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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PRIMAL SOLUTIONS, INC.
(Exact name of Small Business Issuer in its Charter)
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DELAWARE 7372 36-4170318
(State or Other Jurisdiction Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number Identification No.)
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18881 VON KARMAN AVENUE
SUITE 450
IRVINE, CALIFORNIA 92612
(949) 260-1500
(Address and telephone number of Principal Executive Offices)
18881 VON KARMAN AVENUE
SUITE 450
IRVINE, CALIFORNIA 92612
(Address of principal place of business or intended principal place of business)
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JOSEPH R. SIMRELL
18881 VON KARMAN AVENUE
SUITE 450
IRVINE, CALIFORNIA 92612
(949) 260-1500
(Name, Address and Telephone Number of Agent for Service)
with copies to:
BRUCE A. CHEATHAM, ESQ. RANDOLF W. KATZ, ESQ.
WINSTEAD SECHREST & Minick P.C. Bryan Cave LLP
5400 Renaissance Tower 2020 Main Street
1201 Elm Street Suite 600
Dallas, Texas 75270 Irvine, California 92614
(214) 745-5213 (949) 223-7000
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, please
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement of
the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement of
the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Proposed
of Securities To Be Amount To Be Maximum Maximum Amount of
Registered Registered Offering Price Per Aggregate Registration Fee
Share Offering Price
<S> <C> <C> <C> <C>
Common Stock,
$.01 par value 19,660,453 (1) $0.16 (2) $3,145,672.40 $830.46
Total Amount Due $830.46
<FN>
(1) Shares of common stock of the registrant being distributed to
stockholders of Avery Communications, Inc.
(2) Based on the fair market value on an OTCBB marketable minority interest
basis, solely for the purpose of calculating the registration fee pursuant to
Rule 457(f)(1) of the Securities Act of 1933, as amended.
</FN>
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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Subject to Completion, Dated September 22, 2000
PROSPECTUS
PRIMAL SOLUTIONS, INC.
19,660,453 Shares of Common Stock
This prospectus relates to the distribution by Avery Communications, Inc.,
of 13,369,108 shares of our common stock to the holders of record on October 2,
2000, of shares of Avery's common stock, series a, b, c, d and e preferred stock
and convertible note and of 6,291,345 shares of our common stock in redemption
of 4,244,783 shares of Avery's series g preferred stock. The 19,660,453 shares
of our common stock constitutes all of our presently issued and outstanding
shares of common stock. Avery is making the distribution of our common stock
pursuant to the terms of the Primal Solutions, Inc. Preliminary Distribution
Agreement, dated July 31, 2000.
After the distribution, we will be a separate company, no longer owned in
any way by Avery.
Certificates evidencing the 19,660,453 shares of our common stock will be
distributed by mail within a reasonable time after the distribution date,
currently anticipated to be by October 31, 2000.
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OWNERSHIP OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
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The information contained in this prospectus is not complete and may be
changed. We may not sell any shares of the common stock until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities in any state where the offer
or sale is not permitted.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is September 22, 2000
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TABLE OF CONTENTS
Page
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Primal.........................................................................3
Summary........................................................................4
Risk Factors...................................................................6
A Note About Foward Looking Statements........................................17
Use Of Proceeds...............................................................17
The Primal Distribution.......................................................17
Material Federal Income Tax Consequences Of The
Distribution To Primal's Stockholders.........................................36
Market Information............................................................37
Management's Discussion and Analysis Of Financial Condition
and Results of Operations.....................................................37
Business......................................................................44
Legal Proceedings.............................................................56
Management....................................................................56
Certain Relationships and Related Transactions................................59
Limitation of Liability and Indemnification...................................60
Stock Ownership of Directors, Executive Officers and Principal Holders........61
Description of Capital Stock..................................................63
Where you can find more information...........................................64
Experts.......................................................................64
Independent Auditors Report..................................................F-1
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PRIMAL
Primal develops, markets and supports customer management and billing
software, customer analytics software, and intelligent switch mediation software
to support the converging requirements of wireless, voice over Internet
protocol, and data communications service providers. Service providers using
Internet protocol, or IP, networks transmit and receive voice and data
communications using IP either over the Internet, or private networks, while
wireless telecommunications operators utilize radio frequency to transmit and
receive cellular and messaging communications.
Primal's Operational Support System Suite, comprised of Connect CCB(TM),
Access IM(TM), and Outfront CRM(TM), enable communications service providers to
manage all aspects of the subscriber relationship from "switch to bill" for
wireless or IP networks. This includes mission critical functions including
account creation, event mediation, provisioning, usage tracking, rating,
billing, customer management, reporting and marketing analysis. Primal's
integrated Operational Support System Suite provides a comprehensive "quick
start" platform for start-up providers as well as a field proven scalability to
support millions of subscribers for existing service providers. Primal's
experience in managing and billing a wide variety of telephony and data services
across wireless and IP networks provides a level of depth and flexibility not
typically found in solutions developed specifically for a single type of
service. Primal's Operational Support System products currently support more
than eleven million subscribers worldwide across our current base of more than
16 customers worldwide.
Primal's comprehensive and field proven platform, in conjunction with its
open architecture, and knowledge of wireless and IP domains, facilitates the
rapid development of new services that can quickly integrate with both existing
and new software and hardware platforms.
Our principal executive offices are located at 18881 Von Karman Avenue,
Suite 450, Irvine, California 92612, and our telephone number at that address is
(949) 260-1500.
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SUMMARY
The following summary answers certain questions you may have with respect
to Avery's distribution of our common stock and highlights selected information
from this registration statement that is important to you. We encourage you to
read the entire registration statement.
Q: WHAT WILL HAPPEN IN THE DISTRIBUTION?
A: Avery will distribute our common stock on the basis of one share of our
common stock for each share of Avery common stock outstanding on the record
date. Avery will also distribute one share of our common stock to the
holders of Avery's series a, b, c, d and e preferred stock and to the
holder of Avery's convertible note on an "if converted" basis. In other
words, each holder of those securities will receive one share of our common
stock for each share of Avery common stock that they would have held on the
record date for the distribution if those securities had been converted
into Avery common stock prior to that date. Avery will also exchange
6,291,345 shares of our common stock in redemption for 4,224,783 shares of
Avery series g preferred stock, all of which Avery series g preferred stock
is held collectively by John Faltys, Joseph R. Simrell, David Haynes, Mark
J. Nielsen, Arun Anand, Murari Cholappadi, and Sanjay Gupta, referred to
herein as the Old Primal Stockholders. After the distribution, we will be a
separate company, no longer owned in any way by Avery.
Q: WHY IS AVERY UNDERTAKING THE DISTRIBUTION?
A: Avery intends to develop and pursue business opportunities which will have,
as compared to the business currently carried out by us, differences with
respect to markets and capital requirements and will require a different
business plan. Avery's board of directors believes that separating our
software development business from Avery's intended businesses will allow
each company to expand its business more rapidly, as well as pursue
strategies and focus on objectives appropriate to its business. For a more
detailed discussion of our reasons for the distribution, see page 18.
Please note that our business will not substantially change as a result of
the distribution.
Q: DO I HAVE TO PAY FEDERAL INCOME TAXES ON THE RECEIPT OF PRIMAL COMMON
STOCK?
A: You will be required to pay federal income taxes on receipt of your common
stock. As a result of the distribution, each holder of Avery's common
stock, Avery's series a, b, c, d and e preferred stock and Avery's
convertible note will be considered to have received a taxable dividend
includable in income in an amount equal to the fair market value of the
shares of our common stock received in the distribution. Each holder of
Avery series g preferred stock will be deemed to have received taxable
income in an amount equal to the fair market value of the shares of our
common stock received in redemption for the shares of Avery series g
preferred stock minus the holder's tax base in such Avery series g
preferred stock. Management currently estimates that such value will be
$.20 per share of our common stock. However, the actual value will be
determined based on an appraisal to be prepared by SE Biz Val, LLC as of
the date of the distribution. See "Material Federal Income Tax Consequences
of the Distribution to Primal's Stockholders."
Q: WHERE WILL PRIMAL COMMON STOCK BE TRADED?
A: We expect that our common stock will be traded on the OTC Bulletin Board.
Q: WHEN WILL THE DISTRIBUTION OCCUR?
A: We expect the distribution to occur on or about October 31, 2000.
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Q: WHAT WILL OUR BUSINESS BE AFTER THE DISTRIBUTION?
A: Following the distribution, we will continue to develop and license
telecommunications software to provide customer care and billing systems,
mediation systems and customer analytics systems to telecommunications
carriers.
Q: WILL WE COMPETE WITH AVERY AFTER THE DISTRIBUTION?
A: Due to the differing lines of business that each company plans to pursue,
there will be no direct competition between Avery and Primal.
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RISK FACTORS
Ownership of our common stock involves a high degree of risk, you should
consider carefully the factors set forth below, as well as other information
contained in this prospectus.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING AND EVALUATION OF OUR
BUSINESS DIFFICULT.
Our limited operating history makes it difficult to forecast our future
operating results. We were founded in 1996. Our revenue and income potential is
unproven. We received our first revenues from licensing our software and
performing related services in 1999. Since we do not have a long history upon
which to base forecasts of future operating results, any predictions about our
future revenues and expenses may not be as accurate as they would be if we had a
longer business history.
HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY.
In order to become profitable, we must increase our revenues. We may not be
able to increase or even maintain our revenues, and we may not achieve
sufficient revenues or profitability in any future period. We incurred a net
loss of $1,884,375 for the six months ended June 30, 2000, net income of
$280,920 and a net loss of $266,479 for the years ended December 31, 1999 and
1998. These results related to our predecessor company for the year ended
December 31, 1998 and the nine months ended September 30, 1999 and our company
for the three months December 31, 1999 and the six months ended June 30, 2000.
We had an accumulated deficit of $925,616 as of June 30, 2000. We have not
achieved profitability and expect to continue to incur losses before
depreciation and amortization charges for the foreseeable future.
In addition, we expect to increase our expenses significantly in the near
term, especially sales and marketing and product development expenses. As a
result, we will need to generate significant revenues from the sales of Primal
Connect CCB, Access IM, and Outfront CRM to achieve and maintain profitability.
We expect that we will face increased competition, which will make it more
difficult to increase our revenues. Even if we are able to increase revenues, we
may experience price competition that will lower our gross margins and our
profitability. Another factor that will lower our gross margins is any increase
in the percentage of our revenues that is derived from indirect channels and
from services, both of which generally have lower margins.
If we do achieve profitability, we cannot be certain that we can sustain or
increase profitability on a quarterly or annual basis.
WE NEED ADDITIONAL FINANCING TO MAINTAIN AND EXPAND OUR BUSINESS, AND FINANCING
MAY NOT BE AVAILABLE ON FAVORABLE TERMS, IF AT ALL.
We expect to incur net losses before depreciation and amortization charges
for the foreseeable future. We need additional funds to expand or meet all of
our operating needs. We cannot be certain that it will be available on favorable
terms, if at all. Further, if we issue common stock, stockholders will
experience additional dilution, which may be substantial. If we cannot raise
funds on acceptable terms, we may not be able to:
o develop or enhance our products;
o take advantage of future opportunities; or
o respond to customers and competition.
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OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND WE MAY FAIL
TO MEET EXPECTATIONS.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. In future quarters, our operating results
may be below the expectations of public market analysts and investors, and the
price of our common stock may fall. Factors that could cause quarterly
fluctuations include:
o Variations in demand for our products and services;
o The timing and execution of individual contracts, particularly large
contracts that would materially affect our operating results in a given
quarter;
o The timing of sales of our products and services;
o Our ability to develop and attain market acceptance of enhancements to
Outfront CRM, Connect CCB and Access IM and new products and services;
o Delays in introducing new products and services;
o New product introductions by competitors;
o Changes in our pricing policies or the pricing policies of our competitors;
o The mix of products and services sold;
o The mix of sales channels through which our products and services are sold;
o The mix of domestic and international sales;
o Costs related to acquisition of technologies or businesses;
o The timing of releases of new versions of third-party software and hardware
products that work with our products;
o Our ability to attract, integrate, train, retain and motivate a substantial
number of sales and marketing, research and development, technical support
and other management personnel;
o Any increase in our need to supplement our professional services
organization by subcontracting to more expensive consulting organizations
to help provide implementation, support and training services when our own
capacity is constrained;
o Our ability to expand our operations;
o The amount and timing of expenditures related to expansion of our
operations; and
o Global economic conditions generally as well as those specific to
communications carriers and other providers of Internet-based services.
