UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
(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, 2002
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
-------------
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, SUITE 1710 60603
CHICAGO, ILLINOIS
(Address and principal executive offices) (Zip code)
(312) 419-0077
(Registrant's telephone number, including area code)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. YES X
NO .
Check whether the Issuer is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act) Yes No X
The number of shares outstanding of each of the issuer's classes of common
equity, as of October 15, 2002:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
-------------- ----------------------------
Common Stock, $.01 par value 1,048,653
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2002 1-2
(unaudited) and December 31, 2001
Consolidated Statements of Operations - For the Three 3
and Nine Months Ended September 30, 2002 and 2001
(unaudited)
Consolidated Statements of Cash Flows - For the Nine 4
Months Ended September 30, 2002 and 2001 (unaudited)
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
ITEM 1. AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
09/30/02 12/31/01
------------- ------------
(UNAUDITED) (RESTATED)
Current assets:
Cash and cash equivalents $ 3,519,481 $ 5,422,202
------------- ------------
Accounts receivable:
Trade accounts, net of allowance for doubtful accounts of $242,901 2,331,876 3,231,166
Advance payment receivables 2,409,830 1,794,352
LEC billing and collection fees receivable 4,581,309 4,948,502
Receivable from OAN 5,311,615 5,153,881
Other receivables 403,338 94,376
------------- ------------
Total accounts receivable 15,037,968 15,222,277
------------- ------------
Deferred tax asset 494,000 1,090,690
Deposits with LECs 601,485 933,618
Other current assets 915,938 53,354
------------- ------------
Total current assets 20,568,872 22,722,141
------------- ------------
Property and equipment:
Computer equipment and software 5,795,073 5,718,172
Furniture and fixtures 490,410 500,003
Accumulated depreciation and amortization (2,610,407) (1,379,877)
------------- ------------
Property and equipment, net 3,675,076 4,838,298
------------- ------------
Other assets:
Goodwill, net 5,574,366 5,577,735
Customer contracts, net 112,500 -
Investments - 30,100
Long-term deposits with LECs 2,236,983 2,236,983
Purchased contracts, net of accumulated amortization of $354,263 and $339,996 at
September 30, 2002 and December 31, 2001 - 14,267
Notes receivable due from related parties, net of allowance of $781,110 182,700 752,700
Capitalized financing fees, net 601,250 718,299
Long-term deferred tax asset 1,721,542 -
Other assets 2,040 43,036
------------- ------------
Total other assets 10,431,381 9,373,120
------------- ------------
Total assets $ 34,675,329 $ 36,933,559
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
- 1 -
ITEM 1. AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-(CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
09/30/02 12/31/01
----------- -----------
(UNAUDITED) (RESTATED)
Current liabilities:
Line of credit $ 5,582,572 $ 2,607,705
Trade accounts payable 1,446,488 5,144,763
Accrued liabilities 3,277,849 4,306,386
Current portion of customer cure liability 317,701 317,701
Income taxes payable - 163,994
Deposits and other payables related to customers 26,773,187 23,311,999
----------- -----------
Total current liabilities 37,397,797 35,852,548
----------- -----------
Non-current liabilities:
Long-term notes payable to related parties 680,681 680,681
Customer cure liability 1,326,461 1,576,021
----------- -----------
Total non-current liabilities 2,007,142 2,256,702
----------- -----------
Redeemable preferred stock:
Series A; $0.01 par value, 391,667 shares authorized, issued and
outstanding (liquidation preference of $391,667) 391,667 391,667
Series B; $0.01 par value, 390,000 shares authorized, issued and
outstanding (liquidation preference of $390,000) 390,000 390,000
Series C; $0.01 par value, 40,000 shares authorized, issued and
outstanding (liquidation preference of $40,000) 40,000 40,000
Series D; $0.01 par value, 1,500,000 shares authorized, issued and
and outstanding (liquidation preference of $1,500,000) 1,500,000 1,500,000
----------- -----------
Total redeemable preferred stock 2,321,667 2,321,667
----------- -----------
Commitments and contingencies
Stockholders' deficit:
Preferred stock:
Series G; $0.01 par value, 1,140,126 and 2,150,493 shares authorized, issued and
outstanding at September 30, 2002 and December 31, 2001 (liquidation preference
of $11,401 at September 30, 2002 and $21,505 at December 31, 2001) 11,401 21,505
Series H; $0.01 par value, 1,600,000 shares authorized, issued and
outstanding (liquidation preference of $1,600,000) 16,000 16,000
Series I; $0.01 par value, 500,000 shares authorized, issued and
outstanding (liquidation preference of $500,000) 5,000 5,000
Common stock: $0.01 par value, 20,000,000 shares authorized, 1,267,955 issued 12,680 12,680
Additional paid-in capital 6,107,753 6,639,337
Accumulated deficit (12,783,021) (9,055,012)
Treasury stock, at cost, 201,802 and 60,271 common shares at September 30, 2002 and
December 31, 2001 (245,099) (58,440)
Subscription notes receivable, net of allowance of $983,272 and $183,272 at
September 30, 2002 and December 31, 2001 respectively (175,991) (1,078,428)
----------- -----------
Total stockholders' deficit (7,051,277) (3,497,358)
----------- -----------
Total liabilities and stockholders' deficit $ 34,675,329 $36,933,559
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
-----------------------------------------------------------
2002 2001 2002 2001
------------ ------------- ------------ -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 9,713,466 $ 12,455,802 $ 31,228,886 $ 29,056,262
Cost of revenues (6,739,823) (8,842,297) (21,867,837) (20,509,098)
------------ ------------- ------------ -------------
Gross profit 2,973,643 3,613,505 9,361,049 8,547,164
Operating expenses (4,538,459) (3,204,196) (12,773,838) (6,331,192)
------------ ------------- ------------ -------------
Operating income (loss) (1,564,816) 409,309 (3,412,789) 2,215,972
------------ ------------- ------------ -------------
Other income (expense):
Interest expense (147,858) 66,327 (230,751) (48,120)
Option buyback costs - - - (88,378)
Write-off investment in affiliate - (2,221,305) - (2,221,305)
Reserve for non-recourse notes receivable - (930,869) (1,200,000) (930,869)
Other, net - 86,685 (130,100) 269,157
------------ ------------- ------------ -------------
Total other income (expense), net (147,858) (2,999,162) (1,560,851) (3,019,515)
------------ ------------- ------------ -------------
Loss from continuing operations before
provision for income taxes and discontinued operations (1,712,674) (2,589,853) (4,973,640) (803,543)
Income tax benefit (expense) 582,310 623,030 1,245,631 (110,701)
------------ ------------- ------------ -------------
Loss from continuing operations (1,130,364) (1,966,823) (3,728,009) (914,244)
Loss from discontinued operations (net of applicable income
tax benefit of $311,799 for the nine months ended
September 30, 2001) - - - (605,259)
------------ ------------- ------------ -------------
Net loss (1,130,364) (1,966,823) (3,728,009) (1,519,503)
Less dividend earned on preferred stock 123,192 123,192 369,576 330,523
------------ ------------- ------------ -------------
Net loss attributable to common shareholders $ (1,253,556) $ (2,090,015)$ (4,097,585) $ (1,850,026)
============ ============= ============ =============
Per share data:
Basic and diluted net loss per share:
Continuing operations loss $ (1.17) $ (1.65)$ (3.58) $ (0.97)
Discontinued operations - - - (0.48)
------------ ------------- ------------ -------------
Net loss $ (1.17) $ (1.65)$ (3.58) $ (1.45)
============ ============= ============ =============
Weighted average number of common shares outstanding:
Basic common shares 1,075,214 1,267,760 1,144,032 1,279,609
============ ============= ============ =============
Diluted common shares 1,075,214 1,267,760 1,144,032 1,279,609
============ ============= ============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
- 3 -
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2002 2001
---------------- ---------------
(UNAUDITED) (RESTATED)
Cash flows from (used in) operating activities:
Net loss $ (3,728,009) $ (1,519,503)
Loss from discontinued operations - 605,259
Amortization of loan discounts - 6,210
Deferred income taxes (1,124,852) (661,270)
Depreciation and amortization 1,132,297 541,143
