater name recognition than HBS Billing Services, and have, or have access
to, substantially greater financial and personnel resources than those
available to HBS Billing Services.
As a large user of local exchange carrier billing services, HBS Billing
Services enjoys favorable rates and passes the benefits of its buying power on
to its customers. We believe that HBS Billing Services enjoys a good reputation
within the industry for the timeliness and accuracy of its collections and
disbursements to customers.
Several significant challenges face potential new entrants in the local
telephone company billing services industry. The cost to acquire the necessary
billing and collection agreements is significant, as is the cost to develop and
implement the required systems for processing telephone call records and other
transactions. Additionally, most billing and collection agreements require a
user to make substantial monthly or annual volume commitments. Given these
factors, the average cost of billing and collecting a record could hinder
efforts to compete effectively on price until a new entrant could generate
sufficient volume. The price charged by most local telephone companies for
billing and collection services is based on volume commitments and actual
volumes being processed.
Since most customers in the billing clearinghouse industry are under
contracts with a minimum term of at least one year, penetration of the existing
market will be difficult. In addition, a new entrant must be financially sound
and have system integrity because funds collected by the local telephone
companies flow through the third-party clearinghouse, which then distributes
the funds to the customer whose traffic is being billed.
Insurance
Avery does not maintain errors and omissions insurance for the business
conducted by HBS Billing Services.
Employees
At December 31, 1999, HBS Billing Services had 44 full-time employees,
including two executive officers, two sales and marketing personnel, eight
technical and operations personnel, eight accounting, administrative and
support personnel, and 24 customer service representatives and related support
personnel. HBS Billing Services' employees are not represented by a union. HBS
Billing Services believes that its employee relations are good.
22
PRIMAL DISTRIBUTION
On February 12, 2001, Avery distributed 100% of the outstanding capital
stock of Primal to its securityholders. Accordingly, as of such date, Avery had
no further ownership interest in Primal or its subsidiary, Wireless Billing
Systems.
Of the capital stock distributed, 32% was distributed to the seven original
stockholders of Primal at the time of Primal's acquisition by Avery in
redemption of 4,976,401 shares of our series g voting preferred stock issued to
these persons in connection with our acquisition of Primal. The shares of our
series g voting preferred stock are now held of record as follows: John Faltys
- -- 655,604 shares; Joseph R. Simrell and David Haynes-- 464,505 shares each;
Mark J. Nielsen -- 354,763 shares; and Arun Anand, Murani Cholappadi and Sanjay
Gupta -- 70,372 shares each. On the date of the distribution, the aggregate
2,150,493 shares of series g voting preferred stock outstanding were
convertible into 2,150,493 shares of Avery's common stock, or 15% of the total
14,336,618 shares of Avery's common stock outstanding on such date and reserved
for issuance upon the exercise of options and the conversion of convertible
securities outstanding on such date. As part of the distribution, the exercise
prices of Avery's outstanding options and the conversion prices of Avery's
convertible securities were adjusted to reflect the distribution. As a result
of such adjustments, on February 12, 2001, Avery had a total of 16,002,540
shares of common stock outstanding and reserved for issuance upon the exercise
of options and the conversion of convertible securities. Accordingly, the
conversion price of the series g preferred stock was decreased from $1.00 to
$0.895896, and the 2,150,493 shares of the series g voting preferred stock held
by the original Primal stockholders became convertible into an aggregate
2,400,381 shares of Avery's common stock, or 15% of the total 16,002,540 shares
of Avery's common stock outstanding and reserved for issuance upon the exercise
of options outstanding and the conversion of convertible securities outstanding
on such date.
Readers should read the information under the captions "Avery" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General" for more detailed information regarding the distribution
of Primal and related transactions.
23
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to the
directors and executive officers of Avery.
Name Age Position
---- --- --------
Patrick J. Haynes, III 51 Director, Chairman of the Board, President and Chief Executive Officer
Scot M. McCormick 46 Director, Vice President, Chief Financial Officer and Secretary
Norman M. Phipps 40 Director
J. Alan Lindauer 60 Director
Robert T. Isham, Jr. 47 Director
Directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualify.
Patrick J. Haynes, III has served as a director and Chairman of the Board of
Avery since November 1995. Mr. Haynes was elected President and Chief Executive
Officer of Avery in July 1998, and served in such capacity until December 1,
1998. On May 5, 2000, Mr. Haynes was re-elected as President and Chief
Executive Officer of Avery. In 1992, Mr. Haynes founded and became President of
American Communications Services, Inc., a start-up, fiber optic, competitive
access provider telephone company. Mr. Haynes directed development of the
strategic plan, put management in place and operated the company on a day-to-
day basis for 18 months. He also advised and consulted in connection with the
placement of $52 million in equity and $81 million in debt. American
Communications is now a NASDAQ-listed company with a market capitalization in
excess of $400 million. Mr. Haynes is the Senior Managing Director of the
Thurston Group, Inc., a private merchant bank in Chicago. Mr. Haynes and
Russell T. Stern, Jr. founded the Thurston Group in 1987. Previously, Mr.
Haynes was associated with Merrill Lynch, Oppenheimer & Company, and Lehman
Brothers as an investment banker.
Scot M. McCormick has served as Vice President, Chief Financial Officer and
Secretary of Avery since July 1996. Mr. McCormick was elected as a director and
to the office of Secretary in July 1998. Prior to becoming the Chief Financial
Officer of Avery, Mr. McCormick was a consultant to Avery from 1995 through
June 1996. From 1993 to 1995, Mr. McCormick served as Chief Financial Officer
and Secretary of The Park Corporation in Barrington, Illinois. From 1990 to
1993, he served as Chief Financial and Administrative Officer and Secretary of
Whitestar Graphics, Inc. From 1978 to 1990, Mr. McCormick was associated with
the Crown organization in Chicago, including Controller of American Envelope
Company from 1980 to 1990. From 1976 to 1978, Mr. McCormick worked for Coopers
& Lybrand.
Norman M. Phipps has served as a director of Avery since November 1995. Mr.
Phipps is a director of LogiMetrics, Inc., a company primarily involved in the
manufacture of infrastructure equipment for the wireless broadband
telecommunications market. Mr. Phipps has served as the President and Chief
Operating Officer of LogiMetrics since April 1997, and also as interim Chief
Financial Officer since March 1998. From May 1996 to April 1997, Mr. Phipps
served as Chairman of the Board and Acting President of LogiMetrics. Mr. Phipps
has served as a principal of two private investment firms, Phipps, Teman &
Company, L.L.C. (from January 1994 to December 1997) and CP Capital Partners
(from January 1991 to December 1993).
J. Alan Lindauer has served as a director of Avery since November 1995. Mr.
Lindauer currently serves as President of Waterside Capital and has served as
President of Waterside Management, Inc., a business consulting firm, since
1986. Mr. Lindauer has also served as a director of Commerce Bank of Virginia
since 1986 and serves as chair of its Loan Committee, Norfolk Division, and a
member of the Executive, Trust, Marketing, Compensation, and Mergers &
Acquisition Committees. Mr. Lindauer served as director of Citizens Trust Bank
from 1982 to 1985 as well as a member of its Trust and Loan Committees. Mr.
Lindauer founded Minute-Man Fuels in 1963 and managed Minute-Man Fuels until
1985.
24
Robert T. Isham, Jr. originally served as a director of Avery from November
1995 to March 1996, and then rejoined the Board in July 1998. Mr. Isham is
currently a managing director of the Thurston Group, Inc., a private merchant
bank based in Chicago. Previously, he ran his own commercial law practice in
Chicago and, before that, he was a partner with the law firm of McDermott, Will
& Emery.
Significant Employee
Harold D. ("Rick") Box is Vice President of Operations and Marketing of HBS
Billing Services. Mr. Box has been involved in the telecommunications industry
since 1983 in areas such as paging, long distance and local exchange carrier
clearing house services. He served as Director of Client Relations for HBS
Billing Services' major competitor, Zero Plus Dialing (a subsidiary of Billing
Concepts, Inc.) from 1988 to 1993. He was a Vice President of Operations of
Home Owners Long Distance Incorporated from 1993 to 1994 and a founding partner
of HBS Billing Services.
Compensation of Directors
Each member of the Board receives a one-time warrant to purchase 75,000
shares of common stock at an exercise price determined by the Board at the time
of issuance. Each non-employee director also receives an annual stipend of
$20,000 and an annual grant of options to purchase 10,000 shares of common
stock at an exercise price determined by the board at the time of the grant.
The non-employee directors of Avery also receive $1,000 for each meeting
attended, plus reimbursement of travel expenses.
25
Executive Compensation
The following table summarizes certain information relating to the
compensation paid or accrued by Avery for services rendered during the years
ended December 31, 1999 and 1998, to each person serving as its Chief Executive
Officer and each of Avery's other most highly paid executive officers whose
total annual salary and bonus for the years ended December 31, 1999 and 1998,
exceeded $100,000.
Summary Executive Compensation Table
Annual Compensation
-------------------------------------------------------------
Long-Term
Name and Principal Fiscal Salary Other Annual Compensation
Position Year ($) Bonus ($) Compensation ($) Awards/Options (#)
- ------------------ ------ -------- --------- ---------------- ------------------
Patrick J. Haynes, 1999 $200,000 $100,000 $36,804 100,000
III(/1/)............... 1998 $100,000 $ -- $30,000 420,000
Chairman of the Board
Mark J.
Nielsen(/2/)(/3/)...... 1999 $200,000 $117,500 $14,400 --
President and Chief 1998 $ 16,667 $ -- $ -- 925,000
Executive Officer
Scot M. McCormick(/3/).. 1999 $130,000 $ 50,000 $12,912 150,000
Vice President, Chief 1998 $122,667 $ 35,000 $ -- 75,000
Financial Officer
and Secretary
- --------
(/1/)Mr. Haynes served as the Chief Executive Officer of Avery through November
30, 1998. "Other Annual Compensation" represents monthly automobile
allowance and premiums for health, life, disability and medical insurance.
(/2/)Mr. Nielsen became the Chief Executive Officer of Avery on December 1,
1998.
(/3/)"Other Annual Compensation" includes premiums for health, life, disability
and medical insurance.
Option Grants in Last Fiscal Year
Indvidual Grants
- -------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise or Base Expiration
Name Granted in Fiscal Year Price ($/Sh) Date
- ---- ---------- -------------- ---------------- ----------
Patrick J. Haynes, III... 100,000 8.0% $1.63 11/18/09
Scot M. McCormick........ 150,000 11.9% $1.63 11/18/04
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End(#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
- ---- --------------- ----------------- ------------- -------------
Patrick J.
Haynes,
III........ -- -- 380,000/140,000 $ 37,500/$0
Mark J.
Neilsen.... -- -- 925,000/0 $ 0/$0
Scot M.
McCormick.. -- -- 125,000/100,000 $ 56,250/$37,500
26
Employment Agreements
Effective July 1, 1998, Mr. Haynes entered into an employment agreement with
Avery. Under his employment agreement, Mr. Haynes serves as Chairman of the
Board, President and Chief Executive Officer, subject to the Board of
Directors' power to elect and remove officers of Avery. The employment
agreement expires June 30, 2003. Mr. Haynes' initial base salary is $200,000
annually. In addition, Mr. Haynes is entitled to receive bonuses based on
performance goals as established by the Board, to receive stock options, to
participate in applicable incentive plans established by Avery, to participate
in Avery's hospitalization and major medical plans, or, at his option, to be
reimbursed for amounts paid by Mr. Haynes for comparable coverage, and to an
automobile of his choice. Mr. Haynes also received a ten-year warrant to
purchase 420,000 shares of common stock at $3.00 per share.
Effective January 1, 2000, Scot M. McCormick entered into an employment
agreement with Avery. Under his employment agreement, Mr. McCormick serves as
Vice President, Chief Financial Officer and Secretary, subject to the Board of
Directors' power to elect and remove officers of Avery. The employment
agreement expires December 31, 2001, and will automatically be renewed for
additional terms unless either party notifies the other prior to November 1 of
a given year that they do not wish to renew the agreement. Mr. McCormick's
initial base salary is $143,000 annually. In addition, Mr. McCormick is
entitled to annual incentive compensation in an amount equal to 40% of his
annual salary if certain performance goals established by the Board of
Directors are met or exceeded. Mr. McCormick is entitled to participate in
applicable incentive plans established by Avery, to participate in Avery's
hospitalization and major medical plans, or, at his option, to be reimbursed
for amounts paid by Mr. McCormick for comparable coverage, and to receive such
other bonuses as the Board may determine in its sole discretion.
Effective November 1, 1996, Harold D. Box entered into an employment and
noncompetition agreement with HBS Billing Services. Under his employment
agreement, Mr. Box will serve as Vice President of Operations and Marketing of
HBS Billing Services, subject to the general partner's power to elect and
remove officers of HBS Billing Services. The employment agreement expires on
December 31, 2001, and will automatically be renewed for additional terms of
one year unless either party notifies the other prior to January of a given
year that they do not wish to renew the employment agreement. Mr. Box is
entitled to receive an annual salary of $100,000, subject to standard payroll
deductions, and is entitled to receive the same benefits as HBS Billing
Services provides to other employees at comparable salaries and
responsibilities to those of Mr. Box. In addition, Mr. Box is entitled to
participate in HBS Billing Services' profit sharing plan, entitled to receive
up to 83,333 shares of common stock in each of calendar years 1998, 1999, 2000
and 2001 if HBS Billing Services' pre-tax earnings equal or exceed certain
specified targets for the respective preceding year, and to receive such other
bonuses as the Board may determine in its sole discretion.
The employment agreement with Mr. Box contains certain covenants by such
employee not to compete with the business of Avery. A state court may determine
not to enforce, or only partially enforce, these covenants.
Limitation of Liability and Indemnification
Section 145 of the Delaware General Corporation Law
Section 145(a) provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
27
Section 145(b) provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
Section 145(c) provides that to the extent that a present or former
director, officer, employee or agent of a corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred
to in subsections (a) and (b) of Section 145, or in defense of any claim, issue
or matter therein, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with such defense.
Section 145(d) provides that any indemnification under subsections (a) and
(b) of Section 145, unless ordered by a court, shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b) of Section 145. Such determination
shall be made, with respect to a person who is a director or officer at the
time of such determination:
. by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum; or
. by a committee of such directors designated by majority vote of such
directors, even though less than a quorum; or
. if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion; or
. by the stockholders.
Section 145(e) provides that expenses, including attorneys' fees, incurred
by an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or for such director or officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the corporation as authorized in Section 145. Such expenses,
including attorneys' fees, incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation deems appropriate.
Certificate of Incorporation
The certificate of incorporation of Avery provides that a director of Avery
shall not be liable to Avery or its stockholders for monetary damages for
breach of fiduciary duty as a director, unless the breach involves
. a breach of the director's duty of loyalty to Avery or its stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. liability for unlawful dividend payments or stock purchases or
redemptions; or
28
. a transaction from which the director derived an improper personal
benefit.
The certificate of incorporation of Avery provides that Avery shall
indemnify all persons whom it may indemnify to the fullest extent permitted by
law.
Bylaws
The bylaws of Avery generally make mandatory the provisions of Section 145
of the Delaware General Corporation Law discussed above, including the
advancement of expenses reasonably incurred in defending a claim prior to its
final resolution, and provide that Avery's directors and officers will at all
times be indemnified to the maximum extent permitted by law.
Indemnification Agreements
Avery has entered into indemnification agreements with each of its directors
and executive officers. These agreements provide the directors and executive
officers of Avery with indemnification to the maximum extent permitted by law.
These agreements also include provisions requiring advancement of expenses,
establishing procedures and standards for resolving claims, and providing for
indemnification following a change of control of Avery.
D&O Insurance
Avery has a directors' and officers' liability insurance policy to insure
its directors and officers against losses resulting from wrongful acts
committed by them in their capacities as directors and officers of Avery,
including liabilities arising under the Securities Act.
