UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-27095
-------------
AVERY COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 12-2227079
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
190 SOUTH LASALLE STREET,
SUITE 1710 60603
CHICAGO, ILLINOIS
(Address and principal executive offices) (Zip code)
(312) 419-0077
(Registrant's telephone number, including area code)
The number of shares outstanding of each of the issuer's classes of common
equity, as of May 9, 2000
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
--------------- ----------------------------
Common Stock, $.01 par value 9,968,867
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Interim Condensed Consolidated Financial Statements 1
(Unaudited)
Condensed Consolidated Balance Sheets - March 31, 1
2000 and December 31, 1999
Condensed Consolidated Statements of Operations - 2
For the Three Months Ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows - 3
For the Three Months Ended March 31, 2000 and 1999
Notes to Interim Condensed Consolidated Financial 4
Statements
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2000 1999
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 602,547 $ 1,777,015
Trade accounts and notes receivable, net of allowance for doubtful accounts of
$106,536 and $102,580 at March 31, 2000 and December 31, 1999, respectively 1,611,175 993,406
Income taxes receivable 82,651 -
Other 331,464 368,588
----------- -----------
Total current assets 2,627,837 3,139,009
----------- -----------
Property and equipment:
Computers and office equipment 1,929,809 1,524,626
Furniture and fixtures 110,760 107,650
Accumulated depreciation and amortization (117,711) (23,431)
----------- -----------
Total equipment, net 1,922,858 1,608,845
----------- -----------
Other assets:
Goodwill, net 4,393,237 4,563,584
Net long-term assets of discontinued operations 4,823,405 4,588,549
Other 61,464 61,552
----------- -----------
Total other assets 9,278,106 9,213,685
----------- -----------
Total assets $13,828,801 $13,961,539
=========== ===========
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
----------- -----------
(Unaudited)
Current liabilities:
Current portion of notes payable (including $88,333 to
related parties at March 31, 2000 and December 31, 1999.) $ 416,625 $ 473,252
Current portion of capital lease obligations 164,667 89,577
Trade accounts payable 478,489 371,121
Accrued liabilities 773,177 860,473
Income taxes payable - 137,651
Deferred revenue 1,705,709 1,023,605
Net current liabilities of discontinued operations 3,545,512 3,564,078
----------- -----------
Total current liabilities 7,084,179 6,519,757
----------- -----------
Long-term liabilities:
Capital lease obligations, net of current portion 107,288 62,049
Long-term portion of notes payable (including $407,436 to
related parties at March 31, 2000 and December 31, 1999.) 1,997,249 2,053,303
----------- -----------
2,104,537 2,115,352
----------- -----------
Stockholders' equity:
Preferred stock (20,000,000 shares authorized): (See Note 4)
Series A; $0.01 par value, 800,000 shares authorized, 400,000 shares issued and
outstanding at March 31, 2000 and December 31, 1999
(liquidation preference of $400,000) 4,000 4,000
Series B; $0.01 par value, 1,050,000 shares authorized, 390,000 shares issued and
outstanding at March 31, 2000 and December 31, 1999
(liquidation preference of $390,000) 3,900 3,900
Series C; $0.01 par value, 340,000 shares authorized, 60,000 and 70,000 shares issued and
outstanding at March 31, 2000 and December 31, 1999, respectively (liquidation preference
of $60,000 and $70,000 at March 31, 2000 and December 31, 1999, respectively) 600 700
Series D; $0.01 par value, 1,500,000 authorized, issued and outstanding
at March 31, 2000 and December 31, 1999
(liquidation preference of $1,500,000) 15,000 15,000
Series E; $0.01 par value, 350,000 authorized, issued and outstanding
at March 31, 2000 and December 31, 1999
(liquidation preference of $350,000) 3,500 3,500
Series F; $0.01 par value, 8,000,000 shares authorized, 3,890,373 shares issued and
outstanding at March 31, 2000 and December 31, 1999
(liquidation preference of $38,904) 38,904 38,904
Common stock, $0.01 par value, 20,000,000 shares authorized,
9,960,867 and 9,803,949 shares issued at march 31, 2000 and
December 31, 1999, respectively 99,609 98,040
Additional paid-in capital 12,366,803 12,306,163