Option buyback costs - 88,378
Write off investment in affiliate - 2,221,305
Investment asset surrendered in exchange for royalty obligation 30,100 -
Change in operating assets and liabilities:
Trade accounts receivable 899,290 (521,495)
Advance payment receivables (615,478) (1,145,030)
Other current assets (862,584) (94,535)
Deposits 332,133 (282,775)
Related party notes receivable - provision for bad debt expense 1,200,000 1,210,800
Other receivables (269,503) (3,668,715)
Trade accounts payable and accrued liabilities (4,735,626) 1,157,046
Income taxes payable (163,994) 300,106
Deposits and other payables related to customers 3,211,628 16,809,291
Other assets 331,414 (1,080)
--------------- --------------
Net cash provided by (used in) continuing operations (4,363,184) 15,045,135
Net cash provided by (used in) discontinued operations - 275,271
--------------- --------------
Net cash provided by (used in) operations (4,363,184) 15,320,406
--------------- --------------
Cash flows from (used in) investing activities:
Purchase of property and equipment (67,308) (445,300)
Payment received on notes receivable - 13,308
Amounts loaned for notes receivable - (2,549,805)
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 (67,308) (4,355,242)
--------------- --------------
Cash flows from (used in) financing activities:
Redemption of preferred shares (10,104) (350,000)
Proceeds from line of credit 2,974,867 -
Purchase of options for cash - (215,000)
Purchase of treasury stock (75,408) (1,207,617)
Payment of preferred stock dividends (361,584) (278,023)
Issuance of shares of common and preferred stock for cash - 2,046,307
--------------- --------------
Net cash provided by (used in) financing activities 2,527,771 (4,333)
--------------- --------------
Increase/(decrease) in cash (1,902,721) 10,960,831
Cash at beginning of period 5,422,202 6,719,888
--------------- --------------
Cash at end of period $ 3,519,481 $ 17,680,719
=============== ==============
Supplemental disclosures:
Interest paid $ 230,751 $ 46,702
=============== ==============
Income taxes paid $ - $ 160,066
=============== ==============
Schedule of non-cash financing activities:
Receipt of common stock in exchange for notes receivable $ 102,437 $ -
=============== ==============
Receipt of preferred stock in exchange for notes receivable $ 170,000 $ -
=============== ==============
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 (collectively, the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Avery's principal subsidiaries, whose results are included in the
financial statements, are as follows:
o ACI Billing Services, Inc. ("ACI"), which provides billing and
collection clearinghouse services to telecommunications
customers;
o HBS Billing Services Company ("HBS"), which provides billing
and collection clearinghouse services to telecommunications
customers; and
o Aelix, Inc. ("Aelix"), which offers intelligent message
communication services, principally in the travel and
hospitality sectors.
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.
Certain prior period amounts have been reclassified to conform to the
2002 presentation.
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-month and nine-month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
NOTE 2. LIQUIDITY
Avery has incurred a net loss of $3.7 million during the nine months
ended September 30, 2002, which included a $1.2 million non-cash write-off of
notes receivable from related parties. The Company used $4.4 million of cash in
operating activities during the same period.
- 5 -
The Company is optimistic that it will achieve profitability during the fourth
quarter of 2002, based upon cost reductions being realized through a
consolidation of operations which was completed during the third quarter of
2002. Accordingly, the Company does not anticipate the need over the foreseeable
future for additional financing or capital (excluding funding from the existing
line of credit) to fund continuing operations.
The Company's revenue during the first nine months of 2002 increased by
$2.2 million compared to the same period in 2001. The increase reflected $9.8
million of additional revenue from the acquired ACI and Aelix businesses (see
Note 7) offset by a $7.6 million decline in the HBS business. Revenue in the
Company's core business is declining as a result of a decrease in the volume of
call records processed on behalf of the Company's customers. The latter,
typically long distance network resellers, have been adversely affected by
increased usage of cell phones and prepaid phone cards and greater consumer
reliance on local exchange carriers ("LECs") for long distance service. The
Company is attempting to increase revenue through the acquisition of
complementary businesses and through the offering of new services, such as 900
area code business billing and the Aelix message communication services. The
Company's intention is to make acquisitions or expand into markets which will
leverage the Company's existing infrastructure.
Avery's working capital position at September 30, 2002 was a negative
$16.8 million, compared to a negative $13.1 million at December 31, 2001. The
Company can operate with negative working capital because a significant portion
of its current liabilities do not require payment in the near future. For
example, current liabilities at September 30, 2002 include approximately $6
million of deposits from customers which are not typically refunded in the
ordinary course of business. The customer deposits would be refundable over time
only if the customer were to significantly reduce the volume of business done
with the Company or terminate its relationship. Most of the Company's customers
have experienced lower call record volumes during 2002, and such volume
reductions have reduced certain categories of deposits from customers. Avery has
not historically experienced any material loss of customers in its business in
any one year.
NOTE 3. NET LOSS PER COMMON SHARE
Basic and diluted net loss per share are computed by dividing the net
loss, less preferred stock dividends earned of $123,192 and $123,192 for the
three month periods and $369,576 and $330,523 for the nine month periods ended
September 30, 2002 and 2001, 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 loss per common share was $0.11 and
$0.10 per weighted average common share outstanding for the three month periods
and $0.32 and $0.24 for the nine month periods ended September 30, 2002 and
2001, respectively.
Diluted net loss per share equals basic loss per share because of the
anti-dilutive effect of outstanding options, warrants and instruments
convertible into common stock. If all outstanding options and warrants to
purchase common stock were exercised, and if all instruments convertible into
common stock were so converted, then the additional common stock outstanding
would approximate 762,000 shares.
- 6 -
NOTE 4. DISCONTINUED OPERATIONS
On August 1, 2000, the Board of Directors of Avery approved the
spin-off of Primal Solutions, Inc. ("PSI").
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 Primal 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.
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 exclude expenses
relating to PSI.
The operating results of PSI for the period January 1, 2001 to
February 12, 2001 were as follows:
Period January 1,
2001 to February
12, 2001
------------------
Operating revenues $ 825,417
Cost of revenues (598,792)
------------------
Gross profit 226,625
Selling, general and administrative expenses (1,127,751)
------------------
Loss from operations (901,126)
Other Expense (15,932)
------------------
Loss before income tax benefit (917,058)
Income tax benefit 311,799
------------------
Net loss $ (605,259)
==================
NOTE 5. CERTAIN TRANSACTIONS
On March 9, 2001, HBS' largest customer, which accounted for 57% of its
call records processed in 2000 and 55% of all call records processed during
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. The
customer's volume of call records processed has declined since the bankruptcy
filing, but the decline in volume is believed to be attributable to general
industry trends. For the first nine months of 2002, the customer accounted for
62% of all call records processed by HBS, compared to 64% during the same period
of 2001. As of September 30, 2002, 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 currently
anticipate that the filing will materially adversely affect the relationship
with this company in the future.
In connection with our purchase of assets from Qorus.com, Inc.
