UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
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 22-2227079
(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 September 30, 2001
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
-------------- ----------------------------
Common Stock, $.01 par value 10,142,076
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2001 1
(unaudited) and December 31, 2000
Consolidated Statements of Operations - For the 3
Periods Ended September 30, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows - For the 4
Periods Ended September 30, 2001 and 2000 (unaudited)
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II OTHER INFORMATION
Item 2. Changes in securities 17
ITEM 1. AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
-------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 17,680,719 $ 6,719,888
Trade accounts and notes receivable, net of allowance for doubtful accounts of $242,901
for both periods 1,935,744 1,414,249
Advance payment receivables 2,942,664 1,797,634
LEC billing and collection fees receivables 6,422,750 4,561,600
Other receivables 320,091 210,227
Deferred tax asset 1,226,832 565,562
Deposits with LECs 10,326,123 2,746,869
Other current assets 124,196 29,661
Net current assets of discontinued operations - 669,620
----------- -----------
Total current assets 40,979,119 18,715,310
----------- -----------
Property and equipment:
Computer equipment and software 4,927,488 1,282,988
Furniture and fixtures 322,823 322,023
Accumulated depreciation and amortization (1,120,205) (784,168)
----------- -----------
Total property and equipment, net 4,130,106 820,843
----------- -----------
Other assets:
Goodwill, net of accumulated amortization of $1,198,003 and $1,001,725, respectively 2,557,614 2,753,892
Investments 30,100 1,519,000
Net long-term assets of discontinued operations - 7,746,836
Purchased contracts, net of accumulated amortization of $337,053
and $328,225, respectively 17,210 26,038
Notes receivable due from related parties, net of allowance of $1,210,800 at September 30, 2001 4,664,472 4,046,772
Capitalized acquisition costs 254,345 -
Other assets 15,634 14,554
----------- -----------
Total other assets 7,539,375 16,107,092
----------- -----------
Total assets $ 52,648,600 $35,643,245
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
- 1 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -(Continued)
-------------- -------------
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2001 2000
-------------- -------------
(Unaudited)
Current liabilities:
Current notes payable $ 6,667 $ 6,667
Trade accounts payable 4,007,026 4,117,671
Accrued liabilities 4,591,565 3,323,874
Purchase price payable to OAN 5,183,423 -
Income taxes payable 614,653 314,547
Deposits and other payables related to customers 35,711,432 18,594,786
----------- -----------
Total current liabilities 50,114,766 26,357,545
----------- -----------
Non-current liabilities
Long-term notes payable due to related parties 339,685 333,475
Customer cure liability 2,200,000 -
----------- -----------
Total non-current liabilities 2,539,685 333,475
----------- -----------
Redeemable preferred stock:
Series A; $0.01 par value, 391,667 shares authorized, issued and outstanding
at September 30, 2001 and December 31, 2000 (liquidation preference
of $391,667 at September 30, 2001 and December 31, 2000) 391,667 391,667
Series B; $0.01 par value, 390,000 shares authorized, issued and
outstanding at September 30, 2001 and December 31, 2000 (liquidation preference 390,000 390,000
of $390,000 at September 30, 2001 and December 31, 2000)
Series C; $0.01 par value, 40,000 shares authorized, issued and outstanding
at September 30, 2001 and December 31, 2000, (liquidation preference
of $40,000 at September 30, 2001 and December 31, 2000) 40,000 40,000
Series D; $0.01 par value, 1,500,000 authorized, issued and
outstanding at September 30, 2001 and December 31, 2000 (liquidation preference 1,500,000 1,500,000
of $1,500,000 at September 30, 2001 and December 31, 2000)
Series E; $0.01 par value, 0 and 350,000 shares authorized, issued and
outstanding at September 30, 2001 and December 31, 2000, respectively
(liquidation
preference of $0 and $350,000 at September 30, 2001 and December 31, 2000, respectively) - 350,000
----------- -----------
Total redeemable preferred stock 2,321,667 2,671,667
----------- -----------
Commitments and contingencies Stockholders' equity (deficit):