SEC Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Avery
pursuant to the foregoing provisions, or otherwise, Avery has been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
29
CERTAIN TRANSACTIONS
In December 1998, Avery's Board of Directors authorized Avery to repurchase
any or all of its outstanding warrants for a price of $1.00 per underlying
share. In December 1998, Avery repurchased warrants held by Waveland, LLC to
purchase 100,000 shares of common stock at an exercise price of $1.50 per
share. On January 5, 1999, Avery repurchased warrants held by the Thurston
Group to purchase 300,000 shares of common stock at an exercise price of $1.00
per share and warrants to purchase 200,000 shares of common stock at $1.50 per
share. On March 31, 1998, Avery repurchased warrants held by the Thurston Group
to purchase 80,000 shares of common stock at an exercise price of $1.50 per
share. On April 16, 1999, Avery repurchased warrants held by Thurston
Interests, LLC to purchase 41,746 shares of common stock at an exercise price
of $1.50 per share. Of the total $621,736 used to repurchase the warrants,
$300,000 was classified as compensation paid to Mr. Haynes. None of this amount
was classified as compensation paid to Mr. Isham. Waveland, Thurston Group and
Thurston Interests are affiliates of Mr. Haynes. Thurston Group and Thurston
Interests are also affiliates of Mr. Isham.
Mark J. Nielsen, who was at the time Avery's President and Chief Executive
Officer, was also the Chairman of Primal and owned approximately 16.04% of the
Primal common equity on a fully diluted basis at the time the agreement to
acquire Primal was entered and at the close of business on September 30, 1999,
the date the acquisition was completed. Mr. Nielsen received 320,893 shares of
Avery's convertible preferred stock in the merger. Each share of Avery's
convertible preferred stock issued in the merger was immediately convertible
into shares of Avery's common stock on a one-for-one basis.
In contemplation of entering into an agreement for the acquisition of
Primal, Avery made a $100,000 working capital loan to Primal on December 15,
1998. The loan was secured by a first lien on the accounts receivable of
Primal. On January 25, 1999, the working capital loan was increased to
$180,000. This loan was replaced with the loan described in the following
paragraph.
In contemplation of the Corsair transaction, on February 3, 1999, Avery
agreed to loan Primal up to $1,000,000 on a revolving credit basis in
replacement of the then-outstanding $180,000 loan described above. This loan
was secured by a pledge of all the stock of Primal Billing Solutions, the
wholly owned subsidiary of Primal that acquired the Corsair assets, and by a
security interest in all of the accounts receivable and general intangibles,
including all intellectual property of Primal Systems. As noted above, Avery
completed its acquisition of Primal after the close of business on
September 30, 1999, and the loan was paid in full.
Please see the information under the caption "Change In Control of Avery"
for information regarding other transactions involving the directors and
officers of Avery.
30
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership of Avery's Voting Securities
On March 20, 2001, Avery had 10,062,076 shares of common stock, 1,500,000
shares of series d preferred stock, and 2,150,493 shares of series g preferred
stock outstanding. The holders of the series d preferred stock are presently
entitled to one vote per share on any matters submitted to Avery's stockholders
for a vote. The holders of the series g preferred stock are presently entitled
to 1.1162 votes per share on any matters submitted to Avery's stockholders for
a vote. The holders of these securities vote as a single class on all matters
submitted to Avery's stockholders for a vote unless a separate vote is
otherwise required by law or Avery's certificate of incorporation.
Therefore, as of March 20, 2001, a total of 13,962,457 shares of Avery's
voting securities were outstanding, all of which constitute a single class of
voting securities.
The following table sets forth information for any person who is known to
Avery to be the beneficial owner of more than five percent of Avery's single
class of voting securities. A beneficial owner of a security includes any
person who, directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares:
. voting power, which includes the power to vote, or to direct the voting,
of such security; and/or
. investment power, which includes the power to dispose, or to direct the
disposition of, such security.
All of Avery's voting securities beneficially owned by a person, regardless
of the form which such beneficial ownership takes, have been aggregated in
calculating the number of shares beneficially owned by such person. In making
these calculations, a person is deemed to be the beneficial owner of a security
if that person has the right to acquire beneficial ownership of such security
within 60 days
. through the exercise of any option, warrant or right;
. through the conversion of a security;
. pursuant to the power to revoke a trust, discretionary account, or
similar arrangement; or
. pursuant to automatic termination of a trust, discretionary account, or
similar arrangement.
Any securities not outstanding which are subject to such options, warrants,
rights or conversion privileges and beneficially owned by a person in the table
below are deemed to be outstanding for the purpose of computing the percentage
of outstanding securities of the class owned by such person but are not deemed
to be outstanding for the purpose of computing the percentage of the class
beneficially owned by any other person.
Number Percent
Name of Beneficial Owner of Shares of Class
------------------------ --------- --------
Patrick J. Haynes, III(1)(4)................................. 4,767,584 26.7%
Thurston Group, Inc.(1)(4)................................... 3,992,965 22.5%
J. Alan Lindauer(2).......................................... 2,255,367 14.4%
Waterside Capital Corporation(2)............................. 2,157,667 13.8%
John Faltys(3)(4)............................................ 731,785 5.0%
- --------
(1) The business address of this person is 190 South LaSalle Street, Suite
1710, Chicago, Illinois 60603. The shares shown as beneficially owned by
Mr. Haynes include all the shares beneficially owned by the Thurston Group,
Inc., of which Mr. Haynes is the Senior Managing Director.
(2) The business address for this person is 300 East Main Street, Suite 1380,
Norfolk, VA 23510. The shares shown as beneficially owned by Mr. Lindauer
include all the shares beneficially owned by Waterside Capital Corporation,
of which Mr. Lindauer is President and a director.
(3) The business address for this person is 18881 Von Karman, Suite 500,
Irvine, California 92612.
(4) The shares shown as beneficially owned by Mr. Faltys include 731,785 of the
shares beneficially owned by the Thurston Group, Inc. The Thurston Group,
Inc. holds a proxy to vote all of these shares.
31
Security Ownership of Management
The following table sets forth information as of March 20, 2001, as to each
class of Avery's equity securities beneficially owned by each director, by each
executive officer, and by all directors and executive officers as a group. In
calculating the ownership percentages for Avery's common stock, we used the
10,062,076 shares of common stock outstanding on March 20, 2001. Since these
calculations do not include the two series of Avery's voting preferred stock
included in the calculations in the preceding table, the beneficial ownership
percentages set forth below will differ from those set forth in the preceding
table.
Common Stock Preferred Stock
---------------------- ----------------------------
Number Percent Number Percent
Name of Beneficial Owner of Shares of Class Series of Shares of Class
------------------------ ---------- -------- ------ --------- --------
Patrick J. Haynes,
III(1)................... 4,767,584(2) 34.2% B 100,000(2) 25.6%
D 1,500,000(2) 100.0%
G 2,400,381(2) 100.0%
Scot M. McCormick(1)...... 245,000 2.4%
Norman M. Phipps(3)....... 75,000 0.7%
J. Alan Lindauer(4)....... 812,867(5) 19.1%
Robert T. Isham, Jr.(1)... 187,355(6) 1.8% A 8,333(6) 5.3%
All directors and
executive officers as a
group (2)(5)(6).......... 11,825,993 47.9% A 8,333 5.3%
B 100,000 25.6%
D 1,500,000 100.0%
G 7,126,894 100.0%
- --------
(1) The business address for this person is 190 South LaSalle Street, Suite
1710, Chicago, Illinois 60603.
(2) Includes 3,992,965 shares beneficially owned by the Thurston Group, Inc.,
of which Mr. Haynes is the Senior Managing Director, 691,286 shares
beneficially owned by Waveland, LLC, of which Mr. Haynes is the owner, and
83,333 held in escrow by Bank One, Texas, N.A., for the benefit of the
former owners of HBS Billing Services and for which Mr. Haynes has an
irrevocable proxy. Of these shares, 45,286 represent shares that may be
acquired within 60 days upon the exercise of options or warrants,
1,416,667 represent shares that may be acquired within 60 days upon the
conversion of convertible securities, and 2,400,381 represent the total
number of votes represented by the 2,150,493 shares of the series g
preferred stock for which the Thurston Group, Inc. has an irrevocable
proxy.
(3) The business address of this person is 435 Moreland Road, Hauppauge, New
York 11788.
(4) The business address for this person is 300 East Main Street, Suite 1380,
Norfolk, Virginia 23510.
(5) Of these shares, 715,167 are beneficially owned by Waterside Capital
Corporation, of which Mr. Lindauer is President and a director. Of these
shares, 466,667 represent shares that may be acquired within 60 days upon
the conversion of a convertible note and 1,250,000 represent shares that
may be acquired within 60 days upon the conversion of convertible
securities.
(6) Of these shares, 117,487 represent shares that may be acquired within 60
days upon the exercise of options and warrants, 3,138,889 represent shares
that may be acquired within 60 days upon the conversion of convertible
securities and 2,400,381 represent the total number of votes represented
by the 2,150,493 shares of the series g preferred stock for which the
Thurston Group has an irrevocable proxy.
32
CHANGE IN CONTROL OF AVERY
On August 1, 2000, as part of a distribution agreement providing for us to
distribute all the shares of our subsidiary, Primal Solutions, Inc., to our
securityholders, Thurston Group, Inc. acquired a proxy to vote 7,126,894 shares
of our series g voting preferred stock.
Thurston Group is controlled by Patrick J. Haynes, III, the Chairman of
Avery.
After being granted the proxy to vote the 7,126,894 shares of our series g
voting preferred stock, Mr. Haynes had the right to vote or to direct the
voting of an aggregate of 10,360,485 shares, or approximately 50.5%, of our
20,524,158 then outstanding voting securities.
The 7,126,894 shares of our series g voting preferred stock were issued to
the original seven stockholders of Primal, John Faltys, Joseph R. Simrell,
David Haynes, Mark J. Nielsen, Arun Anand, Murari Cholappadi, and Sanjay Gupta,
in exchange for an aggregate of 7,126,894 shares of our series f non-voting
preferred stock as part of a series of transactions in contemplation of our
distribution of all the issued and outstanding shares of Primal to our
securityholders.
As described in this prospectus under the caption "Primal Distribution," we
completed the distribution of Primal to our stockholders on February 12, 2001.
In connection with the distribution, Avery redeemed 4,976,401 shares of the
series g preferred stock from the original seven stockholders of Primal in
exchange for shares of Primal common stock representing 32% of Primal's
outstanding common stock. As a result of these and other transactions since
August 1, 2000, Mr. Haynes presently beneficially owns 26.7% of our outstanding
voting securities. Excluding shares of common stock that Mr. Haynes and others
could acquire within 60 days upon the exercise of options and the conversion of
shares of preferred stock, Mr. Haynes presently beneficially owns 34.4% of our
outstanding voting securities.
Patrick J. Haynes, III and David Haynes are not related.
33
DESCRIPTION OF CAPITAL STOCK
Avery's amended articles of incorporation authorize 20,000,000 shares of
common stock, par value $0.01 per share, and 20,000,000 shares of preferred
stock, par value $0.01 per share. As of March 20, 2001, 10,062,076 shares of
common stock were outstanding, which excludes 1,215,216 shares held by Avery as
treasury shares. As of such date, there were approximately 345 record holders.
In addition, Avery has issued and outstanding 391,667 shares of series a
convertible preferred stock, 390,000 shares of series b convertible preferred
stock, 40,000 shares of series c convertible preferred stock, 1,500,000 shares
of series d convertible voting preferred stock, 2,150,493 shares of series g
participating convertible voting preferred stock and 1,600,000 shares of series
h convertible preferred stock.
Common Stock
Each holder of common stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote of the
outstanding shares present at a stockholders' meeting is required for most
actions to be taken by stockholders. Directors of Avery are elected by a
plurality. The holders of the common stock do not have cumulative voting
rights. Accordingly, the holders of a majority of the voting power of the
shares voting for the election of directors can elect all of the directors if
they choose to do so. The common stock bears no preemptive rights, and is not
subject to redemption, sinking fund or conversion provisions.
Holders of common stock are entitled to receive dividends if, as and when
declared by Avery's board of directors out of funds legally available for
dividends, subject to the dividend and liquidation rights of Avery's
outstanding preferred stock and any other series of preferred stock that may be
issued in the future and subject to any dividend restriction contained in any
credit facility which Avery may enter into in the future. Any dividends
declared with respect to shares of common stock will be paid pro rata in
accordance with the number of shares of common stock held by each stockholder.
Senior Preferred Stock
The board of directors has designated 1,500,000 shares of preferred stock as
the series d senior cumulative convertible redeemable preferred stock, all of
which are issued and outstanding.
The holders of the series d senior preferred stock are entitled to
preferential quarterly dividends to the common stock payable at the rate of
$.025 per share. Upon liquidation, dissolution or winding-up of Avery, holders
of the series d senior preferred stock are each entitled to receive a
liquidation distribution of $1.00, plus any unpaid accumulated dividends to
date in preference to the holders of the common stock, but subject to
liquidation preference of the series d senior preferred stock and any other
senior preferred stock which may be designated in the future.
Avery is obligated to offer to repurchase the series d senior preferred
stock in the event Avery makes a disposition of HBS Billing Services.
At the option of the holders of the series d senior preferred stock, the
series d senior preferred stock may be, or, upon the vote or written consent of
the holders of at least two-thirds of the outstanding shares of the series d,
or upon the closing of a firm commitment underwritten public offering
registered under the Securities Act at a price of $5.00 or more per share and
aggregate proceeds from such offering exceeding $7 million, the series d senior
preferred stock will be automatically converted into common stock at a rate
equal to .5 share of common stock per share. If the audited balance sheet of
Avery at the ending of any fiscal year ending on or after December 31, 1997,
indicates that the stockholders' equity of Avery is $7 million or more greater
than the stockholders' equity as indicated on Avery's audited balance sheet on
December 31, 1996, the series d senior preferred stock must be redeemed at its
liquidation value plus any unpaid accumulated dividends to that date. Avery's
stockholders' equity on December 31, 1996, was $1,295,437. Accordingly, the
series d preferred stock
34
must be redeemed in the year following the December 31 on which Avery's
stockholders' equity is $8,295,437 or more. At December 31, 1999, Avery's
stockholders' equity was $5,326,430.
Avery may not issue any additional shares of its preferred stock that rank
senior or equal to the series d senior preferred stock without the prior
approval of the holders of at least two-thirds of the shares of the series d
senior preferred stock then outstanding. In addition, the shares of series d
senior preferred stock are entitled to one vote per share on all matters
submitted to the holders of common stock and vote with the holders of common
stock as a single class, except as otherwise required by law.
Junior Preferred Stock
The board of directors has designated five other series of preferred stock
that remain outstanding: series a junior convertible redeemable preferred
stock, series b junior convertible redeemable preferred stock, series c junior
convertible redeemable preferred stock, series g junior participating
convertible voting preferred stock and series h convertible preferred stock.
For convenience, the series a, series b, series c, series g and series h
preferred stock will sometimes be referred to collectively as junior preferred
stock.
The holders of the junior preferred stock other than the series g are
entitled to preferential dividends to the common stock but subordinate to the
series d senior preferred stock and any other senior preferred stock that may
be designated in the future. Holders of the series a are entitled to quarterly
dividends payable at the rate of $0.025 per share. Holders of the series b,
series c and series h are entitled to quarterly dividends payable at the rate
of $.03 per share.
Upon liquidation, dissolution or winding-up of Avery, holders of the junior
preferred stock other than the series g are entitled to receive a liquidation
distribution of $1.00 per share, plus any unpaid accumulated dividends to date
in preference to the holders of the common stock, but subject to liquidation
preference of the series d senior preferred stock and any other senior
preferred stock which may be designated in the future. Holders of series g are
entitled to receive a liquidation distribution of $.01 per share.
At the option of the holders of the junior preferred stock, the series a and
the series c may be converted into common stock at a rate equal to .6667 share
of common stock per share, the series b and series g may be converted into
common stock at a rate equal to 1.6667 shares of common stock per share and the
series h may be converted into common stock at a rate equal to one share of
common stock per share. Upon the vote or written consent of the holders of at
least two-thirds of the outstanding shares of the respective series, or upon
the closing of a firm commitment underwritten public offering registered under
the Securities Act at a price of $5.00 or more per share and aggregate proceeds
from such offering exceeding $7 million, the series of junior preferred stock
other than the series g and the series h will be automatically converted into
common stock at the ratios set forth above.
If the audited balance sheet of Avery at the end of any fiscal year ending
on or after December 31, 1997 indicates that the stockholders' equity of Avery
is $7 million or more greater than the stockholders' equity as indicated on
Avery's audited balance sheet on December 31, 1996, the junior preferred stock
other than the series g is to be redeemed at its liquidation value plus any
unpaid accumulated dividends to that date. Avery's stockholders' equity on
December 31, 1996, was $1,295,437. Accordingly, the junior preferred stock
other than the series g and the series h must be redeemed in the year following
the December 31 on which Avery's stockholders' equity is $8,295,437 or more. At
December 31, 1999, Avery's stockholders' equity was $5,326,430.
