UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-27095
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AVERY COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 12-2227079
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
190 SOUTH LASALLE STREET, 60603
SUITE 1710
CHICAGO, ILLINOIS
(Address and principal executive offices) (Zip code)
(312) 419-0077
(Registrant's telephone number, including area code)
The number of shares outstanding of each of the issuer's classes of common
equity, as of October 23, 2000
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
-------------- ----------------------------
Common Stock, $.01 par value 11,247,264
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Consolidated Balance Sheets at September 30, 2000 1
(unaudited) and December 31, 1999
Consolidated Statements of Operations For the Periods
Ended September 30, 2000 and 1999 (unaudited) 2
Consolidated Statements of Cash Flows For the Periods 3
Ended September 30, 2000 and 1999 (unaudited)
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II OTHER INFORMATION
Item 5. Other information 14
ITEM 1. AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2000 1999
--------------- ----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 12,762,196 $ 5,744,069
Trade accounts receivable, net of allowance for doubtful accounts of
$242,901 (unaudited) and $188,901 752,213 813,589
Advanced payment receivables 1,966,242 6,810,249
Other receivables 390,825 681,526
Deferred tax asset 374,086 374,086
Income tax receivable 310,529 -
Other 75,987 27,527
Net current assets of discontinued operations - 285,029
--------------- ----------------
Total current assets 16,632,078 14,736,075
--------------- ----------------
Property and equipment:
Computer equipment and software 1,131,637 1,063,674
Furniture and fixtures 338,041 334,944
Accumulated depreciation and amortization (701,693) (506,535)
--------------- ----------------
Total property and equipment, net 767,985 892,083
--------------- ----------------
Other assets:
Goodwill, net of accumulated amortization of $934,511 (unaudited) and $732,869 2,821,106 3,022,748
Net long-term assets of discontinued operations 7,694,625 4,443,827
Deposits 2,574,357 185,514
Purchased contracts, net of accumulated amortization of $314,998 (unaudited)
and $276,208, respectively 39,265 70,555
Non-recourse notes receivable, including $1,439,000 (unaudited) due from related parties 1,563,500 -
Other receivables, including $1,150,000 (unaudited) and $400,000, due from
related parties 1,150,772 417,649
--------------- ----------------
Total other assets 15,843,625 8,140,293
--------------- ----------------
Total assets $ 33,243,688 $ 23,768,451
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current notes payable $ 6,667 $ 6,667
Trade accounts payable 2,907,786 4,369,562
Accrued liabilities 3,983,284 2,576,753
Income taxes payable - 255,673
Deposits and other payables related to customers 17,326,623 10,908,168
Net current liabilities of discontinued operations 135,037 -
--------------- ----------------
Total current liabilities 24,359,397 18,116,823
--------------- ----------------
Long-term liabilities:
Long-term portion of notes payable, due to related parties 331,405 325,195
--------------- ----------------
Stockholders' equity:
Preferred stock (20,000,000 shares authorized):
Series A; $0.01 par value, 800,000 shares authorized, 391,667 shares issued
and outstanding at September 30, 2000 (unaudited) and 400,000 at
December 31, 1999 (liquidation preference of $391,667 at September 30, 2000
(unaudited) and $400,000 at December 31, 1999) 3,917 4,000
Series B; $0.01 par value, 1,050,000 shares authorized, 390,000 shares
issued and outstanding at September 30, 2000 (unaudited) and December
31, 1999 (liquidation preference of $390,000) 3,900 3,900
Series C; $0.01 par value, 340,000 shares authorized, 40,000 shares issued
and outstanding at September 30, 2000 (unaudited) and 70,000 at
December 31, 1999 (liquidation preference of $40,000 at September 30, 2000
(unaudited), and $70,000 at December 31, 1999) 400 700
Series D; $0.01 par value, 1,500,000 authorized, issued and outstanding
at September 30, 2000 (unaudited) and December 31, 1999
(liquidation preference of $1,500,000) 15,000 15,000
Series E; $0.01 par value, 350,000 authorized, issued and outstanding
at September 30, 2000 (unaudited) and December 31, 1999
(liquidation preference of $350,000) 3,500 3,500
Series F; $0.01 par value, 8,000,000 shares authorized, 0 shares issued and
outstanding at September 30, 2000 (unaudited) and 3,890,373 shares
issued and outstanding at December 31, 1999 (liquidation preference of
$0 at September 30, 2000 (unaudited) and $38,904 at December 31, 1999) - 38,904
Series G; $0.01 par value, 8,000,000 shares authorized, 7,126,894 shares issued and