("Qorus") in November 2001 (which resulted in the formation of our Aelix
business), the Company agreed to pay Qorus an amount equal to five percent (5%)
- 7 -
of the net after-tax income, if any, generated by the acquired intelligent
message communications service business for a period of five years following the
closing date. Pursuant to an agreement among the parties entered into in March
2002, Qorus agreed to eliminate this royalty obligation in exchange for the
Company's (i) cash payment in the amount of $100,000, (ii) return of all
3,010,000 common shares of Qorus held by the Company; and (iii) agreement to
cancel all unexercised options to purchase 1,066,500 common shares of Qorus at a
price of $0.01 per share. At December 31, 2001, the investment in Qorus was
recorded in the Company's financial statements at $30,100. During the first
quarter of 2002, the Company recorded an expense of $130,100 in connection with
this transaction.
On January 3, 2002, the Company advanced the sum of $200,000 to
Norlenton Investments, a shareholder of the Company, in exchange for a recourse
promissory note. The note bears interest at 6% and calls for the repayment of
all principal and interest on January 3, 2003. The advance is secured by 38,881
shares of common stock in the Company.
In October 2000, in order to permit its employees to participate in the
PSI spin-off, the Board of Directors of the Company authorized the Company to
accelerate all its outstanding options and to loan its employees, on a secured
but non-recourse basis, the amount required to exercise such options, plus an
additional amount to offset the tax consequences of such exercises. The loans,
which were classified as stock subscriptions receivable, were secured by the
stock acquired by the employees upon exercise of their options. At December 31,
2001, the aggregate of subscription notes receivable was $1,078,428. During the
second quarter of 2002, the Company established an $800,000 reserve against the
subscription notes receivable, based on the excess of the amount owed over the
fair market value of the underlying stock. The reserve was deemed adequate at
September 30, 2002.
Effective March 20, 2002, pursuant to a unanimous written consent of
the Company's Directors, the Company formally acknowledged that certain
promissory notes aggregating $685,118 received from executive officers and/or
directors in October 2000, in connection with the exercise of stock options,
were intended by the Company and the various borrowers at the time of the
transaction to be non-recourse loans secured solely with the common stock issued
pursuant to the stock option exercise. The originally issued notes, however,
were issued without the intended non-recourse language. In July 2002, new notes
which clarified the notes as secured and non-recourse were exchanged for the
previously issued notes.
In connection with the spin-off of PSI, the Company advanced certain
former PSI stockholders $1,563,500 on July 31, 2000 in exchange for promissory
notes. The notes are non-recourse, bear interest at 6.6% per annum and were
originally due on July 31, 2002. During the third quarter of 2001, the Company
established a reserve of $810,000 against those notes receivable, due to the
excess of the amount due over the stock value. In January 2002, notes with a
face value of $878,500 were assigned to an unrelated party, and the maturity
date of such assigned notes was extended to July 31, 2006. During the second
quarter of 2002, the Company added $400,000 to the reserve based upon a further
decline in the stock value. On July 31, 2002, notes with a face value of
$685,000 (and a net carrying value of $170,000) were cancelled in exchange for
surrender of the related collateral of 1,010,367 shares of the Company's
non-dividend bearing Series G preferred stock. At September 30, 2002, the
- 8 -
$878,500 of outstanding loans (with a net carrying value of $182,700) are
secured by 1,140,126 shares of the Company's non-dividend bearing Series G
preferred stock (which are convertible into 159,076 shares of the Company's
common stock).
During the first nine months of 2002, the Company has purchased a total
of 49,700 shares of the Company's common stock in open market transactions at an
average purchase price of $1.52 per share. The Company additionally acquired
91,831 shares of common stock through the surrender of collateral securing
certain cancelled non-recourse notes receivable.
NOTE 6. COMMITMENTS AND CONTINGENCIES
On August 3, 2001, the Company, through ACI, completed the acquisition
of certain assets from OAN Services, Inc. ("OAN"). OAN had filed a bankruptcy
petition under Chapter 11 of the U.S. Bankruptcy Code earlier in 2001. During
2002, one of the major pre-petition creditors of OAN appealed certain of the
bankruptcy's court's rulings relative to the disbursement of OAN's funds to
creditors after the bankruptcy filing. During the third quarter of 2002, the
pre-petition creditor succeeded in obtaining a ruling from an appeals court
which remanded the case back to the bankruptcy court for reconsideration of its
earlier rulings. The creditor has put many of ACI's customers on notice that all
or a portion of OAN's disbursements to them which were previously approved by
the bankruptcy court may be disgorged. The Company is not a party to the
bankruptcy filing nor any appeal of the bankruptcy court's rulings. The Company
does not believe that the ultimate resolution of this dispute will have a
material adverse effect on the Company's results of operation or financial
position; however, due to the inherent uncertainty of litigation, there can be
no assurance that the resolution of the dispute would not have a material
adverse effect on the Company's results of operations or financial position for
the fiscal period in which such resolution occurred.
The Company is involved in various other claims 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 or financial position for the fiscal period in
which such resolution occurred.
NOTE 7. OAN and AELIX TRANSACTIONS
ACI completed its purchase of certain assets from OAN in August 2001.
The Company completed its acquisition of substantially all of the assets of
Aelix in November 2001.
At the time of ACI's purchase of the net assets of OAN, OAN had
indicated that the net bad debt reserve held against customers (a liability
which was assumed by ACI) was $0.6 million. This amount represents a liability
for funds withheld from customers to cover bad debt charges for processed call
records. During the third quarter of 2002, the Company determined,
- 9 -
with OAN's cooperation, that the amount withheld from customers to cover bad
debts as of the closing date of the purchase was actually $3.6 million. The
Company has adjusted its bad debt reserves, recorded a $3.0 million additional
receivable from OAN and restated the prior period financial statements (see Note
11 to Consolidated Financial Statements). The Company believes the receivable is
collectible in full from the OAN bankruptcy estate.
Unaudited pro forma financial information for the nine months ended
September 30, 2001 as though the OAN and Aelix acquisitions had occurred on
January 1, 2001 is as follows:
NINE MONTHS
ENDED
SEPTEMBER 30, 2001
Revenue $ 46,571,343
Net loss from continuing operations (9,656,338)
Net loss per share from continuing operations:
Basic $ (7.55)
Diluted $ (7.55)
NOTE 8 - SEGMENT INFORMATION
The local exchange carrier billing segment represents the third party
billing clearinghouses for the telecommunications industry. These third party
clearinghouses process telephone call records and other transactions and submit
them to local telephone companies for inclusion in their monthly bills to
end-users. The intelligent message communication services segment provides
services to enterprises, particularly in the travel, hospitality and
transportation sectors.
A summary of the segments' operating income (loss) for the nine-month
period ended September 30, 2002 and certain balance sheet data as of September
30, 2002 is as follows:
LOCAL EXCHANGE INTELLIGENT MESSAGE CORPORATE CONSOLIDATED
CARRIER BILLING COMMUNICATIONS ADMINISTRATION
Revenue $ 30,745,263 $ 483,623 $ - $ 31,228,886
Depreciation and Amortization 955,758 132,295 44,244 1,132,297
Segment profit (loss) 643,040 (1,069,600) (3,301,449) (3,728,009)
Segment assets 24,021,398 4,225,023 6,057,828 34,304,249
Capital expenditures by 168,777 (104,969) * 3,500 67,308
segment
<FN>
* $150,000 reclassified from fixed assets to intangible assets
</FN>
The intelligent message communication service business was acquired in
November 2001. Accordingly, there was only one continuing segment during the
nine months ended September 30, 2001.
Approximately $2.1 million of Avery's corporate office expenses and
$0.4 million of the intelligent message communication business expenses have
been allocated to the local exchange carrier billing segment based on services
provided to that segment.