The shares of the junior preferred stock other than the series g and series
h do not have any voting rights, except as otherwise required by law. The
holders of our series g vote as a single class with the holders of our common
stock and our series d senior preferred stock. The series g votes on an "as if
converted basis," which is presently 1.1162 votes for each share outstanding.
35
In addition to any other vote or consent required by the laws of the State
of Delaware, Avery cannot, without the affirmative votes or written consent of
the holders of at least 66 2/3% of the outstanding shares of series h, with
each share of series h being entitled to one vote:
. In any manner, including by amendment of its Certificate of
Incorporation or By-laws, alter or change the powers, rights, preferences
or privileges or the qualifications, limitations or restrictions of the
series h;
. Create, authorize or issue a new class or series, or change or
reclassify a class or series of shares with junior, subordinate or inferior
rights into a class or series of shares, having rights, preferences or
privileges prior or superior with the shares of series h in the payment of
dividends or in the payment of amounts in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of Avery,
or increase the rights, preferences, privileges or number of any class or
series having rights, preferences or privileges on dissolution that are
prior, superior or on parity with those of the series h;
. Increase or decrease the aggregate number of authorized shares of
series h, except for any decrease resulting from any redemption, repurchase
or other reacquisition; effect an exchange or reclassification or create a
right of exchange, of all or part of the shares of series h into shares of
another class; effect an exchange or reclassification or create a right of
exchange, of all or part of the shares of another class or series into the
shares of the series h; change the shares of all or part of the series h
into a different number of shares of series h;
. Repurchase, redeem or otherwise acquire any shares of Avery's capital
stock other than the series h if any dividends on the series h which have
accrued and are payable remain outstanding at the time;
. Liquidate, dissolve or wind-up the affairs of Avery or merge or
consolidate Avery with any other entity or sell or encumber all or
substantially all of the Corporation's assets or issue in one or a series
of related transactions shares representing more than 50% of the aggregate
voting power of all classes and series of Avery's voting stock if any
dividends on the series h which have accrued and are payable remain
outstanding at the time; or
. Declare or pay any dividend or other distribution with respect to
junior preferred stock if any dividends on the series h which have accrued
and are payable remain outstanding at the time.
Future Issuances of Preferred Stock
Avery has no present intention to issue any additional shares of preferred
stock.
36
LEGAL PROCEEDINGS
From time to time Avery is party to what it believes is routine litigation
and proceedings that may be considered as part of the ordinary course of its
business. Currently, Avery is not aware of any current or pending litigation or
proceedings that would have a material adverse effect on Avery's business,
results of operations or financial condition.
CHANGES IN ACCOUNTS
On June 11, 1999, PricewaterhouseCoopers LLP was dismissed as Avery's
auditors, and King Griffin & Adamson P.C. was engaged on June 11, 1999, to
audit the financial statements of Avery for fiscal year ended December 31,
1998. Avery's board of directors unanimously resolved to reappoint King Griffin
& Adamson P.C. as Avery's independent accountants for the fiscal year ended
December 31, 1998. King Griffin & Adamson P.C. had served as Avery's
independent accountants since 1995 and was dismissed on February 10, 1999.
PricewaterhouseCoopers LLP was engaged on February 10, 1999.
PricewaterhouseCoopers LLP has not issued any reports on Avery's financial
statements.
Through the date of their dismissal, June 11, 1999, there were no
disagreements with PricewaterhouseCoopers LLP, whether or not resolved, on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
Avery has requested that PricewaterhouseCoopers LLP furnish a letter
addressed to the SEC stating whether or not it agrees with the above statements
in the immediately preceding two paragraphs. A copy of such letter is filed as
Exhibit 16.1 to this Form SB-2.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy
statements and other information with the SEC. In addition, our complete
registration statement with all exhibits is filed with the SEC.
You may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding us
and other issuers that file electronically with the SEC. The address of the
SEC's Internet site is http://www.sec.gov.
Please note that our registration statement, of which this prospectus is
only a part, contains additional information about us. In addition, our
registration statement includes numerous exhibits containing information about
us. Copies of our complete registration statement may be obtained from the SEC
by following the procedures described above.
EXPERTS
The audited financial statements of Avery included in this prospectus, to
the extent and for the periods indicated in their report, have been prepared by
King Griffin & Adamson P.C., independent accountants, for the years ended
December 31, 1999 and 1998, and are included in this prospectus in reliance
upon such reports given upon the authority of such firm as experts in
accounting and auditing.
37
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants......................... F-1
Financial Statements:
Consolidated Balance Sheets.............................................. F-2
Consolidated Statements of Operations.................................... F-4
Consolidated Statement of Stockholders' Equity (Deficit)................. F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
38
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Avery Communications, Inc.
We have audited the accompanying consolidated balance sheets of Avery
Communications, Inc., and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Primal Solutions, Inc., a consolidated subsidiary, which statements reflect
total assets of $9,674,468 as of December 31, 1999, and total revenue of
$4,547,703 for the three months ended December 31, 1999. These statements were
audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for Primal Solutions,
Inc. is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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, based on our report and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Avery Communications, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ King Griffin & Adamson P.C.
Dallas, Texas
March 15, 2000, except as to Note 3 which is as of November 15, 2000
F-1
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------ September 30,
1998 1999 2000
----------- ----------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........... $ 1,086,473 $ 5,744,069 $12,762,196
Trade accounts and notes receivable,
net of allowance for doubtful
accounts of $0, $188,901 and
$242,901 (unaudited),
respectively....................... 1,090,672 813,589 752,213
Advance payment receivables......... 11,893,146 6,810,249 1,966,242
Other receivables................... 486,596 681,526 390,825
Deferred tax asset.................. -- 374,086 374,086
Income tax receivable............... -- -- 310,529
Other............................... 11,981 27,527 75,987
Net current assets of discontinued
operations......................... -- 285,029 --
----------- ----------- ------------
Total current assets............. 14,568,868 14,736,075 16,632,078
----------- ----------- ------------
Property and equipment:
Computer equipment and software..... 899,072 1,063,674 1,131,637
Furniture and fixtures.............. 325,358 334,944 338,041
Accumulated depreciation and
amortization....................... (249,217) (506,535) (701,693)
----------- ----------- ------------
Total property and equipment,
net............................. 975,213 892,083 767,985
----------- ----------- ------------
Other assets:
Goodwill, net of accumulated
amortization of $464,178, $732,869
and $934,511 (unaudited),
respectively....................... 2,993,539 3,022,748 2,821,106
Net long-term assets of discontinued
operations......................... -- 4,443,827 7,694,625
Deposits............................ 1,570,278 185,514 2,574,357
Purchased contracts, net of
accumulated amortization of
$251,671, $276,208 and $314,998
(unaudited), respectively.......... 35,092 70,555 39,265
Non-recourse notes receivable,
including $0, $0 and $1,439,000
(unaudited) due from related
parties............................ -- -- 1,563,500
Other (includes $500,000, $400,000
and $1,150,000 (unaudited),
respectively, due from related
parties)........................... 594,850 417,649 1,150,772
----------- ----------- ------------
Total other assets............... 5,193,759 8,140,293 15,843,625
----------- ----------- ------------
Total assets..................... $20,737,840 $23,768,451 $ 33,243,688
=========== =========== ============
F-2
December 31,
------------------------ September 30,
1998 1999 2000
----------- ----------- -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Line of credit....................... $ 5,766,832 $ -- $ --
Current notes payable................ 6,667 6,667 6,667
Trade accounts payable............... 3,891,070 4,369,562 2,907,786
Accrued liabilities.................. 2,382,735 2,576,752 3,983,284
Income taxes payable................. -- 255,673 --
Deposits and other payables related
to customers........................ 9,535,698 10,908,169 17,326,623
Net current liabilities of
discontinued operations............. -- -- 135,037
----------- ----------- -----------
Total current liabilities........... 21,583,002 18,116,823 24,359,397
----------- ----------- -----------
Long-term notes payable:
Long-term notes payable, due to
related parties..................... 316,915 325,195 331,405
----------- ----------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity (deficit):
Preferred stock (20,000,000 shares
authorized):
Series A; $0.01 par value, 800,000
shares authorized, 400,000 shares
issued and outstanding at December
31, 1998 and 1999 and 391,667 shares
issued and outstanding at September
30, 2000 (unaudited) (liquidation
preference of $400,000 at December
31, 1998 and 1999 and $391,667 at
September 30, 2000 (unaudited))..... 4,000 4,000 3,917
Series B; $0.01 par value, 1,050,000
shares authorized, 390,000 shares
issued and outstanding at December
31, 1998 and 1999 and September 30,
2000 (unaudited) (liquidation
preference of $390,000)............. 3,900 3,900 3,900
Series C; $0.01 par value, 340,000
shares authorized, 70,000 shares
issued and outstanding at December
31, 1998 and 1999 and 40,000 issued
and outstanding at September 30,
2000 (unaudited) (liquidation
preference of $70,000 at December
31, 1998 and 1999, and $40,000 at
September 30, 2000 (unaudited))..... 700 700 400
Series D; $0.01 par value, 1,500,000
authorized, issued and outstanding
at December 31, 1998 and 1999 and
September 30, 2000 (unaudited)
(liquidation preference of
$1,500,000)......................... 15,000 15,000 15,000
Series E; $0.01 par value, 350,000
authorized, issued and outstanding
at December 31, 1998 and 1999 and
September 30, 2000 (unaudited)
(liquidation preference of
$350,000)........................... 3,500 3,500 3,500
Series F; $0.01 par value, 8,000,000
shares authorized, 3,890,373 shares
issued and outstanding at December
31, 1999 and 0 shares issued and
outstanding at September 30, 2000
(unaudited), respectively
(liquidation preference of $38,904
at December 31, 1999 and $0 at
September 30, 2000 (unaudited),
respectively)....................... -- 38,904 --
Series G; $0.01 par value, 8,000,000
shares authorized, 0 shares issued
and outstanding at December 31, 1998
and 1999 and 7,126,894 shares issued
and outstanding at September 30,
2000 (unaudited), respectively
(liquidation preference of $0 at
December 31, 1998 and 1999 and
$71,269 at September 30, 2000
(unaudited), respectively).......... -- -- 71,269
Common stock, $0.01 par value,
20,000,000 shares authorized,
9,803,949 shares issued at December
31, 1998 and 1999 and 9,972,435
shares issued at September 30, 2000
(unaudited)......................... 98,039 98,039 99,724
Additional paid-in capital........... 8,417,991 12,306,164 15,734,219
Accumulated deficit.................. (7,838,840) (5,161,775) (5,342,242)
Treasury stock, 1,130,250 and
1,176,916 shares at December 31,
1998 and 1999, respectively, and
1,215,216 shares at September 30,
2000 (unaudited), at cost........... (1,866,367) (1,981,999) (2,036,801)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (1,162,077) 5,326,433 8,552,886
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)................... $20,737,840 $23,768,451 $33,243,688
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
Year ended December 31, September 30,
-------------------------- --------------------------
1998 1999 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Revenues................ $ 19,633,576 $ 23,702,748 $ 16,335,812 $ 27,443,282
Cost of revenues........ (13,043,784) (17,385,337) (12,158,093) (19,763,332)
------------ ------------ ------------ ------------
Gross profit.......... 6,589,792 6,317,411 4,177,719 7,679,950
------------ ------------ ------------ ------------
Selling, general and
administrative
expenses............... (3,837,196) (5,330,242) (3,960,174) (4,455,205)
Credit (charge) in
connection with
terminated customers... (4,271,394) 226,219 -- --
Advance funding program
income................. 1,417,528 609,950 452,273 227,111
Advance funding program
costs.................. (726,354) (268,656) (192,772) (130,046)
------------ ------------ ------------ ------------
Total............... (7,417,416) (4,762,729) (3,700,673) (4,358,140)
------------ ------------ ------------ ------------
Operating income
(loss)............. (827,624) 1,554,682 477,046 3,321,810
------------ ------------ ------------ ------------
Other income (expense):
Interest expense...... (388,240) (292,258) (254,036) (50,240)
Financing fees and
debt issuance costs.. (118,590) (321,736) (321,736) --
Other, net............ 10,976 129,045 100,723 297,961
------------ ------------ ------------ ------------
Total other income
(expense).......... (495,854) (484,949) (475,049) 247,721
------------ ------------ ------------ ------------
Income (loss) from
continuing operations
before income taxes.... (1,323,478) 1,069,733 1,997 3,569,531
Income tax benefit
(expense).............. -- 648,573 -- (1,095,289)
------------ ------------ ------------ ------------
Income (loss) from
continuing operations.. (1,323,478) 1,718,306 1,997 2,474,242
Income (loss) from
discontinued
operations, net of
income tax benefit
(expense) of $(667,809)
and $1,314,025,
respectively........... -- 958,759 -- (2,654,709)
------------ ------------ ------------ ------------
Net income (loss)... $ (1,323,478) $ 2,677,065 $ 1,997 $ (180,467)
============ ============ ============ ============
Per share data:
Basic net income (loss)
per share:
Continuing operations... $ (0.19) $ 0.17 $ (0.02) $ 0.26
Discontinued
operations............. -- 0.11 -- (0.30)
------------ ------------ ------------ ------------
Net income (loss)....... $ (0.19) $ 0.28 $ (0.02) $ (0.04)
============ ============ ============ ============
Diluted net income
(loss) per share:
Continuing operations... $ (0.19) $ 0.14 $ (0.02) $ 0.16
Discontinued
operations............. -- 0.09 -- (0.17)
------------ ------------ ------------ ------------
Net income (loss)....... $ (0.19) $ 0.23 $ (0.02) $ (0.01)
============ ============ ============ ============
Weighted average number
of common shares:
Basic common shares... 8,541,575 8,643,526 8,649,084 8,730,734
============ ============ ============ ============
Diluted common
shares............... 8,541,575 10,617,821 8,649,084 15,865,627
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock Additional Treasury Stock
------------------ ----------------- Paid-in --------------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
--------- ------- --------- ------- ----------- --------- ----------- ------------ -----------
Balance at December
31, 1997............ 4,566,667 $45,667 8,640,893 $86,409 $ 9,882,156 550,000 $ (496,537) $(6,515, 362) $ 3,002,333
Issuance of shares
for cash in
connection with
exercise of
warrants............ -- -- 198,705 1,986 224,820 -- -- -- 226,806
Issuance of shares in
connection with
exercise of cashless
warrants............ -- -- 196,502 1,965 (1,965) -- -- -- --
Accounts payable paid
through issuance of
common shares....... -- -- 43,184 432 58,946 -- -- -- 59,378
Issuance of HBS
escrow shares--
employment
agreements.......... -- -- 499,998 5,000 (5,000) -- -- -- --
Redemption of HBS
Exchange Series..... (640,000) (6,400) -- -- (633,600) -- -- -- (640,000)
Partial redemption of
HBS Series.......... (400,000) (4,000) -- -- (396,000) -- -- -- (400,000)
Partial conversion of
HBS Series.......... (200,000) (2,000) 100,000 1,000 1,000 -- -- -- --
Partial redemption of
Series A Preferred
Stock............... (300,000) (3,000) -- -- (297,000) -- -- -- (300,000)
Partial conversion of
Series B Preferred
Stock............... (110,000) (1,100) 110,000 1,100 -- -- -- -- --
Partial redemption of
Series C Preferred
stock............... (200,000) (2,000) -- -- (118,000) -- -- -- (120,000)
Partial conversion of
Series C Preferred
Stock............... (6,667) (67) 2,667 27 40 -- -- -- --
Issuance of common
stock in exchange
for debt............ -- -- 12,000 120 29,880 -- -- -- 30,000
Common shares
received into
treasury in
connection with sale
of Bordercom and
related company..... -- -- -- -- -- 419,000 (900,000) -- (900,000)
Purchase of common
shares for the
treasury............ -- -- -- -- -- 161,250 (469,830) -- (469,830)
Issuance of
compensatory stock
warrants............ -- -- -- -- 118,590 -- -- -- 118,590
Payment of preferred
stock dividend...... -- -- -- -- (445,876) -- -- -- (445,876)
Net loss............. -- -- -- -- -- -- -- (1,323,478) (1,323,478)
--------- ------- --------- ------- ----------- --------- ----------- ------------ -----------
Balance at December
31, 1998............ 2,710,000 27,100 9,803,949 98,039 8,417,991 1,130,250 (1,866,367) (7,838,840) (1,162,077)
Purchase of common
shares for the
treasury............ -- -- -- -- -- 46,666 (115,632) -- (115,632)
Payment of preferred
stock dividend...... -- -- -- -- (468,300) -- -- -- (468,300)
Purchase of Primal
Systems, Inc........ 3,890,373 38,904 -- -- 3,365,173 -- -- -- 3,404,077
Release of HBS escrow
shares-employment
agreements.......... -- -- -- -- 991,300 -- -- -- 991,300
Net income........... -- -- -- -- -- -- -- 2,677,065 2,677,065
--------- ------- --------- ------- ----------- --------- ----------- ------------ -----------
Balance at December
31, 1999............ 6,600,373 66,004 9,803,949 98,039 12,306,164 1,176,916 (1,981,999) (5,161,775) 5,326,433
Payment of preferred
stock dividend
(unaudited)......... -- -- -- -- (247,392) -- -- -- (247,392)
Issuance of shares
for cash in
connection with
exercise of warrants
(unaudited)......... -- -- 153,153 1,532 132,582 -- -- -- 134,114
Partial conversion of
preferred stock
(unaudited)......... (38,333) (383) 15,333 153 230 -- -- -- --
Treasury stock
received in
settlement
(unaudited)......... -- -- -- -- -- 38,300 (54,802) -- (54,802)
Preferred stock
issued in connection
with Primal Systems,
Inc. settlement and
related spin-off
(unaudited)......... 3,236,521 32,365 -- -- 3,542,635 -- -- -- 3,575,000
Net loss
(unaudited)......... -- -- -- -- -- -- -- (180,467) (180,467)
--------- ------- --------- ------- ----------- --------- ----------- ------------ -----------
Balance at September
30, 2000
(unaudited)......... 9,798,561 $97,986 9,972,435 $99,724 $15,734,219 1,215,216 $(2,036,801) $ (5,342,242) $ 8,552,886
========= ======= ========= ======= =========== ========= =========== ============ ===========
The accompanying notes are an integral part of this consolidated financial
statement.