outstanding at September 30, 2000 (unaudited) and 0 shares issued and
outstanding at December 31, 1999 (liquidation preference of $71,269 at
September 30, 2000 (unaudited) and $0 at December 31, 1999) 71,269 -
Common stock, $0.01 par value, 20,000,000 shares authorized, 9,972,435 shares issued at
September 30, 2000 (unaudited) and 9,803,949 shares issued at December 31, 1999 99,724 98,039
Additional paid-in capital 15,734,219 12,306,164
Accumulated deficit (5,342,242) (5,161,775)
Treasury stock, 1,215,216 shares at September 30, 2000 (unaudited) and 1,176,916
at December 31, 1999, respectively, at cost (2,036,801) (1,981,999)
--------------- ----------------
Total stockholders' equity 8,552,886 5,326,433
--------------- ----------------
Total liabilities and stockholders' equity $ 33,243,688 $ 23,768,451
=============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
- 1 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
Revenues $ 9,665,863 $ 6,607,559 $ 27,443,282 $ 16,335,812
Cost of revenues (6,911,393) (5,045,296) (19,763,332) (12,158,093)
-------------- -------------- -------------- --------------
Gross profit 2,754,470 1,562,263 7,679,950 4,177,719
Selling, general and administrative espense (1,529,423) (1,292,754) (4,455,205) (3,960,174)
Advance funding program income 36,987 150,680 227,111 452,273
Advance funding program costs (35,564) (47,646) (130,046) (192,772)
-------------- -------------- -------------- --------------
Total (1,528,000) (1,189,720) (4,358,140) (3,700,673)
-------------- -------------- -------------- --------------
Operating income 1,226,470 372,543 3,321,810 477,046
-------------- -------------- -------------- --------------
Other income (expense):
Interest expense (14,464) (78,354) (50,240) (254,036)
Financing fees and debt issuance costs - - - (321,736)
Other, net 126,299 39,328 297,961 100,723
-------------- -------------- -------------- --------------
Total other income (expense) 111,835 (39,026) 247,721 (475,049)
-------------- -------------- -------------- --------------
Income from continuing operations before
income taxes 1,338,305 333,517 3,569,531 1,997
Income tax expense (332,718) - (1,095,289) -
-------------- -------------- -------------- --------------
Income from continuing operations 1,005,587 333,517 2,474,242 1,997
Loss from discontinued operations, net of income tax
benefit of $563,658 and $1,314,025, respectively (855,813) - (2,654,707) -
-------------- -------------- -------------- --------------
Net income (loss) $ 149,774 $ 333,517 $ (180,465) $ 1,997
============== ============== ============== ==============
Per share data:
Basic net income (loss) per share:
Continuing operations $ 0.11 $ 0.03 $ 0.26 $ (0.02)
Discontinued operations (0.10) 0.00 (0.30) 0.00
-------------- -------------- -------------- --------------
Net income (loss) $ 0.01 $ 0.03 $ (0.04) $ (0.02)
============== ============== ============== ==============
Diluted net income (loss) per share:
Continuing operations $ 0.06 $ 0.03 $ 0.16 $ (0.02)
Discontinued operations (0.05) 0.00 (0.17) 0.00
-------------- -------------- -------------- --------------
Net income (loss) $ 0.01 $ 0.03 $ (0.01) $ (0.02)
============== ============== ============== ==============
Weighted average number of common shares:
Basic common shares 8,753,919 8,628,482 8,730,734 8,649,084
============== ============== ============== ==============
Diluted common shares 16,791,723 9,509,878 15,865,627 8,649,084
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------------
2000 1999
----------------- ------------------
Cash flows from operating activities:
Net income (loss) $ (180,465) $ 1,997
Loss from discontinued operations 2,654,707 -
Adjustments to reconcile net income (loss) to net cash provided by
operating activities from continuing operations:
Bad debt expense 54,000 188,901
Amortization of loan discounts 6,210 6,210
Depreciation and amortization 435,590 398,374
Treasury stock received in settlement (54,802) -
Change in operating assets and liabilities:
Trade accounts receivable 7,374 155,442
Advance payment receivables 4,844,007 5,512,154
Other current assets 242,241 123,998
Deposits (2,388,843) 1,038,376
Trade accounts payable and accrued liabilities (55,245) 1,518,613
Income taxes payable/receivable (566,202) -
Deposits and other payables related to customers 6,418,455 (1,618,176)
Other assets 16,877 158,463
--------------- -----------------
Net cash provided by operating activities 11,433,904 7,484,352
Net cash used in operating activities of discontinued operations (1,910,439) -
--------------- -----------------
Net cash provided by operations 9,523,465 7,484,352
--------------- -----------------
Cash flows from investing activities:
Purchase of contracts (7,500) (60,000)