Preferred stock (20,000,000 shares authorized):
Series G; $0.01 par value, 2,150,493 and 7,126,894 shares authorized,
issued and outstanding at September 30, 2001 and December 31, 2000,
respectively (liquidation
preference of $21,505 and $71,269 at September 30, 2001 and December 31, 2000, respectively) 21,505 71,269
Series H; $0.01 par value, 1,600,000 and 0 shares authorized, issued and
outstanding at September 30, 2001 and December 31, 2000, respectively (liquidation
preference of $1,600,000 and $0 at September 30, 2001 and December 31, 2000, respectively) 16,000 -
Series I; $0.01 par value, 500,000 and 0 shares authorized, issued and
outstanding at September 30, 2001 and December 31, 2000, respectively (liquidation
preference of $500,000 and $0 at September 30, 2001 and December 31, 2000, respectively) 5,000 -
Common stock: $0.01 par value, 20,000,000 shares authorized, 12,541,230 and 12,461,230 shares issued
at September 30, 2001 and December 31, 2000, respectively 125,412 124,613
Additional paid-in capital 9,885,927 15,752,226
Accumulated deficit (8,058,516) (6,539,013)
Treasury stock, 2,399,154 and 1,215,216 shares at September 30, 2001 and December 31, 2000,
respectively, at cost (3,244,418) (2,036,801)
Subscription notes receivable (1,078,428) (1,091,736)
----------- -----------
Total stockholders' equity (deficit) (2,327,518) 6,280,558
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 52,648,600 $35,643,245
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
------------------------------ ------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
------------------------------ ------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Revenues $ 12,455,802 $ 9,665,863 $ 29,056,262 $ 27,443,282
Cost of revenues (8,842,297) (6,911,393) (20,509,098) (19,763,332)
------------ ------------- ------------ -------------
Gross profit 3,613,505 2,754,470 8,547,164 7,679,950
Operating expenses 3,204,196 (1,528,000) 6,331,192 (4,358,140)
------------ ------------- ------------ -------------
Operating income 409,309 1,226,470 2,215,972 3,321,810
------------ ------------- ------------ -------------
Other income (expense):
Interest expense 66,327 (14,464) (48,120) (50,240)
Option buyback costs - - (88,378) -
Write off investment in affilitate (2,221,305) - (2,221,305) -
Reserve for non-recourse notes receivable (930,869) - (930,869)
Other, net 86,685 126,299 269,157 297,961
------------ ------------- ------------ -------------
Total other income (expense), net (2,999,162) 111,835 (3,019,515) 247,721
------------ ------------- ------------ -------------
Income (loss) from continuing operations before
provision for income taxes and discontinued operations (2,589,853) 1,338,305 (803,543) 3,569,531
Income tax benefit (expense) 623,030 (332,718) (110,701) (1,095,289)
------------ ------------- ------------ -------------
Income (loss) from continuing operations (1,966,823) 1,005,587 (914,244) 2,474,242
Loss from discontinued operations (less applicable income
tax benefit of $563,654 for the three months ended
September 30, 2000 and $311,799 and 1,314,028 for the
nine months ended September 30, 2001 and 2000, respectively) - (855,813) (605,259) (2,654,707)
------------ ------------- ------------ -------------
Net income (loss) $ (1,966,823) $ 149,774 $ (1,519,503) $ (180,465)
============ ============= ============ =============
Per share data:
Basic net income (loss) per share:
Continuing operations income (loss) $ (0.21) $ 0.11 $ (0.12) $ 0.26
Discontinued operations - (0.10) (0.06) (0.30)
------------ ------------- -------------- -------------
Net income (loss) $ (0.21) $ 0.01 $ (0.18) $ (0.04)
============ ============= ============== =============
Diluted net income (loss) per share:
Continuing operations income (loss) $ (0.21) $ 0.06 (0.12) 0.16
Discontinued operations - (0.05) (0.06) (0.17)
------------ ------------- ------------ -------------
Net income (loss) $ (0.21) $ 0.01 $ (0.18) $ (0.01)
============ ============= ============ =============
Weighted average number of common shares outstanding:
Basic common shares 10,142,076 8,753,919 10,236,868 8,730,734
============ ============= ============ =============
Diluted common shares 10,142,076 16,791,723 10,236,868 15,865,627
============ ============= ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
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AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
The accompanying notes are an integral part of these consolidated financial
statements.
