UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 2003
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-27095
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AVERY COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2227079
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
2700 Patriot Boulevard 60025
Suite 150 (Zip code)
Glenview, IL 60025
(Address of principal executive offices)
(847) 832-0077
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 .
Indicate by check mark whether the registrant 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 April 30, 2003:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
-------------- ----------------------------
Common Stock, $.01 par value 888,483
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2003
(unaudited) and December 31, 2002 1-2
Consolidated Statements of Operations - For the Three
Months Ended March 31, 2003 and 2002 (unaudited) 3
Consolidated Statements of Cash Flows - For the Three
Months Ended March 31, 2003 and 2002 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
03/31/03 12/31/02
-------------- ---------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 2,402,657 $ 4,142,377
-------------- ---------------
Accounts receivable:
Trade accounts receivable 3,321,388 3,182,984
Advance payment receivables, net of allowance for doubtful accounts of
$303,759 and $289,147 at March 31, 2003 and December 31, 2002, respectively 3,013,323 3,322,057
LEC billing and collection fees receivable 5,475,108 4,285,232
-------------- ---------------
Total accounts receivable 11,809,819 10,790,273
-------------- ---------------
Receivable from OAN 5,584,555 5,484,364
Other receivables 50,818 11,825
Current portion of deposits with LECs - 1,300,000
Other current assets 804,787 600,155
-------------- ---------------
Total current assets 20,652,636 22,328,994
-------------- ---------------
Property and equipment:
Computer equipment and software 5,519,866 5,538,422
Furniture and fixtures 480,346 487,410
Leasehold improvements 199,608 199,608
Accumulated depreciation and amortization (2,735,591) (2,510,046)
-------------- ---------------
Property and equipment, net 3,464,229 3,715,394
-------------- ---------------
Other assets:
Goodwill, net 5,577,735 5,577,735
Deposits with LECs, net of current portion 1,447,527 1,470,648
Notes receivable due from related parties, net of allowance of $881,110 382,700 382,700
Investments in affiliates 93,172 93,172
Purchased contracts, net of accumulated amortization of $416,763 and
$404,263 at March 31, 2003 and December 31, 2002, respectively 87,500 100,000
Capitalized financing fees, net of accumulated amortization of $269,963
and $215,970 at March 31, 2003 and December 31, 2002, respectively 493,265 547,258
Other assets 854 854
-------------- ---------------
Total other assets 8,082,753 8,172,367
-------------- ---------------
Total assets $ 32,199,618 $ 34,216,755
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
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AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-(CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
------------- -------------
03/31/03 12/31/02
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(UNAUDITED)
Current liabilities:
Lines of credit $ 3,320,016 $ 6,076,312
LEC billing and collection fees payable 2,871,835 2,815,057
Trade accounts payable 219,479 511,304
Accrued liabilities 523,823 861,701
Current portion of customer cure liability 317,701 317,701
Deposits and other payables related to customers 30,410,742 28,718,804
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Total current liabilities 37,663,596 39,300,879
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Non-current liabilities:
Notes payable to related party 680,681 680,681
Customer cure liability, net of current portion 977,760 1,011,461
------------- -------------
Total non-current liabilities 1,658,441 1,692,142
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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 shares authorized, issued and
outstanding (liquidation preference of $11,401) 11,401 11,401
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 12,061,316 12,098,816
Accumulated deficit (21,150,023) (20,841,370)
Treasury stock, at cost, 379,472 common shares (381,617) (381,617)
Subscription notes receivable, net of allowance of $125,000 (18,843) (18,843)
------------- -------------
Total stockholders' deficit (9,444,086) (9,097,933)
------------- -------------
Total liabilities and stockholders' deficit $ 32,199,618 $ 34,216,755
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
------------------------------
THREE MONTHS ENDED
March 31,
------------------------------
2003 2002
------------- ---------------
Revenues $ 8,817,970 $ 11,179,661
Cost of revenues (5,942,383) (8,027,725)
------------ -------------
Gross profit 2,875,587 3,151,936
Operating expenses (3,148,563) (3,868,731)