We have difficulty predicting the volume and timing of orders. For example,
we expect an increasing percentage of our total revenues will come from licenses
of Connect CCB, Access IM and Outfront CRM and related services, but the market
for these products is in its early stages of development and is therefore
unpredictable. In any given quarter, we expect our sales to involve large
financial commitments from a relatively small number of customers. As a result,
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the cancelation or deferral of even a small number of licenses of Connect CCB,
Access IM and Outfront CRM would reduce our revenues, which would adversely
affect our quarterly financial performance. Significant sales may also occur
earlier than expected, which could cause operating results for later quarters to
compare unfavorably with operating results from earlier quarters.
We record as deferred revenue fees from contracts that do not meet our
revenue recognition policy requirements. While a portion of our revenues in each
quarter is recognized from deferred revenue, our quarterly performance will
depend primarily upon entering into new contracts to generate revenues for that
quarter. New contracts that we enter into may not result in revenue in the
quarter in which the contract was signed, and we may not be able to predict
accurately when revenues from these contracts will be recognized.
We plan to significantly increase our operating expenses to expand our
sales and marketing operations, broaden our customer support capabilities,
develop new distribution channels and fund greater levels of research and
development. We determine our operating expenses largely on the basis of
anticipated revenue trends and a high percentage of our expenses are fixed in
the short term. As a result, a delay in generating or recognizing revenue could
cause significant variations in our operating results from quarter-to-quarter
and could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance.
OUR PRODUCTS HAVE A LONG SALES CYCLE, WHICH MAKES IT DIFFICULT TO PLAN OUR
EXPENSES AND FORECAST OUR RESULTS.
It takes us between three and six months to complete the majority of our
sales, but it can take us up to one year or longer. It is therefore difficult to
predict the quarter in which a particular sale will occur and to plan our
expenditures accordingly. The period between our initial contact with a
potential customer and their purchase of our products and services is relatively
long due to several factors, including:
o The complex nature of our products;
o Our need to educate potential customers about the uses and benefits of our
products;
o The purchase of our products requires significant resources on the part of
a customer;
o Our customers have budget cycles which affect the timing of purchases;
o Many of our customers require competitive evaluation and internal approval
before purchasing our products;
o Potential customers may delay purchases due to announcements or planned
introductions of new products by us or our competitors; and
o Many of our customers are large organizations, which may require a long
time to make decisions.
The delay or failure to complete sales in a particular quarter could reduce
our revenues in that quarter, as well as subsequent quarters over which revenues
for the sales would likely be recognized. If our sales cycle unexpectedly
lengthens in general or for one or more large orders, it would adversely affect
the timing of our revenues. If we were to experience a delay of several weeks on
a large order, it could harm our ability to meet our forecasts for a given
quarter.
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OUR GROWTH DEPENDS ON THE COMMERCIAL ACCEPTANCE OF OUR RECENTLY INTRODUCED
PRODUCTS, CONNECT CCB, OUTFRONT CRM AND ACCESS IM.
Our future growth depends on the commercial success of Connect CCB,
Outfront CRM and Access IM. We expect that our future growth will depend
significantly on revenue from licenses of Connect CCB, Outfront CRM, Access IM,
and related services. Our business will be harmed if our target customers do not
adopt and purchase Connect CCB, Outfront CRM, and Access IM. The market for
next-generation customer management and billing systems and analytical CRM
software is in its early stages of development. Our future financial performance
will also depend on the successful development, introduction and customer
acceptance of new and enhanced versions of Connect CCB, Outfront CRM, and Access
IM. We are not certain that our target customers will widely adopt and deploy
Connect CCB as their customer management and billing system, or Outfront CRM as
their analytical CRM solution. In the future we may not be successful in
marketing Connect CCB, Outfront CRM, Access IM, or any new or enhanced products
or services. Our future revenues will also depend on our customers licensing
software for additional subscribers, users, or for additional call detail
records. Their failure to do so could harm our business.
Significant technical challenges arise in our business because many of our
customers purchase and implement Outfront CRM in phases, deploy Outfront CRM
across a variety of computer hardware platforms and integrate it with a number
of legacy systems, third-party software applications and programming tools.
Implementation currently requires participation by our professional services
group, which has significantly limited resources. Some customers may also
require us to develop costly customized features or capabilities, which increase
our costs and consume our limited customer service and support resources. Also,
revenues we derive from our services business have a significantly lower margin
than revenues derived from licensing Outfront CRM. If new or existing customers
have difficulty deploying our products or require significant amounts of our
professional services support, our operating margins could be harmed.
OUR BUSINESS WILL SUFFER IF WE DO NOT INCREASE MARKET AWARENESS OF OUR PRODUCTS
BY SIGNIFICANTLY EXPANDING OUR SALES CAPABILITIES.
We sell our products primarily through our direct sales force. We must
significantly expand our direct sales operations to increase market awareness of
our products and increase revenue. We cannot be certain that we will be
successful in these efforts. Our products and services require sophisticated
sales efforts. As a result, our ability to increase our direct sales operation
will depend on our ability to recruit, train, and retain top sales people with
advanced sales skills and technical knowledge. There is a shortage of sales
personnel with these qualifications, and competition for qualified personnel is
intense in our industry.
The introduction of our new Connect CCB, Outfront CRM and Access IM
products requires us to hire new sales personnel with the skills required to
sell these products. New sales personnel require training and take time to
achieve full productivity. If we are unable to hire or retain qualified sales
personnel, or if newly hired personnel fail to develop the necessary skills or
reach productivity more slowly than anticipated, our business could be harmed.
In addition, because we currently rely on direct sales for substantially
all of our market opportunities, we may miss sales opportunities that are
available through other sales distribution methods and other sources of leads,
such as indirect sales channels, including system integrators, hardware platform
and software applications developers and service providers, domestic and foreign
resellers and value-added resellers. In the future, we intend to augment our
direct sales channel through additional third-party distribution arrangements.
However, there is no guarantee that we will successfully augment these
arrangements or that the expansion of indirect sales distribution methods will
increase revenues. We may be at a serious competitive disadvantage if we fail to
enhance these indirect sales channels.
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CUSTOMER SATISFACTION AND DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO
EXPAND OUR PROFESSIONAL SERVICES GROUP, WHICH ASSISTS OUR CUSTOMERS WITH THE
IMPLEMENTATION OF OUR PRODUCTS.
We believe that growth in our product sales depends on our ability to
provide our customers with professional services to assist with support,
training, consulting and initial implementation of our products and to educate
third-party systems integrators in the use of our products. As a result, we plan
to increase the number of professional services personnel to meet these needs.
New professional services personnel will require training and take time to reach
full productivity. We may not be able to attract or retain a sufficient number
of highly qualified professional services personnel. Competition for qualified
professional services personnel with the appropriate knowledge is intense. We
are in a new market and there are a limited number of people who have the
necessary skills. To meet our customers' needs for professional services, we may
also need to use more costly third-party consultants to supplement our own
professional services group. In addition, we could experience delays in
recognizing revenue if our professional services group falls behind schedule in
connecting our products to customers' systems and data sources.
WE MAY BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO NOT DEVELOP NEW PRODUCTS AND
ENHANCEMENTS.
If we do not continue to improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and rapidly evolving customer requirements and achieve market
acceptance, we may be unable to attract new customers. For example, we are
developing new applications as well as new versions of a number of our existing
applications, which are scheduled for release in 2000. In particular, we are
currently developing an enhanced version of Connect CCB, which we plan to
introduce in the second half of 2000. The actual features and introduction date
of this new version could differ materially from those anticipated as a result
of a number of factors, many of which are beyond our control. We may not be
successful in developing and marketing these applications and new versions, or
other product enhancements and new products that respond to technological
advances and market changes, on a timely or cost-effective basis. In addition,
even if these products are developed and released, they may not achieve market
acceptance. We have in the past experienced delays in releasing new products and
product enhancements and may experience similar delays in the future. These
delays or problems in the installation or implementation of our new releases may
cause customers to forego purchases of our products.
MARKET ACCEPTANCE OF OUR PRODUCTS MAY SUFFER IF WE ARE UNABLE TO KEEP PACE WITH
RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.
Rapidly changing technology and operating system standards may impede
market acceptance of our products. Our new applications have been designed based
upon currently prevailing Internet technology. If new Internet technologies
emerge that are incompatible with our applications, our key products may become
obsolete and our existing and potential customers may seek alternatives to our
products. We may not be able to quickly adapt our products to any new Internet
technology.
Additionally, we have designed our products to work with databases such as
Oracle. Any changes to those databases, or increasing popularity of other
databases, could require us to modify our products, and could cause us to delay
releasing future products and enhancements. Furthermore, software adapters are
necessary to integrate our products with other systems and data sources used by
our customers. We must develop and update these adapters to reflect changes to
these systems and data sources in order to maintain the functionality provided
by our products. As a result, uncertainties related to the timing and nature of
new product announcements, introductions or modifications by vendors of
operating systems, databases, customer relationship management software, web
servers and other enterprise and Internet-based applications could delay our
product development, increase our product development expense or cause customers
to delay evaluation, purchase and deployment of our products.
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FAILURE TO LICENSE NECESSARY THIRD PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS
MAY CAUSE DELAYS OR REDUCTIONS IN OUR SALES.
We license third party software, which we incorporate into our products.
These licenses may not continue to be available on commercially reasonable terms
or at all. The loss of any such license could result in delays or reductions of
our applications until equivalent software is identified, licensed and
integrated or developed by us.
WE FACE INTENSE COMPETITION, WHICH COULD MAKE IT DIFFICULT TO ACQUIRE AND RETAIN
CUSTOMERS.
Our market is intensely competitive, and we expect competition to intensify
in the future. Our failure to maintain and enhance our competitive position
could seriously harm our business. Our customers' requirements and the
technology available to satisfy those requirements are continually changing.
Therefore, we must be able to respond to these changes in order to remain
competitive. Our competitors vary in size and in the scope and breadth of
products and services offered.
In addition, we face potential competition from vendors of other enterprise
applications as they expand the functionality of their product offerings,
including companies that design software for decision support, management of
customer relationships or of organizations' operational information, as well as
vendors of database applications. Accordingly, it is possible that new
competitors may emerge and acquire our market share.
Some of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do, and thus may be able to respond more quickly to new or
changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have wider name recognition and more extensive
customer bases that they could leverage, thereby gaining market share to our
detriment. They may be able to undertake more extensive promotional activities,
adopt more aggressive pricing strategies, and offer purchasers more attractive
terms than we can. Our competitors may develop products that are superior to
ours or that achieve greater market acceptance. In addition, current and
potential competitors may establish cooperative relationships among themselves
or with third parties to enhance their products to address customer needs.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our products. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully against current or future
competitors, our business would be seriously harmed.
WE DEPEND ON OUR INTELLECTUAL PROPERTY, AND LITIGATION REGARDING OUR
INTELLECTUAL PROPERTY COULD HARM OUR BUSINESS.
Our intellectual property is important to our business. Our intellectual
property includes our proprietary technology, our trade secrets, patents,
copyrights in our software products, and our trademarks. Our copyrights and
patents are important to the protection of our software, and our trademarks are
important to the protection of our company and product names. These copyrights,
patents and trademarks discourage unauthorized use of our software and our
company and product names and provide us with a way to enforce our rights in the
event that this unauthorized use occurs. Unauthorized use or misappropriation of
our intellectual property could seriously harm our business. Third parties may
infringe upon our intellectual property rights, and we may be unable to detect
this unauthorized use or effectively enforce our rights. Furthermore, the laws
of certain countries in which we sell our products do not protect our software
products and intellectual property rights to the same extent as do the laws of
the United States. In addition, any legal action that we may bring to protect
our intellectual property rights could be expensive and distract management from
day-to-day operations.
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Our business activities may infringe upon the proprietary rights of others,
and other parties may assert infringement claims against us. In addition, in the
future, we may receive communications from other parties asserting that our
intellectual property infringes their proprietary rights. If we become liable to
any third party for infringing its intellectual property rights, we could be
required to pay substantial damage awards and to develop non-infringing
technology, obtain licenses or cease selling the applications that contain the
infringing intellectual property. We could have to redesign our products, which
could be costly and time-consuming and could substantially delay product
shipments, assuming that a redesign is feasible. We may be unable to develop
non-infringing technology or obtain licenses on commercially reasonable terms,
if at all.
Litigation is subject to inherent uncertainties and any of which in
connection with a lawsuit could seriously harm our business. Furthermore, we
could incur substantial costs in defending against any intellectual property
litigation, and these costs could increase significantly if any dispute were to
go to trial. Our defense of any litigation, regardless of the merits of the
complaint, will likely be time-consuming, costly and a distraction for our
management personnel. Publicity related to any intellectual property litigation
could also harm the sale of our products.