--------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
2001 2000
------------------- -----------------
Cash flows from operating activities:
Net loss $ (1,519,503) $ (180,465)
Loss from discontinued operations 605,259 2,654,707
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities from continuing operations net of effects of acquisition:
Provision for bad debt expense 1,210,800 54,000
Amortization of loan discounts 6,210 6,210
Deferred income taxes (661,270) -
Depreciation and amortization 541,143 435,590
Treasury stock received in settlement - (54,802)
Option buyback costs 88,378 -
Write off investment in affiliate 2,221,305 -
Change in operating assets and liabilities:
Trade accounts receivable (521,495) 7,374
Advance payment receivables (1,145,030) 4,844,007
Other current assets (94,535) (48,460)
Deposits (282,775) (2,402,043)
Other receivables (627,890) (1,104,717)
Trade accounts payable and accrued liabilities 1,157,046 (55,245)
Income taxes payable 300,106 (566,202)
Deposits and other payables related to customers 13,768,466 7,813,873
Other assets (1,080) 30,077
----------------- ---------------
Net cash provided by continuing operations 15,045,135 11,433,904
Net cash provided by (used in) discontinued operations 275,271 (1,910,439)
----------------- ---------------
Net cash provided by operations 15,320,406 9,523,465
----------------- ---------------
Cash flows from investing activities:
Purchase of contracts - (7,500)
Purchase of property and equipment (445,300) (71,060)
Payment received on notes receivable 13,308 -
Amounts loaned for notes receivable (2,549,805) (2,313,500)
Acquisition costs (254,345) -
Purchase of OAN Services, Inc. net assets (1,108,000) -
Purchase of investments (11,100) -
----------------- ---------------
Net cash used in investing activities (4,355,242) (2,392,060)
----------------- ---------------
Cash flows from financing activities:
Redemption of preferred shares (350,000) -
Purchase of options for cash (215,000) -
Cash paid for treasury stock (1,207,617) -
Payment of preferred stock dividends (278,023) (247,392)
Issuance of shares of common and preferred stock for cash 2,046,307 134,114
----------------- ---------------
Net cash used in financing activities (4,333) (113,278)
----------------- ---------------
Increase in cash 10,960,831 7,018,127
Cash at beginning of period 6,719,888 5,744,069
----------------- ---------------
Cash at end of period $ 17,680,719 $ 12,762,196
================= ===============
Supplemental disclosures:
Interest paid $ 46,702 $ 55,849
================= ===============
Income taxes paid $ 160,066 $ 453,000
================= ===============
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
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 three and nine month periods ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2001.
Certain reclassifications have been made to conform to current
classifications, in part reclassifying Local Exchange Carriers ("LEC") deposits
from "Other Assets" to "Deposits with LECs" and LEC billing and collection fees
receivables from "Customer Deposits and Other Payables" to "Other Current
Receivables".
NOTE 2. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share is computed by dividing the net
income (loss), (decrease) increased by the preferred stock dividends of $123,192
and $70,692 for the three month periods ending September 30, 2001 and 2000,
respectively, and $330,523 and $213,092 for the nine month periods ending
September 30, 2001 and 2000, 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 income (loss) per common share was
$0.01 per weighted average common share outstanding for the three month periods
ending September 30, 2001 and 2000 and $0.03 and $0.02, respectively, per
weighted average common share outstanding for the nine month periods ending
September 30, 2001 and 2000. Diluted loss per share includes the effect of all
dilutive options, warrants and instruments convertible into common stock.
NOTE 3. 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 was 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, prior filed financial statements
for the period ending 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 October 1,
- 5 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Systems, 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.
On February 12, 2001, Avery distributed 100% of the outstanding capital
stock of PSI to its security holders. Accordingly, as of such date, Avery had no
further ownership interest in PSI or its subsidiary, Wireless Billing Systems.