Purchase of property and equipment (71,060) (167,916)
Capitalized cost in connection with Primal acquisition - (266,874)
Issuance of notes receivable (2,313,500) -
--------------- -----------------
Net cash used in investing activities (2,392,060) (494,790)
--------------- -----------------
Cash flows from financing activities:
Proceeds from notes payable - 160,000
Principal payments on notes payable - (5,668,415)
Payment of preferred stock dividends (247,392) (252,900)
Issuance of shares of common and preferred stock for cash 134,114 -
Cash paid for treasury stock - (115,632)
--------------- -----------------
Net cash used in financing activities (113,278) (5,876,947)
--------------- -----------------
Increase in cash 7,018,127 1,112,615
Cash at beginning of period 5,744,069 1,086,473
--------------- -----------------
Cash at end of period $ 12,762,196 $ 2,199,088
=============== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Avery
Communications, Inc. ("Avery") and subsidiaries ("Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions per Item 310(b) of
Regulation SB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
Certain reclassifications have been made to conform to current
classifications.
NOTE 2. EARNINGS (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing the net
income (loss), decreased (increased) by the preferred stock dividends of $70,692
and $71,800 for the three month periods ending September 30, 2000 and 1999 and
$213,092 and $215,400 for the nine-month periods ending September 30, 2000 and
1999 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 basic net income (loss) per common share was $0.01 and $0.02 per
weighted average common share outstanding for the three and nine-months ended
September 30, 2000 and 1999, respectively. Diluted net income (loss) per share
includes the effect of all dilutive options and warrants and instruments
convertible into common stock. The effect of outstanding warrants and options on
the computation of net income (loss) per share for the nine-months ended
September 30, 1999 would be antidilutive and, therefore, is not included in the
computation of diluted weighted average shares. The effect of outstanding
warrants, options and convertible securities on the computation of net income
(loss) per share for the three and nine month periods ending September 30, 2000
and the three month period ending September 30, 1999 was dilutive and is
included in the computation of diluted weighted average shares.
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes it
is unlikely that the final outcome of any of the claims or proceedings to which
the Company is a party will have a material adverse effect on the Company's
financial position or results of operations; however, due to the inherent
uncertainty of litigation, there can be no assurance that the resolution of any
particular claim or proceeding would not have a material adverse effect on the
Company's results of operations for the fiscal period in which such resolution
occurred.
- 4 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. DISCONTINUED OPERATIONS
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 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. Accordingly, the annual report as of December
31, 1999 and the quarterly report as of March 31, 2000 reflect HBS as
discontinued operations.
In March 1999, Avery entered into a merger agreement with PSI and
certain shareholders of PSI. Pursuant to this agreement, PSI was purchased
effective as of the close of business on September 30, 1999. PSI is a software
development company that designs, develops and supports an integrated suite of
client/server and browser-based software solutions focusing on customer
acquisition and retention in the communications industry, primarily utilizing
decision support software and Internet technologies. As part of this merger,
Avery also acquired Wireless Billing Solutions, PSI's subsidiary, which sells
and supports convergent billing, customer care and mediation system software
products. The transaction was accounted for using the purchase method of
accounting with revenues and expenses of PSI being included in Avery's
operations from the acquisition date.
Under the terms of the spin-off agreement with PSI, each common
shareholder of Avery on the payment date of the spin-off will receive one share
of PSI common stock for each share of the Avery'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 PSI 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 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 fully
diluted basis. In addition, the former PSI shareholders have agreed to waive
their right for Avery to repurchase 1.55 million of their Avery shares 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.