F-5
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
Years Ended December 31, September 30,
-------------------------- ------------------------
1998 1999 1999 2000
------------ ------------ ----------- -----------
(unaudited) (unaudited)
Cash flows from operating
activities:
Net income (loss)............... $ (1,323,478) $ 2,677,065 $ 1,997 $ (180,467)
(Income) loss from discontinued
operations..................... -- (958,759) -- 2,654,707
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities
from continuing operations:
Bad debt expense............... -- 188,901 188,901 54,000
(Credit) charge in connection
with terminated customers..... 4,271,394 (226,219) -- --
Amortization of loan
discounts..................... 30,166 8,280 6,210 6,210
Write-off unamortized loan
discounts..................... 83,930 -- -- --
Write-off debt issuance
costs......................... 90,203 -- -- --
Depreciation and
amortization.................. 518,419 550,546 398,374 435,590
Compensation in connection
with issuance of warrants..... 118,590 -- -- --
Compensation in connection
with issuance of stock........ -- 693,400 -- --
Treasury stock received in
settlement.................... -- -- -- (54,802)
Change in operating assets and
liabilities:
Trade accounts and notes
receivable.................... (300,611) 88,182 155,442 7,374
Advance payments receivable.... 1,652,200 5,082,897 5,512,154 4,844,009
Deferred tax assets............ -- (374,086) -- --
Other current assets........... (232,397) (210,476) 123,998 242,241
Deposits....................... (1,022,309) 1,384,764 1,038,376 (2,388,843)
Trade accounts payable and
accrued liabilities........... 65,129 670,427 1,518,613 (55,245)
Income taxes payable........... -- 255,673 -- (566,202)
Deposits and other payables
related to customers.......... (1,346,620) 1,598,688 (1,618,176) 6,418,455
Other assets................... 68,866 177,202 158,463 16,877
------------ ------------ ----------- -----------
Net cash provided by
continuing operations....... 2,673,482 11,606,485 7,484,352 11,433,904
Net cash provided by (used
in) discontinued
operations.................. 1,651,302 (366,020) -- (1,910,439)
------------ ------------ ----------- -----------
Net cash provided by
operations.................. 4,324,784 11,240,465 7,484,352 9,523,465
------------ ------------ ----------- -----------
Cash flows from investing
activities:
Purchase of contracts.......... (48,100) (60,000) (60,000) (7,500)
Purchase of property and
equipment..................... (683,054) (174,188) (167,916) (71,060)
Capitalized cost in connection
with Primal Acquisition....... -- -- (266,874) --
Issuance of notes receivable... (500,000) -- -- (2,313,500)
------------ ------------ ----------- -----------
Net cash used in investing
activities.................. (1,231,154) (234,188) (494,790) (2,392,060)
------------ ------------ ----------- -----------
Cash flows from financing
activities:
Proceeds from notes payable.... 752,973 160,000 160,000 --
Principal payments on notes
payable--line of credit,
net........................... (1,599,250) (5,924,749) (5,668,415) --
Payment of preferred stock
dividends..................... (445,876) (468,300) (252,900) (247,392)
Redemption of preferred stock
for cash...................... (1,460,000) -- -- --
Issuance of shares of common
and preferred stock for
cash.......................... 226,806 -- -- 134,114
Cash paid for treasury stock... (469,830) (115,632) (115,632) --
------------ ------------ ----------- -----------
Net cash used in financing
activities.................. (2,995,177) (6,348,681) (5,876,947) (113,278)
------------ ------------ ----------- -----------
Increase in cash................ 98,453 4,657,596 1,112,615 7,018,127
Cash at beginning of period..... 988,020 1,086,473 1,086,473 5,744,069
------------ ------------ ----------- -----------
Cash at end of period........... $ 1,086,473 $ 5,744,069 $ 2,199,088 $12,762,196
============ ============ =========== ===========
Supplemental disclosures:
Interest....................... $ 998,291 $ 372,360 $ 329,542 $ 55,829
============ ============ =========== ===========
Income tax..................... $ -- $ -- $ -- $ 453,000
============ ============ =========== ===========
Schedule of non-cash financing
and investing transactions:
Treasury stock received in
settlement.................... $ -- $ -- $ -- $ 54,802
============ ============ =========== ===========
Preferred stock issued in
acquisition of Primal......... $ -- $ 3,404,077 $ -- $ 3,575,000
============ ============ =========== ===========
Net liabilities assumed in
acquisition of Primal......... $ -- $ 971,300 $ -- $ --
============ ============ =========== ===========
Release of HBS escrow shares-
employment and earn-out-
agreements.................... $ -- $ 991,300 $ -- $ --
============ ============ =========== ===========
Financing fees in connection
with issuance of warrants..... $ 118,590 $ -- $ -- $ --
============ ============ =========== ===========
Payment of accounts payable
through issuance of common
stock......................... $ 59,378 $ -- $ -- $ --
============ ============ =========== ===========
Payment of debt through
issuance of common stock...... $ 30,000 $ -- $ -- $ --
============ ============ =========== ===========
Receipt of treasury stock in
connection with sale of
Bordercomm.................... $ 900,000 $ -- $ -- $ --
============ ============ =========== ===========
Loss on disposal of
discontinued operations....... $ 51,301 $ -- $ -- $ --
============ ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General and Summary of Significant Accounting Principles
Business Activity
Avery Communications, Inc. ("Avery"), a Delaware corporation, is the parent
company of three wholly-owned subsidiaries, Avery Communications, Inc. a Texas
corporation, Hold Billing Services, Ltd. ("HBS"), Primal Solutions, Inc.
("PSI") and Wireless Billing Solutions (100% owned by PSI), doing business as
Primal Billing Solutions ("Primal Billing Solutions"). Avery Communications,
Inc. and its subsidiaries are collectively referred to as the "Company."
Avery acquired PSI effective after the close of business on September 30,
1999 in a purchase transaction, and its operations are included in the
accompanying financial statements from October 1, 1999. Effective July 30,
2000, the board of directors approved the spin-off of PSI. Accordingly, the
operations of this entity have been reflected as discontinued operations in the
accompanying financial statements. Through this entity and its subsidiary,
Primal Billing Solutions, the Company provides computer software programming,
customization, program maintenance and product marketing for a variety of
software languages and platforms. PSI also designs, develops and supports an
integrated suit of client/server and browser-based software solutions focusing
on customer acquisition and retention in the telecommunications industry
primarily utilizing decision support software and internet technologies.
HBS provides billing and collection clearinghouse services to its
telecommunications customers. Billing and collection services are performed by
Local Exchange Carriers ("LEC's") which HBS administers pursuant to long-term
contracts. HBS currently operates under contracts with all of the regional bell
operating companies and various other independents. The contracts give HBS the
capability of billing in 49 states and the District of Columbia.
Effective January 1, 1998, Avery disposed of two of its previously owned
subsidiaries, Alternate Telephone and Communications, Inc. ("ATC") and
BorderComm, Inc. ("Bordercomm").
Interim Periods
The information set forth in these financial statements as of September 30,
2000 and for the nine months ended September 30, 1999 and September 30, 2000 is
unaudited and reflects all adjustments, consisting only of normal recurring
adjustments, that, in the opinion of management, are necessary to present
fairly the financial position and results of operations of the Company for the
respective periods. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the full fiscal year.
Consolidation
The accompanying consolidated financial statements include the accounts of
Avery and all of its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Statement of Cash Flows
For purposes of the statements of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of three months or less when purchased.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line method over the assets estimated useful life of
five to seven years.
F-7
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation from continuing operations for the years ended December 31,
1999 and 1998 was $257,318 and $154,125, respectively. Maintenance and repairs
are charged to operations when incurred. Betterments and renewals are
capitalized.
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of. In accordance with SFAS No. 121, long-lived assets are reviewed
when events or changes in circumstances indicate that their carrying value may
not be recoverable. There was no impairment of the value of such assets for the
years ended December 31, 1999 or 1998.
Goodwill
Goodwill results from the difference between the purchase price paid and
liabilities assumed by Avery over the estimated fair market value of assets of
HBS and subsequent increases to goodwill resulting from earn out payments.
Initial goodwill is being amortized using the straight-line method over 15
years with additional goodwill from the earn out payments being amortized over
the remaining goodwill life. On an on-going basis, management reviews
recoverability and the valuation and amortization of goodwill. As a part of
this review, the Company considers the undiscounted projected future net cash
flows in evaluating the goodwill. If the undiscounted future net cash flows is
less than the stated value, goodwill would be written down to fair value.
Purchased Contracts
The direct costs of acquiring billing and collection contracts with LEC's
are capitalized and amortized straight-line over the contract life, generally
three to five years.
Revenue Recognition
Continuing Operations:
Revenue and Cost Recognition on Contracts, Billing Services, and Advance
Funding Programs
Billing Services--The Company recognizes billing services revenue when its
customers' records are accepted by the LEC for billing and collection. Bills
are generated by the LEC's and the collected funds are remitted to the Company,
which in turn remits these funds, net of fees and reserves, to its billing
customers. These reserves represent cash withheld from customers to satisfy
future obligations on behalf of the customer. The obligations consist of local
exchange carrier billing fees, bad debts, and sales and excise taxes. The
Company records trade accounts receivable and service revenue for fees charged
for its billing services. When the customers' receivables are collected by the
Company from the LEC's, the Company's trade receivables are reduced by the
amount corresponding to the Company's processing fees. The remaining funds are
recorded as amounts due to customers and included in Deposits and other
payables related to customers in the accompanying balance sheets. The Company
also retains a reserve from its customers' settlement proceeds, calculated to
cover accounts that the LEC's are unable to collect, including LEC billing fees
and sales taxes, and are included in Deposits and other payables related to
customers in the accompanying balance sheets.
Advance Funding Programs--The Company offers participation in advance
funding to qualifying customers through its advance payment program. Under the
terms of the agreements, the Company purchases the customer's accounts
receivable for an amount equal to the face amount of the billing records
submitted to
F-8
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the LEC by the Company, less various items including costs and expenses on
previous billing records, financing fees, LEC charges, rejects and other
similar items. The Company advances 50% to 85% of the purchased amount. The
purchased accounts receivable are recorded at the gross amount (as Advance
payment receivables). The amount due to the customer (included in Deposits and
other payables related to customers in the accompanying balance sheets) is
recorded as the purchased accounts receivable less amounts advanced, adjusted
for various other reserve items. Financing charges are assessed until the
Company recoups its initial payment.
Discontinued Operations:
Software Licenses, Services and Post-Contract Customer Support
Revenues from sales of software licenses, which generally do not contain
multiple elements, are recognized upon shipment of the related product if the
requirements of AICPA Statement of Position 97-2, as amended, are met. If the
requirements of AICPA Statement of Position 97-2, including evidence of an
arrangement, client acceptance, a fixed or determinable fee, collectibility or
vendor-specific objective evidence about the value of an element are not met at
the date of shipment, revenue recognition is deferred until such items are
known or resolved. Revenues from service and post-contract customer support is
deferred and recognized ratably over the term of the contract.
Software Programming and Customization Services
Revenues are recognized as services are performed under the agreements.
Debt Issuance Costs
Financial advisory, accounting, legal and other expenses associated with the
debt are amortized by the straight-line method over the term of the loans.
Additional financing costs are recorded for warrants issued as payment for
financing services and in connection with the loans and/or extending these
loans, and is amortized by the straight-line method over the term or extension
period of the loans. Additional financing fees resulting from the decrease in
the exercise price of certain warrants are expensed in the period in which the
decrease in exercise price is granted.
Stock Based Compensation
The Company measures compensation cost for its stock based compensation
plans under the provisions of Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees. The difference, if any, between
the fair value of the stock on the date of grant over the amount received for
the stock is expensed over the related vesting period. Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation, ("SFAS
123") requires companies electing to continue to use APB 25 to account for its
stock-based compensation plan to make pro forma disclosures of net income
(loss) and earnings (loss) per share as if SFAS 123 had been applied (See Note
11).
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing the net income
(loss), increased (decreased) by preferred stock dividends of $287,200 and
$338,582 for the years ended December 31, 1999 and 1998, respectively, by the
weighted average number of shares of common stock outstanding during the
respective periods. The effect of the preferred stock dividend on the net
income (loss) per common share was $0.03 and $0.04 per weighted average common
share outstanding for the years ended December 31, 1999 and 1998,
F-9
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively. Diluted earnings per share includes the effect of all dilutive
options and warrants and instruments convertible into common stock. During the
year ended December 31, 1999, the effect of outstanding warrants and options
and convertible securities on the computation of net income (loss) per share
was dilutive and, therefore, is included in the computation of weighted average
shares. During the year ended December 31, 1998, the effect of outstanding
warrants and options and convertible securities on the computation of net
income (loss) per share was antidilutive and, therefore, is not included in the
computation of weighted average shares.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
Fair Value of Financial Instruments
The recorded amounts of financial assets and liabilities at December 31,
1999 and 1998 approximate fair value based on the Company's incremental
borrowing rate or due to the relatively short period of time between
origination of the instruments and their expected realization.
Adoption of New Accounting Standards
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This standard requires the presentation of comprehensive
income and its components for each year in which a statement of operations is
presented. The Company had no transactions during the years ended December 31,
1999 and 1998 that would be included as comprehensive income.
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. This statement
establishes the standard for the way business enterprises report information
about operating segments in annual and interim financial statements. The
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. After excluding the
discontinued operations segment, the Company currently has only one operating
segment.
The FASB has issued SFAS No. 132, Employers' Disclosures about Pensions and
Other Post-retirement Benefits, an amendment of FASB Statements No. 87, 88, and
106. This Statement revises employers' disclosures about pension and other
post-retirement benefit plans and standardizes the disclosure requirements for
pensions and other postretirement benefits. The Company adopted the statement
effective January 1, 1998. The Company typically does not offer the types of
benefit programs that fall under the guidelines of SFAS No. 132.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No.133", which establishes accounting and reporting standards for
derivative instruments. SFAS No.137 is effective for all fiscal quarters for
all fiscal years beginning after June 15, 2000. The adoption of SFAS 137 is not
expected to have a significant impact on the Company's results of operations.