As part of the formal distribution, the seven PSI stockholders at the
time of the Company's acquisition of PSI redeemed 4,976,401 shares of the
Company's Series G voting preferred stock in exchange for 32% of PSI's capital
stock. Also, the exercise prices of Avery's outstanding options and the
conversion prices of Avery's convertible securities were adjusted to reflect the
distribution. After the transaction was completed, Avery's outstanding Series G
preferred stock was reduced to 2,150,493 shares, which are held by the seven
original PSI stockholders on a pro-rata basis.
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 and
ACI's (See Note 7) plus expenses of Avery.
At December 31, 2000, the net current assets of PSI were as follows:
December 31,
2000
---------------------
CURRENT ASSETS
Cash $ 1,844,767
Trade accounts receivable 1,770,317
Other current assets 312,548
---------------------
Total current assets 3,927,632
---------------------
CURRENT LIABILITIES
Current portion of capital lease obligations 237,204
Current portion of notes payable 512,572
Trade accounts payable 403,872
Accrued liabilities 1,030,356
Deferred revenue 1,074,008
---------------------
Total current liabilities 3,258,012
---------------------
NET CURRENT ASSETS OF DISCONTINUED OPERATIONS $ 669,620
=====================
- 6 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At December 31, 2000, the net long-term assets of PSI were as follows:
December 31,
2000
---------------------
PROPERTY AND EQUIPMENT
Computer equipment and software $ 2,257,142
Furniture and fixtures 115,943
Accumulated depreciation and amortization (571,665)
---------------------
Total property and equipment 1,801,420
---------------------
OTHER ASSETS AND LONG-TERM LIABILITIES
Goodwill, net 7,219,072
Capital lease obligations (75,555)
Notes payable (1,219,728)
Other 21,627
---------------------
Total other assets 5,945,416
---------------------
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS $ 7,746,836
=====================
The operating results of PSI for the period January 1, 2001 to February
12, 2001 and for the three and nine months ended September 30, 2000 is as
follows:
--------------------------------------------------------------
Period January 1,
2001 to February Three months ended Nine months ended
12, 2001 September 30, 2000 September 30, 2000
--------------------------------------------------------------
Operating revenues $ 825,417 $ 2,186,362 $ 6,254,158
Cost of revenues (598,792) (1,187,295) (3,223,552)
-----------------------------------------------------------
Gross profit 226,625 999,067 3,030,606
Selling, general and administrative expenses (1,127,751) (2,363,338) (6,869,201)
-----------------------------------------------------------
Loss from operations (901,126) (1,364,271) (3,838,595)
Other Expense (15,932) (55,200) (130,137)
-----------------------------------------------------------
Loss before income tax provision (917,058) (1,419,471) (3,968,732)
Income tax benefit 311,799 563,658 1,314,025
-----------------------------------------------------------
Net loss $ (605,259) $ (855,813) $ (2,654,707)
===========================================================
NOTE 4. CERTAIN TRANSACTIONS
On March 9, 2001, HBS' largest customer, which accounted for 57% of its
call records processed in 2000 and 64% of all call records processed for the
nine months ended September 30, 2001, filed a voluntary petition for protection
under Chapter 11 of the U. S. Bankruptcy Code in connection with the
reorganization of its parent company. As of October 31, 2001, the filing has had
no material adverse effect on HBS' business relationship with this customer,
and, based upon conversations between the managements of the two companies, the
Company does not presently anticipate that this filing will materially adversely
affect the relationship with this customer in the immediate future.
- 7 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On February 1, 2001, the Company purchased all of the capital stock of
the Company held by (at the time of the transaction) a beneficial owner of more
than five percent (5%) of the common stock of the Company, and all outstanding
options and warrants to purchase capital stock of the Company held by two
individuals, who were also former directors of the Company. The total purchase
price for the transaction was $1,787,000. The transaction consisted of 1,183,938
shares of common stock at $1.02 per share (totaling $1,207,617, the fair value
at the date of the transaction), 350,000 shares of Series E preferred stock at
$1.00 per share (totaling $350,000, the liquidation value) plus accrued and
unpaid dividends and options to purchase 215,000 shares of Avery common stock
for $215,000. The Company recorded the fair value of the options, calculated by
using the Black Scholes model, at $126,622. This $126,622 was reflected as a
reduction in additional paid in capital, with the balance, $88,378, being
charged to the income statement in the other income section.