- 5 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At September 30, 2000 and December 31, 1999, the net current assets
(liabilities) and net long-term assets of PSI were as follows:
September 30, December 31,
2000 1999
--------------------------------------
CURRENT ASSETS (unaudited)
Cash $ 1,311,690 $ 1,710,996
Trade accounts receivable 1,248,296 993,406
Other current assets 779,130 366,088
--------------------------------------
Total current assets 3,339,116 3,070,490
--------------------------------------
CURRENT LIABILITIES
Current portion of capital lease obligations 138,946 89,577
Current portion of notes payable 202,142 473,252
Trade accounts payable 215,708 346,932
Accrued liabilities 950,852 852,095
Deferred revenue 1,966,505 1,023,605
--------------------------------------
Total current liabilities 3,474,153 2,785,461
--------------------------------------
Net current assets (liabilities) of discontinued operations $ (135,037) $ 285,029
======================================
PROPERTY AND EQUIPMENT
Computer equipment and software $ 2,256,098 $ 1,524,626
Furniture and fixtures 110,814 107,650
Accumulated depreciation and amortization (351,955) (23,431)
--------------------------------------
Total property and equipment 2,014,957 1,608,845
--------------------------------------
OTHER ASSETS AND LONG-TERM LIABILITIES
Goodwill, net 7,533,208 4,563,584
Capital lease obligations (241,284) (62,046)
Notes payable (1,673,543) (1,728,108)
Other 61,287 61,552
--------------------------------------
Total other assets 5,679,668 2,834,982
--------------------------------------
Net long-term assets of discontinued operations $ 7,694,625 $ 4,443,827
======================================
- 6 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The operating results of PSI for the three months ended December 31,
1999 and nine-months ended September 30, 2000, are as follows:
Nine-months ended Three-months ended
September 30, 2000 December 31, 1999
--------------------------------------
Operating revenues $ 6,254,158 $ 4,547,703
Cost of revenues (3,223,552) (1,069,108)
--------------------------------------
Gross profit 3,030,606 3,478,595
Selling, general and administrative expenses (6,869,201) (1,787,241)
--------------------------------------
Income (loss) from operations (3,838,595) 1,691,354
Other expense (130,137) (64,786)
--------------------------------------
Income (loss) before income tax provision (3,968,732) 1,626,568
Income tax benefit (expense) 1,314,025 (667,809)
--------------------------------------
Net income (loss) $ (2,654,707) $ 958,759
======================================
NOTE 5. 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 stockholders. In addition, the Company advanced $750,000 to a company which
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.
NOTE 6. 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 Note 7.)
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.
NOTE 7. 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.
NOTE 8. 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.
- 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
This Quarterly Report on Form 10-QSB contains certain
"forward-looking" statements as is defined in the Private Securities Litigation
Reform Act of 1995 and information relating to the Company and its subsidiaries
that are based on the beliefs of the Company's management as well as assumptions
made by and information currently available to the Company's management. When
used in this report, the words "anticipate," "believe," "estimate," "expect" and
"intend" and words or phrases of similar intent, as they relate to the Company
or its subsidiaries or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitations, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in other
filings made by the Company with the Securities and Exchange Commission. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
GENERAL
The following is a discussion of the consolidated financial condition
and results of operations of the Company for the three and nine months ended
September 30, 2000 and 1999, respectively. It should be read in conjunction with
the Consolidated Financial Statements of the Company, the notes thereto and
other financial information included elsewhere in this report, and the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999. For purposes
of the following discussion, references to year periods refer to the Company's
fiscal year ended December 31 and references to quarterly periods refer to the
Company's fiscal three and 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 PSI, a wholly-owned
subsidiary that is being spun-off. The annual report as of December 31, 1999 and
the quarterly report as of March 31, 2000 reflect HBS as discontinued
operations. See Note 4 to Consolidated Financial Statements for further
explanation. All discussions relating to revenue, cost of revenues, operating
expenses, etc. pertain only to continuing operations, which consist of Avery and
HBS.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain items in the Company's Condensed
Consolidated Statements of Operations:
Three Months Ended Nine Months Ending
September 30, September 30,
------------------------------------ --------------------------------
2000 1999 2000 1999
------------------ ---------------- --------------------------------
(In Thousands) (In Thousands)
Revenues $ 9,666 $ 6,608 $ 27,443 $ 16,336
Cost of revenues (6,911) (5,045) (19,763) (12,158)
---------------- -------------- ------------ --------------
Gross profit 2,755 1,563 7,680 4,178
Operating expenses, excluding DD&A (1,390) (1,157) (4,040) (3,581)
Advance funding program income 37 151 227 452
Advance funding program costs (36) (48) (130) (193)
Depreciation and amortization (140) (136) (416) (379)
---------------- -------------- ------------ --------------
Total (1,529) (1,190) (4,359) (3,701)
---------------- -------------- ------------ --------------
Operating income from continuing operations 1,226 373 3,321 477
Other income (expense) 112 (39) 248 (475)
Discontinued operations loss (856) - (2,655) -
Income taxes (333) - (1,095) -
---------------- -------------- ------------ --------------
Net income (loss) $ 149 $ 334 $ (181) $ 2
================ ============== ============ ==============
Operating Revenues
The Company's revenues are derived primarily from the provision of
billing clearinghouse and information management services to direct dial long
distance carriers and operator services providers ("Local Exchange Carrier
billing" or "LEC billing"). To a lesser extent, 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 the Company include processing and
customer 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 the Company to
local telephone companies for billing and collection. Processing fees also
include any charges assessed to the Company by local telephone companies for
billing and collection services that are passed through to the customer.