F-10
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions and Dispositions
The Alternate Telephone and BorderComm Disposition
Effective January 1, 1998, the Company disposed of ATC and Bordercomm and
its subsidiaries in exchange for 419,000 shares of the Company's common stock,
valued at $900,000, cash of $1,600,000 and a receivable for $185,000 from a
third party. Assets and liabilities disposed of are as follows:
Current assets.................................................. $ 2,302,665
Equipment in service and furniture and equipment................ 226,363
Microwave concessions and other assets.......................... 1,819,394
Inter-company receivable........................................ 1,321,627
Current liabilities............................................. (2,955,895)
Long-term liabilities........................................... (162,853)
-----------
$ 2,551,301
===========
The Corsair Transaction
In February 1999, Corsair Communications, Inc. ("Corsair") and its wholly
owned subsidiary, Subscriber Computing, Inc., sold substantially all of the
assets relating to Subscriber's Communication Resource Manager billing system
and Intelligent Message Router to Primal Billing Solutions, a wholly owned
subsidiary of Primal Systems, Inc. Primal Systems, Inc. changed its name to
Primal Solutions, Inc. concurrent with its acquisition by Avery after the close
of business on September 30, 1999. As consideration for Primal Billing
Solutions entering into the Corsair transaction, Corsair paid $1,000,000 cash
to Primal Billing Solutions. Corsair also agreed to loan Primal Billing
Solutions the difference between the assets and liabilities acquired by Primal
Billing Solutions, plus $200,000 cash. The terms of the note are 10% annual
interest, five year amortization, and payment in full required in May 2001.
Avery guaranteed the obligations of Primal Billing Solutions. The Corsair
transaction was entered into in contemplation of Avery's acquisition of Primal
Systems, Inc. discussed below. Primal Billing Solutions recorded the
acquisition under the purchase method of accounting, acquiring assets at fair
value of $4,581,889 and assuming liabilities of $2,343,647 in addition to the
note payable to Corsair. There was no goodwill recorded in connection with this
transaction.
The Primal Acquisition
In March 1999, Avery entered into a merger agreement with Primal Systems,
Inc. and certain shareholders of Primal Systems, Inc. Pursuant to this
agreement, Primal Systems, Inc. was purchased effective after the close of
business on September 30, 1999. At the time of the merger, Avery issued
3,890,373 shares of Avery's convertible preferred stock in exchange for all of
the issued and outstanding shares of Primal Systems, Inc. Of this amount,
1,945,188 shares will be held in escrow, to be issued to Primal Systems, Inc.'s
shareholders based upon the operating performance of Primal Systems, Inc. from
August 1, 1999 through July 31, 2000. Upon the meeting of certain operating
performance thresholds by Primal Systems, Inc. during this period, the Primal
Systems, Inc. shareholders may receive up to a maximum of 4,000,000 additional
shares of Avery convertible preferred stock as additional consideration for the
merger. In addition, upon Primal Systems, Inc.'s satisfaction of certain
operating performance levels during this period, certain shareholders of Primal
Systems, Inc. will have the right in September through October, 2000 to require
Avery to repurchase up to 1,550,000 shares of Avery common stock issued upon
the conversion of Avery preferred stock received in the merger for the purchase
price of $2.50 per share.
The transaction was accounted for using the purchase method of accounting
with revenues and expenses of Primal Systems, Inc. being included in the
Company's operations from the acquisition date. The stock issued
F-11
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in the merger was valued at $3,404,076 using the closing price of Avery's
common stock on the acquisition date plus other acquisition costs of $356,845.
The Company acquired assets at fair value of $4,421,356 and assumed liabilities
of $5,393,230. The Company recorded goodwill of $4,732,795 in connection with
this transaction which includes the expenses incurred to consummate the
transaction.
Mark J. Nielsen, the Company's President and Chief Executive Officer, was
the Chairman of the Board and a significant shareholder of Primal Systems, Inc.
at the time of its acquisition by the Company.
3. Discontinued Operations
On August 1, 2000, the Board of Directors of Avery approved the spin-off of
PSI. The decision revised its plan announced February 29, 2000 to spin-off HBS,
its local exchange carrier billing clearing house business. The decision to
spin-off PSI instead of HBS is motivated primarily by the expectation that
Avery shareholders will pay less in taxes under a spin-off of PSI than would
have been the case with a spin-off of HBS. Prior filed annual financial
statements reflect HBS as discontinued operations.
Under the terms of the spin-off agreement with PSI, each common shareholder
of the Company on the record date of the spin-off will receive one share of
Primal common stock for each share of the Company's common stock held on that
date. In addition, owners of shares of Avery's series A, B, C, D or E
convertible preferred stock will receive Primal common stock, in the amount of
the preferred stock's common stock equivalent for each share of Avery preferred
stock held on the record date of the spin-off. The spin-off will be recorded at
book value for accounting purposes since PSI is an ongoing business.
The board of directors approved the spin-off primarily due to the fact that
it appears that investors will be better able to understand and value the PSI
and HBS businesses in separate entities rather than being combined into one
entity. The exercise and conversion price of outstanding stock warrants,
options and convertible securities will be adjusted to reflect the spin-off.
The valuation of the PSI stock to be distributed will be determined through an
appraisal of the PSI business. The spin-off will be a taxable transaction for
federal income tax purposes. As part of the transaction, the original PSI
owners have agreed to receive 15% and 32% of Avery and PSI, respectively, on a
fully diluted basis. In addition, the former PSI shareholders have agreed to
waive their right for Avery to repurchase 1,550,000 shares of their Avery stock
and Avery has agreed to provide $4.0 million in working capital to PSI.
The financial information contained in this document presents PSI as a
discontinued operation due to the spin-off. Accordingly, the amounts in the
statements of operations through the provision for income taxes are HBS's plus
expenses of Avery.
F-12
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 and September 30, 2000 (unaudited) the net current
assets (liabilities) and net long-term assets of PSI were as follows:
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
Current assets
Cash............................................ $ 1,710,996 $1,311,690
Trade accounts receivable....................... 993,406 1,248,296
Other current assets............................ 366,088 779,130
----------- ----------
Total current assets.......................... 3,070,490 3,339,116
----------- ----------
Current liabilities
Current portion of capital lease obligations.... 89,577 138,946
Current portion of notes payable................ 473,252 202,142
Trade accounts payable.......................... 346,932 215,708
Accrued liabilities............................. 852,095 950,852
Deferred revenue................................ 1,023,605 1,966,505
----------- ----------
Total current liabilities..................... 2,785,461 3,474,153
----------- ----------
Net current assets (liabilities) of discontinued
operations....................................... $ 285,029 $ (135,037)
=========== ==========
Property and equipment
Computer equipment and software................. $ 1,524,626 $2,256,098
Furniture and fixtures.......................... 107,650 110,814
Accumulated depreciation and amortization....... (23,431) (351,955)
----------- ----------
Total property and equipment.................. 1,608,845 2,014,957
----------- ----------
Other assets and long-term liabilities
Goodwill, net................................... 4,563,584 7,533,208
Capital lease obligations....................... (62,046) (241,284)
Notes payable................................... (1,728,108) (1,673,543)
Other........................................... 61,552 61,287
----------- ----------
Total......................................... 2,834,982 5,679,668
----------- ----------
Net long-term assets of discontinued operations... $ 4,443,827 $7,694,625
=========== ==========
F-13
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The operating results of PSI for the year ended December 31, 1999 and nine
months ended September 30, 2000 (unaudited) are as follows:
Year Ended Nine Months Ended
December September 30,
31, 1999 2000
----------- -------------------
Operating revenues........ $ 4,547,703 $ 6,254,158
Cost of revenues.......... (1,069,108) (3,223,552)
----------- -----------
Gross profit............ 3,478,595 3,030,606
Selling, general and
administrative expenses.. (1,787,241) (6,869,201)
----------- -----------
Income (loss) from
operations............. 1,691,354 (3,838,595)
Other (expense)........... (64,786) (130,137)
----------- -----------
Income (loss) before
income tax provision... 1,626,568 (3,968,732)
Income tax benefit
(expense).............. (667,809) 1,314,025
----------- -----------
Net income (loss)....... $ 958,759 $(2,654,707)
=========== ===========
PSI was acquired effective after the close of business on September 30,
1999, and accordingly the results of operations for the year ended December 31,
1999 include only three months of PSI operations.
4. Commitments and Contingencies
Continuing Operations:
The Company has entered into various non-cancelable operating leases related
to office space. At December 31, 1999, future minimum lease payments required
under the operating leases are as follows:
Year ended December 31,
-----------------------
2000............................................................... $108,462
2001............................................................... 108,462
2002............................................................... 108,462
2003............................................................... --
2004............................................................... --
--------
Total minimum lease payments..................................... $325,386
========
Rent expense for the years ended December 31, 1999 and 1998 amounted to
$108,462 and $109,026, respectively.
HBS is obligated to pay minimum usage charges over the lifetime of most LEC
billing contracts. Each contract has a minimum usage amount which relates to
HBS's customers' sales volume to be processed through the LEC. HBS does not
expect to incur any losses with respect to these minimum usage requirements.
The remaining minimum usage for significant contracts at December 31, 1999 is
as follows:
Amount Expires
---------- ---------------
Contract 1........................................ $4,850,000 March 1, 2001
Contract 2........................................ 450,000 January 1, 2003
Others............................................ 757,000 Throughout 2003
----------
$6,057,000
==========
F-14
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
HBS files consolidated sales and excise tax returns on behalf of its
customers for the various municipal, state and Federal jurisdictions in which
its customers do business. HBS relies on monthly tax reports it receives from
the LEC's in reporting and remitting such taxes. HBS's customers are
contractually obligated to reimburse HBS for any disputes with taxing
authorities that may arise from filing the sales and excise tax returns on
behalf of their customers. HBS is contingently liable for any such disputes or
assessments if its customers are unable or unwilling to honor the contract
provisions. There were no such disputes at December 31, 1999. HBS is also
contingently liable for chargebacks from the LEC's, to the extent such
chargebacks exceed HBS's reserves for such chargebacks. This contingent
liability is increased when HBS discontinues business with a particular
customer.
In connection with the acquisition of HBS, two of the previous partners of
HBS entered into contingent incentive compensation agreements with HBS under
which a total of 666,664 shares were issuable based on HBS achieving certain
pre-tax income levels (as defined). Prior to 1998 166,664 shares were earned
pursuant to these compensation agreements. During 1998 and 1999, 0 and 416,665
shares, respectively, were earned pursuant to these contingent incentive
compensation agreements. These shares are reflected as compensation and an
increase in stockholders equity, and are included in the increase in equity of
$991,300 in the accompanying financial statements. At December 31, 1999, 83,335
shares can still be earned under these agreements.
HBS was party to a legal proceeding filed in July 1998. HBS was named in a
complaint for injunctive relief filed by the Federal Trade Commission ("FTC")
against Veterans of America Association ("VOAA"). The suit alleged that VOAA
caused unauthorized charges to appear on end users' bills based on deceptive
marketing programs and sought relief against HBS and others. Several months
prior to the filing of the suit, HBS terminated its contract with VOAA based on
suspicion of the same activities alleged by the FTC in its suit. Since
termination, HBS has voluntarily paid out approximately twice the revenue it
took in from this account in order to reimburse end-users for credits due and
owing. Attorneys for HBS and Avery met with the FTC immediately after suit was
filed and offered full cooperation in its investigation. Without admitting any
liability or complicity in the alleged activities of its former customer, HBS
and Avery agreed to a stipulated preliminary injunction with terms consistent
with existing HBS guidelines as revised before suit was filed. The suit also
sought monetary fines and/or reimbursement to end-users from all parties
jointly and severally. No trial date has been set by the Court, and while
denying liability, HBS has offered to cooperate with the FTC in developing new
standards for the industry designed to better protect end-users. In 1999, HBS
settled with the FTC in the amount of $250,000 and agreed to abide by the
standards set by the FTC.
From time to time, HBS is party to what it believes is routine litigation
and proceedings that may be considered as part of the ordinary course of its
business. Currently, HBS is not aware of any current or pending litigation or
proceedings that would have a material adverse effect on HBS's business,
results of operations or financial condition.
F-15
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Discontinued operations:
PSI leases office space and certain equipment under various non-cancelable
operating and capital leases. At December 31, 1999, future minimum lease
payments required under the operating and capital leases are as follows:
Operating Capital
Year ended December 31, Leases Leases
----------------------- --------- --------
2000..................................................... $466,419 $107,010
2001..................................................... 155,473 42,910
2002..................................................... -- 28,261
2003..................................................... -- --
2004..................................................... -- --
-------- --------
Total minimum lease payments............................. $621,892 178,181
========
Less amount representing interest........................ 26,555
--------
Present value of minimum lease payments.................. 151,626
Less current portion at December 31, 1999.............. 89,577
--------
Long-term obligation at December 31, 1999................ $ 62,049
========
Rent expense under such operating leases was $147,266 for the year ended
December 31, 1999.
5. Short-Term Debt Obligations
The Company has a $10,000,000 revolving note payable--line of credit with a
financial institution. Interest is payable monthly at the prime rate plus 1.5%
(10% and 9.25% at December 31, 1999 and 1998, respectively) and the principal,
if any, was due March 25, 2000. The note was paid off in 2000. The note is
secured by substantially all the assets of the HBS. The line of credit
agreement contains certain covenants that require the Company to maintain a
certain financial ratio related to debt servicing and to limit capital
expenditures and additional indebtedness. During 1998, the Company was in
violation of three of these covenants, including exceeding the capital
expenditure limitation, exceeding the advance funding limit, and notification
of pending litigation. The Company received a waiver for these violations.
During 1999, the Company was in violation of the capital expenditure limitation
and has also received a waiver for this violation. The balance outstanding at
December 31, 1999 and 1998 was $0 and $5,766,832, respectively, leaving an
available balance of $4,971,481 and $4,233,168 as of December 31, 1999 and
1998, respectively.
F-16
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Notes Payable
Notes payable at December 31, 1999 and 1998 are as follows:
1999 1998
-------- --------
Note payable to third party bearing interest at 12% per
annum, payable quarterly; principal and any unpaid
interest originally due September 30, 1996, now due on
demand.................................................. $ 6,667 $ 6,667
Note payable to related party bearing interest at 12% per
annum, principal due December 10, 2002, convertible to
common stock at a price of $1.25 per share at any time,
unsecured. Principal at December 31, 1999 and 1998 is
$350,000 adjusted for a discount for warrants issued in
connection with the note based on imputed interest rate
of 20%.................................................. 325,195 316,915
-------- --------
331,862 323,582
Less current maturities.................................. 6,667 6,667
-------- --------
Long-term portion........................................ $325,195 $316,915
======== ========
Principal amounts due on notes payable at December 31, 1999 are as follows:
2000............................................................... $ 6,667
2001............................................................... --
2002............................................................... 350,000
2003............................................................... --
2004............................................................... --
--------
Total............................................................ 356,667
Loan discounts..................................................... (24,805)
--------
Total............................................................ $331,862
========
7. Concentration of Credit Risk and Significant Customers
At December 31, 1998, ten customers represented approximately 82% of trade
receivables and five customers represented approximately 83% of HBS's
outstanding advanced payment receivables. At December 31, 1999, six customers
comprised approximately 92% of trade receivables and five customers accounted
for approximately 93% of HBS's outstanding advanced payment receivables. All of
the 1999 receivables were collected after December 31, 1999. Credit risk with
respect to trade accounts receivable generated through billing services is
limited as the Company collects its fees through receipt of all its customers'
cash directly from LEC's. The credit risk with respect to purchase of accounts
receivable is reduced as the Company only advances 50% to 85% of the gross
accounts receivable purchased. Management evaluates accounts receivable
balances on an on-going basis and provides allowances as necessary for amounts
estimated to eventually become uncollectible which at December 31, 1999 and
1998 were considered to be minimal. In the event of complete non-performance of
accounts receivable, the maximum exposure to the Company is the recorded amount
shown on the balance sheet.
Under its billing contracts with the LEC's, the Company is obligated to pay
refunds due by the Partnership's customers to the LEC's if they are assessed.
Accordingly, to the extent that the Company is unable to recover refunds from
its customers and to the extent that it is holding insufficient reserves of its
customers to cover these refunds, the Company will be financially responsible
for these refunds.
F-17
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is at risk to the extent that cash held at banks exceeds the
Federal Deposit Insurance Corporation insured amounts. Cash in excess of these
limits amounted to approximately $5,622,000 and $115,000 at December 31, 1999
and 1998, respectively. The Company minimizes this risk by placing its cash
with high credit quality financial institutions.
8. Stockholders' Equity (Deficit)
The Company had six and five series of preferred stock outstanding as of
December 31, 1999 and 1998, respectively.