During the nine months ended September 30, 2001, the Company also
advanced an additional $1,828,500 to a company in which it owns 3,010,000 common
shares, 1,100,000 shares of which were acquired during the nine months ended
September 30, 2001. The related notes bear interest at 10% per annum, are due
December 31, 2001 and are secured. On May 2, 2001, Avery's board of directors
approved the acquisition of this company subject to certain conditions (See Note
8). These notes are expected to be converted to equity during the fourth quarter
of 2001 in connection with the acquisition. Avery's Chief Executive Officer is
also a director and officer of this entity.
During 2000 and 2001, the Company invested $1,995,000 in preferred
stock, $4,905 in common stock and $221,400 in receivables of a company for which
Avery's Chief Executive Officer is also a controlling shareholder and Chief
Executive Officer. During September, 2001 the Company wrote off the investment
of $2,221,305. The Company has ceased operations.
In connection with the spin-off of PSI, the Company loaned amounts to
certain PSI shareholders. The resulting notes receivables were non-recourse and
were secured by Avery's common stock owned by the PSI shareholders. Because of
the continued decline in the Company's stock price during the three months ended
September 30, 2001, a valuation reserve of $810,800 was provided for the notes
reducing their carrying value to estimated net realizable value.
NOTE. 5 PREFERRED STOCK
SERIES H
The Company sold 1,600,000 shares of Series H convertible preferred
stock for $1.00 per share in February 2001. The holders of the Series H
convertible preferred stock are entitled to annual cumulative dividends of $0.12
per share payable quarterly, a $1.00 per share liquidation value and conversion
into common stock on a one for one basis. One company, whose president is a
director of Avery, holds 1,250,000 shares of the Series H preferred stock.
SERIES I
- 8 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company sold 500,000 shares of Series I convertible preferred stock
for $1.00 per share in April 2001. The holder of the Series I convertible
preferred stock is entitled to annual cumulative dividends of $0.12 per share
payable quarterly, a $1.00 per share liquidation value and conversion into
common stock on a one for one basis.
NOTE 6. 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.
NOTE 7. ACQUISITIONS
On August 3, 2001, the Company, through its wholly owned subsidiary,
ACI Communications, Inc. ("ACI"), completed the acquisition of certain assets
from OAN Services, Inc. ("OAN"), which was approved by the U.S. Bankruptcy Court
in Los Angeles, California. The results of operations of the acquired business
is included in the Company's results of operations from the date of the
acquisition. OAN is located in Northridge, California and was a competitor to
the Company's local exchange carrier billing clearinghouse business, HBS Billing
Services Company. Under the asset purchase agreement, ACI has agreed to pay
approximately $11.8 million, consisting of a combination of assumed liabilities
and cash. The assets purchased include substantially all of OAN's customer base,
cash deposits with the local exchange carriers of approximately $7.2 million,
substantially all of its computer software and hardware, all of its furniture
and fixtures, all of its call center assets and certain other assets. A summary
of the net assets acquired are as follows:
- 9 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ASSETS
LEC billing and collection fee receivable $ 1,343,124
Deposits with LEC's 7,296,479
Fixed Assets 3,200,000
---------------------
TOTAL ASSETS 11,839,603
---------------------
LIABILITIES
Due to OAN 5,183,423
Accrued LEC billing and collection fees 2,111,567
Customer bad debt reserves 657,113
Customer termination reserves 579,500
Customer cure liabilities 2,200,000
---------------------
Total Liabilities 10,731,603
---------------------
---------------------
Net Assets Acquired $ 1,108,000
=====================
The customer cure liabilities amount represents 5% of the cure amount
due for customers that agreed to assign their billing contracts with OAN to
Avery. Avery has agreed to pay this amount in the future through reduced billing
fees.