SOFTWARE DEFECTS COULD LEAD TO LOSS OF REVENUE OR DELAY IN MARKET ACCEPTANCE FOR
OUR PRODUCTS.
Our software products are internally complex and may contain defects,
especially when they are first introduced or when new versions are released. In
the past we have discovered software errors in some of our products after their
introduction. If we are not able to detect and correct errors in products or
releases before commencing commercial shipments, we may experience loss of
revenue or delays in market acceptance for our products. We continue to evaluate
our products for errors following the commencement of commercial shipments and
receive information from customers regarding errors they detect, as well as
requests for future enhancements to our products. Our license agreements with
our customers typically contain provisions designed to limit our exposure to
potential product liability claims. However, all domestic and international
jurisdictions may not enforce these limitations. We may encounter product
liability claims in the future. Product liability claims brought against us
could divert the attention of management and key personnel, could be expensive
to defend and may result in adverse settlements and judgments.
WE RELY HEAVILY ON REVENUES FROM A FEW SIGNIFICANT CUSTOMERS.
Our total revenues from our four largest customers during the year 1999
ended December 31 represented approximately 72% of total revenues. Two customers
each accounted for approximately 20% or more of our total revenues in 1999. Two
customers accounted for approximately 10% or more of our total revenues for the
six months ended June 30, 2000. This concentration of customers can cause our
revenues and earnings to fluctuate from quarter to quarter, based on such
customers' requirements and the timing of their respective orders. Although we
believe we have good relationships with our largest customers and have in the
past received a substantial portion of our revenues from repeated business with
established customers, most of our major customers have no obligation to
purchase additional products or services, and these customers generally have
acquired fully paid licenses to their installed systems. Therefore, there can be
no assurance that any of our major customers will continue to purchase new
systems, system enhancements and services in amounts similar to previous years.
A significant decrease in business from any of our major customers would have a
material adverse effect on our results of operations and financial condition.
Additionally, the acquisition by a third party of one of our major customers
could result in the loss of that customer and have a material adverse effect on
our results of operations.
THE LOSS OF KEY PERSONNEL OR ANY INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD AFFECT OUR ABILITY TO SUCCESSFULLY GROW OUR BUSINESS.
Our future success depends in large part on the continued service of our
existing key management, sales and marketing, technical, product development and
operational personnel, and on our ability to continue to attract, motivate and
retain highly qualified employees, including technical, managerial and sales and
marketing personnel. A number
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of key members of our management have been with us for only a short period of
time. The inability to hire and retain qualified personnel or the loss of the
services of key personnel could have a material adverse effect upon our current
business, new product development efforts and future business prospects. There
can be no assurance that we will be able to retain our key executives, senior
managers and employees. If such personnel do not remain active in our business,
our business operations and financial condition could be materially adversely
affected.
BARRIERS TO INTERNATIONAL EXPANSION COULD LIMIT OUR FUTURE GROWTH.
We intend to expand our international operations, but we may face
significant barriers to this expansion. Our failure to manage our international
operations effectively could limit the future growth of our business.
International customers represented approximately 43% of our total revenue for
the year ended December 31, 1999 and 27% or our total revenue for the six months
ended June 30, 2000. We conduct our international sales primarily through direct
sales from our offices in the United States. The expansion of our existing
international operations and entry into additional international markets will
require significant management attention and financial resources.
Our international operations face numerous risks. Our products must be
localized -- customized to meet local user needs -- in order to be sold in
particular foreign countries. Developing local versions of our products for
foreign markets is difficult and can take longer than we anticipate. We
currently have limited experience in localizing products and in testing whether
these localized products will be accepted in the targeted countries. In
addition, we have only a limited history of marketing, selling and supporting
our products and services internationally. As a result, we must hire and train
experienced personnel to staff and manage our foreign operations. However, we
may experience difficulties in recruiting and training an international staff.
We must also be able to enter into strategic relationships with companies in
international markets. If we are not able to maintain successful strategic
relationships internationally or recruit additional companies to enter into
strategic relationships, our future growth could be limited.
We also face certain other risks inherent in conducting business
internationally, such as:
o difficulties and costs of staffing and managing international operations;
o language and cultural differences;
o difficulties in collecting accounts receivable and longer collection
periods;
o seasonal business activity in certain parts of the world;
o fluctuations in currency exchange rates;
o legal and governmental regulatory requirements;
o trade barriers; and
o potentially adverse tax consequences.
Any of these factors could seriously harm our international operations and,
consequently, our business.
To date, a majority of our international revenue and costs have been
denominated in United States dollars. However, future international revenue and
costs may be denominated in currencies other than the United States dollar. We
have not engaged in any foreign exchange hedging transactions, and we are
therefore subject to foreign currency risk.
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WE ARE GROWING RAPIDLY, AND THE FAILURE TO MANAGE OUR GROWTH, INCLUDING
EXPANSION OF OUR MANAGEMENT SYSTEMS, COULD ADVERSELY AFFECT OUR BUSINESS.
We have grown rapidly and will need to continue to grow in all areas of
operation in order to execute our business strategy. Our total number of
full-time employees grew from 12 at December 31, 1998 to 99 at June 30, 2000,
and we anticipate further significant increases in the number of our employees.
Our growth has placed significant demands on management as well as on our
administrative, operational and financial resources and controls. We expect our
future growth to cause similar, and perhaps increased, strain on our systems and
controls. In particular, we need to implement several new information systems.
If we cannot effectively establish and improve our processes, we may not be able
to manage our growth successfully or sustain and manage the growth rates we have
experienced in the past.
IF WE ACQUIRE ADDITIONAL COMPANIES, PRODUCTS OR TECHNOLOGIES IN THE FUTURE, THEY
COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER
VALUE OR ADVERSELY AFFECT OUR OPERATING RESULTS.
We intend to make other investments in complementary companies, products or
technologies. We may not realize the anticipated benefits of any other
acquisition or investment. The success of our acquisition program will depend on
our ability to overcome substantial obstacles, such as the availability of
acquisition candidates, our ability to compete successfully with other acquirers
seeking similar acquisition candidates, the availability of funds to finance
acquisitions and the availability of management resources to oversee the
operation of acquired businesses. Furthermore, we may have to incur debt or
issue equity securities to pay for any additional future acquisitions or
investments, the issuance of which could be dilutive to us or our existing
stockholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired goodwill and other
intangible assets. We have limited resources and we can offer no assurance that
we will succeed in consummating any additional acquisitions or that we will be
able to integrate and manage any acquisitions successfully.
We have no present commitments, understandings or plans to acquire other
software companies.
FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE SHARES ISSUED IN THIS
OFFERING, MAY DEPRESS OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. In addition, such sales could create the perception in the public of
difficulties or problems with our products and services. As a result, these
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
WE DO NOT INTEND TO PAY DIVIDENDS; YOU WILL NOT RECEIVE FUNDS WITHOUT SELLING
SHARES.
We have never declared or paid any cash dividends on our capital stock and
do not intend to pay dividends in the foreseeable future. We intend to invest
our future earnings, if any, to fund our growth. Therefore, you will not receive
any funds without selling your shares.
BECAUSE SOME STOCKHOLDERS WILL TOGETHER OWN OR HAVE THE RIGHT TO VOTE 55.65% OF
OUR STOCK, THE VOTING POWER OF OTHER STOCKHOLDERS MAY BE LIMITED.
After this offering, it is anticipated that our officers, directors and
five percent or greater stockholders will beneficially own or control, directly
or indirectly, outstanding shares of common stock, which in the aggregate will
represent approximately 55.65% of the outstanding shares of common stock. As a
result, if some of these persons or entities act together, they will have the
ability to control all matters submitted to our stockholders for approval,
including the election and removal of directors and the approval of any business
combination. This may delay or prevent an acquisition or cause the market price
of our stock to decline. Some of these persons or entities may have interests
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different than yours. For example, they may be more interested in selling Primal
to an acquirer than other investors or may want us to pursue strategies that are
different from the wishes of other investors.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY.
Our certificate of incorporation and bylaws contain provisions, that could
make it harder for a third party to acquire us without the consent of our board
of directors. For example, if a potential acquirer were to make a hostile bid
for us, the acquirer would not be able to call a special meeting of stockholders
to remove our board of directors. The acquirer will not be able to cumulate
votes at a meeting, which will require the acquirer to hold more shares to gain
representation on the board of directors than if cumulative voting were
permitted. In addition, Section 203 of the Delaware General Corporation Law
limits business combination transactions with 15% stockholders that have not
been approved by the board of directors. These provisions and other similar
provisions make it more difficult for a third party to acquire us without
negotiation.
THESE PROVISIONS MAY APPLY EVEN IF THE OFFER MAY BE CONSIDERED BENEFICIAL BY
SOME STOCKHOLDERS.
Our board of directors could choose not to negotiate with an acquirer that
it did not feel was in the strategic interests of Primal. If the acquirer was
discouraged from offering to acquire us or prevented from successfully
completing a hostile acquisition by the anti-takeover measures, you could lose
the opportunity to sell your shares at a favorable price.
WE BELIEVE THAT OUR COMMON STOCK WILL TRADE ONLY SPORADICALLY AND IS EXPECTED TO
EXPERIENCE IN THE FUTURE, SIGNIFICANT PRICE AND VOLUME VOLATILITY, WHICH
SUBSTANTIALLY INCREASES THE RISK OF LOSS TO PERSONS OWNING OUR COMMON STOCK.
There has been no market for our common stock prior to this offering. At
best, only a limited market is expected to develop for our common stock. Because
of the potentially limited trading market for our common stock, and because of
the possible price volatility, you may not be able to sell your shares of common
stock when you desire to do so. The inability to sell your shares in a rapidly
declining market may substantially increase your risk of loss because of such
illiquidity and because the price for our common stock may suffer greater
declines because of its price volatility.
THE DISTRIBUTION WILL RESULT IN TAXABLE INCOME TO OUR STOCKHOLDERS.
As a result of the distribution, each holder of shares of Avery common
stock, Avery's series a, b, c, d, and e preferred stock and the holder of
Avery's convertible note will be deemed to have received, to the extent of our
current and accumulated earnings and profits, a taxable dividend includable in
income in an amount equal to the value of our common stock received in the
distribution. Each holder of shares of Avery series g preferred stock will be
deemed to have received, to the extent of our current and accumulated earnings
and profits, taxable income in an amount equal to the value of our common stock
received in redemption for shares of Avery series g preferred stock minus each
holder's tax basis in the shares of Avery series g preferred stock.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MANAGE TECHNOLOGICAL CHANGE.
The market for CM&B and analytical CRM software and services and Internet
applications is characterized by:
o rapid technological change;
o frequent new product introductions;
o changes in customer requirements; and
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o evolving industry standards.
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
products obsolete. Our future success will depend upon our ability to develop
and introduce a variety of new products and product enhancements to address the
increasingly sophisticated needs of our customers.
Our products are designed to work on a variety of hardware and software
platforms used by our customers. However, our products may not operate correctly
on evolving versions of hardware and software platforms, programming languages,
database environments, accounting and other systems that our customers use. We
must constantly modify and improve our products to keep pace with changes made
to these platforms and to back-office applications and other Internet-related
applications. This may result in uncertainty relating to the timing and nature
of new product announcements, introductions or modifications, which may harm our
business. If we fail to modify or improve our products in response to evolving
industry standards, our products could rapidly become obsolete, which would harm
our business.
THE TELECOMMUNICATIONS INDUSTRY IS EXPERIENCING CONSOLIDATION, WHICH MAY REDUCE
THE NUMBER OF POTENTIAL CLIENTS FOR OUR SOFTWARE.
The telecommunications industry is experiencing significant consolidation.
In the future, there may be fewer potential clients requiring business and
Operational Support System software and related products and services,
increasing the level of competition in the industry. In addition, larger
consolidated telecommunications companies have strengthened their purchasing
power, which could create pressure on the prices and the margins we could
realize. These companies are also striving to streamline their operations by
combining different telecommunications systems and the related operations
support systems into one system, reducing the number of vendors needed. Although
we have sought to address this situation by continuing to market our products
and services to new clients and by working with major operators to provide
products and services that they need to remain competitive, we cannot be certain
that we will not lose clients as a result of industry consolidation.
IF OUR CLIENTS DO NOT RECEIVE SUFFICIENT FINANCING, OUR BUSINESS MAY BE HARMED.