NOTE 9. REVERSE STOCK SPLIT
- 10 -
The stockholders of the Company approved a 1-for-8 reverse split of the
Company's common stock, which was effective on December 12, 2001. Shares
outstanding and earnings per share during periods before the reverse stock split
have been restated to reflect the split.
NOTE 10. GOODWILL
Financial Accounting Standard No. 142 "Goodwill and Other Intangible
Assets" requires that goodwill recorded on acquisitions completed prior to July
1, 2001 be amortized through December 31, 2001. Effective January 1, 2002,
goodwill is no longer to be amortized in periodic equal pre-determined charges,
but will instead be tested for impairment as set forth in the statement. The
Company adopted this statement effective January 1, 2002.
The net effect of not recording any amortization of goodwill reduced
the net loss by $40,000 for the three months ended September 30, 2002 and
$120,000 for the nine months ended September 30, 2002. If the statement had been
applied effective at the beginning of the three-month period ended September 30,
2001, the net loss for that period would have decreased by $40,000, resulting in
net loss of $1,927,000 ($1.52 loss per share, basic and diluted). If the
statement had been applied effective at the beginning of the nine-month period
ended September 30, 2001, the net loss from continuing operations and net income
would have decreased by $120,000, which would have resulted in net loss from
continuing operations of $794,000 ($0.62 loss per share, basic and diluted), and
a net loss of $1,400,000 ($1.09 loss per share, basic and diluted).
The Company has two segments which correspond with its two reporting
units, the local exchange carrier billing segment and the intelligent message
communications segment. Goodwill recorded on the Company's financial statements
includes $2.5 million within the local exchange carrier billing segment and $3.1
million within the intelligent message communication segment.
The Company obtained an independent valuation of the intelligent
message communication segment during the second quarter of 2002, updating a
valuation obtained to support the Company's initial purchase price allocation.
This business valuation supports the related goodwill carried on the Company's
financial statements. On the basis of the independent valuation and the judgment
of management, the Company concluded that there is no impairment of goodwill for
this segment.
The Company intends annually, on a going forward basis, to evaluate the
goodwill of its intelligent message communications segment during the fourth
quarter of each year. Accordingly, this goodwill impairment review process will
be completed again during the fourth quarter of 2002 using an enterprise value
methodology. If the fair market value of the business is less than the carrying
value, the Company will complete the impairment test to specifically identify
the goodwill impairment amount.
In connection with its local exchange carrier billing segment, the
Company has completed its initial assessment of the business value by comparing
its estimate of fair value to the carrying amount and has concluded that the
fair value of this segment exceeds its carrying
- 11 -
value. The Company intends annually, on a going forward basis, to evaluate the
goodwill of its local exchange carrier billing segment during the fourth quarter
of each year. Accordingly, this goodwill impairment review process will be
completed again during the fourth quarter of 2002 using an enterprise value
methodology. If the fair market value of the business is less than the carrying
value, the Company will complete the impairment test to specifically identify
the goodwill impairment amount.
NOTE 11. RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
During the third quarter of 2002, the Company determined, with OAN's
cooperation, that an error was made in the computation of the purchase price for
net assets purchased. It was determined that the liability assumed by the
Company for amounts withheld from customers to cover bad debts as of the closing
date of the purchase was actually $3.6 million, rather than the $0.6 million
calculated at the time of closing. The Company has adjusted its bad debt
reserves, recorded a $3.0 million additional receivable from OAN and restated
the December 31, 2001 balance sheet as previously filed in the Company's Annual
Report on Form 10-KSB as if such entries had been made as of the date of the
asset purchase. The adjustments affect only the balance sheet and statement of
cash flows dated after August 2001. There was no impact to the Company's
statement of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
General
Avery is a telecommunications service company which operates two lines
of business. Through its HBS and ACI subsidiaries, Avery provides billing and
collection services for inter-exchange carriers and long-distance resellers.
Through its Aelix subsidiary, Avery provides intelligent message communication
services to the travel, hospitality and transportation sectors.
Our billing and collection service operates as a clearinghouse.
Customers, principally long distance service resellers, submit their billing
records to us. We aggregate those records from all of our customers and present
them to local exchange carriers, such as regional Bell operating companies. The
local exchange carriers include the submitted charges on monthly phone bills
sent to end-users. The local exchange companies remit collected funds to us,
generally 45 to 60 days after we submit our customers' billing records to them.
We then remit such funds to our customers, after withholding our fees and other
expenses.
Our intelligent message communication service allows us to accept and
deliver messages, via voice, e-mail or fax, between our customers and any
individual or group of people (customers, suppliers, employees, etc.) on an
expedited basis. Examples of the types of services we offer include
confirmations of airline and hotel reservations. Generally, we charge a
per-message fee to our intelligent message communication service customers.
- 12 -
Forward Looking Statements
This Quarterly Report on Form 10-Q 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, 2002 and 2001. 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, 2001. 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 month periods ended September 30, 2002 and 2001.
The results of operations for the first nine months in 2002 include
nine months of activity by ACI, which purchased the assets of OAN in August
2001, and nine months of activity by Aelix, which was purchased in November
2001. The corresponding results of operation for the first nine months of 2001
include two months' activity for ACI and no activity from Aelix.
The results on the "Discontinued operations" lines during the first
nine months of 2001 relate to PSI, a wholly owned subsidiary that was spun-off
in February 2001. All discussions relating to revenue, cost of revenues and
operating expenses pertain only to continuing operations, which consist of
Avery, HBS, ACI and Aelix.
RESULTS OF OPERATIONS
- 13 -
The following table presents certain items in the Company's
Consolidated Statements of Operations for the three and nine months ended
September 30, 2002 and 2001:
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- -------------- ------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(In Thousands) (In Thousands)
Revenues $ 9,714 $ 12,456 $ 31,229 $ 29,056
Cost of revenues (6,740) (8,842) (21,868) (20,509)
------------ ------------- ------------ -------------
Gross profit 2,974 3,614 9,361 8,547
Operating expenses (4,539) (3,204) (12,774) (6,331)
------------ ------------- ------------ -------------
Operating income (loss) (1,565) 410 (3,413) 2,216
Other income (expense), net (148) (2,999) (1,561) (3,019)
Income tax benefit (expense) 583 623 1,246 (111)
Discontinued operations loss - - - (605)
------------ ------------- ------------ -------------
Net loss $ (1,130) $ (1,966) $ (3,728) $ (1,519)
============ ============= ============ =============
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
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, and from electronic messaging services provided by Aelix. 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 revenue for the three months ended September 30, 2002 was $9.7
million, which was $2.7 million or 22.0% lower than revenue in the comparable
quarter in 2001. Revenue included in the third quarter of 2002 from the acquired
ACI and Aelix business units was $4.5 million and $0.2 million, respectively.
During the third quarter of 2001, ACI provided $4.5 million of revenue.
Excluding revenue generated by ACI and Aelix in both periods, the Company's
revenue would have declined by 37.3%, reflecting a 33.0% decrease in records
processed and a competitive pricing environment. The decline in call records
processed reflects increased consumer usage of cell phones and prepaid phone
cards to make long distance calls. Call records for neither cell phones nor
prepaid phone cards are typically processed through a billing clearinghouse.
Additionally, some of the local exchange companies have begun to offer long
distance service, which reduces the market share of the network resellers who
typically use clearinghouse services.
The Company is pursuing additional sources of revenue to supplement its
LEC billing business. The additional sources of revenue could arise from
acquisitions or internal growth. The Company has engaged, from time to time, in
discussions with various entities regarding potential acquisition of such
entities. In order to achieve internal growth, the Company intends to offer new
services, such as 900 area code business billing and the Aelix message
- 14 -
communication services. The Company's intention is to make acquisitions or
expand into markets which will leverage the Company's existing infrastructure.