NOTE 8. PENDING ACQUISITION
On May 2, 2001, Avery's board of directors approved the acquisition of
the assets of a company in which it, through a wholly owned subsidiary, has a
note receivable in the amount of $3,728,000 and owns 3,010,000 shares of common
stock in the target company's parent. Avery's Chief Executive Officer is also a
controlling shareholder and chairman of the entity. The consummation of this
transaction will be subject to a number of conditions, including appropriate
regulatory approval, the affirmative votes of shareholders of the selling
company and receipt of fairness opinions. The company provides intelligent
message communications services to enterprises notably in the travel and
hospitality sectors.
NOTE 9. PENDING REVERSE STOCK SPLIT
The board of directors approved a 1-for-8 reverse split of the
Company's common stock. An information statement regarding the reverse split was
filed with the SEC on August 2, 2001. It is presently anticipated that the
reverse split will become effective mid-December 2001. An affirmative vote of a
majority of the holders of shares entitled to vote is required to approve the
amendment of the Certificate of Incorporation to effect the reverse stock split.
Controlling stockholders have consented in writing to the amendment and this is
sufficient to obtain the stockholder vote necessary to approve the amendment
without the approval of any other stockholders. The board of directors believes
the reverse stock split may allow Avery to meet the listing criteria for its
common stock to be listed on the Nasdaq SmallCap Market, increasing the
acceptance of its common stock by the financial community and, accordingly,
enhancing stockholder value.
- 10 -
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 such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company 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 import, 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 limitation,
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 month periods
ended September 30, 2001 and 2000. 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/A for the year ended December 31, 2000. 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,
2001 and 2000.
The results of operations include ACI Communications, Inc. ("ACI"),
from August 3, 2001 through September 30, 2001. ACI purchased the net assets of
OAN Services, Inc. ("OAN").
The results on the "Discontinued operations" lines represent the
results of operations for the respective periods for PSI, a wholly owned
subsidiary that was spun-off in February 2001. The annual report as of December
31, 1999 and the quarterly report as of March 31, 2000 reflect HBS as
discontinued operations. See Note 3 to Consolidated Financial Statements
discussed above. All discussions relating to revenue, cost of revenues,
operating expenses, etc. pertain only to continuing operations, which consist of
Avery, HBS and ACI.
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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
Consolidated Statements of Operations:
--------------------- -----------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
--------------------- -----------------------
2001 2000 2001 2000
--------------------- -----------------------
(In Thousands) (In Thousands)
Revenues $ 12,456 $ 9,666 $ 29,056 $ 27,443
Cost of revenues (8,842) (6,911) (20,509) (19,763)
--------- -------- --------- ---------
Gross profit 3,614 2,755 8,547 7,680
Operating expenses (2,944) (1,382) (5,789) (3,922)
Depreciation and amortization (261) (146) (541) (436)
--------- -------- --------- ---------
Operating income (loss) 409 1,227 2,217 3,322
Other income (expense), net (2,999) 111 (3,020) 249
Income tax benefit (expense) 623 (333) (111) (1,095)
Discontinued operations loss - (856) (605) (2,655)
--------- -------- --------- ---------
Net income (loss) $ (1,967) $ 149 $ (1,519) $ (179)
========= ======== ========= =========
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 three months ended September 30, 2001 were $12.5
million, up 28.9% from the comparable prior year quarter. Revenues included in
this period for ACI were $4.5 million. Billing service revenues increased 28% to
$12.1 million, from $9.5 million in 2000. Eliminating the effects of the ACI
acquisition produces a 17% reduction in billing service revenues from $9.5
million in 2000 to $7.6 million in 2001, reflecting a 21% decrease in records
processed. The remaining revenue is primarily related to customer service
operations and was $364,000 for the three months ended September 30, 2001, up
74.3% from $209,000 in the prior year. The majority of this increase is
attributable to ACI. Total revenue for the nine months ended September 30, 2001
was $29.1 million, up 6% from $27.4 million in the prior year period.