Some of our clients and potential clients are new entrants to the
telecommunications market and have limited or no operating histories and limited
financial resources. These clients often must obtain significant amounts of
financing to pay for their spectrum licenses, fund operations and to deploy
their networks. We frequently work with such companies prior to their receipt of
financing. If these companies fail to receive adequate financing, particularly
after we have begun working with them, our results of operations may be harmed.
GOVERNMENTAL REGULATIONS THAT LIMIT THE GROWTH OF INTERNET OR TELECOMMUNICATIONS
CAN REDUCE OUR POTENTIAL MARKET.
The telecommunications carriers that constitute our clients are regulated
at the federal, state and local levels. Federal and state regulations may
inhibit the growth of the Internet or telecommunications industry, affect the
development of Internet enhanced services of other markets, limit the number of
potential clients for our services, impede our ability to offer competitive
services to the Internet and telecommunications market, or otherwise have a
material adverse effect on our business, financial condition, results of
operations and cash flow. The Telecommunications Act of 1996, which in large
measure deregulated the telecommunications industry, has caused, and is likely
to continue to cause, significant changes in the industry, including the
entrance of new competitors, consolidation of industry participants and the
introduction of bundled wireless, wireline, data, video and other services.
Those changes could in turn subject us to increased pricing pressures, decrease
the demand for our products and
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services, increase our cost of doing business or otherwise have a material
adverse effect on our business, financial condition, results of operations and
cash flow.
GOVERNMENT REGULATION OF THE COLLECTION AND USE OF PERSONAL DATA COULD REDUCE
DEMAND FOR OUR PRODUCTS.
Our product, Outfront CRM, connects to and analyzes data from various
applications, including Internet applications, which enable businesses to
capture and use information about their customers. Government regulation, which
limits our customers' use of this information, could reduce the demand for our
products. A number of jurisdictions have adopted, or are considering adopting,
laws that restrict the use of customer information from Internet applications.
The European Union has required that its member states adopt legislation that
imposes restrictions on the collection and use of personal data, and that limits
the transfer of personally identifiable data to countries that do not impose
equivalent restrictions. In the United States, the Children's Online Privacy
Protection Act was enacted in October 1998. This legislation directs the Federal
Trade Commission to regulate the collection of data from children on commercial
websites. In addition, the Federal Trade Commission has begun investigations
into the privacy practices of businesses that collect information on the
Internet. These and other privacy-related initiatives could reduce demand for
some of the Internet applications with which our products operate, and could
restrict the use of our products in some e-commerce applications. This could
reduce demand for our products.
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical fact, included in this
prospectus are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or
"believe." We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur. Our actual future performance could differ materially from such
statements. Factors that could cause or contribute to such differences include,
but are not limited to:
o the passage of legislation or court decisions adversely affecting the
telecommunications industry;
o competition in the telecommunications industry; and
o the advent of new technology.
You should not unduly rely on these forward-looking statements, which speak
only as of the date of this prospectus. Except as required by law, we are not
obligated to release publicly any revisions to these forward-looking statements
to reflect events or circumstances occurring after the date of this prospectus
or to reflect the occurrence of unanticipated events. Important factors that
could cause our actual results to differ materially from our expectations are
discussed under the caption "Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the distribution of our common stock
by Avery.
THE PRIMAL DISTRIBUTION
19,660,453 shares of our common stock described in this prospectus are
being registered and will be distributed by Avery to its stockholders pursuant
to the terms of the distribution agreement. The board of directors of Avery has
approved the distribution of all the shares of its wholly owned subsidiary,
Primal, to the stockholders of Avery.
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The distribution of the Primal shares will be taxable to Avery's
securityholders. See "Material Federal Income Tax Consequences of the
Distribution to Primal Stockholders."
REASONS FOR THE DISTRIBUTION
Avery intends to develop and pursue business opportunities which will have,
as compared to the business currently carried out by Primal, differences with
respect to markets and capital requirements and will require a different
business plan. Primal's business will primarily involve the development and
licensing of software used in the telecommunications industry to provide
customer care systems, mediation systems and customer relationship management
decision support systems to telecommunications carriers. Avery's ultimate
objective is to enhance the value of its subsidiary, HBS Billing Services
Company, which acts as a billing clearinghouse business for telecommunication
companies. Both companies believe that separating HBS Billing Services Company's
billing clearinghouse business from Primal's telecommunications software
business will allow each company to expand its business more readily, as well as
pursue strategies and focus on objectives appropriate to its business.
Avery's board of directors approved the distribution for the following
principal reasons.
Investor Understanding. Debt and equity investors and securities analysts
-----------------------
should be able to evaluate the financial performance of each company and their
respective strategies better, thereby enhancing the likelihood that each will
achieve appropriate market recognition. The stock of each of the two companies
will also appeal to investors with differing investment objectives and risk
tolerance, and will allow potential investors to focus their investments more
directly to the areas of their primary interest.
Management Focus. Primal's telecommunications software business and HBS
-----------------
Billing Services Company's billing clearinghouse business have different
dynamics and business cycles, serve different marketplaces and customer bases,
are subject to different competitive forces and must be managed with different
long-term and short-term strategies and goals. Avery believes that separating
its businesses into independent public companies, each with its own management
team and board of directors, is necessary to address current and future
management issues and considerations that result from operating these diverse
businesses within a single company. The separation will enable the management of
each business to focus on that business, and to adopt and implement strategies
for that business, solely with regard to the needs and objectives of that
business. In addition, as a result of the separation, the management of each
business will be able to devote its full attention to managing that business.
Capital Structure. Avery believes that the distribution will allow each of
-----------------
the companies to organize its capital structure and allocate its resources to
support the very different needs and goals of the particular business. Capital
borrowings can be tailored to the specific needs of the various business units.
Each business will be able to allocate its resources without considering the
needs of the other businesses.
Attracting and Retaining Key Employees. Avery's and Primal's management
----------------------------------------
believe that the ability to attract and retain key personnel is fundamental to
their ability to establish a leadership position in their software businesses.
The distribution would enable each company to establish focused equity-based
compensation programs that should enable each of them to attract and retain key
personnel more successfully.
RECORD DATE, EFFECTIVE DATE AND REGULATORY REQUIREMENTS
The Avery board has tentatively set the record for the distribution as
October 2, 2000. Accordingly, all Avery stockholders of record on the record
date will be entitled to participate in the distribution and to receive the
shares of the common stock of Primal that will be distributed. It is presently
anticipated that the distribution will be effective on October 31, 2000.
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Avery does not presently believe that the approval of Avery's stockholders
is required to complete the distribution of Primal to Avery's stockholders. If
stockholder approval were to be required, however, Patrick J. Haynes, III, the
Chairman of Avery, presently beneficially owns approximately 55% of Avery's
voting securities and could approve the transaction as approved by Avery's board
without the vote of any of the other Avery stockholders.
Avery is not aware of any other regulatory filings or approvals that will
be necessary to complete the distribution of Primal to Avery's stockholders as
approved by Avery's board.
HISTORY OF PRIMAL TRANSACTION
Avery acquired Primal after the close of business on September 30, 1999.
The acquisition of Primal was accomplished by merging Primal Systems, Inc. into
a wholly owned subsidiary of Avery and changing the name of that subsidiary to
Primal Solutions, Inc. At that time, Avery issued 1,945,175 of its series f
preferred stock to the seven stockholders of Primal Systems, John Faltys, Joseph
R. Simrell, David Haynes, Mark J. Nielsen, Arun Anand, Murari Cholappadi, and
Sanjay Gupta. Pursuant to the Primal merger agreement, an additional 1,945,188
shares of the series f preferred stock were issued at the closing and delivered
into escrow to satisfy contingent liabilities. The release of these escrowed
shares was also subject to Primal's meeting certain agreed revenue tests during
the 12-month period ended July 31, 2000. In addition, the Old Primal Stockholder
could also receive up to an additional 4 million shares of series f preferred
stock if Primal met additional agreed revenue tests during the same 12-month
period.
Assuming the revenue tests specified in the Primal merger agreement were
met and all 7,890,363 shares of the series f preferred stock were issued to the
Old Primal Stockholders, the Old Primal Stockholders would have owned
approximately 34% of Avery common stock on a fully diluted basis. Assuming all
of the 7,890,363 shares of the series f preferred stock were issued to the Old
Primal Stockholders and assuming all of these shares were converted into Avery
common stock, the Old Primal Stockholders would have owned approximately 43% of
Avery's voting securities. These calculations assume, of course, that the Old
Primal Stockholders would not exercise their repurchase right described in the
following paragraph, and that no additional shares of Avery common stock would
be issued upon the exercise of options and warrants or the conversion of
convertible securities.
As part of an investors rights agreement entered into at the same time as
the Primal merger agreement among Avery and the Old Primal Stockholders, Avery
agreed to repurchase up to 1,550,000 shares of Avery series f preferred stock at
$2.50 per share from the Old Primal Stockholders if Primal met or exceeded an
agreed revenue test during the same 12-month period. The Old Primal Stockholders
could exercise this right during a 60-day period beginning on August 15, 2000.
If this repurchase right were fully exercised, the aggregate purchase price
would be $3.875 million.
Also as part of the investors rights agreement, the Old Primal Stockholders
had the right for a period of two years to designate one member on Avery's
board. In addition, the Old Primal Stockholders also had the right to have a
representative attend Avery board meetings in an observer capacity.
Finally, as part of the investors rights agreement, Avery agreed to
register for sale by the Old Primal Stockholders all the shares of the Avery
common stock issuable upon conversion of the series f preferred stock. Avery
agreed to file this registration statement under the Securities Act as soon as
reasonably practicable after August 15, 2000.
A NOTE ABOUT CALCULATIONS
The discussion that follows will make references to percentages of
ownership of the outstanding common stock of Avery and Primal on a fully diluted
basis. The term "fully diluted basis" is used in this discussion to refer to the
outstanding common stock of Avery or Primal assuming that all outstanding
options and warrants to purchase shares of the common stock of Avery or Primal
are exercised and that the underlying shares of common stock are issued and
outstanding, and that all securities that are convertible into or exchangeable
for shares of the common stock of Avery
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or Primal are converted into or exchanged for shares of the common stock of
Avery or Primal and that these shares of common stock are issued and
outstanding. These calculations are not the same as the calculations prescribed
by generally accepted accounting principles to compute earnings per share, and
they are not the same as the calculations prescribed by the SEC to compute
beneficial ownership percentages.
THE DISTRIBUTION AGREEMENT
On July 31, 2000, the Primal Solutions, Inc. Preliminary Distribution
Agreement was entered. The parties to the distribution agreement are as follows:
o Avery;
o Primal;
o the Old Primal Stockholders, who are John Faltys, Joseph R. Simrell,
David Haynes, Mark J. Nielsen, Arun Anand, Murari Cholappadi, and
Sanjay Gupta;
o Thurston Group, Inc.;
o Patrick J. Haynes, III, the Chairman of Avery and the President of
Thurston Group; and
o Scot M. McCormick, the Vice President and Chief Financial Officer of
Avery.
For convenience in the discussion that follows, we will refer to individuals by
only their last names except for David Haynes, who will be referred to as D.
Haynes, and Patrick J. Haynes, III, who will be referred to as P. Haynes.
THE DISTRIBUTION; PRE-DISTRIBUTION COVENANTS
The Distribution. The parties agreed to use their commercially reasonable
----------------
best efforts to cause the distribution of the Primal common stock to Avery's
stockholders to be made as soon as is reasonably practicable and otherwise to
give effect to the transactions described in the distribution agreement.
Avery and Primal agreed to cause Primal's wholly owned subsidiary, Wireless
Billing Systems, to continue to be wholly owned by Primal on the date of the
distribution.
Capitalization of Primal on the Distribution Date. The total number of
----------------------------------------------------
shares of Primal common stock to be issued in the distribution transactions was
calculated by dividing the sum of Avery's shares of common stock outstanding on
the record date, plus the shares of Avery's common stock reserved for issuance
upon the conversion of Avery's convertible securities, excluding the shares of
Avery common stock reserved for the conversion of the Avery series g preferred
stock, outstanding on the record date, by 68%.
Ownership of Primal Following the Distribution. Immediately following the
----------------------------------------------
distribution, the Old Primal Stockholders will collectively own 32% of the
outstanding shares of the Primal common stock, and the other securityholders of
Avery will collectively own 68% of the outstanding shares of the Primal common
stock. At the time of the distribution, Primal will not have outstanding any
options, warrants or convertible securities.
Ownership of Avery Following the Distribution. Immediately following the
----------------------------------------------
distribution, the Old Primal Stockholders will collectively own shares of the
Avery series g preferred stock representing 15% of the outstanding shares of the
Avery common stock on a fully diluted basis, and the other securityholders of
Avery will collectively own 85% of the outstanding shares of the Avery common
stock.