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. Cost of revenues also
includes $0.2 million of costs relating to the Aelix business unit.
The Company's gross profit margin in the third quarter of 2002 was
30.6%, compared to 29.0% in the third quarter of 2001. The increase in gross
margin principally reflects the inclusion of ACI for three months in the third
quarter of 2002 compared to two months in the third quarter of 2001. ACI has
historically achieved a higher gross margin level than HBS. Additionally, the
Company was able to reduce personnel costs associated with the customer service
function by consolidating into a single location during the second quarter of
2002.
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 third quarter of 2002 were $4.5 million,
compared to $3.2 million in the third quarter of 2001. The increase in operating
expenses was attributable to the inclusion, in the third quarter of 2002, of
three months' operating expenses for ACI, compared to two months in the third
quarter of 2001 and the inclusion of Aelix in the 2002 expenses. Excluding the
effect of the acquired businesses in both periods, operating expenses in 2002
would have been $2.5 million, compared to $2.4 million in 2001. The 2002 period
expenses included approximately $0.1 million of one-time termination and
redundancy costs associated with the consolidation of our two LEC billing
business units.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended
September 30, 2002 and 2001 was $601,392 and $260,610 respectively. The increase
in expense during 2002 was attributable to (i) depreciation and amortization
expenses associated with fixed assets of ACI and Aelix and (ii) an additional
$0.3 million writedown of assets to fair value, offset by (iii) the absence of
amortization expense for goodwill during the 2002 period, pursuant to the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
Other Income (Expense), Net
Other income (expense), net, in the third quarter of 2002 was an
expense of $147,858 compared to an expense of $3.0 million during the third
quarter of 2001. Other expense in the
- 15 -
third quarter of 2002 consisted of interest expense. Other expenses of $3.0
million in 2001 included a $2.2 million write-off of an investment in an
affiliated company and a $0.9 million increase in reserves for non-recourse
notes receivable. The $2.2 million write-off of the investment in an affiliated
company occurred when the company ceased operations. The reserve for
non-recourse notes receivable related to notes from former employees who
borrowed funds to purchase shares of Avery and Primal stock. The increase in the
reserves was deemed appropriate in light of a decline in the value of the
underlying stock for the non-recourse notes (see Note 5 to Consolidated
Financial Statements).
Income Taxes
An income tax benefit of $0.6 million was recorded during both the
third quarter of 2002 and the third quarter of 2001. The income tax benefit in
third quarter of 2001 differs materially from the expected income benefit
primarily because of items permanently not deductible for income tax reporting
purposes.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Total revenue for the nine months ended September 30, 2002 was $31.2
million, up $2.2 million or 7.5% from the $29.1 million of revenue in the
comparable period in 2001. Revenue included in the first nine months of 2002
from the acquired ACI and Aelix business units was $13.8 million and $0.5
million, respectively. During the first nine months of 2001, revenue from the
acquired ACI business unit was $4.5 million. Excluding revenue generated by ACI
and Aelix in both periods, the Company's revenue would have declined by 31.0%,
reflecting a 26.8% decrease in records processed and a competitive pricing
environment. The decline in call records processed reflects increased consumer
usage of cell phones and prepaid phone cards to make long distance calls. Call
records for neither cell phones nor prepaid phone cards are typically processed
through a billing clearinghouse. Additionally, some of the local exchange
companies have begun to offer long distance service, which reduces the market
share of network resellers who typically use clearinghouse services.
The Company is pursuing additional sources of revenue to supplement its
LEC billing business. The additional sources of revenue could arise from
acquisitions or internal growth. In general, the Company intends to make
acquisitions or expand into markets which will leverage the Company's existing
infrastructure.
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
- 16 -
aggregated volumes and can pass these discounts to its customers. Cost of
revenues also includes $0.4 million of costs relating to the Aelix business
unit.
The Company's gross profit margin in the first nine months of 2002 was
30.0%, which was 0.6% better than the 29.4% gross margin earned during the same
period in 2001. The modestly improved gross profit margin in 2002 reflects the
higher mix of calls processed by ACI in the 2002 financial results, offset by a
competitive pricing environment in 2002. ACI has historically achieved a higher
gross margin level than HBS.
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 first nine months of 2002 were $12.8
million, compared to $6.3 million in the first nine months of 2001. The $6.5
million increase in operating expenses in 2002 is attributable to the inclusion,
in the first nine months of 2002, of $6.9 million of operating expenses for ACI
and Aelix, compared to $0.8 million during the first nine months of 2001.
Excluding the effect of the acquired businesses, operating expenses in 2002
would have been $5.8 million, which would have been $0.3 million higher than
operating expenses in the first nine months of 2001. Operating expenses in 2002
were adversely affected by staffing redundancies, travel, severance and other
costs associated with the consolidation of operations into a single facility.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended
September 30, 2002 and 2001 was $1.1 million and $0.5 million, respectively. The
increase in expense during 2002 was attributable to (i) depreciation and
amortization expenses associated with fixed assets of ACI and Aelix and (ii) an
additional $0.3 million writedown of assets to fair value, offset by (iii) the
absence of amortization expense for goodwill during 2002, pursuant to the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
Other Income (Expense), Net
Other income (expense), net, in the first nine months of 2002 was an
expense of $1.6 million, compared to an expense of $3.0 million during the first
nine months of 2001. Other expense in 2002 included $1.2 million of charges
relating to increases in reserves for non-recourse notes receivable and stock
subscription notes receivable, $0.2 million in interest expense and $0.1 million
in royalty payments. The $1.2 million increase in the reserve for non-recourse
debt was deemed appropriate in light of a decline in the value of the stock
which serves as collateral for the non-recourse notes (see Note 5 to
Consolidated Financial Statements). The Company's $0.1 million of royalty
expense arose in connection with the Company's agreement with Qorus to relieve
the Company of any future royalty obligation to Qorus in exchange for the
Company's cash payment of $100,000, the Company's surrender of 3,010,000 common
shares of Qorus and the Company's waiver of its right to purchase up to
1,066,500 shares of Qorus common stock for $0.01 per share.
Other expenses of $3.0 million in 2001 included a $2.2 million
writedown of an investment in an affiliated company and a $0.9 million increase
in reserves for non-recourse
- 17 -
notes receivable. The increase in the reserves was deemed appropriate in light
of a decline in the value of the underlying stock for the non-recourse notes
(see Note 5 to Consolidated Financial Statements).
Income Taxes
An income tax benefit of $1.2 million was recorded for the first nine
months of 2002 compared to an expense of $0.1 million (from continuing
operations) in the first nine months of 2001. The income tax benefit in both
periods differs from the expected income benefit primarily because of items
permanently not deductible for income tax reporting purposes.
Loss from Discontinued Operations
The Company's loss from discontinued operations, net of tax benefits,
was $605,259 for the nine months ended September 30, 2001. The loss relates to
PSI, which was spun-off on February 12, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Avery's cash balance at September 30, 2002 was $3.5 million, compared
to $5.4 million at December 31, 2001. Fluctuations in daily cash balances are
normal due to the large amount of customer receivables that we collect and
process on behalf of our customers. We receive money daily from local exchange
carriers, but we ordinarily disburse such collected funds to our customers once
each week on Fridays. Accordingly, our cash balance is generally at its highest
level on Thursdays and its lowest level on Fridays.
Avery incurred a net loss of $3.7 million during the nine months ended
September 30, 2002, which included a $1.2 million write-off of notes receivable
from related parties. The Company used $4.4 million of cash in operating
activities during the same period. The Company is optimistic that it will
achieve profitability during the fourth quarter of 2002, based upon cost
reductions being realized through consolidation of operations, which was
completed during the third quarter of 2002.