Advance funding program income 78,761 43,933
------------ -------------
Operating loss (194,215) (672,862)
------------ -------------
Other income (expense):
Interest expense (114,438) (40,011)
Other, net - (123,871)
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Total other expense (114,438) (163,882)
------------ -------------
Income tax benefit - 284,493
------------ -------------
Net loss (308,653) (552,251)
------------ -------------
Less dividend earned on preferred stock 123,192 123,192
------------ -------------
Net loss attributable to common shareholders $ (431,845) $ (675,443)
============ =============
Per share data:
Basic and diluted net loss per share $ (0.49) $ (0.56)
============ =============
Weighted average number of common shares outstanding:
Basic common shares 888,483 1,198,906
============ =============
Diluted common shares 888,483 1,198,906
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
------------------------------------
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2003 2002
----------------- ----------------
(RESTATED)
Cash flows from (used in) operating activities:
Net loss $ (308,653) $ (552,251)
Deferred income taxes - (284,493)
Depreciation and amortization 292,038 223,669
Writeoff of property and equipment 34,568 -
Investment asset surrendered in exchange for royalty obligation - 30,100
Change in operating assets and liabilities:
Trade accounts receivable (138,404) (1,102,376)
Advance payment receivables 308,734 60,177
Other current assets (204,632) (605,963)
Deposits with LECs 1,323,121 352,323
Other receivables (1,329,060) (1,564,734)
LEC billing and collection fees payable 56,778 (79,100)
Trade accounts payable and accrued liabilities (663,404) 1,107,381
Income taxes payable - (51,500)
Deposits and other payables related to customers 1,691,938 (2,988,170)
Other assets - (5,893)
--------------- --------------
Net cash provided by (used in) operations 1,063,024 (5,460,830)
--------------- --------------
Cash flows from (used in) investing activities:
Purchase of property and equipment (8,948) (123,127)
--------------- --------------
Net cash used in investing activities (8,948) (123,127)
--------------- --------------
Cash flows from (used in) financing activities:
Proceeds (repayments) from line of credit, net (2,756,296) 2,767,278
Purchase of treasury stock - (33,137)
Payment of preferred stock dividends (37,500) (37,500)
--------------- --------------
Net cash provided by (used in) financing activities (2,793,796) 2,696,641
--------------- --------------
Decrease in cash (1,739,720) (2,887,316)
Cash at beginning of period 4,142,377 5,422,202
--------------- --------------
Cash at end of period $ 2,402,657 $ 2,534,886
=============== ==============
Supplemental disclosures:
Interest paid $ 114,438 $ 40,011
=============== ==============
Income taxes paid $ - $ 51,500
=============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
AVERY COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
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 and call center support services.
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
2003 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 period ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. This filing should be read in conjunction with the
Company's annual report on Form 10-K/A for the year ended December 31, 2002.
NOTE 2. LIQUIDITY
The Company incurred a net loss of $0.3 million during the three months
ended March 31, 2003. The Company's operating activities provided $1.1 million
of cash during the same three month period, and at March 31, 2003, stockholders'
deficit is $9.4 million. The Company is optimistic that it will achieve
profitability during 2003, based largely upon cost reductions realized through a
consolidation of operations and incremental income from newly introduced
business services. 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.
Revenue during the first three months of 2003 decreased by $2.4 million
compared to the same period in 2002. Revenue from clearinghouse services is
declining as a result of a decrease in the volume of call records processed on
behalf of our customers. The Company's customers, 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
- 5 -
offering of new services, such as 900 area code business billing and the Aelix
message communication and call center support services. The Company's intention
is to make acquisitions or expand into markets which will leverage its existing
infrastructure.
The Company's working capital position at both March 31, 2003 and
December 31, 2002 was a negative $17.0 million. The Company can operate with
significant negative working capital because a significant portion of current
liabilities do not require payment in the near future. For example, current
liabilities at March 31, 2003 include approximately $7 million of deposits from
customers which are not typically refunded in the ordinary course of business.