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Closing Condition. It is a condition to making the distribution that no
------------------
permanent injunction or preliminary injunction or other order be entered, and
not vacated, by a court or administrative agency of competent jurisdiction, in
any proceeding or action, which enjoins, restrains, makes illegal or prohibits
the transactions contemplated by the distribution agreement. The threat or
existence of any other litigation, action or other proceeding, however, will not
prevent the parties from concluding such transactions.
PRE-DISTRIBUTION TRANSACTIONS
Release of Escrow Shares. On August 1, 2000, all 1,945,188 shares of
--------------------------
Avery's series f preferred stock being held in escrow were released to the Old
Primal Stockholders.
Determination and Issuance of Additional Merger Consideration. Avery and
---------------------------------------------------------------
the Old Primal Stockholders agreed in the distribution agreement that an
additional 3,236,531 shares of Avery's series f preferred stock would be issued
to the Old Primal Stockholders pursuant to the earn-out provisions of the Primal
merger agreement. The maximum number of shares that could have been earned under
these provisions was 4 million. These 3,236,531 shares of Avery's series f
preferred stock were issued to the Old Primal Stockholders on August 1, 2000.
Exchange of Securities. On August 1, 2000, the Old Primal Stockholders
------------------------
exchanged an aggregate of 7,126,894 shares of Avery's series f preferred stock
for 7,126,894 of Avery series g preferred stock. The Avery series g preferred
stock is identical in all respects to the series f preferred stock, except that
o the Avery series g preferred stock will have one vote for each share
of Avery common stock into which it is from time to time convertible
and will vote with the holders of Avery's common stock as a single
class,
o the Avery series g preferred stock will not be entitled to participate
in the distribution by Avery of the shares of the Primal common stock
to Avery's securityholders, and
o the Avery series g preferred stock will not be convertible into
Avery's common stock until the earlier of the date of the distribution
or the termination of the distribution agreement.
Redemptions. Immediately prior to the date of the distribution, Avery will
-----------
distribute to the Old Primal Stockholders 32% of the Primal common stock in
redemption of such number of shares of the Avery series g preferred stock as
will leave outstanding shares of the Avery series g preferred stock that
represent 15% of Avery's common stock on a fully diluted basis.
Amendments to Investors Rights Agreement.
----------------------------------------
Elimination of Repurchase Right. Avery and the Old Primal Stockholders
-------------------------------
amended the investors rights agreement to eliminate Avery's obligation to
repurchase 1,550,000 shares of Avery's series f preferred stock at $2.50 per
share, or $3.875 million, issuable upon conversion of the Avery series g
preferred stock.
Reconstitution of Primal's Board. Avery and the Old Primal Stockholders
--------------------------------
amended the investors rights agreement to reconstitute the Primal board of
directors. The new Primal board consists of a total of seven members, with two
members being designated by Avery, two members being designated by Faltys,
Simrell, D. Haynes and Nielsen, two members being independent members, one of
which shall initially be the designee of Franklin Capital Corporation, and one
member being the new chief executive officer of Primal, Bill Salway. Avery and
each of Faltys, Simrell, D. Haynes and Nielsen will each use their commercially
reasonable best efforts to fill the vacancy on the board for an independent
member as soon as is reasonably practicable. Except as to the Franklin Capital
designee, Rule 4200(a)(14) of the rules of the National Association of
Securities Dealers, Inc. relating to The Nasdaq Stock Market will be used to
determine whether a member of the board of directors is independent. Faltys,
Simrell, D. Haynes
21
<PAGE>
and Nielsen will not designate Nielsen to the new Primal board, and Avery will
not designate either P. Haynes or McCormick to the new Primal board. All rights
to designate directors will terminate on January 27, 2002.
On August 1, 2000, Avery, in its capacity as the sole stockholder of
Primal, executed a written consent to implement the new board. The members of
Primal's board are John Faltys, David Haynes, William Salway, Spencer Brown,
Alan Lindauer and Norman Phipps. Messrs. Faltys and D. Haynes are the designees
of Faltys, Simrell, D. Haynes and Nielsen, Mr. Brown is Franklin Capital's
designee, and Messrs. Lindauer and Phipps are Avery's designees. Messrs. Brown,
Lindauer, and Phipps are presently members of Avery's board.
LOANS
On August 1, 2000, Avery loaned $398,000 to Faltys, $377,000 to each of
Simrell and D. Haynes, $287,000 to Nielsen, and $41,500 to each of Anand,
Cholappadi and Gupta. The loans are non-recourse, and none of the Old Primal
Stockholders will have any personal liability for their repayment in excess of
the collateral pledged to secure the repayment of the loans. To secure the
repayment of the loans, however, each of the Old Primal Stockholders pledged to
Avery, and granted to Avery a first priority security interest in, all shares of
series f preferred stock and Avery series g preferred stock beneficially owned
by him on August 1 or thereafter acquired pursuant to the distribution
agreement. Each of the loans bears interest at the rate of 6.6% per annum, the
minimum applicable federal rate required to prevent imputed interest from being
recognized for federal income tax purposes. Each of the loans is due and payable
in full on August 1, 2002. From and after the distribution date, each of the Old
Primal Stockholders will be permitted to sell the shares of Avery's common stock
pledged as collateral to secure repayment of the loans if, and only if, all
proceeds received upon any such sale are first applied to pay all accrued but
unpaid interest on the loans and then to reduce the outstanding principal amount
of the loans then outstanding.
CAPITAL CONTRIBUTION TO NEW PRIMAL
Avery will contribute to Primal $4 million to use for general corporate and
working capital purposes. Avery contributed $2,000,000 of the $4,000,000 to
Primal on August 1, 2000. Avery will contribute the remaining $2,000,000 of the
$4,000,000 to Primal on the first to occur of October 29, 2000, or the
distribution date, unless, in either case, such date is not a business day, in
which case, the contribution will be made on the first business day following
such date.
TREATMENT OF AVERY'S CONVERTIBLE SECURITIES IN THE DISTRIBUTION
The holders of Avery's series a, b, c, d and e preferred stock and the
holder of Avery's convertible note will participate in the distribution on an
"if converted" basis. In other words, such holders will not receive any Primal
preferred stock in the distribution, and, in its place, such holders will
receive one share of Primal common stock for each share of Avery common stock
that such holder would have held on the record date for the distribution had
such holder converted the Avery preferred stock or note held by such holder into
Avery common stock on the day immediately preceding the record date.
REGISTRATION STATEMENTS
Distribution Registration Statement. Pursuant to the distribution
---------------------------------------
agreement, Avery agreed to cause Primal to file this registration statement to
register all shares of Primal common stock to be issued in the distribution
under the Securities Act and under all applicable state securities laws as soon
as reasonably practicable, and agreed to use its commercially reasonable best
efforts to cause this registration statement to be declared effective by the SEC
and obtain permits under state securities laws. Faltys, Simrell, D. Haynes and
Nielsen agreed to use their commercially reasonable best efforts to cooperate
with Avery. Avery will pay all costs and expenses in connection with this
registration statement. Avery agreed to cause this registration statement to
comply in substance and as to form in all material respects with the
requirements of the Securities Act and the rules promulgated thereunder, and
agreed to provide Faltys,
22
<PAGE>
Simrell, D. Haynes and Nielsen with a reasonable opportunity to review and
comment upon the registration statement and any amendments thereto, and Avery
will further keep Faltys, Simrell, D. Haynes and Nielsen reasonably apprised as
to its status.
Avery Resale Registration Statement. Pursuant to the distribution
----------------------------------------
agreement, Avery will file a registration statement to register all shares of
Avery common stock beneficially owned by the Old Primal Stockholders, or that
they would be entitled to receive upon conversion of the Avery series g
preferred stock, for resale under the Securities Act as soon as reasonably
practicable after August 28, 2000, will use its commercially reasonable best
efforts to cause such registration statement to be declared effective by the
SEC, and will pay all related costs and expenses. Avery will cause such
registration statement to comply in substance and as to form in all material
respects with the requirements of the Securities Act and the rules promulgated
thereunder, and will provide Faltys, Simrell, D. Haynes and Nielsen with a
reasonable opportunity to review and comment upon the registration statement and
any amendments thereto, and Avery will further keep Faltys, Simrell, D. Haynes
and Nielsen reasonably apprized as to its status.
Primal Resale Registration Statement. Pursuant to the distribution
----------------------------------------
agreement, Primal will file a registration statement to register all shares of
Primal common stock held by the Old Primal Stockholders for resale under the
Securities Act as soon as practicable, but in no event later than 90 days after
completion of the distribution, will use its commercially reasonable best
efforts to cause such registration statement to be declared effective by the
SEC, and will pay all related costs and expenses. Primal will cause such
registration statement to comply in substance and as to form in all material
respects with the requirements of the Securities Act and the rules promulgated
thereunder, and will provide Faltys, Simrell, D. Haynes and Nielsen with a
reasonable opportunity to review and comment upon the registration statement and
any amendments thereto, and Primal will further keep Faltys, Simrell, D. Haynes
and Nielsen reasonably apprized as to its status.
IRREVOCABLE PROXIES
On August 1, 2000, each of the Old Primal Stockholders executed and
delivered to Thurston Group and its affiliates an irrevocable proxy to vote all
shares of the Avery series g preferred stock owned or held by him or thereafter
acquired, and all shares of the Avery common stock owned or held by him or
thereafter acquired.
On August 1, 2000, each of Thurston Group and its affiliates and P. Haynes
and his affiliate, Waveland, LLC, executed and delivered to the Old Primal
Stockholders an irrevocable proxy to vote all shares of Primal common stock held
by them or thereafter acquired. P. Haynes, the Chairman of Avery, is an
affiliate of Thurston Group.
P. Haynes, in his capacity as Chairman of Avery, also holds a proxy to vote
certain shares of Avery common stock held in escrow in connection with Avery's
acquisition of its HBS Billing Services Company subsidiary. P. Haynes, in his
capacity as the Chairman of Avery, granted to the Old Primal Stockholders an
irrevocable proxy to vote the shares of Primal common stock distributed to the
escrow agent for these shares until they are released from escrow or until they
are returned to Avery pursuant to the provisions of the governing escrow
agreement.
Each of the proxies covering shares of the Primal common stock provides
that any action required or permitted to be taken pursuant to the proxy by
Faltys, Simrell, D. Haynes, Nielsen, Anand, Cholappadi and Gupta, including any
voting of the shares covered thereby, may be so taken if the former holders of
at least 66% of the issued and outstanding shares of Primal immediately prior to
its acquisition by Avery approve the taking of any such action. These
percentages were as follows:
o Faltys - 30.4861%
o Simrell and D. Haynes - 21.5999% each
23
<PAGE>
o Nielsen - 16.4969%
o Anand, Cholappadi and Gupta - 3.2724% each
This means that Faltys and any two of Simrell, D. Haynes or Nielsen can control
the voting of these proxies.
For information regarding the number of shares covered by these proxies and
the percentages of the voting securities such shares represent, please see
"Stock Ownership of Directors, Executive Officers and Principal Holders."
In the event the distribution is not completed, the proxies will
automatically terminate.
EXPENSES
Except as otherwise provided, Avery will pay all legal and accounting fees
incurred by Avery, Primal and Faltys, Simrell, D. Haynes and Nielsen in
connection with the distribution agreement and the distribution. Avery's
liability to pay for legal and accounting fees incurred by Primal and Faltys,
Simrell, D. Haynes and Nielsen, however, is limited to an aggregate of $75,000.
NEW PRIMAL INTERIM CEO
Bill Salway has been elected as the chief executive officer of Primal. As
part of the distribution, the Primal board of directors will grant stock options
to Mr. Salway to replace his Avery stock options, which will be canceled as part
of the distribution.
NEW PRIMAL INTERIM MANAGEMENT
Until the distribution date, Primal will not employ Nielsen in any capacity
without the express prior written consent of Avery, nor will Nielsen serve as a
member of the Primal board of directors without the express prior written
consent of Avery.
ADJUSTMENTS TO AVERY'S OPTIONS AND CONVERTIBLE SECURITIES IN THE
DISTRIBUTION
The parties agreed that Avery's outstanding options, warrants and
convertible securities will be adjusted to give effect to the distribution as
follows:
Incentive Stock Options. All 550,777 options intended to qualify as
-------------------------
incentive stock options under Section 422 of the Internal Revenue Code and held
by employees of Primal or Wireless Billing Systems will be canceled as part of
the distribution, effective on and as of the distribution date.