Accumulated deficit (5,855,430) (5,161,778)
Treasury stock, 1,215,216 and 1,176,916 shares at March 31, 2000 and
December 31, 1999, respectively, at cost (2,036,801) (1,981,999)
----------- -----------
Total stockholders' equity 4,640,085 5,326,430
----------- -----------
Total liabilities and stockholders' equity 13,828,801 13,961,539
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
------------------------------
Three Months Ended
March 31,
------------------------------
2000 1999
----------- -----------
Revenues $ 1,973,482 $ -
Cost of revenues 948,554 -
----------- -----------
Gross profit 1,024,928 -
Operating expenses 2,768,113 231,659
----------- -----------
Operating loss (1,743,185) (231,659)
----------- -----------
Other income (expense):
Interest expense (60,920) (40,827)
Other, net 36,923 5,737
----------- -----------
Total other expense, net (23,997) (35,090)
----------- -----------
Loss from continuing operations before
provision for income taxes (1,767,182) (266,749)
Income tax benefit 82,651 -
----------- -----------
Loss from continuing operations (1,684,531) (266,749)
Income (loss) from discontinued operations (less applicable income
tax provision of $530,278 at March 31, 2000) 990,878 (234,803)
----------- -----------
Net loss $ (693,653) $ (501,552)
=========== ===========
Per share data:
Basic net income (loss) per share:
Continuing operations $ (0.20) $ (0.04)
Discontinued operations 0.11 (0.03)
----------- -----------
Net income (loss) $ (0.09) $ (0.07)
=========== ===========
Diluted net income (loss) per share:
Continuing operations $ (0.20) $ (0.04)
Discontinued operations 0.11 (0.03)
----------- -----------
Net income (loss) $ (0.09) $ (0.07)
=========== ===========
Weighted average number of common shares:
Basic common shares 8,687,257 8,665,477
=========== ===========
Diluted common shares 8,687,257 8,665,477
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-------------------------------------------------
Three Months Ended
March 31,
-------------------------------------------------
2000 1999
---------------- --------------
Cash flows from operating activities:
Net loss $ (693,653) $ (501,552)
(Earnings) loss from discontinued operations (990,878) 234,803
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities from continuing operations:
Bad debt expense 3,956 2,070
Depreciation and amortization 264,627 -
Change in operating assets and liabilities:
Trade accounts and notes receivable (676,527) -
Deferred revenues 682,104 -
Other current assets 37,124 (182,056)
Trade accounts payable and accrued liabilities 20,071 701,093
Income taxes payable (220,302) -
Other assets 88 -
--------------- --------------
Net cash provided by (used in) operating activities (1,573,390) 254,358
Net cash provided by (used in) operating activities of
discontinued operations 737,456 (434,854)
--------------- --------------
Net cash used in operations (835,934) (180,496)
--------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (255,023) -
Capitalized cost in connection with Primal acquisition - (322,762)
Cash paid for treasury stock - (35,634)
--------------- --------------
Net cash used in investing activities (255,023) (358,396)
--------------- --------------
Cash flows from financing activities:
Principal payments on notes payable (145,619) -
Payment of preferred stock dividends (71,800) (252,900)
Issuance of shares of common and preferred stock for cash 133,908 -
--------------- --------------
Net cash used in financing activities (83,511) (252,900)
--------------- --------------
Decrease in cash (1,174,468) (791,792)
Cash and cash equivalents at beginning of period 1,777,015 867,198
--------------- --------------
Cash and cash equivalents at end of period $ 602,547 $ 75,406
=============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by Avery Communications, Inc. ("Avery") or ("Company"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company's management, the accompanying
interim condensed consolidated financial statements reflect all adjustments that
are necessary for a fair presentation of the Company's financial position,
results of operations and cash flows for such periods. All such adjustments are
of a normal recurring nature. It is recommended that these interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Report on Form 10-KSB for the years ended December 31, 1999 and 1998.