Additionally, Avery's working capital position at September 30, 2002
was a negative $16.8 million, compared to a negative $13.1 million at December
31, 2001. The Company can operate with negative working capital, because a
significant portion of its current liabilities do not require payment in the
near future. For example, current liabilities at September 30, 2002 include
approximately $6 million of deposits from customers which are not typically
refunded in the ordinary course of business. The customer deposits would be
refundable over time only if the customer were to significantly reduce the
volume of business done with the Company or terminate its relationship. Most of
the Company's customers have experienced lower call record volumes during 2002,
and such volume reductions have reduced certain categories of deposits from
customers. Avery has not historically experienced any material loss of customers
in its business in any one year. The Company also maintains a $9 million line of
credit to meet peak cash demands. The credit line includes a $6 million facility
for working capital and a $3
- 18 -
million line to provide advance funding to customers. The Company's ability to
borrow funds at any point in time is determined by the value of its accounts
receivable. At September 30, 2002, the Company had $2.2 million available under
this credit line.
Cash flow from operating activities. Net cash used in operating
activities was $4.4 million during the first nine months of 2002, compared to
$15.0 million provided during the first nine months of 2001 (excluding
discontinued operations). The $4.4 million of cash used in operating activities
during 2002 was principally attributable to a $4.7 million reduction in trade
accounts payable and accrued liabilities, a $3.7 million net loss, a $1.1
million increase in deferred income taxes, a $0.9 million increase in other
current assets and a $0.6 million increase in advance funding receivables,
offset by a $3.2 million increase in deposits and other payables related to
customers, a $1.2 million non-cash provision for uncollectible related party
receivables, $1.1 million of depreciation and amortization, a $0.9 million
decrease in trade accounts receivable and a $0.3 million decrease in deposits
with LECs.
During the first nine months of 2001, the Company's continuing
operations provided $15.0 million of cash, arising principally from a $16.8
million increase in deposits and other payables related to customers. The
increase in deposits and other payables to customers was largely attributable to
ACI's acquisition of assets and liabilities from OAN in August 2001.
Cash flow from investing activities. Cash used in investing activities
was $0.1 million during the first nine months of 2002 compared to $4.4 million
in the comparable period of 2001. During the first nine months of 2002 the
Company purchased property and equipment costing $0.1 million. In the same
period in 2001, the Company used $4.4 million of cash, principally through its
extension of $2.5 million of loans to other entities, the purchase of the OAN
assets for $1.4 million (inclusive of acquisition costs) and the purchase of
$0.4 million in property and equipment.
Cash flow from financing activities. Cash provided by financing
activities was $2.5 million during the first nine months of 2002 compared to a
net use of zero during the first nine months of 2001. During the first nine
months of 2002, the Company borrowed $3.0 million under its line of credit, and
used cash to pay $0.4 million of dividends to preferred stockholders and
purchase $0.1 million of treasury stock. In the corresponding period in 2001,
the Company raised $2.0 million from the issuance of common and preferred stock,
and used cash to (i) redeem $0.3 million of preferred stock, (ii) purchase $0.2
million of outstanding stock options, (iii) purchase common stock for $1.2
million, and (iv) pay $0.3 million for preferred stock dividends.
Avery's operating cash requirements consist principally of working
capital requirements, scheduled debt service obligations, and payments of
preferred dividends and capital expenditures. The Company believes cash flows
generated from operations, together with borrowings under its existing line of
credit, will be sufficient to fund working capital needs, debt and dividend
payment obligations and capital expenditure requirements for the next twelve
months.
- 19 -
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). The preparation of these financial statements requires us to
make estimates and adjustments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate these estimates, including
those related to bad debts, technological obsolescence, tax obligations and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
evaluation of these estimates forms the basis for making judgments about the
carrying values of assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions.
We have identified below the accounting policies believed to be the
most critical to our business operations as discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations where
such policies affect our reported and expected financial results.
Revenue Recognition
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 LECs 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 Company collects
the customers' receivables from the LECs, 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 LECs 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 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 75% of the purchased
amount. The purchased accounts receivable are recorded at the net amount
advanced to customers (as advance payment receivables). Financing charges
are assessed until the Company recoups its initial payment. The Company
records as income an initial
- 20 -
non-refundable fee, typically no more than 1%, when funds are advanced to
the customer. The Company also records interest income, typically at four
percentage points over prime on outstanding advances. There are no
substantial costs incurred in factoring a customer's receivables, and all
costs associated with the receivable are recognized as incurred. The
receivables are typically repaid in 60 days.
The Company believes that three factors reduce the potential exposure to
credit losses. First, the Company advances funds against customer receivables
at a level which is usually less than 90% of the expected recovery from the
billing LEC. Second, payments from a diversified group of telephone end-users
are being passed through a LEC, which has historically been an A+ credit
risk. Thirdly, the LECs pay the Company directly, so that the Company can
deduct any amounts owed it before remitting funds to the customer. In
addition, the Company typically withholds a portion of payments received from
LECs before remitting the balance due to its customers which minimizes the
Company's exposure to subsequent charges from LECs.
Goodwill and Impairment of Intangibles
Goodwill results from the difference between the purchase price
paid and liabilities assumed by the Company over the estimated fair market
value of assets of HBS and Aelix and subsequent increases to goodwill
resulting from earn out payments for the HBS acquisition. Initial goodwill
for HBS was amortized using the straight-line method over 15 years with
additional goodwill from earn out payments amortized over the remaining
goodwill life. The Company discontinued amortizing goodwill effective
January 1, 2002 in accordance with FAS 142 (see Recent Accounting
Pronouncements). 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 were
less than the stated value, goodwill would be written down to fair value.
Income Taxes and Deferred Taxes
The Company utilizes the asset and liability approach to
accounting and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statements and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
have an effect upon taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense or benefit is the tax payable or refundable
for the period plus or minus the change during the period in deferred tax
assets and liabilities.
- 21 -
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in marketable
securities (which consist of certificates of deposit). At September 30, 2002,
our marketable securities were recorded at a fair value of approximately
$206,000, with an overall weighted average return of approximately 2% and an
overall weighted average life of less than one year. The marketable securities
held by the Company have exposure to price risk, which is estimated as the
potential loss in fair value due to a hypothetical change of 20 basis points
(10% of our overall average rate of return) in quoted market prices. This
hypothetical change would have an immaterial effect on the recorded value of the
marketable securities.
The Company is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt since 100% of our
long-term debt is at a fixed rate as of September 30, 2002. The fair value of
our long-term debt at September 30, 2002 is estimated to be $0.7 million based
on the 8% rate of the long-term debt and its maturity of 4.25 years, which is
consistent with market rates currently available for loans of comparable
duration and comparable risk.
To date, the Company has not entered into any derivative financial
instruments to manage interest rate risk and currently is not evaluating the
future use of any such financial instruments.
The Company does not have any exposure to foreign currency transaction
gains or losses. Virtually all of the Company's business transactions are in
U.S. Dollars.
Item 4 Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
filings.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
The exhibits are listed in the Exhibit Index filed herewith, which
Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K
None
- 22 -
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 Communications, Inc.
(Registrant)
------------------------------------------------
Date November 14, 2002 /s/Patrick J. Haynes III
---------------------- ------------------------------------------------
Patrick J. Haynes III
Chairman of the Board
------------------------------------------------
Date November 14, 2002 /s/ Thomas C. Ratchford
---------------------- ------------------------------------------------
Thomas C. Ratchford
Chief Financial Officer
AVERY COMMUNICATIONS, INC.