The preferred stock Series' A, B, C, D and E contain a conditional mandatory
redemption feature. Beginning in 1998 and continuing from year to year
thereafter, once audited stockholders' equity increased to $7,000,000, as
compared to the December 31, 1996 stockholders' equity balance of $1,295,437,
the Company would redeem the outstanding shares in each series on or before the
first September 30 following that audited balance sheet date. Each series has a
liquidation preference of $1.00 per share together with all unpaid dividends.
Each series also includes a conversion feature. This feature provides for the
preferred stockholder to convert their shares into common stock at a stated
conversion price as follows: Series A and C--$2.50 per share, Series B and E--
$1.00 per share, and Series D--$2.00 per share. The preferred stock Series D
contains additional mandatory redemption provisions which are enacted based
upon the sale of HBS. Series A, B, C, D and E preferred stock are automatically
convertible at the earlier of 1) a vote of 2/3 of the shares of the respective
series outstanding, or 2) the closing of an initial public offering of at least
$5 per share and at least $7,000,000 in aggregate proceeds.
The preferred stock Series F is participating and convertible. The
participating feature entitles the holders to participate, on a "if converted"
basis, in any and all dividends paid with respect to the common stock. The
conversion feature associated with the Series F provides for the issuance of
one share of common stock for every share of preferred Series F issued. The
Series F preferred stock has a liquidation preference of $1.00 per share.
Dividends are payable, as and if declared by the Board of Directors, at an
annual rate of $0.10 per share (Series A and D) and $0.12 per share (Series B,
C and E), all payable quarterly.
9. Income Taxes
Income taxes at December 31, 1999 and 1998 consists of the following:
1999 1998
--------- ----
Federal.........................................................
Current....................................................... $ 255,673 $--
Deferred...................................................... (904,246) --
State........................................................... -- --
--------- ----
Income tax benefit............................................ $(648,573) $--
========= ====
F-18
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the federal income tax provision (benefit) based on the
U.S. Corporate income tax rate of 34% for the years ended December 31, 1999
and 1998 is as follows:
1999 1998
----------- ---------
Income tax provision (benefit) at statutory rate... $ 363,709 $(449,983)
Net operating loss utilized........................ (67,097) --
Change in deferred tax rate........................ 89,124 --
Other.............................................. 19,144 8,500
Change in valuation allowance...................... (1,053,453) 441,483
----------- ---------
Income tax benefit............................... $ (648,573) $ --
=========== =========
Deferred tax assets and liabilities at December 31, 1999 and 1998 are as
follows:
1999 1998
----------- -----------
Current deferred tax asset....................... $ 573,281 $ 1,216,766
Valuation allowance for current deferred tax
asset........................................... (199,195) (1,216,766)
----------- -----------
Net current deferred tax asset................. $ 374,086 $ --
=========== ===========
Non-current deferred tax asset................... $ 1,377,513 $ 1,448,895
Non-current deferred tax liability............... -- (35,500)
Valuation allowance for non-current deferred tax
asset........................................... (1,377,513) (1,413,395)
----------- -----------
Net non-current deferred tax asset............. $ -- $ --
=========== ===========
The current deferred tax asset results primarily from differences in
contingency and valuation reserves for financial and federal income tax
reporting purposes and differences in the treatment of compensating stock
options. The non-current deferred tax asset results primarily from the net
operating loss. A significant portion of the current and non-current deferred
tax assets have a valuation allowance due to the uncertainty of generating
sufficient future taxable income.
As of December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $4,700,000, that begin
expiring in the year 2008. The utilization of the net operating loss is
subject to limitations in accordance with (S)382 of the Internal Revenue Code.
10. Related Party Transactions and Other Events
In December 1997, the Company entered into a five-year $350,000 note
payable with a company for which its president is also a member of the board.
The note bears interest at 12%, is convertible to common
stock and contains warrants for 175,000 shares of common stock at $1.50
exercise price. The outstanding note balance at December 31, 1999 is $325,195.
In May 1998, the Company granted options to purchase 100,000 shares of its
common stock at $2.69 per share (fair value at the date of grant) to the
directors of the Company.
During July 1998, the Company repaid a $1,000,000 loan to an entity of
which its chairperson is a partner.
Also during July 1998, the Company entered into an employment agreement
with its chairperson and issued an option to purchase 420,000 shares of common
stock at a price of $3.00 per share (fair value at the date of grant). The
terms of the employment agreement require the Company to pay an annual salary
of $200,000 for five years.
F-19
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company granted a warrant to a director during July 1998 for 25,000
shares at $3.00 per share.
During December 1998, the Company entered into an employment agreement with
its new president and issued an option to purchase 925,000 shares of common
stock at a price of $2.00 per share (which was more than fair value at the date
of grant). One-half of the option vested at the date of the grant, with the
balance vesting during the first six months of 1999. The terms of the
employment agreement require the Company to pay an annual salary of $200,000.
During December 1998, the Company advanced $400,000 to an HBS employee at 9%
interest. The Company advanced $100,000 to a company at 10% for which its
president is a major stockholder. The advance of $100,000 was repaid in 1999.
In December 1998, Avery's Board of Directors authorized Avery to repurchase
any or all of its outstanding warrants for a price of $1.00 per underlying
share. In December 1998, Avery repurchased warrants held by an entity
controlled by its chairperson to purchase 100,000 shares of common stock at an
exercise price of $1.50 per share. The $100,000 amount was recorded as
compensation in 1998. During 1999, an additional 621,736 warrants and options
with $1.50 exercise prices were repurchased from entities controlled by the
Company's chairperson for a price of $1.00 per underlying share. $300,000 has
been recorded as compensation, with $321,736 being recorded as financing fees.
At the close of business on September 30, 1999, the Company purchased Primal
Systems, Inc. Mark Nielsen, President and Chief Executive Officer of the
Company, was Chairman of the Board and a significant shareholder of Primal
Systems at the time of the purchase.
In conjunction with the acquisition of PSI, Avery acquired certain notes
payable to the officers of PSI. At December 31, 1999, the total amount due on
these notes was $170,575, net of discount of $6,091. These notes bear interest
at 6%. The current portion of these notes at December 31, 1999 was $88,333 and
the long-term portion of these notes was $82,242.
11. Stock Options and Warrants
Pursuant to various note agreements and in accordance with agreements for
key employees, the Company has issued certain stock options and warrants. The
options are considered compensatory.
Following is a summary of warrant and option activity:
Weighted
Average
Compensatory Exercise
Options Warrants Total Price Total
------------ --------- --------- -------- ----------
Outstanding at December
31, 1997............... 592,500 2,283,923 2,876,423 $1.37 $3,946,946
Purchase of option.... (100,000) -- (100,000) $1.50 (150,000)
Granted............... 1,510,000 12,500 1,522,500 $2.32 3,532,502
Exercised............. (17,500) (567,871) (585,371) $1.38 (806,808)
--------- --------- --------- ----------
Outstanding at December
31, 1998............... 1,985,000 1,728,552 3,713,552 6,522,640
Purchase of option.... -- (621,736) (621,736) $1.26 (783,387)
Granted............... 1,257,777 70,000 1,327,777 $1.56 2,066,667
Expired............... -- (121,666) (121,666) $1.50 (182,499)
--------- --------- --------- ----------
Outstanding at December
31, 1999............... 3,242,777 1,055,150 4,297,927 $7,623,421
========= ========= ========= ==========
F-20
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The outstanding stock options and warrants expire from August 1998 through
2008.
The following summarizes information about compensatory options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------
Weighted Avg. Weighted Avg. Weighted Avg.
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
----------------- ----------- ---------------- ------------- ----------- -------------
$.50-$3.00 3,242,777 6.1 years $1.85 2,281,268 $1.90
The weighted average fair values of compensatory option exercise prices
equal to and below market price at the date of grant are as follows:
Equal to Below
-------- -----
1999.......................................................... $1.17 $ --
1998.......................................................... $1.52 $1.37
Compensation cost totaling $118,590 was recognized for several options
granted in 1998 as the exercise price was below the fair value at the grant
date. The considered fair value of the Company's common stock on the date of
each respective grant was based upon the quoted NASD closing share price. The
remaining options granted in 1998 and 1999 have exercise prices which
approximate fair value (which was the quoted trading price at the date of
grant) and accordingly, no compensation cost has been recognized for those
compensatory stock options in the consolidated financial statements. Had
compensation cost for the Company's stock options been determined consistent
with FASB Statement No. 123, the Company's net income (loss) and net income
(loss) per share would have been increased (decreased) to the pro forma
amounts indicated below.
Years ended December
31,
----------------------
1999 1998
---------- -----------
Net income (loss)......................... As reported $2,677,065 $(1,323,478)
Pro forma $2,126,579 $(2,880,877)
Income (loss) per common share, as
reported................................. Basic $ .28 $ (.19)
Diluted $ .23 $ (.19)
Income (loss) per common share, Pro
forma.................................... Basic $ .21 $ (.38)
Diluted $ .19 $ (.38)
The estimate for the fair value of each option grant is on the date of
grant using the Black-Scholes method option-pricing model. The following
assumptions were used for grants in 1999--dividend yield of 0%, expected
volatility of 100%, expected life of 3 to 5 years and an estimated risk free
interest rate of 6.0%. The following assumptions were used for grants in
1998--dividend yield of 0%, expected volatility of 89%, expected life of 2 to
5 years and an estimated risk free interest rate of 6.0%.
The model is based on historical stock prices and volatility which, due to
the low volume of transactions, may not be representative of future price
variances.
12. Charge (Credit) in Connection with Terminated Customers
During the year ended December 31, 1998, the Company recorded a charge of
$4,271,394. The charge relates primarily to cash received from LEC's that has
been paid by the Company to terminated customers and must be refunded to the
LEC's. Under its billing contracts with the LEC's, the Company is obligated to
pay these refunds if it is unable to collect them from its customers. During
the later half of 1998, the Company paid
F-21
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
an estimated $3.8 million to terminated customers that will have to be refunded
to the LEC's. Of this amount, $1,471,742 was actually refunded to local
exchange carriers in calendar 1998. Management does not believe that these
amounts can be collected from the four customers that generated most of the
charge since they are out of business with no material surviving assets. The
refunds resulted from customers placing inappropriate charges on customer's
local telephone bills. The inappropriate charges stem from unauthorized
switching of long distance service from a consumer's incumbent provider to our
customer and placing unauthorized charges for services such as voice mail,
internet access and paging on consumer's local telephone bills. Prior to
incurring these refunds, the Company had processed billing records for these
customers for periods ranging from approximately 10 months to two years. During
these periods LEC refunds were within acceptable levels.
The $4,271,394 consists of cash refunds made in calendar 1998 totaling
$1,471,742 and estimated future refunds as of December 31, 1998 of 2,799,652
which is included in Deposits and other payables related to customers in the
accompanying consolidated balance sheet. The Company estimated the $2,799,652
by reviewing actual refunds for the terminated customers in 1998 and 1999 and
projecting future refunds based on each customer's actual refund pattern. In
addition to the $3.8 million discussed above, included in the $4,271,394 charge
is a$250,000 payment made to the FTC as further described in Note 4. The
Company has instituted a series of controls to limit its exposure to this type
of refund in the future.
In 1999, the Company expended $1,663,221 in cash relating to the $4.3
million dollar loss. Management determined that the loss was overestimated by
$226,219, and accordingly, adjusted the reserve. At December 31, 1999, $901,212
of the original $4.2 million estimated loss remained in the Deposits and other
payables related to customers section of the accompanying consolidated balance
sheet. This is the remaining amount estimated for future cash expenditures
expected to be charged by the Company in connection with the terminated
customers.
13. 401(k) Plan
The Company initiated a 401(k) Plan ("Plan") which covers substantially all
of Avery's and HBS's employees. Employees can contribute up to $10,000 for 1999
and 1998. Avery matches contributions to the Plan at $0.50 per dollar up to 6%
of employees compensation and may make additional discretionary contributions.
During 1999 and 1998, $27,670 and $16,680, respectively were contributed to the
Plan for the benefit of the Company's employees.
14. Subsequent Events
PSI Spin-Off
On August 1, 2000, the Board of Directors of Avery approved the spin-off of
Primal Solutions, Inc. ("PSI"). The decision revised its plan announced
February 29, 2000 to spin-off HBS Billing Services Company ("HBS") its local
exchange carrier billing clearinghouse business. The decision to spin-off PSI
instead of HBS is motivated primarily by the expectation that Avery
shareholders will pay less in taxes under a spin-off of PSI than would have
been the case with a spin-off of HBS. Accordingly, the financial information
contained in this document presents PSI as a discontinued operation due to the
spin-off and the amounts in the statements of operations through the provision
for income taxes are HBS's plus expenses of Avery. Financial statements filed
previously have reflected HBS as discontinued operations.
Notes and Other Receivables
In August 2000, the Company advanced certain former PSI stockholders
$1,564,000 pursuant to the Preliminary PSI Distribution Agreement. The notes
are non-recourse, bear interest at 6.6% per annum and are due in August 2002.
The loans are secured by the Company's series g preferred stock owned by the
former PSI
F-22
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stockholders. In addition, the Company advanced $750,000 to a company that is
related to its Chairman. The advance was made on terms identical to those of
other advances to the Company by other non-related professional investors. The
related note bears interest at 10% per annum and will be converted into
securities of the related company prior to December 31, 2000.
Preferred Stock
In accordance with the terms of the Preliminary PSI Distribution Agreement,
in August 2000, an additional 3,236,531 shares of Avery's series f preferred
stock were issued to the former PSI stockholders. (See PSI Preliminary
Distribution Agreement below.)
Immediately subsequent to the issuance of the 3,236,521 shares discussed
above the Company exchanged all of the outstanding shares (7,126,894) of the
Company's series f preferred stock for 7,126,894 shares of the Company's series
g preferred stock, pursuant to the Preliminary PSI Distribution Agreement. The
series g preferred stock is identical to the series f preferred stock except
that (i) it will have one vote for each share of the Company's common stock
into which it is convertible as a single class, (ii) is not entitled to
participate in the distribution rights by the Company of the shares of the PSI
common stock to the Company's security holders and (iii) is not convertible
into the Company's common stock until the earlier of the date of the
distribution or the termination of the Preliminary PSI Distribution Agreement.
PSI Preliminary Distribution Agreement
On August 1, 2000, certain contingencies relating to the original purchase
of PSI by the Company were resolved and resulted in the issuance of an
additional 3,236,531 shares of series f preferred stock and the recording of
additional goodwill of $3,575,000 related to the purchase of PSI. The issuance
of preferred stock and resulting additional goodwill relates to the attainment
by PSI of certain revenue and net loss targets and from the satisfaction of the
conditions relating to the repurchase right of 1,550,000 Avery common shares
from former PSI shareholders.
The Board of Directors of the Company approved the spin-off of PSI as a
separate public company in August 2000. In connection with the distribution,
certain agreements with the Company and the former PSI shareholders were agreed
to as follows: The Company agreed to provide $4,000,000 of cash to PSI. The
former PSI shareholders waived the repurchase right discussed above and the
additional 3,236,531 shares of Avery series f preferred stock discussed above
was issued to those shareholders. The former chief executive officer of the
Company agreed to cancel options to purchase 925,000 shares of the Company's
common stock in return for the issuance of 250,000 shares of PSI's common stock
post distribution.
Options and Warrants
On August 1, 2000, the Board of Directors of the Company approved a
temporary reduction in the exercise price of most of the 4,495,000 outstanding
options and warrants to $0.50 per share. This reduction in exercise price was
only applicable if the warrant/option holder exercised the underlying option by
October 20, 2000. During the fourth quarter, 2,155,000 options and warrants
were exercised. The Company will record a charge to earnings in the fourth
quarter in connection with the reductions in exercise prices.
F-23
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the securities offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------
TABLE OF CONTENTS
Page
----
Avery.................................................................... 3
Risk Factors............................................................. 4
A Note About Forward-Looking Statements.................................. 6
Use of Proceeds.......................................................... 7
Plan of Distribution..................................................... 7
Selling Securityholders.................................................. 8
Price Range of Common Stock.............................................. 9
Dividend Policy.......................................................... 9
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 10
Business................................................................. 19
Primal Distribution...................................................... 23
Management............................................................... 24
Certain Transactions..................................................... 30
Security Ownership of Certain Beneficial Owners and Management........... 31
Change in Control of Avery............................................... 33
Description of Capital Stock............................................. 34
Legal Proceedings........................................................ 37
Changes in Accounts...................................................... 37
Where You Can Find More Information...................................... 37
Experts.................................................................. 37
Index to Financial Statements............................................ 38
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4,100,381
Avery Communications, Inc.