Results of operations for interim periods are not necessarily indicative of
results that may be expected for any other interim periods or the full fiscal
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to conform to current
classifications.
NOTE 2. EARNINGS (LOSS) PER SHARE
Basic loss per share is computed by dividing the net loss, increased by the
preferred stock dividends of $71,500 and $71,800 for the periods ending March
31, 2000 and March 31, 1999, respectively, by the weighted average number of
shares of common stock outstanding during the respective periods. The effect of
the preferred stock dividend on the basic loss per common share was $0.01 per
weighted average common share outstanding for the three months ended March 31,
2000 and 1999. Diluted loss per share includes the effect of all dilutive
options and warrants and instruments convertible into common stock. The effect
of outstanding warrants and options on the computation of net loss per share for
the three months ended March 31, 2000 and 1999 would be antidilutive and,
therefore, are not included in the computation of diluted weighted average
shares.
4
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes it
is unlikely that the final outcome of any of the claims or proceedings to which
the Company is a party will have a material adverse effect on the Company's
financial position or results of operations; however, due to the inherent
uncertainty of litigation, there can be no assurance that the resolution of any
particular claim or proceeding would not have a material adverse effect on the
Company's results of operations for the fiscal period in which such resolution
occurred.
NOTE 4. DISCONTINUED OPERATIONS
Hold Billing Services was converted from a Texas limited partnership to a
corporation named Hold Billing Services Company ("HBS") effective February 15,
2000. In connection with the conversion, Avery-HBS, Inc., the legal entity that
owned the 1% general partnership interest of Hold Billing Services, became the
owner of 100% of the stock of HBS. Avery-HBS reincorporated in Delaware and
changed its name to Thurston Communications Corporation. HBS is now a wholly
owned subsidiary of Thurston Communications Corporation ("TCC"), which is a
wholly owned subsidiary of Avery. These changes were made in anticipation of the
TCC spin-off discussed below.
On February 29, 2000, the board of directors of the Company approved the
spin-off of TCC. In essence, the spin-off of TCC is a spin-off of HBS. Each
shareholder of the Company on the record date of the spin-off will receive one
share of TCC common stock for each share of the Company's common stock and
preferred series F held on that date. In addition, owners of shares of Avery's
series A, B, C, D or E preferred stock will receive substantially equivalent
shares of TCC's preferred stock for each share of Avery preferred stock held on
the record date of the spin-off. The spin-off will be recorded at book value for
accounting purposes since HBS is an ongoing business.
The board of directors approved the spin-off primarily due to the fact that
it appears that investors will be better able to understand the Primal Solutions
Inc, ("PSI") and HBS businesses in separate entities rather than being combined
into one entity. The exercise and conversion price of outstanding stock
warrants, options and convertible securities will be adjusted to reflect the
spin-off. The valuation of the TCC stock to be distributed will be determined
through an appraisal of the HBS business. The spin-off will be a taxable
transaction for federal income tax purposes. The financial information contained
in this document presents HBS as a discontinued operation due to the spin-off.
Accordingly, the amounts in the statement of operations through the provision
for income taxes are PSI's plus expenses of Avery not associated with the
discontinued operations segment.
HBS was originally acquired during 1996. Pursuant to certain contingent
incremental issuances of the Company's common stock in connection with HBS
achieving required earnings projections, the Company released 185,000 of its
common stock in 1999 as additional consideration for the HBS purchase. The
shares were recorded at fair value of $297,900.