The customer deposits would be refundable over time, typically over 18 months,
and only if the customer were to significantly reduce the volume of business
done with the Company or terminate its relationship. Most customers have
experienced lower call record volumes over the past year, and such volume
reductions have reduced certain categories of deposits from customers. The
Company has not historically experienced any material loss of customers in its
business in any one year.
NOTE 3. NEW ACCOUNTING STANDARDS
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123"
("SFAS No. 148"). This statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for fiscal years ending after December 15,
2002. We adopted the disclosure requirements of SFAS No. 148 effective December
15, 2002. We adopted this statement effective January 1, 2003, and the adoption
of this standard had no material effect on our financial condition, cash flows
or results of operations.
NOTE 4. STOCK BASED COMPENSATION
We account for stock-based employee compensation using the intrinsic
value-based method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations. As such, compensation expense is recorded on the date of grant
to the extent the current market price of the underlying stock exceeds the
exercise price. We recorded no compensation expense in the quarters ended March
31, 2003 and 2002. If we had determined compensation based on the fair value at
the grant date for the stock options under SFAS No. 123, as amended by SFAS No.
148, net loss per share would not have been materially different for the
quarters ended March 31, 2003 and 2002.
(UNAUDITED)
--------------------------------
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2003 2002
---------------- --------------
Net loss attributable to stockholders, as reported $ (431,845) $ (675,443)
Add: Stock based employee compensation expense (credit) included
in reported net loss - -
Deduct: Stock based employee compensation expense determined
under fair value based method - -
-------------- -------------
Pro forma net loss attributable to common stockholders $ (431,845) $ (675,443)
============== =============
Basic as reported $ (0.49) $ (0.56)
============== =============
Diluted as reported $ (0.49) $ (0.56)
============== =============
Pro forma - Basic $ (0.49) $ (0.56)
============== =============
Pro forma - Diluted $ (0.49) $ (0.56)
============== =============
NOTE 5. INCOME TAXES
During the three months ended March 31, 2003, the Company recorded no
provision for income taxes (and related deferred tax assets) due to the
uncertainty of generating future taxable income to offset any deferred tax
assets. The prior year income tax provision differed from expected taxes of 34%
because of items permanently not deductible for income tax reporting purposes.
- 6 -
NOTE 6. NET LOSS PER COMMON SHARE
Basic and diluted net loss per share are computed by dividing the net
loss, plus preferred stock dividends earned of $123,192 for each of the three
month periods ended March 31, 2003 and 2002 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 and diluted loss per common share was
$0.14 and $0.10 per weighted average common share outstanding for the three
month periods ended March 31, 2003 and 2002, 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 870,000 equivalent shares at March 31, 2003.
NOTE 7. CERTAIN TRANSACTIONS
On March 9, 2001, HBS' largest customer, which accounted for 24% of our
revenue in 2002, 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. As of March 31, 2003, 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, we do not currently
anticipate that the filing will materially adversely affect the relationship
with this entity in the future.
In connection with our purchase of assets from Qorus.com, Inc.
("Qorus") in November 2001 (which resulted in the formation of Aelix), we agreed
to pay Qorus a royalty amount equal to five percent (5%) of the net after-tax
income, if any, generated by the acquired intelligent message communications
service 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 our (i) cash payment in the
amount of $100,000; (ii) return of all 3,010,000 common shares of Qorus held by
us; 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 our financial statements at $30,100. During
the first quarter of 2002, we recorded an expense of $130,100 in connection with
this transaction.
On January 3, 2002, we advanced the sum of $200,000 to Norlenton
Investments, one of our shareholders, in exchange for a recourse promissory
note. The balance due under the note totaled $200,000 at December 31, 2002. The
note bore interest at 6% and called for the repayment of all principal and
interest on January 3, 2003. On January 3, 2003, the note was exchanged for a
new 6% note totaling $212,000, which matures on January 3, 2005. The note is
secured by 38,881 shares of our common stock.