Eliminating the effects of the ACI acquisition generates a 10.9% reduction in
revenues from $27.4 million for the nine months ended September 30, 2000 to
$23.8 million for the same period in
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2001, reflecting a 19% reduction in call records processed. The remaining
revenue is primarily related to customer service operations and was $756,200 for
the nine months ended September 30, 2001, up 2.6% from the $736,000 for the
prior year period. ACI contributed $229,000 during this period. Telephone call
record volumes, including records processed by the newly acquired ACI, which
were 13.4 million for the period from August 3, 2001 through September 30, 2001
were as follows:
--------------------------------- ---------------------------------
THREE-MONTHS ENDED NINE-MONTHS ENDED
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- ----------------
(In Thousands) (In Thousands)
Records processed 82,384 87,348 228,148 265,609
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 28.5% to 29.0% from the prior
three month period ended September 30, 2000 to the current year. The gross
profit margin increased from 28.0% to 29.4% from the prior nine month period
ended September 30, 2000 to the current year period. The increase in gross
profit percentage is primarily due to improved gross margins in the existing
business offset by lower gross margins in the business aquired by ACI.
Operating Expenses
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 three-month periods ended September 30,
2001 and 2000 were $2.9 million and $1.4 million, respectively. Operating
expenses for the nine-month periods ended September 30, 2001 and 2000 were $5.8
million and $3.9 million, respectively. The major components of the increases in
operating expenses for the three month and nine month periods are fully
reserving an employee note receivable in the amount of $400,000 and including
$800,000 of additional operating expenses resulting from the ACI acquisition.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended
September 30, was $260,500 in 2001, and $146,000 in 2000. For the nine months
ended September 30, depreciation and amortization expense was $541,000 in 2001
and $435,600 in 2000. The increase is primarily due to the purchase of ACI and
the resulting amortization of computers and software.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating Income (Loss) from Continuing Operations
Operating income from continuing operations for the three months ended
September 30, 2001 was $409,000, or 3.3% of revenues, compared to operating
profit of $1,227,000 or 12.7% of revenues, in the comparable period of 2000.
Operating income for the nine month period ending September 30, 2001 was
$2,217,000, or 7.6% of revenue, compared to $3,322,000, or 12.1% of revenue, in
the comparable period of 2000. The decrease in operating income from continuing
operations is primarily attributable to the decrease in the volume of call
records processed and the reserve established for the employee receivable
discussed above.
Other Income (Expense), Net
Other income (expense), net in the three months ended September 30,
2001 was $2,999,000 of net expense compared to $111,000 of net income in 2000.
During the nine months ended September 30, 2001, the other income (expense), net
was $3,020,000 of net expense in 2001 compared to $249,000 of net income in
2000. The changes for both the three and nine month periods are due to a
valuation allowance and write off of interest receivable totaling $931,000
relating to non-recourse notes receivable and writing-off $2,221,000 of
investment in a affiliated company which has ceased operations. Because of the
continued decline in the Company's stock price during the three months ended
September 30, 2001, a valuation reserve of $810,800 was provided for the notes
reducing their carrying value to estimated net realizable value.
Income Taxes
A income tax benefit of $623,000 was recorded for the three months
ended September 30, 2001 and income tax expense of $333,000 was recorded for the
prior year quarter. For the nine months ended September 30, 2001, an income tax
benefit of $111,000 was recorded compared to expense of $1,095,000 for the same
period in 2000. The income tax benefit for the three and nine month periods
ended September 30, 2001 and a portion of income tax expense for the nine month
period ending September 30, 2000 are offset on a consolidated basis by income
tax benefit recorded for discontinued operations. Total income taxes differ from
expected income taxes because of permanently non-deductible items and income
taxes recorded to adjust prior year estimates.
Loss from Discontinued Operations
Loss from discontinued operations was $856,000 for the quarter ending
September 30, 2000 net of tax benefits of $564,000. Revenues from discontinued
operations were $825,000 and $2,186,000 for the period January 1, 2001 to
February 12, 2001 and for the quarter ending September 30, 2000, respectively.