The option spread, whether positive or negative, at the distribution date
with respect to existing Avery options intended to qualify as incentive stock
options under Section 422 of the Internal Revenue Code and held by employees of
Avery and HBS Billing Services Company after the distribution will be preserved
by adjusting the per share exercise price and the number of shares covered by
each such option to reflect the distribution. Each such option will be adjusted
so that
o the per share exercise price will equal the original per share
exercise price multiplied by the "Avery ratio," as described below,
and
o the number of shares of Avery common stock covered will equal the
original number of shares stated in the applicable option divided by
the Avery ratio.
24
<PAGE>
The "Avery ratio" is a fraction. The numerator of this fraction is 3. The
denominator of this fraction is 5.
Non-Qualified Stock Options and Common Stock Purchase Warrants. Nielsen's
---------------------------------------------------------------
options to purchase 925,000 shares of Avery common stock and Bill Salway's
options to purchase 300,000 shares of Avery common stock will be canceled as
part of the distribution, effective on and as of the distribution date.
Avery's remaining outstanding options to purchase Avery common stock that
were granted under Avery's 1999 flexible incentive plan and not intended to
qualify as incentive stock options under Section 422 of the Internal Revenue
Code, outstanding non-qualified stock options that were not granted under
Avery's 1999 flexible incentive plan, and Avery's outstanding common stock
purchase warrants will be adjusted to reflect the distribution. The option or
warrant spread, whether positive or negative, at the distribution date with
respect to such options and warrants will be preserved by adjusting the per
share exercise price and the number of shares covered by each such option or
warrant to reflect the distribution. Each such option or warrant will be
adjusted so that
o the per share exercise price will equal the original per share
exercise price multiplied by the Avery ratio, and
o the number of shares of Avery common stock covered will equal the
original number of shares stated in the applicable option or warrant
divided by the Avery ratio.
Avery's Convertible Preferred Stock. Avery's outstanding convertible
--------------------------------------
preferred stock will be adjusted to reflect the distribution by the Avery ratio.
The conversion spread, whether positive or negative, at the distribution date
with respect to such preferred stocks will be preserved by adjusting the per
share conversion price on the distribution date to reflect the distribution.
Because each series of Avery's outstanding convertible preferred stock is
convertible into as many shares as is determined by dividing a fixed dollar
amount by the current conversion price, and none of such series is convertible
into a fixed number of shares, it is not necessary to make an adjustment
regarding the number of shares to be received upon conversion. Avery's
outstanding series a, b, c, d and e preferred stock will be adjusted so that the
per share conversion price of each such series will equal the current per share
conversion price on the distribution date multiplied by the Avery ratio.
A different adjustment, however, is required for the Avery series g
preferred stock. Because the outstanding shares of these series are supposed to
be equal to, if all such shares were converted into Avery common stock, 15% of
the outstanding Avery common stock on a fully diluted basis both before and
after the distribution, simply multiplying the current conversion price by the
Avery ratio would result in these shares being equal to more than 15% after the
distribution because the number of outstanding shares of Avery common stock will
not be adjusted in the distribution. Accordingly, the Avery series g preferred
stock will be adjusted so that the per share conversion price of each such
series will equal the current per share conversion price on the distribution
date multiplied by the "Primal preferred ratio." The "Primal preferred ratio" is
a fraction. The numerator of this fraction is the number of outstanding shares
of Avery common stock on a fully diluted basis immediately preceding the
distribution date, excluding the shares of Avery common stock reserved for
issuance upon conversion of the Avery series g preferred stock. The denominator
of this fraction is the number of outstanding shares of Avery common stock on a
fully diluted basis on the distribution date, excluding the shares of Avery
common stock reserved for issuance upon conversion of the series f preferred
stock and the Avery series g preferred stock.
Avery's Convertible Note. Avery's outstanding convertible note will be'
--------------------------
adjusted to reflect the distribution. The conversion spread, whether positive or
negative, at the distribution date with respect to such note will be preserved
by adjusting the per share conversion price on the distribution date to reflect
the distribution. Because the note is convertible into as many shares as the
principal amount thereof divided by the present conversion price will purchase,
and is not presently convertible into a fixed number of shares, it is not
necessary to make an adjustment regarding the number of shares to be received
upon conversion. The per share conversion price of the note will be adjusted to
equal the current conversion price on the distribution date multiplied by the
Avery ratio.
25
<PAGE>
RELEASES
The parties to the distribution agreement have mutually released one
another from all claims, demands, proceedings, causes of action, orders,
obligations, contracts, agreements, debts and liabilities whatsoever, whether
known or unknown, suspected or unsuspected, both at law and in equity, which any
of them now has, have ever had or may thereafter have against any of the other
parties arising contemporaneously with or prior to July 31, 2000, or on account
of or arising out of any matter, cause or event occurring contemporaneously with
or prior to July 31, 2000. Obligations under the distribution agreement and
other existing agreements are excluded from the releases.
The parties have also agreed to refrain from, directly or indirectly,
asserting any claim or demand, or commencing, instituting or causing to be
commenced, any proceeding of any kind, against any other party based upon any
matter purported to be released or based upon the distribution or the other
transactions contemplated by the distribution agreement. Any claim, demand or
proceeding based upon a breach or alleged breach of the distribution agreement,
however, are expressly excluded.
Without in any way limiting any of the rights and remedies otherwise
available to any of the parties, each of the parties agreed to indemnify and
hold harmless each other from and against all loss, liability, claim, damage,
including incidental and consequential damages, or expense, including costs of
investigation and defense and reasonable attorneys' fees, whether or not
involving third party claims, arising directly or indirectly from or in
connection with the assertion by or on behalf of any of party of any claim or
other matter purported to be released or based upon the distribution or the
other transactions contemplated by the distribution agreement, other than any
claim, demand or proceeding based upon a breach or alleged breach of the
distribution agreement, which claims, demands and proceedings are expressly
excluded, and the assertion by any third party of any claim or demand against
any of the parties, which claim or demand arises directly or indirectly from, or
in connection with, any assertion by or on behalf of any party against such
third party of any claims or other matters purported to be released or based
upon the distribution or the other transactions contemplated by the distribution
agreement, other than any claim, demand or proceeding based upon a breach or
alleged breach of the distribution agreement, which claims, demands and
proceedings are expressly excluded.
CORSAIR GUARANTEE
It is a condition precedent to Avery's making the distribution that Avery
be fully and unconditionally released from any and all liability under its
guarantee of amounts owed by Primal to Corsair Computing, or, alternatively,
that an arrangement or arrangements reasonably satisfactory to Avery be made to
mitigate Avery's liability under such guarantee. With respect to the foregoing,
however, Avery acknowledged and agreed that one such satisfactory arrangement
will be an agreement to indemnify and hold Avery harmless from and against any
and all liabilities of any nature whatsoever arising from or incidental to such
guarantee from Primal and Wireless Billing Systems.
FAILURE TO COMPLETE THE DISTRIBUTION
Avery Party or Parties at Fault. If
-------------------------------
o the distribution has not occurred on or before December 31, 2000,
o the failure of the distribution to have occurred on or before such
date is due to the failure of the Avery, Thurston Group, P. Haynes and
McCormick, or any one or more of the Avery, Thurston Group, P. Haynes
or McCormick, to comply fully with its or his obligations under the
distribution agreement or their representations and warranties in the
distribution agreement are not true in all material respects, and
26
<PAGE>
o the Old Primal Stockholders have substantially complied with their
respective obligations under the distribution agreement and their
respective representations and warranties in the distribution
agreement are true in all material respects,
then Avery will forgive the loans to the Old Primal Stockholders and release the
shares of Avery series g preferred stock pledged to secure the repayment of the
loans.
Faltys, Simrell or D. Haynes at Fault. If
-------------------------------------
o the distribution has not occurred on or before December 31, 2000,
o the failure of the distribution to have occurred on or before such
date is due to the failure of Faltys, Simrell and D. Haynes, or any
one or more of Faltys, Simrell or D. Haynes, to comply fully with
their or his obligations under the distribution agreement or their or
his representations and warranties in the distribution agreement are
not true in all material respects, and
o Nielsen, Anand, Cholappadi, Gupta, Avery, Thurston Group, P. Haynes
and McCormick have substantially complied with their respective
obligations under the distribution agreement and their respective
representations and warranties in the distribution agreement are true
in all material respects,
then each of the Old Primal Stockholders will deliver to Avery their respective
pro rata portion, based on their respective pro rata ownership of Primal
immediately prior to its acquisition by Avery, of such number of shares of the
Avery series g preferred stock pledged to secure the repayment of the loans as
would, if converted into Avery common stock, leave outstanding shares of the
Avery series g preferred stock that would equal, assuming the shares of the
Avery series g preferred stock were converted into Avery common stock, 20% of
the Avery common stock on a fully diluted basis.
In addition, each of Faltys, Simrell and D. Haynes will also deliver 20,000
shares of the Avery series g preferred stock to Nielsen, Anand, Cholappadi and
Gupta. These 60,000 shares of the Avery series g preferred stock will be
distributed to Nielsen, Anand, Cholappadi and Gupta pro rata based on their
respective pro rata ownership of Primal immediately prior to its acquisition by
Avery, and, following the delivery of such shares, the loans to Nielsen, Anand,
Cholappadi and Gupta will be forgiven by Avery.
Nielsen at Fault. If
----------------
o the distribution has not occurred on or before December 31, 2000,
o the failure of the distribution to have occurred on or before such
date is due to the failure of Nielsen to comply fully with his
obligations under the distribution agreement or his representations
and warranties in the distribution agreement are not true in all
material respects, and
o Faltys, Simrell, D. Haynes, Anand, Cholappadi, Gupta, Avery, Thurston
Group, P. Haynes and McCormick have substantially complied with their
respective obligations under the distribution agreement and their
respective representations and warranties in the distribution
agreement are true in all material respects,
then each of the Old Primal Stockholders will deliver, or cause to be delivered,
to Avery their respective pro rata portion, based on their respective pro rata
ownership of Primal immediately prior to its acquisition by Avery, of such
number of shares of the Avery series g preferred stock pledged to secure the
repayment of the loans as would, if converted into Avery common stock, leave
outstanding shares of the Avery series g preferred stock that would equal,
27
<PAGE>
assuming the shares of the Avery series g preferred stock were converted into
Avery common stock, 20% of the Avery common stock on a fully diluted basis.
In addition, Nielsen will also deliver 60,000 shares of the Avery series g
preferred stock to Faltys, Simrell, D. Haynes, Anand, Cholappadi and Gupta.
These 60,000 shares of the Avery series g preferred stock will be distributed to
Faltys, Simrell, D. Haynes, Anand, Cholappadi and Gupta pro rata based on their
respective pro rata ownership of Primal immediately prior to its acquisition by
Avery, and, following the delivery of such shares, the loans to Faltys, Simrell,
D. Haynes, Anand, Cholappadi and Gupta will be forgiven by Avery.
Anand, Cholappadi and Gupta at Fault. If
------------------------------------
o the distribution has not occurred on or before December 31, 2000,
o the failure of the distribution to have occurred on or before such
date is due to the failure of Anand, Cholappadi and Gupta, or any one
or more of Anand, Cholappadi or Gupta, to comply fully with their or
his obligations under the distribution agreement or their or his
representations and warranties in the distribution agreement are not
true in all material respects, and
o Faltys, Simrell, D. Haynes, Nielsen, Avery, Thurston Group, P. Haynes
and McCormick have substantially complied with their respective
obligations under the distribution agreement and their respective
representations and warranties in the distribution agreement are true
in all material respects,
then the Old Primal Stockholders will deliver, or cause to be delivered, to
Avery their respective pro rata portion, based on their respective pro rata
ownership of Primal immediately prior to its acquisition by Avery, of such
number of shares of the Avery series g preferred stock pledged to secure the
repayment of the loans as would, if converted into Avery common stock, leave
outstanding shares of the Avery series g preferred stock that would equal,
assuming the shares of the Avery series g preferred stock were converted into
Avery common stock, 20% of the Avery common stock on a fully diluted basis.