Common Stock
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Delaware General Corporation Law
Section 145(a) of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present or
former director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of Section 145, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
Section 145(d) of the DGCL provides that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be
made by the corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of Section
145. Such determination shall be made, with respect to a person who is a
director or officer at the time of such determination, (1) by a majority vote
of the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors designated
by majority vote of such directors, even though less than a quorum, or (3) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined
II-1
that such person is not entitled to be indemnified by the corporation as
authorized in Section 145. Such expenses (including attorneys' fees) incurred
by former directors and officers or other employees and agents may be so paid
upon such terms and conditions, if any, as the corporation deems appropriate.
Certificate of Incorporation
The Certificate of Incorporation of Avery, as amended, a copy of which is
filed as Exhibit 3.1 to the Registration Statement, provides that a director of
Avery shall not be liable to Avery or its stockholders for monetary damages for
breach of fiduciary duty as a director, unless the breach involves (i) a breach
of the director's duty of loyalty to Avery or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) liability for unlawful dividend payments or
stock purchases or redemptions or (iv) for a transaction from which the
director derived an improper personal benefit. The Amended Certificate of
Incorporation provides Avery will indemnify all persons whom it may indemnify
to the fullest extent permitted by the DGCL.
Amended and Restated Bylaws
The bylaws of Avery generally make mandatory the provisions of Section 145
of the Delaware General Corporation law discussed above, including the
advancement of expenses reasonably incurred in defending a claim prior to its
final resolution, and provide that Avery's directors and officers will at all
times be indemnified to the maximum extent permitted by law.
Indemnification Agreements
Avery has entered into indemnification agreements pursuant to which it will
indemnify certain of its directors and officers against judgments, claims,
damages, losses and expenses incurred as a result of the fact that any director
or officer, in his capacity as such, is made or threatened to be made a party
to any suit or proceeding. Such persons will be indemnified to the fullest
extent now or hereafter permitted by the DGCL. The indemnification agreements
also provide for the advancement of certain expenses to such directors and
officers in connection with any such suit or proceeding.
Insurance
Avery has a directors' and officers' liability insurance policy to insure
its directors and officers against losses resulting from wrongful acts
committed by them in their capacities as directors and officers of Avery,
including liabilities arising under the Securities Act.
II-2
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered hereby, other than the
underwriting discount. All amounts are estimated except the Commission
registration fee.
SEC registration fee............................................. $ 910
Blue Sky fees and expenses....................................... --
Accounting fees and expenses..................................... 10,000
Printing and engraving expenses.................................. 10,000
Legal fees and expenses.......................................... 25,000
Registrar and transfer agent's fees.............................. --
Miscellaneous fees and expenses.................................. 25,000
-------
Total.......................................................... $70,910
Item 26. Recent Sales of Unregistered Securities
Since January 1, 1996, Avery issued an aggregate of 2,000,881 shares of
common stock to approximately 20 persons upon exercise of outstanding warrants
previously issued by Avery to such persons. Each of the purchasers of such
shares upon exercise of such warrants was an accredited investor who acquired
such shares for investment. Avery issued such shares upon exercise of such
warrants in transactions not involving a public offering in reliance upon the
exemption set forth in Section 4(2) of the Securities Act.
On July 1, 1998, Avery granted to Patrick J. Haynes, III, its Chairman and
then Chief Executive Officer, pursuant to his employment agreement, a ten-year
warrant to purchase 420,000 shares of Avery's common stock at $3.00 per share.
On December 1, 1998, Avery granted to Mark J. Nielsen, its new Chief Executive
Officer, pursuant to his employment agreement, a ten-year option to purchase
425,000 shares of Avery's Common Stock at $2.00 per share. These securities
were issued in reliance upon the exemption set forth in Rule 701 under the
Securities Act.
The shares of convertible preferred stock issued in the Primal merger were
issued to seven individuals who were the stockholders of Primal. Each of these
persons was either an accredited investor or a person who either alone or with
his purchaser representative(s) had such knowledge and experience in financial
and business matters that he was capable of evaluating the risks of the
investment in Avery, or who Avery reasonably believed came within this
description. Each of such persons confirmed that he was acquiring such shares
for investment and not with a view to the distribution thereof within the
meaning of the Securities Act, and agreed not to sell such shares except
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from such registration requirements. The certificate
representing such shares contains a legend to such effect, and appropriate stop
transfer orders were given to Avery's transfer agent. Such shares were issued
in a transaction not involving a public offering in reliance upon the exemption
set forth in Section 4(2) of the Securities Act and in reliance on the safe
harbor provided by Rule 506 thereunder.
Item 27. Exhibits
Exhibit
Number Description of Document
------- -----------------------
2.1 Partnership Interest Purchase Agreement dated as of May 3, 1996, by
and among Avery Communications, Inc., Avery Acquisition Sub, Inc.,
Hold Billing Services, Ltd., Hold Billing & Collection, L.C., Joseph
W. Webb, James A. Young, Edward L. Dunn, Philip S. Dunn,
Harold D. Box, and David W. Mechler, Jr. (filed as Exhibit 2.1 to
Avery's Registration Statement on Form SB-2 (File No. 333-65133) (the
"Prior Registration Statement") and incorporated herein by reference
thereto)
2.2 First Amendment to Partnership Interest Purchase Agreement by and
between Avery Communications, Inc., Avery Acquisition Sub, Inc., Hold
Billing Services, Ltd., Hold Billing & Collection, L.C., Joseph W.
Webb, James A. Young, Edward L. Dunn, Philip S. Dunn, Harold D. Box
and David W. Mechler, Jr. (filed as Exhibit 2.2 to the Prior
Registration Statement and incorporated herein by reference thereto)
II-3
Exhibit
Number Description of Document
------- -----------------------
2.3 Partnership Interest Option Agreement dated as of May 3, 1996, by and
among Avery Communications, Inc., Avery Acquisition Sub, Inc., Harold
D. Box and David W. Mechler, Jr. (filed as Exhibit 2.3 to the Prior
Registration Statement and incorporated herein by reference thereto)
2.4 First Amendment to Partnership Interest Option Agreement dated as of
October 15, 1996, by and among Avery Communications, Inc., Avery
Acquisition Sub, Inc., Harold D. Box, and David W. Mechler, Jr. (filed
as Exhibit 2.4 to the Prior Registration Statement and incorporated
herein by reference thereto)
2.5 Agreement and Plan of Merger, dated as of March 19, 1999, by and among
Avery Communications, Inc., ACI Telecommunications Financial Services
Corporation, Primal Systems, Inc., Mark J. Nielsen, John Faltys,
Joseph R. Simrell and David Haynes (the "Primal Merger Agreement")
(filed as Exhibit 2.5 to the Prior Registration Statement and
incorporated herein by reference thereto)
2.6 Amendment No. 1 to the Primal Merger Agreement (filed as Exhibit 2.6
to the Prior Registration Statement and incorporated herein by
reference thereto)
2.7 Amendment No. 2 to the Primal Merger Agreement (filed as Exhibit 2.1
to the registrant's Current Report on Form 8-K, dated
September 27, 1999, and incorporated herein by reference thereto)
2.8 Primal Solutions, Inc. Preliminary Distribution Agreement (the
"Distribution Agreement"), dated July 31, 2000, by and among Avery
Communications, Inc., a Delaware corporation, Primal Solutions, Inc.,
a Delaware corporation, John Faltys, Joseph R. Simrell, David Haynes,
Mark J, Nielsen, Arun Anand, Murari Cholappadi, Sanjay Gupta, Thurston
Group, Inc., a Delaware corporation, Patrick J. Haynes, III and Scot
M. McCormick (filed as Exhibit 2.1 to Avery's Form 8-K dated August
31, 2000 (the "Primal Form 8-K") and incorporated by reference herein)
2.9 Form of Non-Recourse Promissory Note, which is attached as Exhibit 5-A
to the Distribution Agreement (filed as Exhibit 2.2 to the Primal Form
8-K and incorporated by reference herein)
2.10 Form of Pledge Agreement, which is attached as Exhibit 5-B to the
Distribution Agreement (filed as Exhibit 2.3 to the Primal Form 8-K
and incorporated by reference herein)
2.11 Form of Irrevocable Proxy for Thurston Group, Inc., Patrick J. Haynes
III and their affiliates relating to the common stock of Primal, which
is attached as Exhibit 9-A to the Distribution Agreement (filed as
Exhibit 2.4 to the Primal Form 8-K and incorporated by reference
herein)
2.12 Form of Irrevocable Proxy for the Old Primal Stockholders relating to
the common stock of Avery, which is attached as Exhibit 9-B to the
Distribution Agreement (filed as Exhibit 2.5 to the Primal Form 8-K
and incorporated by reference herein)
2.13 Indemnification Agreement, dated July 31, 2000, by and between Avery
Communications, Inc., a Delaware corporation, John Faltys, Joseph R.
Simrell, and David Haynes (filed as Exhibit 2.6 to the Primal Form 8-K
and incorporated by reference herein)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Prior Registration Statement and incorporated herein by reference
thereto)
3.2 Amended and Restated Bylaws (filed as Exhibit 3.2 to the Prior
Registration Statement and incorporated herein by reference thereto)
3.3 Certificate of Designation of Series A Junior Convertible Redeemable
Preferred Stock*
3.4 Certificate of Designation of Series B Junior Convertible Redeemable
Preferred Stock*
3.5 Certificate of Designation of Series C Junior Convertible Redeemable
Preferred Stock*
3.6 Certificate of Designations of Series D Senior Cumulative Convertible
Redeemable Preferred Stock*
3.7 Certificate of Designations of Series E Junior Convertible Redeemable
Preferred Stock*
II-4
Exhibit
Number Description of Document
------- -----------------------
3.8 Certificate of Designations of Series G Junior Participating
Convertible Voting Preferred Stock*
3.9 Certificate of Designations of Series H Convertible Preferred Stock*
3.10 Certificate of Decrease in Authorized Number of Shares of Series of
Preferred Stock*
4.1 Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.2 Form of Warrant Exchange and Exercise Agreement (filed as Exhibit 4.2
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.3 Form of Warrant Exercise and Securities Exchange Agreement for
$800,000 Bridge Loan Notes (filed as Exhibit 4.3 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.4 Form of Warrant Exercise and Securities Exchange Agreement for
$1,050,000 Promissory Note (filed as Exhibit 4.4 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.5 Form of Warrant Exercise and Securities Exchange Agreement for
$340,000 Promissory Notes (filed as Exhibit 4.5 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.6 Registration Rights Agreement by and among Avery Communications, Inc.
and Joseph W. Webb, James A. Young, Edward L. Dunn, Philip S. Dunn,
Harold D. Box, and David W. Mechler, Jr. dated November 15, 1996
(filed as Exhibit 4.6 to the Prior Registration Statement and
incorporated herein by reference thereto)
4.7 Registration Rights Agreement by and between Avery Communications,
Inc. and The Franklin Holding Corporation (Delaware) dated May 30,
1997 (filed as Exhibit 4.7 to the Prior Registration Statement and
incorporated herein by reference thereto)
4.8 Registration Rights Agreement by and between Avery Communications,
Inc. and Roger Felberbaum dated December 5, 1996 (filed as Exhibit 4.8
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.9 Registration Rights Agreement by and between Avery Communications,
Inc. and Giulio Curiel dated December 31, 1996 (filed as Exhibit 4.9
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.10 Registration Rights Agreement by and between Avery Communications,
Inc. and Sabina International S.A. dated December 31, 1996 (filed as
Exhibit 4.10 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.11 Form of Investor Warrant (filed as Exhibit 4.11 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.12 Registration Rights Agreement by and between Avery Communications,
Inc. and Thomas A. Montgomery dated January 24, 1997 (filed as Exhibit
4.12 to the Prior Registration Statement and incorporated herein by
reference thereto)
4.13 Registration Rights Agreement by and between Avery Communications,
Inc. and Thurston Bridge Fund, L.P. dated December 6, 1996 (filed as
Exhibit 4.13 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.14 Registration Rights Agreement by and between Avery Communications,
Inc. and Eastern Virginia Small Business Investment Corporation dated
December 23, 1996 (filed as Exhibit 4.14 to the Prior Registration
Statement and incorporated herein by reference thereto)
4.15 Securities Exchange Agreement for 1996 HBS Series (filed as Exhibit
4.15 to the Prior Registration Statement and incorporated herein by
reference thereto)
II-5
Exhibit
Number Description of Document
------- -----------------------
4.16 $350,000 Promissory Note payable to Eastern Virginia Small Business
Investment Corporation dated December 23, 1996 (filed as Exhibit 4.16
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.17 $50,000 Promissory Note to Global Capital Resources, Inc. dated
September 30, 1996 (filed as Exhibit 4.17 to the Prior Registration
Statement and incorporated herein by reference thereto)
4.18 Loan and Security Agreement, by and between Hold Billing Services,
Ltd. and FINOVA Capital Corporation dated March 25, 1997 (filed as
Exhibit 4.18 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.19 Schedule to Loan and Security Agreement, by and between Hold Billing
Services, Ltd. and FINOVA Capital Corporation dated March 25, 1997
(filed as Exhibit 4.19 to the Prior Registration Statement and
incorporated herein by reference thereto)
4.20 Amendment to Loan and Security Agreement and Schedule to Loan and
Security Agreement, by and between Hold Billing Services, Ltd. and
FINOVA Capital Corporation dated February 1998 (filed as Exhibit 4.20
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.21 Second Amendment to Loan and Security Agreement and Schedule to Loan
and Security Agreement, by and between Hold Billing Services, Ltd. and
FINOVA Capital Corporation dated April 1998 (filed as Exhibit 4.21 to
the Prior Registration Statement and incorporated herein by reference
thereto)
4.22 $7,500,000 Secured Revolving Credit Note to FINOVA Capital Corporation
from Hold Billing Services dated March 25, 1997 (filed as Exhibit 4.22
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.23 Series H Preferred Stock Purchase Agreement dated February 21, 2001*
4.24 Registration Rights Agreement by and between Avery Communications,
Inc. and Jay Geier dated January 4, 2000*
4.25 Registration Rights Agreement by and between Avery Communications,
Inc. and Investor Network Company, LLC dated October 19, 2000*
4.26 Registration Rights Agreement by and among Avery Communications, Inc.,
Waterside Capital Corporation and CapitalSouth Partners Fund I, L.P.
dated February 21, 2001*
5.1 Opinion of Winstead Sechrest & Minick P.C.*
10.1 Employment Agreement by and between Avery Communications, Inc. and
Patrick J. Haynes, III dated July 1, 1998 (filed as Exhibit 10.1 to
the Prior Registration Statement and incorporated herein by reference
thereto)
10.2 Stock Warrant Certificate to Patrick J. Haynes, III dated July 1, 1998
(filed as Exhibit 10.2 to the Prior Registration Statement and
incorporated herein by reference thereto)
10.3 Employment and Noncompetition Agreement by and between Hold Billing
Services, Ltd. and Harold D. Box dated November 15, 1996 (filed as
Exhibit 10.3 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.4 Employment Agreement by and between Avery Communications, Inc. and
Mark J. Nielsen dated December 1, 1998 (filed as Exhibit 10.4 to the
Prior Registration Statement and incorporated herein by reference
thereto)
10.5 Avery Communications, Inc. Stock Option to Mark J. Nielsen dated
December 1, 1998 (filed as Exhibit 10.5 to the Prior Registration
Statement and incorporated herein by reference thereto)
10.6 Investment Agreement by and between The Franklin Holding Corporation
(Delaware) and Avery Communications, Inc. dated May 30, 1997 (filed as
Exhibit 10.6 to the Prior Registration Statement and incorporated
herein by reference thereto)
II-6
Exhibit
Number Description of Document
------- -----------------------
10.7 Warrant to the Thurston Group, Inc. dated May 27, 1997 (filed as
Exhibit 10.7 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.8 Avery Communications, Inc. Stock Purchase Warrant to Thurston Bridge
Fund, L.P. dated December 6, 1996 (filed as Exhibit 10.8 to the Prior
Registration Statement and incorporated herein by reference thereto)
10.9 Avery Communications, Inc. Stock Purchase Warrant to Eastern Virginia
Small Business Investment Corporation dated December 23, 1996 (filed
as Exhibit 10.9 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.10 Avery Communications, Inc. Stock Purchase Warrant to The Franklin
Holding Corporation (Delaware) dated May 30, 1997 (filed as Exhibit
10.10 to the Prior Registration Statement and incorporated herein by
reference thereto)
10.11 Form of Billing Services Agreement (filed as Exhibit 10.11 to the
Prior Registration Statement and incorporated herein by reference
thereto)
10.12 Form of Supplemental Advance Purchase Agreement (filed as Exhibit
10.12 to the Prior Registration Statement and incorporated herein by
reference thereto)
10.13 Form of Director and Officer Indemnification Agreement (filed as
Exhibit 10.13 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.14 Avery Communications, Inc. 1999 Flexible Incentive Plan (filed as
Exhibit 99.1 to Avery's Registration Statement on Form S-8 (File No.