5
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At March 31, 2000 and December 31, 1999, the net current liabilities and
net long-term assets of TCC were as follows:
2000 1999
----------- -----------
Current assets
Cash........................................... $14,027,085 $ 5,678,050
Advance payment receivables.................... 2,436,614 6,621,348
Trade accounts receivable...................... 1,124,831 1,002,490
Other receivables.............................. 165,068 681,526
Deferred tax assets............................ 374,086 374,086
Other current assets........................... 16,669 25,027
----------- -----------
Total current assets........................ 18,144,353 14,382,527
----------- -----------
Current liabilities
Line of credit................................. 26,364 --
Current portion of notes payable............... 6,667 6,667
Trade accounts payable......................... 2,440,896 4,345,373
Current tax payable............................ 470,602 255,673
Accrued liabilities............................ 4,168,436 2,347,676
Accrued interest............................... 3,012 5,227
Deposits and other payables.................... 14,573,888 10,985,989
----------- -----------
Total current liabilities................... 21,689,865 17,946,605
----------- -----------
Net current liabilities of discontinued operations.. $ 3,545,512 $ 3,564,078
=========== ===========
2000 1999
---------- -----------
Property and equipment
Computer equipment and software................ 1,106,386 1,063,674
Furniture and fixtures......................... 337,491 334,944
Accumulated depreciation and amortization...... (571,454) (506,535)
---------- -----------
872,423 892,083
---------- -----------
Other assets
Goodwill, net.................................. 2,955,534 3,022,748
Purchased contracts, net....................... 57,863 70,555
Deposits....................................... 537,585 185,514
Other.......................................... 400,000 417,649
---------- -----------
Total other assets.......................... 3,950,982 3,696,466
---------- -----------
Net long-term assets of discontinued operations..... $ 4,823,405 $ 4,588,549
=========== ===========
6
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The operating results of TCC for the three months ended March 31, 2000 and
1999, are as follows:
2000 1999
----------- -----------
Operating revenues............................... $ 8,909,565 $ 4,384,359
Cost of revenues................................. (6,507,151) (3,206,648)
----------- -----------
Gross profit................................ 2,402,414 1,177,711
Selling, general and administrative expenses..... (1,021,193) (1,208,029)
Advance funding program income, net.............. 92,814 77,590
----------- -----------
Income from operations......................... 1,474,035 47,272
Other income (expense)........................... 47,121 (282,075)
----------- -----------
Income (loss) before income tax provision...... 1,521,156 (234,803)
----------- -----------
Income tax provision........................... (530,278) --
----------- -----------
Net income (loss).............................. $ 990,878 $ (234,803)
=========== ===========
7
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
This Quarterly Report on Form 10-QSB contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions made
by and information currently available to the Company's management. When used in
this report, the words "anticipate," "believe," "estimate," "expect" and
"intend" and words or phrases of similar 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 limitations,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in other
filings made by the company with the Securities and Exchange Commission. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
GENERAL
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three months ended March 31, 2000
and 1999, respectively. It should be read in conjunction with the Interim
Condensed Consolidated Financial Statements of the Company, the notes thereto
and other financial information included elsewhere in this report, and the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999. For
purposes of the following discussion, references to year periods refer to the
Company's fiscal year ended December 31 and references to quarterly periods
refer to the Company's fiscal quarter ended March 31.
The financial information of Primal is included in the results for the
three months ending March 31, 2000 only because Avery's purchase of Primal was
effective at the close of business on September 30, 1999.
Avery's continuing revenues are primarily derived from Primal's sale of
software licenses and related services to telecommunications and Internet
carriers. Primal's revenues are derived from 28 customers located throughout the
world. Software license fees charged by Primal include one time and recurring
license charges, and license upgrade charges for it's customer care and billing,
intelligent mediation, and customer relationship management products. Software
license fees are volume sensitive and generally are based on the number of
subscribers, call records, or number of users. Primal also generates revenue
from providing services relating to its software products. These services
include maintenance fees, installation services, training, and custom software
development.
8
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenues from sales of software licenses, which generally do not contain
multiple elements, are recognized upon shipment of the related product if the
requirements of the American Institute of Certified Public Accountants Statement
of Position 97-2, as amended, are met. If the requirements of SOP 97-2,
including evidence of an arrangement, client acceptance, a fixed or determinable
fee, collectibility or vendor-specific objective evidence about the value of an
element are not met at the date of shipment, revenue recognition is deferred
until such items are known or resolved. Revenue from post-contract customer
support is deferred and recognized ratably over the term of the contract.