Loss from discontinued operations was $605,000 for the period January 1, 2001 to
February 12, 2001 and $2,655,000 for the nine months ended September 30, 2000
net of tax benefits of $312,000 and $1,314,000, for the period January 1, 2001
to February 12, 2001 and the three months ending September 30, 2000,
respectively. PSI was spun-off on February 12, 2001, as previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
On August 3, 2001, the Company purchased the net assets of ACI
Services, Inc. for $1,108,000. The net assets acquired are accounted for
separately on the Cash Flow Statement and therefore are not included in the
following discussion.
- 14 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Avery's cash balance increased to $17.7 million at September 30, 2001,
from $6.7 million at December 31, 2000. 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 receipts also produces large
movements in day-to-day cash balances. In addition, the acquisition of OAN's
assets by ACI provided a certain amount of cash as of September 30, 2001.
Avery's working capital position at September 30, 2001 was a negative
$9.0 million compared to a negative $7.6 million as of December 31, 2000. The
decline in working capital is primarily due to a $22.3 million increase in
current assets offset by a $23.6 million increase in current liabilities. The
substantial increase in both current assets and current liabilities was due to
ACI's acquisition of OAN.
Net cash provided by operating activities, excluding discontinued
operations, was $15.0 million for the nine months ending September 30, 2001, as
compared to $11.4 million for 2000. The $15.0 million cash flow provided by
operations for 2001 results primarily from $13.8 million increase in deposits
and other payables related to customers $2.5 million net income and non cash
items from continuing operations and a $1.2 million increase in trade accounts
payable and accrued liabilities offset by a $1.1 million increase in advance
payment receivables, a $0.3 million increase in deposits, a $0.6 million
increase in other receivables and a $0.5 million increase in trade receivables.
The $11.4 million cash flow provided by operations for 2000 results from $2.9
million net income and non-cash items from continuing operations, $7.8 million
increase in deposits and other payables related to customers and a $4.8 million
decline in advance payment receivables offset by a $2.4 million increase in
deposits, a $1.1 million increase in other receivables and a $0.6 million
decrease in income taxes payable.
During the nine months ended September 30, 2001, the Company advanced
$2.5 million for notes receivable, purchased $1.1 million of net assets of ACI
Services, Inc., purchased $0.4 million of property and equipment, redeemed $0.4
million of the Company's preferred stock, purchased $0.2 million of Avery's
options to acquire Avery common stock, paid $0.3 million for acquisition costs,
paid $0.3 million for preferred stock dividends and purchased $1.2 million of
treasury stock. This use of cash was partially offset by the $2.0 million
received from the issuance of preferred. During the nine months ended September
30, 2000, the Company issued $2.3 million of notes receivable to former PSI
shareholders and a related company, purchased $71,000 of capital equipment and
paid $247,000 of preferred dividends. The $134,000 received from the issuance of
stock offset this use of cash.
Avery's operating cash requirements consist principally of working
capital requirements, scheduled payments of preferred dividends and capital
expenditures. The Company believes
- 15 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
cash flows generated from operations,
together with borrowings and/or proceeds from the sale of equity securities will
be sufficient to fund capital expenditures, working capital needs and debt
repayment requirements for the foreseeable future.
ACCOUNTING CHANGES
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" which requires
the purchase method of accounting for business combination transactions
initiated after June 30, 2001.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets". The statement requires that goodwill recorded on acquisitions completed
prior to July 1, 2001 be amortized through December 31, 2001. Goodwill
amortization is precluded on acquisitions completed after June 30, 2001.
Effective January 1, 2002, goodwill will no longer be amortized but will be
tested for impairment as set forth in the statement. We are currently reviewing
the new standard and evaluating the effects of this standard on our future
financial condition, results of operations, and accounting policies and
practices. Amortization of goodwill for the first nine months of 2001 totaled
$122,000.
- 16 -
PART II OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders.
---- Obtained consent for a 1 for 8 reverse split of the Company's
stock by a 51.5% vote of all security holders entitled to vote.
- 17 -
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
- 18 -