In addition, each of Anand, Cholappadi and Gupta will also deliver 20,000
shares of the Avery series g preferred stock to the Faltys, Simrell, D. Haynes
and Nielsen. These 60,000 shares of the series Avery g preferred stock will be
distributed to Faltys, Simrell, D. Haynes and Nielsen pro rata based on their
respective pro rata ownership of Primal immediately prior to its acquisition by
Avery, and, following the delivery of such shares, the loans to Faltys, Simrell,
D. Haynes and Nielsen will be forgiven by Avery.
More Than One Party at Fault. If
----------------------------
o the distribution has not occurred on or before December 31, 2000, and
o the failure of the distribution to have occurred on or before such
date is due to
o the failure of two or more, but less than all, of
o Avery, Thurston Group, P. Haynes and McCormick or any one or
more of the Avery, Thurston Group, P. Haynes or McCormick,
o Faltys, Simrell and D. Haynes, or any one or more of Faltys,
Simrell or D. Haynes,
o Nielsen, or
28
<PAGE>
o Anand, Cholappadi and Gupta, or any one or more of Anand,
Cholappadi or Gupta,
to comply fully with their, his or its obligations under the
distribution agreement or their, his or its representations and
warranties in the distribution agreement are not true in all material
respects and
o the other parties to the distribution agreement have
substantially complied with their respective obligations under
the distribution agreement and their respective representations
and warranties in the distribution agreement are true in all
material respects,
then the provisions described above with respect to each of such parties will
apply with respect to the parties at fault.
If any of the parties at fault are Old Primal Stockholders, and such
parties would be entitled to receive additional shares of the Avery series g
preferred stock or have their loans forgiven, then such party or parties at
fault will not be entitled to receive any additional shares of the Avery series
g preferred stock, the additional shares of the Avery series g preferred stock
will be distributed to those Old Primal Stockholders who are not at fault, pro
rata based on their respective pro rata ownership of Primal immediately prior to
its acquisition by Avery, and the loans to such party or parties at fault will
not be forgiven by Avery.
No Party or All Parties at Fault. If
--------------------------------
o the distribution has not occurred on or before December 31, 2000, and
o the failure of the distribution to have occurred on or before such
date is due to
o the failure of one or more of the Old Primal Stockholders and one
or more of Avery, Thurston Group, P. Haynes or McCormick to
comply fully with their, his or its obligations under the
distribution agreement or their, his or its representations and
warranties in the distribution agreement are not true in all
material respects, or
o the occurrence of events or circumstances not within the control
of any of the Old Primal Stockholders or Avery, Thurston Group,
P. Haynes and McCormick, and
o the Old Primal Stockholders and Avery, Thurston Group, P. Haynes
and McCormick have substantially complied with their respective
obligations under the distribution agreement and their
representations and warranties in the distribution agreement are
true in all material respects,
then the Old Primal Stockholders will deliver to Avery their respective pro rata
portion, based on their respective pro rata ownership of Primal immediately
prior to the its acquisition by Avery, of such number of shares of the Avery
series g preferred stock as would, if converted into Avery common stock, leave
outstanding shares of the Avery series g preferred stock that would equal,
assuming the shares of the Avery series g preferred stock were converted into
Avery common stock, 20% of the Avery common stock on a fully diluted basis.
Following the delivery to Avery of the shares of the Avery series g preferred
stock, Avery will forgive the loans to the Old Primal Stockholders.
Automatic Extension. The date on which the distribution and the related
--------------------
transactions are to occur will be automatically extended to February 15, 2001,
without any action on the part of any of the parties if Avery, on the one hand,
and Faltys, Simrell, D. Haynes and Nielsen, on the other hand, mutually agree
that it is reasonably likely that the distribution can be consummated on or
before such date.
29
<PAGE>
NEW PRIMAL MANAGEMENT COMPENSATION
From and after the distribution date, Faltys, Simrell and D. Haynes may
receive such stock options as may be granted to them by the Primal board of
directors.
PRIOR AGREEMENTS STILL IN EFFECT
Except as expressly modified by the distribution agreement, each of the
other terms and provisions of the Primal merger agreement and the investors
rights agreement were ratified and confirmed in all respects and remain in full
force and effect in accordance with their terms.
ISSUANCE OF NEW PRIMAL COMMON STOCK TO NIELSEN
On the first business day following the distribution date, Primal will
issue to Nielsen 250,000 shares of the Primal common stock. Nielsen agreed that
the issuance of such shares is in replacement of Nielsen's options to purchase
925,000 shares of Avery common stock, which are being canceled as part of the
distribution, and that the cancellation of such options is a condition precedent
to the receipt of such Primal common stock. Accordingly, Nielsen agreed and
consented to Avery's cancellation of Nielsen's option to purchase 925,000 shares
of Avery Common Stock as provided in the distribution agreement.
RESIGNATIONS
Primal Directors. All parties who were directors of Primal on July 31,
-----------------
2000, resigned as directors of Primal, effective for all purposes on and as of
such date.
Primal Officers. All parties, other than Faltys, Simrell and D. Haynes, who
---------------
were officers of Primal on July 31, 2000, resigned as officers of Primal,
effective for all purposes on and as of such date.
Nielsen as Avery Director. Nielsen resigned as a director of Avery,
---------------------------
effective for all purposes on and as of July 31, 2000.
ENTIRE AGREEMENT AND MODIFICATIONS
The distribution agreement supersedes all prior agreements between the
parties with respect to its subject matter, including that certain Memo dated
June 2000, but specifically not including the Primal merger agreement, the
investors rights agreement or the escrow agreement, except to the extent that
the Primal merger agreement or the investors rights agreement are amended by the
distribution agreement, and the employment agreements between Primal and each of
Faltys, Simrell and D. Haynes, and constitutes a complete and exclusive
statement of the terms of the agreement between the parties with respect to its
subject matter. The distribution agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment. With
respect to the foregoing, however, any action required or permitted to be taken
under the distribution agreement, other than any amendment thereof, but
including voting of any proxy referred to in the distribution agreement, by
Faltys, Simrell, D. Haynes and Nielsen or the Old Primal Stockholders may be so
taken if the former holders of at least 66% of the issued and outstanding shares
of Primal immediately prior to Primal's acquisition by Avery approve the taking
of any such action, other than the amendment hereof, but including voting of any
proxy referred to in the distribution agreement.
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<PAGE>
INDEMNIFICATION AGREEMENT
Avery and Faltys, Simrell and D. Haynes entered into an indemnification
agreement at the time of signing the distribution agreement. The purpose of the
indemnification agreement is for Avery to indemnify Faltys, Simrell and D.
Haynes for claims made by third parties relating to the distribution and related
transactions and for expenses incurred by them in connection with such claims.
The indemnification is intended to provide Faltys, Simrell and D. Haynes with
protections similar to those provided to the directors and officers of Avery by
Avery's bylaws and by the standard form of indemnification agreement to which
Avery and each of its directors and officers is a party.
APPRAISAL OF PRIMAL
SE Biz Val, LLC was retained by Avery to appraise the fair market value
of Primal as of the date of its distribution to serve as a basis for
establishing the amount of any taxable gain to Avery and the Primal dividend and
redemption capital gain value to Avery stockholders resulting from the
distribution. SE Biz Val, as a customary part of its business, is regularly
engaged in the appraisal of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and appraisals for estate, corporate and other purposes.
For purposes of the appraisal, dated September 15, 2000, the term "fair
market value" was defined as the amount at which the Primal capital stock in
aggregate on an OTCBB marketable minority interest basis would change hands
between a willing buyer and willing seller, all having reasonable knowledge of
the relevant facts and neither being under any compulsion to act, with equity to
all. Furthermore, for purposes of the appraisal, SE Biz Val assumed that, after
the distribution, the outstanding shares of Primal common stock will have been
fully distributed, Primal common stock will be trading on an established market,
and information concerning Primal of the type normally available concerning
publicly-traded companies will have been widely disseminated.
The full text of the written appraisal of Primal describes the
assumptions made, matters considered and limits on the review undertaken. you
are urged to read the appraisal carefully and in its entirety. The summary of
the appraisal of SE Biz Val set forth in this registration statement is
qualified in its entirety by reference to the full text of such opinion.
The preparation of a corporate appraisal is a complex process and is
not necessarily susceptible to partial analysis or summary description.
Selecting portions of the analyses or of the summary, without considering the
analysis as a whole, could create an incomplete view of the processes underlying
the appraisal. In arriving at its appraisal conclusions, SE Biz Val considered
the result of all relevant analyses. The analyses were prepared for the purposes
of enabling SE Biz Val to render its appraisal of Primal to Avery for purposes
of establishing the amount of taxable gain, if any, arising from the
distribution. Analyses based upon forecasts of future results are not
necessarily indicative of actual future values, which may be significantly more
or less favorable than suggested by such analyses, nor should they be viewed as
predictions of potential future trading prices for shares of Primal common
stock.
In connection with the appraisal, SE Biz Val made such reviews,
analyses and inquiries as it deemed necessary and appropriate under the
circumstances, including, among other things, the following:
o meeting with certain members of senior management of Avery and Primal to
discuss the operations, financial condition, prospects and projected
operations and financial performance of Primal;
o visits to certain facilities and business offices of Primal;
o Avery's annual report to stockholders and annual report on Form 10-KSB for
the year ended December 31, 1999, as well as other Avery filings with the
Securities and Exchange Commission;
o the audited separate company financial statements for Primal's business for
the three fiscal years ended December 31, 1997-99 as well as the unaudited
interim financial statements for the six months ended June 30, 1999 and
2000;
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<PAGE>
o the forecasts and projections prepared by Avery's management with respect
to Primal for the budget year ended December 31, 2000 and projections of
potential future financial performance for the year 2001 and beyond;
o the historical market prices and trading volume for Avery stock;
o publicly available financial data for certain companies that SE Biz Val
deemed comparable to Primal;
o publicly available information concerning the general economy and the
telecommunications industry; and
o such other studies, analyses and inquiries as S Biz Val deemed appropriate.
The financial forecasts and projections for the fiscal years ended
December 31, 2000 and 2001, prepared by Avery's management with respect to
Primal, were based upon the historical financial results of Primal's business
and business plan through fiscal 2001. Revenues are projected to experience no
substantive growth for 2000 over 1999, but are expected to grow strongly by 63%
to $15.1 million in 2001. However, Primal is projected to incur net losses in
both fiscal 2000 and 2001, totaling together some $6.6 million. Salaries and
benefits were projected to increase each year commensurate with revenue growth.
Operating expenses were projected to approximate historical levels with the
exception of management's estimates of the additional general and administrative
expenses expected to be incurred as a result of Primal operating as a
stand-alone company. The combined federal and state income tax rate was
estimated to be 40%, though with projected losses for 2000 and 2001, Primal will
not be paying any material income taxes for those years. The outlook for Primal
subsequent to 2001 is for strong sales growth averaging about 20% per year with
profitability increasing from basic "break- even" in 2002 to a net profit margin
averaging about 5% of revenues.
SE Biz Val relied upon the financial forecasts and projections provided
to it and assumed, without independent verification, that those financial
forecasts and projections had been reasonably prepared and reflected the best
currently available estimates of the future financial results and condition of
Primal and that there had been no material change in the assets, financial
condition, business or prospects of Primal since the date of the most recent
financial statements made available to it. SE Biz Val did not independently
verify the accuracy and completeness of the information supplied to it with
respect to Primal and does not assume any responsibility with respect thereto.
SE Biz Val did not make any independent appraisal of any of the properties or
assets of Primal.
As part of its analysis, SE Biz Val analyzed the trading volume of
Avery's publicly traded common stock, both before and after the announcement of
the distribution, Avery's common stock traded in the range of $0.50 to $5.00 per
share in the year prior to such announcement. While SE Biz Val considered this
trading activity in its analysis, SE Biz Val utilized an independent valuation
analysis to determine the aggregate fair market value on an OTCBB marketable
minority interest basis of the capital stock of Primal that will be outstanding
after the distribution.
Summary of the Valuation Methods Utilized
In determining the aggregate fair market value on an OTCBB marketable
minority interest basis of the 15.7 million shares of Primal common stock that
will be outstanding after the distribution, SE Biz Val considered generally
accepted valuation methodologies and, after due consideration, utilized
primarily; (1) the cost of capital based discounted projected cash flow ("DCF")
valuation method under the Income Approach, and (2) the market based
capitalization of funds valuation method (i.e., the "Public Guideline Company
Method") under the Market Approach. SE Biz Val did not use any method under the
Asset Approach due to the material level of unidentified going concern
intangible assets employed by Primal.
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<PAGE>
The cost of capital based discounted projected cash flow approach is
one method of determining the value of an operating enterprise. This approach
entailed determining the appropriate cash flows, based upon projected financial
information for the enterprise. An appropriate risk adjusted discount rate for
the enterprise projections is selected based upon an analysis of alternative
investments. The terminal value, which is the value of the enterprise at the end
of the projected period, is determined by using the single period capitalization
of cash flow method. The summation of the discounted value for the projected
period and the discounted value of cash flow for the terminal value determines
the company's aggregate minority interest value. Similarly, to assess the fair
market value of the subject stock, a discount adjustment will be made
recognizing the limited marketability of the stock as it will be traded on the
OTCBB.