333-33486) and incorporated herein by reference thereto)
11.1 Statement Regarding Computation of Earnings per Share (filed as
Exhibit 11.1 to the Prior Registration Statement and incorporated
herein by reference thereto)
16.1 Letter from PricewaterhouseCoopers LLP on change in certifying
accountant (filed as Exhibit 16.1 to the Prior Registration Statement
and incorporated herein by reference thereto)
21.1 Subsidiaries of Registrant (filed as Exhibit 21.1 to the Prior
Registration Statement and incorporated herein by reference thereto)
23.1 Consent of King Griffin & Adamson P.C.*
23.2 Consent of Winstead Sechrest & Minick P.C. (included in Exhibit 5.1)*
24.1 Power of Attorney (included on signature page of this Registration
Statement)
- --------
* Filed herewith.
Item 28. Undertakings
Rule 415
Avery will:
(1) File, during any period in which it offers or sells securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
II-7
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Commission Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Avery pursuant to the foregoing provisions, or otherwise, Avery has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, Avery will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Rule 430A
Avery will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Avery under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Chicago, State of Illinois, on March 21, 2001.
AVERY COMMUNICATIONS, INC.
By:/s/ Scot M. McCormick
-------------------------------
Scott M. McCormick
Each person whose signature appears below constitutes and appoints
Patrick J. Haynes, III, Scot M. McCormick and Robert T. Isham, Jr., and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign on
his behalf individually and in each capacity stated below any amendment,
(including post-effective amendments) to this Registration Statement and any
Registration Statement (including any amendment thereto) for this offering that
is to be effective upon filing pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, and to file the same, with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents and either of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on March 21, 2001.
Signature Title
--------- -----
/s/ Patrick J. Haynes, III Director, Chairman of the Board,
______________________________________ President, and Chief Executive
Patrick J. Haynes, III Officer (Principal Executive Officer)
/s/ Scot M. McCormick Director, Vice President, Chief
______________________________________ Financial Officer and Secretary
Scot M. McCormick (Principal Accounting Officer)
/s/ Norman M. Phipps Director
______________________________________
Norman M. Phipps
/s/ J. Alan Lindauer Director
______________________________________
J. Alan Lindauer
/s/ Robert T. Isham, Jr. Director
______________________________________
Robert T. Isham, Jr.
II-9
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
2.1 Partnership Interest Purchase Agreement dated as of May 3, 1996, by
and among Avery Communications, Inc., Avery Acquisition Sub, Inc.,
Hold Billing Services, Ltd., Hold Billing & Collection, L.C., Joseph
W. Webb, James A. Young, Edward L. Dunn, Philip S. Dunn,
Harold D. Box, and David W. Mechler, Jr. (filed as Exhibit 2.1 to
Avery's Registration Statement on Form SB-2 (File No. 333-65133) (the
"Prior Registration Statement") and incorporated herein by reference
thereto)
2.2 First Amendment to Partnership Interest Purchase Agreement by and
between Avery Communications, Inc., Avery Acquisition Sub, Inc., Hold
Billing Services, Ltd., Hold Billing & Collection, L.C., Joseph W.
Webb, James A. Young, Edward L. Dunn, Philip S. Dunn, Harold D. Box
and David W. Mechler, Jr. (filed as Exhibit 2.2 to the Prior
Registration Statement and incorporated herein by reference thereto)
2.3 Partnership Interest Option Agreement dated as of May 3, 1996, by and
among Avery Communications, Inc., Avery Acquisition Sub, Inc., Harold
D. Box and David W. Mechler, Jr. (filed as Exhibit 2.3 to the Prior
Registration Statement and incorporated herein by reference thereto)
2.4 First Amendment to Partnership Interest Option Agreement dated as of
October 15, 1996, by and among Avery Communications, Inc., Avery
Acquisition Sub, Inc., Harold D. Box, and David W. Mechler, Jr. (filed
as Exhibit 2.4 to the Prior Registration Statement and incorporated
herein by reference thereto)
2.5 Agreement and Plan of Merger, dated as of March 19, 1999, by and among
Avery Communications, Inc., ACI Telecommunications Financial Services
Corporation, Primal Systems, Inc., Mark J. Nielsen, John Faltys,
Joseph R. Simrell and David Haynes (the "Primal Merger Agreement")
(filed as Exhibit 2.5 to the Prior Registration Statement and
incorporated herein by reference thereto)
2.6 Amendment No. 1 to the Primal Merger Agreement (filed as Exhibit 2.6
to the Prior Registration Statement and incorporated herein by
reference thereto)
2.7 Amendment No. 2 to the Primal Merger Agreement (filed as Exhibit 2.1
to the registrant's Current Report on Form 8-K, dated
September 27, 1999, and incorporated herein by reference thereto)
2.8 Primal Solutions, Inc. Preliminary Distribution Agreement (the
"Distribution Agreement"), dated July 31, 2000, by and among Avery
Communications, Inc., a Delaware corporation, Primal Solutions, Inc.,
a Delaware corporation, John Faltys, Joseph R. Simrell, David Haynes,
Mark J, Nielsen, Arun Anand, Murari Cholappadi, Sanjay Gupta, Thurston
Group, Inc., a Delaware corporation, Patrick J. Haynes, III and Scot
M. McCormick (filed as Exhibit 2.1 to Avery's Form 8-K dated August
31, 2000 (the "Primal Form 8-K") and incorporated by reference herein)
2.9 Form of Non-Recourse Promissory Note, which is attached as Exhibit 5-A
to the Distribution Agreement (filed as Exhibit 2.2 to the Primal Form
8-K and incorporated by reference herein)
2.10 Form of Pledge Agreement, which is attached as Exhibit 5-B to the
Distribution Agreement (filed as Exhibit 2.3 to the Primal Form 8-K
and incorporated by reference herein)
2.11 Form of Irrevocable Proxy for Thurston Group, Inc., Patrick J. Haynes
III and their affiliates relating to the common stock of Primal, which
is attached as Exhibit 9-A to the Distribution Agreement (filed as
Exhibit 2.4 to the Primal Form 8-K and incorporated by reference
herein)
2.12 Form of Irrevocable Proxy for the Old Primal Stockholders relating to
the common stock of Avery, which is attached as Exhibit 9-B to the
Distribution Agreement (filed as Exhibit 2.5 to the Primal Form 8-K
and incorporated by reference herein)
II-10
Exhibit
Number Description of Document
------- -----------------------
2.13 Indemnification Agreement, dated July 31, 2000, by and between Avery
Communications, Inc., a Delaware corporation, John Faltys, Joseph R.
Simrell, and David Haynes (filed as Exhibit 2.6 to the Primal Form 8-K
and incorporated by reference herein)
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the
Prior Registration Statement and incorporated herein by reference
thereto)
3.2 Amended and Restated Bylaws (filed as Exhibit 3.2 to the Prior
Registration Statement and incorporated herein by reference thereto)
3.3 Certificate of Designation of Series A Junior Convertible Redeemable
Preferred Stock*
3.4 Certificate of Designation of Series B Junior Convertible Redeemable
Preferred Stock*
3.5 Certificate of Designation of Series C Junior Convertible Redeemable
Preferred Stock*
3.6 Certificate of Designations of Series D Senior Cumulative Convertible
Redeemable Preferred Stock*
3.7 Certificate of Designations of Series E Junior Convertible Redeemable
Preferred Stock*
3.8 Certificate of Designations of Series G Junior Participating
Convertible Voting Preferred Stock*
3.9 Certificate of Designations of Series H Convertible Preferred Stock*
3.10 Certificate of Decrease in Authorized Number of Shares of Series of
Preferred Stock*
4.1 Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.2 Form of Warrant Exchange and Exercise Agreement (filed as Exhibit 4.2
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.3 Form of Warrant Exercise and Securities Exchange Agreement for
$800,000 Bridge Loan Notes (filed as Exhibit 4.3 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.4 Form of Warrant Exercise and Securities Exchange Agreement for
$1,050,000 Promissory Note (filed as Exhibit 4.4 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.5 Form of Warrant Exercise and Securities Exchange Agreement for
$340,000 Promissory Notes (filed as Exhibit 4.5 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.6 Registration Rights Agreement by and among Avery Communications, Inc.
and Joseph W. Webb, James A. Young, Edward L. Dunn, Philip S. Dunn,
Harold D. Box, and David W. Mechler, Jr. dated November 15, 1996
(filed as Exhibit 4.6 to the Prior Registration Statement and
incorporated herein by reference thereto)
4.7 Registration Rights Agreement by and between Avery Communications,
Inc. and The Franklin Holding Corporation (Delaware) dated May 30,
1997 (filed as Exhibit 4.7 to the Prior Registration Statement and
incorporated herein by reference thereto)
4.8 Registration Rights Agreement by and between Avery Communications,
Inc. and Roger Felberbaum dated December 5, 1996 (filed as Exhibit 4.8
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.9 Registration Rights Agreement by and between Avery Communications,
Inc. and Giulio Curiel dated December 31, 1996 (filed as Exhibit 4.9
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.10 Registration Rights Agreement by and between Avery Communications,
Inc. and Sabina International S.A. dated December 31, 1996 (filed as
Exhibit 4.10 to the Prior Registration Statement and incorporated
herein by reference thereto)
II-11
Exhibit
Number Description of Document
------- -----------------------
4.11 Form of Investor Warrant (filed as Exhibit 4.11 to the Prior
Registration Statement and incorporated herein by reference thereto)
4.12 Registration Rights Agreement by and between Avery Communications,
Inc. and Thomas A. Montgomery dated January 24, 1997 (filed as Exhibit
4.12 to the Prior Registration Statement and incorporated herein by
reference thereto)
4.13 Registration Rights Agreement by and between Avery Communications,
Inc. and Thurston Bridge Fund, L.P. dated December 6, 1996 (filed as
Exhibit 4.13 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.14 Registration Rights Agreement by and between Avery Communications,
Inc. and Eastern Virginia Small Business Investment Corporation dated
December 23, 1996 (filed as Exhibit 4.14 to the Prior Registration
Statement and incorporated herein by reference thereto)
4.15 Securities Exchange Agreement for 1996 HBS Series (filed as Exhibit
4.15 to the Prior Registration Statement and incorporated herein by
reference thereto)
4.16 $350,000 Promissory Note payable to Eastern Virginia Small Business
Investment Corporation dated December 23, 1996 (filed as Exhibit 4.16
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.17 $50,000 Promissory Note to Global Capital Resources, Inc. dated
September 30, 1996 (filed as Exhibit 4.17 to the Prior Registration
Statement and incorporated herein by reference thereto)
4.18 Loan and Security Agreement, by and between Hold Billing Services,
Ltd. and FINOVA Capital Corporation dated March 25, 1997 (filed as
Exhibit 4.18 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.19 Schedule to Loan and Security Agreement, by and between Hold Billing
Services, Ltd. and FINOVA Capital Corporation dated March 25, 1997
(filed as Exhibit 4.19 to the Prior Registration Statement and
incorporated herein by reference thereto)
4.20 Amendment to Loan and Security Agreement and Schedule to Loan and
Security Agreement, by and between Hold Billing Services, Ltd. and
FINOVA Capital Corporation dated February 1998 (filed as Exhibit 4.20
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.21 Second Amendment to Loan and Security Agreement and Schedule to Loan
and Security Agreement, by and between Hold Billing Services, Ltd. and
FINOVA Capital Corporation dated April 1998 (filed as Exhibit 4.21 to
the Prior Registration Statement and incorporated herein by reference
thereto)
4.22 $7,500,000 Secured Revolving Credit Note to FINOVA Capital Corporation
from Hold Billing Services dated March 25, 1997 (filed as Exhibit 4.22
to the Prior Registration Statement and incorporated herein by
reference thereto)
4.23 Series H Preferred Stock Purchase Agreement dated February 21, 2001*
4.24 Registration Rights Agreement by and between Avery Communications,
Inc. and Jay Geier dated January 4, 2000*
4.25 Registration Rights Agreement by and between Avery Communications,
Inc. and Investor Network Company, LLC dated October 19, 2000*
4.26 Registration Rights Agreement by and among Avery Communications, Inc.,
Waterside Capital Corporation and CapitalSouth Partners Fund I, L.P.
dated February 21, 2001*
5.1 Opinion of Winstead Sechrest & Minick P.C.*
10.1 Employment Agreement by and between Avery Communications, Inc. and
Patrick J. Haynes, III dated July 1, 1998 (filed as Exhibit 10.1 to
the Prior Registration Statement and incorporated herein by reference
thereto)
II-12
Exhibit
Number Description of Document
------- -----------------------
10.2 Stock Warrant Certificate to Patrick J. Haynes, III dated July 1, 1998
(filed as Exhibit 10.2 to the Prior Registration Statement and
incorporated herein by reference thereto)
10.3 Employment and Noncompetition Agreement by and between Hold Billing
Services, Ltd. and Harold D. Box dated November 15, 1996 (filed as
Exhibit 10.3 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.4 Employment Agreement by and between Avery Communications, Inc. and
Mark J. Nielsen dated December 1, 1998 (filed as Exhibit 10.4 to the
Prior Registration Statement and incorporated herein by reference
thereto)
10.5 Avery Communications, Inc. Stock Option to Mark J. Nielsen dated
December 1, 1998 (filed as Exhibit 10.5 to the Prior Registration
Statement and incorporated herein by reference thereto)
10.6 Investment Agreement by and between The Franklin Holding Corporation
(Delaware) and Avery Communications, Inc. dated May 30, 1997 (filed as
Exhibit 10.6 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.7 Warrant to the Thurston Group, Inc. dated May 27, 1997 (filed as
Exhibit 10.7 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.8 Avery Communications, Inc. Stock Purchase Warrant to Thurston Bridge
Fund, L.P. dated December 6, 1996 (filed as Exhibit 10.8 to the Prior
Registration Statement and incorporated herein by reference thereto)
10.9 Avery Communications, Inc. Stock Purchase Warrant to Eastern Virginia
Small Business Investment Corporation dated December 23, 1996 (filed
as Exhibit 10.9 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.10 Avery Communications, Inc. Stock Purchase Warrant to The Franklin
Holding Corporation (Delaware) dated May 30, 1997 (filed as Exhibit
10.10 to the Prior Registration Statement and incorporated herein by
reference thereto)
10.11 Form of Billing Services Agreement (filed as Exhibit 10.11 to the
Prior Registration Statement and incorporated herein by reference
thereto)
10.12 Form of Supplemental Advance Purchase Agreement (filed as Exhibit
10.12 to the Prior Registration Statement and incorporated herein by
reference thereto)
10.13 Form of Director and Officer Indemnification Agreement (filed as
Exhibit 10.13 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.14 Avery Communications, Inc. 1999 Flexible Incentive Plan (filed as
Exhibit 99.1 to Avery's Registration Statement on Form S-8 (File No.
333-33486) and incorporated herein by reference thereto)
11.1 Statement Regarding Computation of Earnings per Share (filed as
Exhibit 11.1 to the Prior Registration Statement and incorporated
herein by reference thereto)
16.1 Letter from PricewaterhouseCoopers LLP on change in certifying
accountant (filed as Exhibit 16.1 to the Prior Registration Statement
and incorporated herein by reference thereto)
21.1 Subsidiaries of Registrant (filed as Exhibit 21.1 to the Prior
Registration Statement and incorporated herein by reference thereto)
23.1 Consent of King Griffin & Adamson P.C.*
23.2 Consent of Winstead Sechrest & Minick P.C. (included in Exhibit 5.1)*
24.1 Power of Attorney (included on signature page of this Registration
Statement)
- --------
* Filed herewith.
II-13