Revenues from services are recognized as the services are performed under the
agreements.
Primal believes that future license revenues will be generated from three
sources: license fees from new customers; license fees for new products to
existing customers; and growth in the subscriber base, call record volume and/or
number of software users of its existing customers, which will lead to increased
revenue from these volume-based licenses.
Cost of revenues includes hardware costs and software license fees paid to
third-parties under equipment resale and technology license arrangements, as
well as all costs associated with the customer service organization, including
staffing expenses, travel, communications costs, and other support costs related
with installing, training, providing help desk services, and customization for
Primal's software products.
Operating expenses are comprised of sales and marketing costs, research and
development, and general and administrative costs. Sales and marketing costs
include salaries and benefits, commissions, trade shows, advertising and
promotional and presentation materials. Research and development costs consist
of salaries and benefits and other support costs. General and administrative
costs consist of general management and support personnel salaries and benefits,
information systems costs, legal and accounting fees, travel and entertainment
costs and other support costs.
Depreciation and amortization expenses are incurred with respect to certain
assets, including computer hardware, software, office equipment, furniture,
goodwill and other intangibles. Asset lives range between three and fifteen
years.
Since the components of "Other income, net" change on a period-to-period
basis, the items included in this line are explained in the analysis below.
The results on the "Discontinued operations" lines represent the results of
operations for the respective periods for TCC, a wholly-owned subsidiary that is
being spun-off. See Note 4 to Interim Condensed Consolidated Financial
Statements discussed above.
9
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain items in the Company's Condensed
Consolidated Statements of Income:
Three Months Ended
March 31,
-------------------
2000 1999
------ ------
(In Thousands)
Revenues 1,973 --
Cost of revenues 948 --
------ ------
Gross profit 1,025 --
Operating expenses 2,503 232
Depreciation and amortization 265 --
------ ------
Operating loss (1,743) (232)
Other income (expense), net (24) (35)
Income tax benefit 83 --
Discontinued operations income (loss) 991 (235)
------ ------
Net loss (693) (502)
====== ======
Operating Revenues
Total revenue from continuing operations for the three months ended March
31, 2000, which is Primal's revenue from continuing operations for the three
months ended March 31, 2000 was $1,973,000. License revenue for the three months
ended March 31, 2000 was $656,000, or 33% of total revenue. License revenue
includes sales of new licenses and upgrades to existing customer licenses.
Service revenue for the three months ended March 31, 2000 was $1,317,000, or 67%
of total revenue. Service revenue includes revenue from maintenance contracts,
installation services, training services, and custom software development
contracts. International customers accounted for 29% of total revenue versus 72%
from domestic customers.
Cost of Revenues
Total cost of revenue from continuing operations for the three months ended
March 31, 2000, which is Primal's cost of revenues for the three months ended
March 31, 2000 was $948,000, or 48% of total revenues. Cost of revenues consists
primarily of hardware costs and license fees paid to third parties under
equipment resale and technology license arrangements which were not significant
during the period, as well as all costs associated with the customer service
organization, which include staffing expenses, travel, communications costs, and
other support costs related to installing, training, providing help desk
services, and doing customization for Primal's software products.
10
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating Expense
Consolidated operating expenses (excluding depreciation and amortization
expense) increased $2,271,000 from $232,000 in 1999 to $2,503,000 in 2000
primarily due to including Primal operating expenses of $2,121,000 for the three
months ended March 31, 2000. Primal's operating expenses include charges for
sales and marketing, research and development, and general and administrative
expenses. Operating expenses related to Avery increased $150,000 from $232,000
in 1999 to $382,000 in 2000, primarily as a result of professional and director
fees at Avery.
Depreciation and Amortization
Depreciation and amortization expense was $265,000 in 2000, and $0 in 1999.