In connection with the spin-off of our former subsidiary, Primal
Solutions, Inc. ("PSI"), we 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, we 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, we added $400,000 to the reserve based
upon a further decline in the value of the stock collateralizing such notes. 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 our non-dividend bearing Series G preferred stock. At March
31, 2003, the $878,500 of outstanding notes
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(with a net carrying value of $182,700) are secured by 1,140,126 shares of our
non-dividend bearing Series G preferred stock (which are convertible into
159,076 shares of our common stock).
NOTE 8. COMMITMENTS AND CONTINGENCIES
On August 3, 2001, 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 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. We are not a party to the bankruptcy filing or any appeal of the
bankruptcy court's rulings. We do not believe that the ultimate resolution of
this dispute will have a material adverse effect on our 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 our results of operations or financial position for
the fiscal period in which such resolution occurred.
We are involved in various other claims and regulatory proceedings
arising in the ordinary course of business. We believe it is unlikely that the
final outcome of any of the claims or proceedings to which we are a party will
have a material adverse effect on our 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 our results of operations or financial
position for the fiscal period in which such resolution occurred.
NOTE 9. RECEIVABLE FROM OAN
At March 31, 2003 and December 31, 2002, the Company had recorded a
receivable from OAN in the amount of $5.6 million and $5.5 million,
respectively, which at the respective dates is the excess of consideration paid
over the actual assets and liabilities transferred to it at the respective
dates. The receivable from OAN arose primarily because ACI paid for the
acquisition of deposits held by LECs which have not yet been conveyed to the
Company under the terms of the purchase contract and because of other
adjustments to the purchase price of $3.7 million. Management believes the
receivable is collectible in light of the solvency of the party and its
perceived intention to pay.
NOTE 10. GOODWILL
Goodwill recorded on our financial statements at March 31, 2003 and
December 31, 2002 was $5.6 million. Goodwill results from the difference between
the purchase price paid and liabilities assumed by Avery over the estimated fair
market value of the assets of HBS and Aelix, including any post-closing
increases to goodwill resulting from earn out payments or similar adjustments.
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("FAS No. 142") 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 amortized in periodic equal pre-determined charges,
but will instead be tested for impairment as set forth in the statement. The
Company adopted FAS No. 142 effective January 1, 2002.
The Company has performed the required transitional and annual impairment
tests in accordance with the rules contained in SFAS No. 142. In connection with
the annual impairment test, the Company obtained an independent valuation. On
the basis of the independent valuation and management's analyses, the
- 8 -
Company concluded that its enterprise value was greater than the carrying value
and accordingly concluded that there is no impairment of goodwill.
In accordance with the rules contained in SFAS No. 142, the Company
intends annually, on a going forward basis, to evaluate goodwill during the
fourth quarter of each year and when events and circumstances indicate that
goodwill may be impaired. The goodwill impairment review process will rely upon
enterprise value methodology. If the fair market value of the business is less
than its carrying value, the Company will conduct further valuation analysis to
specifically identify and assign the impairment to various asset components.
Should impairment be indicated, the impaired amount will be charged to expense.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Avery is a telecommunications service company with multiple service
offerings, including billing and collection services for inter-exchange carriers
and long-distance resellers and intelligent message communication services to
the travel, hospitality, transportation and telecommunications call center
sectors.
Our billing and collection service is provided by our wholly owned
subsidiaries, HBS Billing Services Company and ACI Billing Services, Inc. Both
subsidiaries operate as a third party clearinghouse. Customers, principally long
distance service resellers, submit their billing records to us. We aggregate
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 is provided through our
wholly owned subsidiary, Aelix, Inc., which we acquired on November 20, 2001.
Aelix's services enable users to improve their customer relationships and
improve efficiency of call center operations. Aelix's services enable secure,
real time, bi-directional communications between companies and their customers
or to other parties through a number of different media and devices worldwide.
During 2002, our clearinghouse service subsidiaries adopted Aelix's technology
platform to improve service levels and improve efficiencies in their call
center.
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 our management as well as assumptions made by and information
currently available to our 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, one time 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. We do not intend to update these
forward-looking statements.