CERTIFICATION
I, Patrick J. Haynes, III, Chief Executive Officer of Avery Communications, Inc.
(the "Company"), certify that:
1. I have reviewed this quarterly report of the Company on Form 10-Q;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
- 23 -
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and board of
directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002 /s/ Patrick J. Haynes, III
--------------------------
Patrick J. Haynes, III, Chief Executive Officer
- 24 -
AVERY COMMUNICATIONS, INC.
CERTIFICATION
I, Thomas C. Ratchford, Chief Financial Officer of Avery Communications, Inc.
(the "Company"), certify that:
1. I have reviewed this quarterly report of the Company on Form 10-Q;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and board of
directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
- 25 -
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002 /s/ Thomas C. Ratchford
-----------------------
Thomas C. Ratchford, Chief Financial Officer
- 26 -
Exhibit Index
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
- 27 -
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)
2.14 Asset Purchase Agreement among Qorus.com, Inc., TMT Holdings, Inc.,
Aelix, Inc. and Avery Communications, Inc. dated May 29. 2001 (filed as
Exhibit 10.37 to the Quarterly Report on Form 10-QSB for the period
ended June 30, 2001, filed by Qorus.com, Inc. (the "Qorus 2Q 10-QSB")
and incorporated herein by reference thereto)
2.15 First Amendment to Asset Purchase Agreement among Qorus.com, Inc., TMT
Holdings, Inc., Aelix, Inc. and Avery Communications, Inc. dated
October 17, 2001 (filed as Exhibit 10.56 to the Quarterly Report on
Form l 0-QSB for the period ended September 30, 2001, filed by
Qorus.com, Inc. (the "Qorus 3Q 10-QSB") and incorporated herein by
reference thereto)
2.16 Asset Purchase Agreement among OAN Services, Inc., nTelecom Holdings
Inc., OAN Services of Florida, Inc. and ACI Communications, Inc. dated
May 25, 2001 (filed as Exhibit 2.1 to Avery's Current Report on Form
8-K dated August 3, 2001 (filed August 20, 2001) and incorporated
herein by reference thereto)
2.17 Management Support and Post-Petition Financing Agreement among OAN
Services, Inc., nTelecom Holdings Inc., OAN Services of Florida, Inc.
and ACI Communications, Inc. dated May 25, 2001 (filed as Exhibit 2.2
to Avery's Current Report on Form 8-K dated August 3, 2001 (filed on
August 20, 2001) and incorporated
- 28 -
herein by reference thereto)
2.18 First Amendment to Asset Purchase Agreement among OAN Services, Inc.,
nTelecom Holdings, Inc., OAN Services of Florida, Inc. and ACI
Communications, Inc. dated July 27, 2001 (filed as Exhibit 2.3 to
Avery's Current Report on Form 8-K/A dated August 3, 2001 (filed
October 17, 2001) and incorporated herein by reference thereto)
2.19 Second Amendment to Asset Purchase Agreement among Qorus.com, Inc., TMT
Holdings, Inc., Aelix, Inc. and Avery Communications, Inc. dated March
15, 2002 (incorporated by reference to the same Exhibit No. of the
Annual Report on Form 10-KSB for the year ended December 31, 2001,
filed by Avery Communications, Inc.)
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 (filed as Exhibit 3.3 to Avery's Registration Statement
on Form SB-2 (File No, 333-57336) (the "Resale Registration Statement")
and incorporated herein by reference thereto)
3.4 Certificate of Designation of Series B Junior Convertible Redeemable
Preferred Stock (filed as Exhibit 3.4 to the Resale Registration
Statement and incorporated herein by reference thereto)
3.5 Certificate of Designation of Series C Junior Convertible Redeemable
Preferred Stock (filed as Exhibit 3.5 to the Resale Registration
Statement and incorporated herein by reference thereto)
3.6 Certificate of Designations of Series D Senior Cumulative Convertible
Redeemable Preferred Stock (filed as Exhibit 3.6 to the Resale
Registration Statement and incorporated herein by reference thereto)
3.7 Certificate of Designations of Series E Junior Convertible Redeemable
Preferred Stock (filed as Exhibit 3.7 to the Resale Registration
Statement and incorporated herein by reference thereto)
3.8 Certificate of Designations of Series G Junior Participating
Convertible Voting Preferred Stock (filed as Exhibit 3.8 to the Resale
Registration Statement and incorporated herein by reference thereto)
3.9 Certificate of Designations of Series H Convertible Preferred Stock
(filed as Exhibit 3.9 to the Resale Registration Statement and
incorporated herein by reference thereto)
- 29 -
3.10 Certificate of Decrease in Authorized Number of Shares of Series of
Preferred Stock (filed as Exhibit 3.10 to the Resale Registration
Statement and incorporated herein by reference thereto)
3.11 Certificate of Designations of Series I Convertible Preferred Stock
(filed as Exhibit 4.2 to Avery's Quarterly Report on Form l0-QSB for
the period ended June 30, 2001, and incorporated herein by reference
thereto)
3.12 Certificate of Amendment to the Certificate of Incorporation of Avery
Communications, Inc. providing for a one-for-eight reverse stock split
dated December 12, 2001 (filed herewith)
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
- 30 -
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)
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 Capita! 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)
- 31 -
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
(filed as Exhibit 4.23 to the Resale Registration Statement and
incorporated herein by reference thereto)
4.24 Registration Rights Agreement by and between Avery Communications, Inc.
and Jay Geier dated January 4, 2000 (filed as Exhibit 4.24 to the
Resale Registration Statement and incorporated herein by reference
thereto)
4.25 Registration Rights Agreement by and between Avery Communications, Inc.
and Investor Network Company, LLC dated October 19, 2000 (filed as
Exhibit 4.25 to the Resale Registration Statement and incorporated
herein by reference thereto)
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 (filed as Exhibit 4.26 to the Resale
Registration Statement and incorporated herein by reference thereto)
*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 Non-competition 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)
- 32 -
*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)
10.15 Demand Promissory Note, dated December 21, 2000, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $650,000 (filed as Exhibit 10.44 to the Form 10-KSB (File No.
0-27551) filed by Qorus.com, Inc. (the "Qorus 10-KSB") and incorporated
herein by reference thereto)
10.16 Demand Promissory Note, dated February 15, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $150,000 (filed as Exhibit 10.45 to the Qorus 10-KSB and
incorporated herein by reference thereto)
- 33 -
10.17 Demand Promissory Note, dated February 28, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $260,000 (filed as Exhibit 10.46 to the Qorus 10-KSB and
incorporated herein by reference thereto)
10.18 Amended and Restated Convertible Promissory Note, dated January 1,
2001, payable to Thurston Communications Corporation by Qorus.com, Inc.