Customer service inquiry fees are assessed as a fee charged for each billing
inquiry made by end users.
Total revenues for the quarter ended September 30, 2000 were $9.7
million, an increase of 46.3% from the comparable prior year quarter. During the
first nine months of 2000, total revenues increased 68.0% to $27.4 million from
$16.3 million during the comparable period of 1999. Billing service revenues
increased 47.3% to $9.4 million in the third quarter of 2000, from $6.4 million
in the third quarter of 1999. 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. Revenues derived from year-to-date enhanced billing services
customers decreased from the comparable prior year period due to the Company
canceling enhanced billing contracts with most of its enhanced services
customers effective the end of February, 1999. Enhanced billing services
revenues were up slightly for the quarter ending September 30, 2000 over the
same period for the prior year due to increased volumes at the one relatively
large remaining enhanced services customer. Telephone call record volumes were
as follows:
Three-Months Ended Nine-Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ----------------
(In Thousands) (In Thousands)
Direct dial long distance 87,155 66,154 265,079 155,619
Enhanced billing 193 173 530 586
Cost of Revenues
Cost of revenues includes billing and collection fees charged to the
Company 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. The Company achieves discounted billing costs due to its aggregated
volumes and can pass these discounts on to its customers.
The gross profit margin increased from 23.6% to 28.5% from the prior
year quarter ended September 30, 1999 to the current year quarter, respectively.
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.
Operating Expense, Excluding DD&A
Operating expenses are comprised of all selling, marketing and
administrative costs incurred in direct support of the business operations of
the Company. Operating expenses for the second quarter of 2000 and 1999 were
$1.4 million and $1.2 million, representing 14.4% and 17.5% of revenues,
respectively. Operating expenses 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, and insurance costs somewhat offset by reduced personnel costs
which resulted from lower levels of employment.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Advance Funding Program Income and Costs
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 encouraged and participated in placing
current customers with significant financing needs with third party financing
companies. HBS plans to assist future customers in a similar manner. Although
internal advance funding is still available, its scope has been reduced to
mainly 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
decreased 75.5% to $37,000 for the third quarter of 2000 from $151,000 for the
third quarter of 1999. 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 decreased 22.9% to $36,000 for the third
quarter of 2000 from $48,000 for the third quarter 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 decreases result from the
Company's policy decision discussed above.
Depreciation and Amortization
Depreciation and amortization expense for the third quarter was
$140,000 in 2000, and $136,000 in 1999. Depreciation and amortization expense
for the nine months ended September, was $416,000 in 2000, and $379,000 in 1999.
Both increases were due to the addition of equipment at HBS.
Operating Income from Continuing Operations
Operating income from continuing operations in the third quarter of
2000 was $1,226,000, or 12.7% of revenues, compared to $373,000 or 5.6% of
revenues, in the third quarter of 1999. 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 are directly
attributable to the significant increases in the volume of call records
processed for the respective periods.
Other Income (Expense), Net
Other income (expense) net in the third quarter increased to $112,000
of net income in 2000 from $39,000 of net expense in 1999. The increase is
primarily attributable to lower interest associated with reduced levels of debt
and higher interest income associated with higher cash balances. Other income
(expense) net for the nine-month period ending 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, warrant buy back cost
occurring in 1999 but not in 2000 and higher interest income associated with
higher cash balances.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Loss from Discontinued Operations
Loss from discontinued operations was $856,000 for the quarter ending
2000 and $2,655,000 for the nine months ending 2000 net of tax benefit of
$564,000 and $1,314,000 for the three and nine-months ended September 30, 2000,
respectively. Revenues from discontinued operations were $2,186,000 for the
quarter ending 2000 and $6,254,000 for the nine months ending 2000. There were
no discontinued operations for 1999 as PSI was not acquired until after the
close of business on September 30, 1999.