GENERAL
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The following is a discussion of the consolidated financial condition
and results of operations for the three month periods ended March 31, 2003 and
2002. It should be read in conjunction with the Consolidated Financial
Statements, the notes thereto and other financial information included elsewhere
in this report, and the Company's Annual Report on Form 10-K/A for the year
ended December 31, 2002 and Form 10-KSB/A 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 March 31, 2003 and 2002.
RESULTS OF OPERATIONS
The following table presents certain items in our Consolidated
Statements of Operations for the three months ended March 31, 2003 and 2002:
(UNAUDITED)
------------------------------
THREE MONTHS ENDED
March 31,
------------------------------
2003 2002
------------- ---------------
(In Thousands)
Revenues $ 8,818 $ 11,180
Cost of revenues (5,942) (8,028)
------------ -------------
Gross profit 2,876 3,152
Operating expenses (3,070) (3,825)
------------ -------------
Operating loss (194) (673)
Other income (expense), net (115) (163)
Income tax benefit - 284
------------ -------------
Net loss $ (309) $ (552)
============ =============
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH
31, 2002
Operating Revenues
Our 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, from billing services for entities which use 900 area code phone
numbers and from electronic messaging services provided by Aelix. LEC billing
fees charged by us 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 us to local telephone companies for
billing and collection. Processing fees also include any charges assessed to us
by local telephone companies for billing and collection services that are passed
through to the customer. Customer service inquiry fees are assessed as a fee
charged for each billing inquiry made by end users.
Total revenue for the three months ended March 31, 2003 was $8.8
million, which was $2.4 million or 21.1% lower than the $11.2 million revenue in
the first quarter in 2002. The revenue decline largely reflects a 48% decline in
the volume of call records processed by the local exchange carrier billing
services, offset by a more favorable mix of services. 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.
We are pursuing additional sources of revenue. The additional sources
of revenue could arise from acquisitions or internal growth. We have engaged,
from time to time, in discussions with various entities regarding potential
acquisition of such entities. In order to achieve internal growth, we have
introduced new services, such as 900 area code business billing and the Aelix
message communication services. Our intention is to make acquisitions or expand
into markets which will leverage our existing infrastructure.
- 10 -
Cost of Revenues
Cost of revenues consists principally of billing and collection fees
charged to us by local telephone companies and related transmission costs, as
well as all costs associated with the customer service organization, including
staffing expenses and costs associated with telecommunications services. Billing
and collection fees charged by the local telephone companies include fees that
are assessed for each record submitted and for each bill rendered to its
end-user customers. We achieve discounted billing costs due to our aggregated
volumes, and we can pass these discounts on to our customers.
Our gross profit margin in the first quarter of 2002 was 32.6%,
compared to 28.2% in the first quarter of 2002. The increase in gross margin
principally reflects a favorable change in mix of services. The favorable change
in mix results principally from a greater proportion of 0+ and 900 area code
billing services, which carry a higher margin than billing for 1+ telephone
calls. Additionally, we were 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 our business operations.
Operating expenses for the first quarter of 2003 were $3.1 million, compared to
$3.8 million in the first quarter of 2002. The decrease in operating expenses
reflects the consolidation of operations into a single facility during the
second half of 2002, a corresponding reduction in employees and personnel costs
and an overall reduction in overhead.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March
31, 2003 and 2002 was $292,038 and $223,669, respectively. The increase in
expense during 2003 was attributable to the purchase of depreciable assets.
Other Income (Expense), Net
Other income (expense), net, in the first quarter of 2003 was an
expense of $114,438 compared to an expense of $163,882 during the first quarter
of 2002. Other expense in the first quarter of 2003 consisted exclusively of
interest expense. Other expenses in the first quarter of 2002 consisted
principally of $130,100 of expense related to payments to Qorus to eliminate a
royalty obligation (see Note 7 to Consolidated Financial Statements) and $40,011
of interest expense.
Income Taxes
No income tax benefit was recorded during the first quarter of 2003,
due to our decision to establish a full valuation allowance on all deferred tax
assets, which was based on the uncertainty of our ability to generate taxable
income and realize such assets in the future. During the first quarter of 2002,
we recorded a tax benefit of $284,493. The latter tax benefit was reversed at
December 31, 2002, when we elected to establish a full valuation allowance of
all accumulated deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance at March 31, 2003 was $2.4 million, compared to $4.1
million at December 31, 2002. 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.