in the original principal amount of $750,000 (filed as Exhibit 10,37 to
the Qorus 10-KSB and incorporated herein by reference thereto)
10.19 Convertible Promissory Note, dated October 20, 2000, payable to
Thurston Communications Corporation by Qorus.com, Inc. in the original
principal amount of $250,000 (filed as Exhibit 10.38 to the Qorus
10-KSB and incorporated herein by reference thereto)
10.20 Convertible Promissory Note, dated October 30, 2000, payable to
Thurston Communications Corporation by Qorus.com, Inc. in the original
principal amount of $250,000 (filed as Exhibit 10.39 to the Qorus
10-KSB and incorporated herein by reference thereto)
10.21 Promissory Note, dated March 16, 2001, payable to Thurston
Communications Corporation by Qorus.com, Inc. in the original principal
amount of $160,000 (filed as Exhibit 10.48 to the Qorus 10-KSB and
incorporated herein by reference thereto)
10.22 Note Extension, Modification and Amendment Agreement dated as of May
31, 2001, among Qorus.com, Inc., Aelix, Inc., Thurston Interests, LLC,
Apex Investment Fund III, L.P., Apex Strategic Partners, LLC, Thurston
Communications Corporation and Customer Care and Technology Holdings,
Inc. (filed as Exhibit 10.38 to the Qorus 2Q 10-QSB and incorporated
herein by reference thereto)
10.23 Demand Promissory Note, dated as of March 29, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $160,000 (filed as Exhibit 10.39 to the Qorus 2Q 10-QSB and
incorporated herein by reference thereto)
10.24 Demand Promissory Note, dated as of April 12, 2001, payable to Thurston
Communications Corporation in the original principal amount of $80,000
(filed as Exhibit 10.40 to the Qorus 2Q 10-QSB and incorporated herein
by reference thereto)
10.25 Demand Promissory Note, dated as of April 30, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $170,000 (filed as Exhibit 10.41 to the Qorus 2Q 10-QSB and
incorporated herein by reference thereto)
10.26 Demand Promissory Note, dated as of May 11. 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of
- 34 -
$25,000 (filed as Exhibit 10.42 to the Qorus 2Q 10-QSB and incorporated
herein by reference thereto)
10.27 Demand Promissory Note, dated as of May 15, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of S75,000 (filed as Exhibit 10.43 to the Qorus 2Q 10-QSB and
incorporated herein by reference thereto)
10.28 Demand Promissory Note, dated as of May 31, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $42,000 (filed as Exhibit 10.44 to the Qorus 2Q 10-QSB and
incorporated herein by reference thereto)
10.29 Demand Promissory Note, dated as of June 15, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $80,000 (filed as Exhibit 10.45 to the Qorus 2Q 10-QSB and
incorporated herein by reference thereto)
10.30 Demand Promissory Note, dated as of June 28, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $60.000 (filed as Exhibit 10.46 to the Qorus 2Q 10-QSB and
incorporated herein by reference thereto)
10.31 Demand Promissory Note, dated as of July 12, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $85,000 (filed as Exhibit 10.47 to the Qorus 2Q 10-QSB and
incorporated herein by reference thereto)
10.32 Demand Promissory Note, dated as of July 31, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $83,500 (filed as Exhibit 10.48 of the Quarterly Report on
Form 10-QSB for the period ended September 30, 2001, filed by
Qorus.com, Inc. (the "Qorus 3Q 10-QSB") and incorporated herein by
reference thereto)
10.33 Demand Promissory Note, dated as of August 14, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $178,000 (filed as Exhibit 10.49 to the Qorus 3Q
10-QSB and incorporated herein by reference thereto)
10.34 Demand Promissory Note, dated as of August 30, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $102,500 (filed as Exhibit 10.50 to the Qorus 3Q
10-QSB and incorporated herein by reference thereto)
10.35 Demand Promissory Note, dated as of September 13, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $96,000
- 35 -
(filed as Exhibit 10.51 to the Qorus 3Q 10-QSB and incorporated herein
by reference thereto)
10.36 Demand Promissory Note, dated as of September 28, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $90,500 (filed as Exhibit 10.52 to the Qorus 3Q
10-QSB and incorporated herein by reference thereto) 10.37 Demand
Promissory Note, dated as of October 1, 2001, payable to Thurston
Communications Corporation by Aelix, Inc. in the original principal
amount of $160,000 (filed as Exhibit 10.53 to the Qorus 3Q 10-QSB and
incorporated herein by reference thereto)
10.38 Demand Promissory Note, dated as of October 12, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $102,000 (filed as Exhibit 10.54 to the Qorus 3Q
10-QSB and incorporated herein by reference thereto)
10.39 Demand Promissory Note, dated as of October 16, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $10,000 (filed as Exhibit 10.55 to the Qorus 3Q
10-QSB and incorporated herein by reference thereto)
10.40 Demand Promissory Note, dated as of October 30, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $72,000 (filed as Exhibit 10.57 to the Qorus 3Q
10-QSB and incorporated herein by reference thereto)
10.41 Demand Promissory Note, dated as of November 5, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $10.000 (filed as Exhibit 10.58 to the Qorus 3Q
10-QSB and incorporated herein by reference thereto)
10.42 Demand Promissory Note, dated as of November 14, 2001, payable to
Thurston Communications Corporation by Aelix, Inc. in the original
principal amount of $77,000 (filed as Exhibit 10.42 of the Annual
Report on Form 10-KSB for the year ended December 31, 2001 by Avery
Communications, Inc. and incorporated herein by reference thereto)
*10.43 Executive Employment Agreement between Avery Communications, Inc. and
Patrick J. Haynes, III dated November 1, 2001 (filed as Exhibit 10.42
of the Annual Report on Form 10-KSB for the year ended December 31,
2001 by Avery Communications, Inc. and incorporated herein by reference
thereto)
10.44 Consulting Agreement between Avery Communications, Inc. and Phipps &
Company, LLC dated September 1, 2001 (filed as Exhibit 10.44 of the
Annual Report on Form
- 36 -
10-KSB for the year ended December 31, 2001 by Avery Communications,
Inc. and incorporated herein by reference thereto)
10.45 Consulting Agreement between Avery Communications. Inc. and Robert T,
Isham, Jr. dated September 1, 2001 (filed as Exhibit 10.45 of the
Annual Report on Form 10-KSB for the year ended December 31, 2001 by
Avery Communications, Inc. and incorporated herein by reference
thereto)
10.46 Nonqualified Stock Option Agreement between Avery Communications. Inc.
and Waveland, LLC dated December 27, 2001 (filed as Exhibit 10.46 of
the Annual Report on Form 10-KSB for the year ended December 31, 2001
by Avery Communications, Inc. and incorporated herein by reference
thereto)
*10.47 Form of Nonqualified Stock Option Agreement entered into between Avery
Communications, Inc. and various directors and employees as of December
27, 2001 (filed as Exhibit 10.47 of the Annual Report on Form 10-KSB
for the year ended December 31, 2001 by Avery Communications, Inc. and
incorporated herein by reference thereto)
10.48 Receivables Sale Agreement dated as of December 19, 2001 among HBS
Billing Services Company and ACI Billing Services, Inc., individually
and collectively, and RFC Capital Corporation (filed as Exhibit 10.48
of the Quarterly Report on Form 10-QSB for the quarter ended March 31,
2002 by Avery Communications, Inc. and incorporated herein by reference
thereto)
10.49 Form of Non-Recourse Promissory Note, dated as of March 20, 2002,
payable to Avery Communications, Inc. which is as restatement and
replacement of a promissory note dated October 19, 2000 (filed as
Exhibit 10.49 of the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 by Avery Communications, Inc. and incorporated
herein by reference thereto)
10.50 Letter dated November 8, 2002 from Textron Financial Corporation
regarding the calculation of covenant compliance under Section 4.3(h)
of the Receivables Sale Agreement dated as of December 19, 2001 among
HBS Billing Services Company and ACI Billing Services, Inc.,
individually and collectively, and RFC Corporation (filed herewith)
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)
- 37 -
21.1 Subsidiaries of Registrant (filed as Exhibit 21.1 of the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002 by Avery
Communications, Inc. and incorporated herein by reference thereto)
99.1 Certificate of the Chief Executive Officer dated as of November 14,
2002 pursuant to the Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certificate of the Chief Financial Officer dated as of November 14,
2002 pursuant to the Sarbanes-Oxley Act of 2002 (filed herewith)
- -------------
*Denotes a management contract or compensatory plan or arrangement.
- 38 -