PSI 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. In addition, PSI provides billing
and customer care software to the wireless communications, IP telephony and
internet service provider industries.
Income Taxes
An income tax provision of $333,000 was recorded for the quarter ending
September 30, 2000. None was recorded in 1999. An income tax provision of
$1,095,000 was recorded for the nine month period ending September 30, 2000.
None was recorded in 1999. Income tax expense was recorded for continuing
operations but is effectively offset on a consolidated basis by income tax
benefit recorded for discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Avery's cash balance increased to $12,762,000 at September 30, 2000,
from $5,744,000 at December 31, 1999, primarily due to timing of cash receipts
for LECs and increased processing volume at HBS. Avery's 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 decrease in
working capital is due to a $6,243,000 increase in current liabilities, offset
by a $1,896,000 increase in current assets. The $6,243,000 increase in current
liabilities is primarily attributable to a $6,419,000 increase in deposits and
other payables associated with increased volume, a $1,150,000 increase in
accrued liabilities and income taxes offset by a $1,462,000 decline in accounts
payable. The $1,896,000 increase in current assets is primarily attributable to
a $7,018,000 increase in cash offset by a $4,844,000 decrease in advanced
payment receivables due to the company's change in direction for financing
receivables.
Net cash provided by operating activities, excluding discontinued
operations, was $11,434,000 and $7,484,000 for the nine months ending September
30, 2000 and 1999, respectively. The $11,434,000 of cash flows, provided by
operations for 2000 results primarily from a $2,915,000 net income and non-cash
items from continuing operations, $6,418,000 increase in deposits and other
payables related to customers, a $4,844,000 decrease in advance payment
receivables offset by a $2,389,000 increase in customer deposits. The $7,484,000
cash flows provided by operations for
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1999 results primarily from a $5,512,000 decrease in advance payment
receivables, a $1,519,000 increase in accounts payable and accrued liabilities,
a $1,038,000 increase in customer deposits, and $595,000 of net income and
non-cash items from continuing operations, offset by a $1,618,000 decrease in
deposits and other payables to customers.
During the period ending September 30, 2000, the Company issued
$2,314,000 of notes receivable to former PSI shareholders 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, the Company spent
$168,000 on capital expenditures, $267,000 of costs associated with the PSI
acquisition, $253,000 in preferred dividends, $116,000 purchase of treasury
stock, and $5,668,000 to pay off its line of credit with a financial
institution.
The Company's operating cash requirements consist principally of
working capital requirements, requirements under its advance-funding program,
scheduled payments of preferred dividends and capital expenditures. In
accordance with the Preliminary PSI Distribution Agreement, the Company has
advanced an additional $2,000,000 of cash to PSI during the quarter ending
December 31, 2000. The Company believes 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.
YEAR 2000 UPDATE
During 1999 we undertook initiatives to ensure that our systems were
Year 2000 compliant. As of the date of this filing, we have not experienced any
disruption of our operations due to Year 2000 issues. The cost of Year 2000
modifications have not been significant and no additional Year 2000 costs are
anticipated.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders
Avery held its annual meeting on September 13, 2000. At the meeting,
the shareholders elected five directors, approved Avery's 1999 flexible
incentive plan and ratified the appointment of Avery's auditors, King Griffin &
Adamson PC. The voting results were as follows:
DIRECTORS FOR AGAINST ABSTAIN/WITHHELD
- --------------------- ------------- -------------- -------------------
Patrick J. Haynes, III 14,580,728 ---- 89,545
Scot M. McCormick 14,580,728 ---- 89,545
Norman M. Phipps 14,580,728 ---- 89,545
J. Alan Lindauer 14,580,728 ---- 89,545
Robert T. Isham, Jr. 14,580,728 ---- 89,545
PLAN 10,760,479 731,709 8,953
AUDITORS 14,605,003 64,020 1,250
ITEM 5. Other Information
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 Hold 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. The annual report as of
December 31, 1999 and the quarterly report as of March 31, 2000 have reflected
HBS as discontinued operations.
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PART II - OTHER INFORMATION
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf, thereunto duly authorized.
Avery Communication, Inc.
(Registrant)
Date____________________ /s/Patrick J. Haynes III
-----------------------------------------
Patrick J. Haynes III
Chairman of the Board
Date_____________________ /s/ Scot McCormick
-----------------------------------------
/s/ Scot McCormick, Secretary
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