We incurred a net loss of $0.3 million during the three months ended
March 31, 2003. Our operating activities provided $1.1 million of cash during
the same three month period, and at March 31, 2003, our stockholders' deficit is
$9.4 million. We are optimistic that we will achieve profitability during 2003,
based largely upon cost reductions realized through a consolidation of
operations and incremental income from newly introduced business services.
Accordingly, we do not anticipate the need over the foreseeable future
- 11 -
for additional financing or capital (excluding funding from the existing line of
credit) to fund continuing operations.
Our working capital position at both March 31, 2003 and December 31,
2002 was a negative $17.0 million. We can operate with significant negative
working capital because a significant portion of our current liabilities do not
require payment in the near future. For example, current liabilities at March
31, 2003 include approximately $7 million of deposits from customers which are
not typically refunded in the ordinary course of business. The customer deposits
would be refundable over time, typically over 18 months, and only if the
customer were to reduce significantly the volume of business done with us or
terminate its relationship. Most of our customers have experienced lower call
record volumes during the past year, and such volume reductions have reduced
certain categories of deposits from customers. We have not historically
experienced any material loss of customers in our business in any one year.
We maintain 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 million
line to provide advance funding to customers. Our ability to borrow funds at any
point in time is determined by our accounts receivable balance outstanding. At
March 31, 2003, we had $2.9 million available under this credit line.
Cash flow from operating activities. Net cash provided by operating
activities was $1.1 million during the first quarter of 2003, compared to $5.5
million used during the first quarter of 2002. The $1.1 million of cash provided
by operating activities during 2003 was principally attributable to a $1.7
million increase in deposits and other payables related to customers, a $1.3
million decrease in deposits maintained with LECs, a $0.3 million decrease in
advance payment receivables and $0.3 million of depreciation and amortization
offset by a $1.3 million increase in receivables for LEC billing and collection
fees, a $0.7 million decrease in trade accounts payable and accrued liabilities
and a $0.3 million net loss. The $5.5 million of cash used in operating
activities during the first quarter of 2002 was principally attributable to a
$3.0 million reduction of customer deposits and payables, a $1.6 million
increase in other receivables, a $1.1 million increase in trade receivables and
the $0.6 million net loss, offset by a $1.1 million reduction in trade accounts
payable and accrued liabilities.
Cash flow from investing activities. Cash used in investing activities
was $8,948 during the first quarter of 2003 compared to $123,127 during the
first quarter of 2002. The cash used in both periods was for the purchase of
property and equipment.
Cash flow from financing activities. Cash used by financing activities
was $2.8 million during the first quarter of 2003 compared to $2.7 million
provided during the first quarter of 2002. During the first quarter of 2003, we
made $2.8 million of net repayments under our credit facility. During the first
quarter of 2002, we had borrowed an additional $2.8 million net. We paid $37,500
of dividends on preferred stock in each of the periods.
Our operating cash requirements consist principally of working capital
requirements, scheduled debt service obligations, and payments of preferred
dividends and capital expenditures. We are expecting improved operating income
for 2003, largely as a result of an expense-reducing consolidation of
operations, income from newly introduced business services and several expense
reduction actions. We believe that cash flows generated from operations,
together with borrowings under our 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in marketable securities
(which consist of certificates of deposit). At March 31, 2003, our marketable
securities were recorded at a fair value of approximately $256,000, with an
overall weighted average return of approximately 2% and an overall weighted
average life of less than one year. The marketable securities 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.
- 12 -
We are 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 March 31, 2003. The fair value of our
long-term debt at March 31, 2003 is estimated to be $0.7 million based on the 8%
rate of the long-term debt and its maturity of 3.75 years, which is consistent
with market rates currently available for loans of comparable duration and
comparable risk.
To date, we have not entered into any derivative financial instruments
to manage interest rate risk and currently are not evaluating the future use of
any such financial instruments.