The increase is due to the addition of Primal's depreciation and amortization
expense for the three months ended March 31, 2000.
Operating Loss from Continuing Operations
Operating loss for 2000 was $1,743,000, as compared to an operating loss of
$232,000 for 1999. Operating loss for 2000 includes Primal's operating loss of
$1,361,000 for the three months ended March 31, 2000. Operating loss related to
Avery was $382,000 for 2000 and $232,000 for 1999. The increase in operating
loss from Avery was primarily due to an increase in professional and director
fees.
Other Income (Expense), Net
Other income (expense), net decreased to $24,000 of net expense in 2000
from $35,000 of net expense in 1999. These amounts consist of interest expense
and other income (expense). Interest expense for 2000 was $61,000, as compared
to $41,000 in 1999. The increase is primarily attributable to additional
interest associated with Primal of $48,000 offset by a reduction in Avery's
interest of $41,000 for the three months ended March 31, 2000. Interest income
increased $31,000 basically due to the addition of Primal for the three months
ended March 31, 2000.
Income Taxes
An income tax benefit of $83,000 was recorded for the period ending March
31, 2000. The significant difference between the tax benefit for the period
ending March 31, 2000 and $0 for the same period of 1999 is the Company's
ability to partially recover taxes paid relating to 1999 because of losses
incurred through March 31, 2000.
Income (Loss) from Discontinued Operations
Income from discontinued operations was $991,000 in 2000, including
applicable income tax provision of $530,000 for the period ending March 31,
2000. Loss from operations was $235,000 for the same period during 1999. The
increase in income from discontinued operations was
11
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
primarily due to an increase in revenues of $4.5 million from $4.4 million in
1999 to $8.9 in 2000 and a charge of $580,000 associated with warrants
repurchased at $1.00 per share in 1999 that was not present in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Avery's cash balance decreased to $603,000 at March 31, 2000, from
$1,777,000 at December 31, 1999, primarily due to operating requirements from
continuing operations and the purchase of additional property and equipment at
Primal. Avery's working capital position at March 31, 2000 was a negative $4.5
million compared to a negative $3.4 million as of December 31, 1999. The decline
in working capital is primarily due to a $0.7 million increase in deferred
revenues. Net cash used in operating activities, excluding discontinued
operations, was $1,573,000 for the three months ending March 31, 2000, as
compared to cash provided by operating activities of $254,000 for 1999. The
decline was primarily due to net loss generated by Primal during the three
months ended March 31, 2000.
Avery generated proceeds from the sale of common and preferred stock of
$134,000 during 2000 and $0 during 1999. Avery also paid preferred dividends of
$72,000 during 2000 and $253,000 during 1999.
Capital expenditures amounted to $255,000 during 2000 and $0 during 1999.
Expenditures for 2000 relate primarily to the purchase of computer equipment and
software at Primal.
Acquisition costs in 1999 totaled $323,000. These costs are comprised of
professional fees relating to the Primal acquisition.
Avery's operating cash requirements consist principally of working capital
requirements, software development costs, sales and marketing costs, scheduled
payments of principal on its outstanding indebtedness and capital expenditures.
As part of the proposed spin-off of Thurston Communications, Thurston
Communications will provide Avery with $2.5 million in cash. In addition, Avery
has another firm commitment for $2.0 million and is in the process of raising
additional capital for a total in the $8.0 to $10.0 million range.
YEAR 2000 UPDATE
During 1999 we undertook initiatives to ensure that our systems were Year
2000 compliant. As of the date of this filing, we have not experienced any
disruption of our operations due to Year 2000 issues. The cost of Year 2000
modifications have not been significant and no additional Year 2000 costs are
anticipated.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf, thereunto duly authorized.
Avery Communication, Inc.
-------------------------
(Registrant)
Date /s/ Patrick J. Haynes, III
------------------------------------- -----------------------------------
Patrick J. Haynes, III
Chairman of the Board
Date /s/ Scot M. McCormick
------------------------------------- -----------------------------------
Scot M. McCormick, Secretary
13