We do not have any exposure to foreign currency transaction gains or
losses. Virtually all of our business transactions are in U.S. Dollars.
ITEM 4. Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our 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 our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in our
periodic SEC filings.
There have been no significant changes in our internal controls or
other factors that could significantly affect these controls subsequent to the
date of our evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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
On March 7, 2003, the Company filed a Current Report on Form
8-K to report that its independent auditors, King Griffin & Adamson
P.C. had resigned to allow its successor entity, KBA Group LLP, to be
engaged as the Company's independent public accountants. On March 1,
2003, the Company engaged KBA Group LLP as its new independent
accountants.
- 13 -
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: May 22, 2003 /s/Patrick J. Haynes, III
--------------- --------------------------------------
Patrick J. Haynes, III
Chairman of the Board
Date: May 22, 2003 /s/ Thomas C. Ratchford
--------------- --------------------------------------
Thomas C. Ratchford
Chief Financial Officer
- 14 -
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:
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.
May 22, 2003 /s/ Patrick J. Haynes, III
--------------------------
Patrick J. Haynes, III, Chief Executive Officer
- 15 -
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
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.
May 22, 2003 /s/ Thomas C. Ratchford
-----------------------
Thomas C. Ratchford, Chief Financial Officer
- 16 -
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 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)
- 17 -
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
STET 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 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)
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 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 (filed as Exhibit 2.19 to the Annual Report on Form
10-KSB for the year ended December 31, 2001 by Avery
Communications, Inc. and incorporated herein by reference thereto)
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)
- 18 -
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)
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 10-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 (filed as Appendix A to Avery's Information Statement on
Schedule 14C filed on November 15, 2001, and incorporated herein by
reference thereto)
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)
- 19 -
4.8 Registration Rights Agreement by and between Avery Communications,
Inc. and Roger Felberbaum dated December 5, 1996 (filed as Exhibit
4.8 to the Prior Registration Statement and incorporated herein by
reference thereto)
4.9 Registration Rights Agreement by and between Avery Communications,
Inc. and Giulio Curiel dated December 31, 1996 (filed as Exhibit
4.9 to the Prior Registration Statement and incorporated herein by
reference thereto)
4.10 Registration Rights Agreement by and between Avery Communications,
Inc. and Sabina International S.A. dated December 31, 1996 (filed as
Exhibit 4.10 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.11 Form of Investor Warrant (filed as Exhibit 4.11 to the Prior
Registration Statement and incorporated herein by reference
thereto)
4.12 Registration Rights Agreement by and between Avery Communications,
Inc. and Thomas A. Montgomery dated January 24, 1997 (filed as
Exhibit 4.12 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.13 Registration Rights Agreement by and between Avery Communications,
Inc. and Thurston Bridge Fund, L.P. dated December 6, 1996 (filed as
Exhibit 4.13 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.14 Registration Rights Agreement by and between Avery Communications,
Inc. and Eastern Virginia Small Business Investment Corporation
dated December 23, 1996 (filed as Exhibit 4.14 to the Prior
Registration Statement and incorporated herein by reference
thereto)
4.15 Securities Exchange Agreement for 1996 HBS Series (filed as Exhibit
4.15 to the Prior Registration Statement and incorporated herein by
reference thereto)
4.16 $350,000 Promissory Note payable to Eastern Virginia Small Business
Investment Corporation dated December 23, 1996 (filed as Exhibit
4.16 to the Prior Registration Statement and incorporated herein by
reference thereto)
4.17 $50,000 Promissory Note to Global Capital Resources, Inc. dated
September 30, 1996 (filed as Exhibit 4.17 to the Prior Registration
Statement and incorporated herein by reference thereto)
4.18 Loan and Security Agreement, by and between Hold Billing Services,
Ltd. and FINOVA Capital Corporation dated March 25, 1997 (filed as
Exhibit 4.18 to the Prior Registration Statement and incorporated
herein by reference thereto)
4.19 Schedule to Loan and Security Agreement, by and between Hold Billing
Services, Ltd. and FINOVA Capital Corporation dated March 25, 1997
(filed as Exhibit 4.19 to the Prior Registration Statement and
incorporated herein by reference thereto)
4.20 Amendment to Loan and Security Agreement and Schedule to Loan and
Security Agreement, by and between Hold Billing Services, Ltd. and
FINOVA Capital Corporation dated February 1998 (filed as Exhibit
4.20 to the Prior Registration Statement and incorporated herein by
reference thereto)
4.21 Second Amendment to Loan and Security Agreement and Schedule to Loan
and Security Agreement, by and between Hold Billing Services, Ltd.
and FINOVA Capital Corporation dated April 1998 (filed as Exhibit
4.21 to the Prior Registration Statement and incorporated herein by
reference thereto)
- 20 -
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 Noncompetition Agreement by and between Hold Billing
Services, Ltd. and Harold D. Box dated November 15, 1996 (filed as
Exhibit 10.3 to the Prior Registration Statement and incorporated
herein by reference thereto)
*10.4 Employment Agreement by and between Avery Communications, Inc. and
Mark J. Nielsen dated December 1, 1998 (filed as Exhibit 10.4 to
the Prior Registration Statement and incorporated herein by
reference thereto)
*10.5 Avery Communications, Inc. Stock Option to Mark J. Nielsen dated
December 1, 1998 (filed as Exhibit 10.5 to the Prior Registration
Statement and incorporated herein by reference thereto)
10.6 Investment Agreement by and between The Franklin Holding Corporation
(Delaware) and Avery Communications, Inc. dated May 30, 1997 (filed
as Exhibit 10.6 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.7 Warrant to the Thurston Group, Inc. dated May 27, 1997 (filed as
Exhibit 10.7 to the Prior Registration Statement and incorporated
herein by reference thereto)
10.8 Avery Communications, Inc. Stock Purchase Warrant to Thurston Bridge
Fund, L.P. dated December 6, 1996 (filed as Exhibit 10.8 to the
Prior Registration Statement and incorporated herein by reference
thereto)
10.9 Avery Communications, Inc. Stock Purchase Warrant to Eastern
Virginia Small Business Investment Corporation dated December 23,
1996 (filed as Exhibit 10.9 to the Prior Registration Statement and
incorporated herein by reference thereto)
10.10 Avery Communications, Inc. Stock Purchase Warrant to The Franklin
Holding Corporation (Delaware) dated May 30, 1997 (filed as Exhibit
10.10 to the Prior Registration Statement and incorporated herein by
reference thereto)
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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)
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)
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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 $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 $75,000 (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 (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)
- 23 -
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 to 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
10.43 to 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 to the
Annual Report on Form 10-KSB for the year ended December 31, 2001 by
Avery Communications, Inc. and incorporated herein by reference
thereto)
10.45 Consulting Agreement between Avery Communications, Inc. and Robert
T. Isham, Jr. dated September 1, 2001 (filed as Exhibit 10.45 to 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 to 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 to 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)
- 24 -
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 as
Exhibit 10.50 to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002 by Avery Communications, Inc. and
incorporated herein by reference thereto)
10.51 Letter dated April 1, 2003 from Textron Financial Corporation
regarding the calculation of covenant compliance under Section
4.3(e) 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 as
Exhibit 10.51 to the Annual Report on Form 10-K for the year ended
December 31, 2002 by Avery Communications, Inc. and incorporated
herein by reference thereto)
11.1 Statement Regarding Computation of Earnings per Share (filed as
Exhibit 11.1 to the Prior Registration Statement and incorporated
herein by reference thereto)
21.1 Subsidiaries of Registrant (filed as Exhibit 11.1 to the Prior
Registration Statement and incorporated herein by reference
thereto)
99.1 Certificate of the Chief Executive Officer dated as of May 22, 2003
pursuant to the Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certificate of the Chief Financial Officer dated as of May 22, 2003
pursuant to the Sarbanes-Oxley Act of 2002 (filed herewith)
- --------------
* Denotes a management contract or compensatory plan or arrangement.
- 25 -