The market-based capitalization of funds generated from operations
approach is another method of determining the fair market value of a company by
determining the level of funds generated from operations which is considered to
be representative of the future operating performance of the company and
capitalizing this level at a selected multiple. Such comparable public companies
as are available are selected for comparison purposes and a comparative risk
analysis is performed. The selection of appropriate multiples for the company is
made based on this comparative risk analysis and a thorough analysis of the
comparable market multiples. Capitalizing the representative levels at the
selected multiple determines the company's aggregate minority interest value on
a "freely traded" basis. To assess the fair market value of the subject stock, a
discount adjustment will be made recognizing the limited marketability of the
stock as it will be traded on the OTCBB.
Results of the Discounted Projected Cash Flow Method
In the cost of capital based discounted projected cash flow method, SE
Biz Val determined Primal's minority interest common equity market
capitalization value by adding (1) the present value of projected discretionary
cash flow for the eight years ended December 31, 2008 net of debt service and
anticipated capital expenditures, and (2) the net present value of the terminal
value after eight years. Eight years of projections were required because Primal
would not show any substantive profitability or dividend paying capacity until
year seven, given management's view that Primal would be operated on a "survival
mode" basis, growing with internally generated funds.
The projected cash flows for the years 2000 and 2001 were based upon
the financial projections provided by Primal's management, including the $4
million of additional funding to be provided by Avery prior to the distribution.
The subsequent projected cash flows for the years 2002 through 2008 were based
upon assumptions reviewed by Primal's management and found to be reasonable. SE
Biz Val discounted these projected cash flows at an investment risk adjusted
discount rate of 25%. The selected discount rate reflects the rate of return
that SE Biz Val estimates would be reasonably required by providers of common
equity capital to Primal to compensate such providers for the time value of
their money, as well as the risks inherent in their investment. The terminal
value was determined by utilizing a single period capitalization of the
estimated cash flow for 2008, using the 25% discount rate and a long-term growth
rate of 15% yielding a 10% capitalization rate.
The result of these calculations was that SE Biz Val determined that
the "market capitalization," or MCAP, of Primal Solutions' common equity on a
freely tradeable minority interest basis was $3.1 million. SE Biz Val then took
into account Primal's likely "thin" trading environment on the over-the-counter
market, concluding that minority shareholders would likely suffer a further
discount for lack of marketability approximating -15%. After assessing this
further discount, SE Biz Val concluded that the aggregate fair market value on
an OTCBB marketable minority interest basis of Primal's common equity would have
a "thinly traded" MCAP value of $2.7 million.
33
<PAGE>
Results of the Market Based Capitalization of Funds Method
In employing the market based capitalization of funds valuation method,
SE Biz Val examined over 120 publicly held companies involved in software-based
business-to-business services provided to the telecommunications industry. From
that initial review, SE Biz Val selected seven publicly held companies who most
closely resembled Primal's operations historic financial performance (no one
company was strictly comparable in terms of business activities). These publicly
held "Guideline" companies ranged in size from $13 million in sales to over $32
million in sales for the latest available 12-month period, as compared to
Primal's revenues of $11.4 million. In most cases, these companies were
substantially better capitalized and had experienced stronger growth in earnings
before interest and taxes, or EBIT, profits than Primal.
We would characterize all of the guideline companies, as well as
Primal, as young, relatively fast growing companies still in the "start-up"
phase of their life cycles. Six of the seven guideline companies were still
incurring losses (only ACE*COMM, a direct competitor of Primal and the largest
guideline company, was profitable in the latest available 12 month period).
Companies in this stage of their life cycle are "capital hungry" and require
periodic infusions of investment capital to fund their losses and continued
growth. Over the past three fiscal years, all of the seven guideline companies
had received substantial equity investment funds, primarily from IPO financing,
averaging almost $9 million per year, compared to Primal's 3-year average of
only $1.5 million. Consequently, many of the guideline companies had large cash
balances as of the valuation date, having yet "burned through" their most recent
capital infusion. As a result the "Cash Burn Rate - Days Cash Available"
averaged 280 days over the past 3 fiscal years compared to Primal's 3-year
average of only 98 days (i.e., the time it would take to consume cash balances
by all operating expenses - excluding cost of sales and interest expenses).
Overall we characterized Primal's investment risk relative to the seven
guideline companies as being "more risky" and therefore deserving a substantial
discount to the market valuation capitalization multiples.
Because all but one of the seven guideline companies were currently
losing money, we could not use any of the valuation capitalization multiple
based on earnings (i.e., the classic P/E multiple was unavailable in this case).
Hence, we turned to capitalization of revenues, gross profit, cash flow, and the
book value of the equity as our indicators of market value. These market
capitalization multiples on trailing 12-month data of the seven publicly traded
guideline companies ranged from 1.4 - 9.3 times revenues, from 1.9 - 13.6 times
gross profit, 16.4 times EBITDA cash flow, and from 0.6 - 7.3 times equity book
value. Most of the difference in market capitalization multiples were
attributable to the strong growth outlook for the highly valued companies,
versus lower growth, less profitability and weaker financial conditions of the
lower valued companies.
After performing a comparative analysis between Primal and these seven
guideline companies, SE Biz Val determined that the MCAP of Primal's equity on a
freely tradable minority interest basis was $4.9 million. This MCAP value
reflects multiples of 0.4X latest sales, 0.7X latest gross profit, 16.6X latest
EBITDA, and a 0.7X multiple of the adjusted equity book value (after adding
Avery's additional $ million of funding prior to the distribution). This
valuation represented a substantial 38% "discount to the market" due to Primal's
smaller size, earlier stage of its life cycle, and the need to find additional
capital to fund future growth. SE Biz Val then further considered the nature of
Primal's likely "thin" trading environment on the OTCBB market, concluding that
minority shareholders would likely suffer a further discount for restricted
marketability approximating -15%. After assessing this further discount, SE Biz
Val concluded that the aggregate fair market value on an OTCBB marketable
minority interest basis of Primal's equity would have a "thinly traded" MCAP
value of $4.2 million.
APPRAISAL SUMMARY AND CONCLUSION
After reviewing all of the relevant data, SE Biz Val concluded that the
fair market conclusion obtained from the cost of capital based discounted
projected cash flow method was more reliable than that resulting from the market
based capitalization of funds valuation method (due to Primal's smaller size,
earlier stage of its life cycle, uncertainty of obtaining future growth capital,
overall greater investment risk, and the lack of earnings based market
capitalization multiples). Hence, SE Biz Val weighted the income approach result
more heavily than the market approach result, thereby concluding that the fair
market value of Primal, common stock after the distribution was in the range of
$0.16 to $0.20 per share, depending on the number of shares of Avery common
stock outstanding at the time of the distribution. The number of Avery common
shares outstanding on the distribution date will vary based on the amount of
warrants and options exercised prior to the
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<PAGE>
distribution date. The maximum number of Primal shares to be distributed is
19,600,453 assuming that all Avery warrants and options which will not be
canceled are exercised. The minimum number of Primal shares to be distributed is
15,735,126 assuming that none of Avery's warrants and options are exercised. The
schedule below presents this conclusion:
<TABLE>
<CAPTION>
PRIMAL SOLUTIONS, INC.
RECONCILIATION OF FAIR MARKET VALUES - COMMON STOCK
CONCLUSION OF FMV ROUNDED TO $0.01/SHARE
AGGREGATE FMV WEIGHTING WTD SUM
------------- --------- -------
<S> <C> <C> <C>
Income Approach 2,650,000 70% 1,855,000
Market Approach 4,160,000 30% 1,248,000
Asset Approach nm nm nm
----------------------
Subtotal $3,103,000
----------------------
Maximum PER SHARE FMV (ROUNDED TO $.01) 15,735,126 SHS EQUALS $0.20/SHARE
-------------- -----------
Minimum PER SHARE FMV (ROUNDED TO $.01) 19,660,453 SHS EQUALS $0.16/SHARE
RESULTANT AGGREGATE FAIR MARKET VALUE EQUALS $3,146.956
----------
</TABLE>
Therefore, based upon the investigation, premises, provisos, and
relevant analyses outlined above, as of September 15, 2000, SE Biz Val's
independent objective opinion of the fair market value on an OTCBB marketable
minority interest basis of the capital stock of Primal is to be reasonably
stated in the amount of $3.1 million, or a maximum of $0.20 and a minimum of
$0.16 per share based on a minimum of 15,735,126 and 19,660,453 shares of common
stock issued and outstanding after the distribution, respectively. If necessary,
SE Biz Val will update its appraisal of the fair market value of the Primal
common stock received as of the distribution date.
In accordance with its engagement letter, SE Biz Val has addressed its
report solely to the board of directors of Avery for their use in connection
with their review and evaluation of the distribution. Neither the report nor the
underlying financial analysis may be relied upon by any person other than the
members of the board of directors of Avery without the prior written consent of
SE Biz Val. Accordingly, under the terms of the engagement letter and the
report, no Avery or Primal shareholder or any other person may rely or allege
reliance on SE Biz Val's report or analysis in any manner. Notwithstanding SE
Biz Val's assertion that only the board of directors may rely on its report, a
court of competent jurisdiction would need to resolve the validity of any such
defense if presented with such issue. In any event, the resolution of such issue
would have no effect on the rights and responsibilities of the board of
directors under state law or on the rights and responsibilities of either SE Biz
Val or the board under federal securities laws. Pursuant to its engagement
letter, SE Biz Val will receive a fee of $25,000 upon the delivery of its
appraisal and Avery has agreed to indemnify SE Biz Val for certain liabilities
which may arise out of the rendering of SE Biz Val's appraisal.
ACCOUNTING TREATMENT
As part of the distribution, Avery will restate its consolidated
financial statements to reflect Primal as a discontinued operation. Because the
distribution is comprised of an ongoing business, the distribution will be
recorded at historical value.
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<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO
PRIMAL'S STOCKHOLDERS
The following discussion summarizes the material U.S. federal income
tax consequences of the distribution that affect our stockholders and does not
address all of the aspects of federal income taxation that may be relevant to
our stockholders. This discussion is based on current provisions of the Internal
Revenue Code of 1986, existing, temporary and proposed Treasury regulations
promulgated thereunder and current administrative rulings and court decisions,
all of which are subject to change. No assurance can be given that future
legislation, regulations, administrative rulings and court decisions will not
significantly change these authorities, possibly with retroactive effect.
Stockholders should note that this discussion is not binding on the Internal
Revenue Service or the courts and that Primal has not sought, and does not
intend to seek, a ruling from the IRS as to any of the federal income tax
consequences to our stockholders of the distribution, and no opinion of counsel
has been, or will be, rendered to us or our stockholders with respect to any of
the federal income tax consequences of the distribution. The following
discussion summarizes the material U.S. federal income tax issues raised by the
distribution and does not reflect either the special circumstances that may be
relevant to a particular stockholder or the effect of the distribution under the
tax laws of any state, local or foreign jurisdiction.
As previously discussed, Avery has authorized the distribution of
Primal to its stockholders. Avery will be required to recognize gain on the
distribution to the extent of the excess, if any, of the fair market value of
Primal common stock over its adjusted basis in the hands of Avery. In order to
determine such fair market value for this purpose, an appraisal of Primal will
be made by SE Biz Val, LLC as of the date of the distribution. SE Biz Val has
provided an appraisal of Primal as of September 15, 2000, of $3.1 million or
$.20 per share based on a minimum of 15,735,126 shares of Primal common stock
outstanding after the distribution (which is based on the number of shares of
Avery common stock outstanding on September 15, 2000, of 8,753,886 plus assumed
conversion of all preferred stock (excluding shares of series f and Avery series
g preferred stock) and convertible debt, which total 15,735,126 shares.
Therefore, based on the SE Biz Val appraisal, the maximum fair market value of
Primal would be $.20 per share. The final per share value of the Primal common
stock will be determined as of the distribution payment date and will depend on
the valuation of Primal as of such date and the actual number of shares of
Primal common stock issued in the distribution. If necessary, SE Biz Val will
update its appraisal of the fair market value of the Primal common stock
received in the distribution as of the distribution payment date.
For federal income tax purposes, the distribution of our common stock
to the Avery stockholders will be treated as a dividend to the extent of Avery's
current and accumulated earnings and profits. To the extent the distribution is
not a dividend, the distribution should be treated as a return of capital to the
stockholders that is to be applied against, and in reduction of, the adjusted
basis of the Avery stock. If the distribution exceeds the adjusted basis of the
Avery stock, the excess will be taxed as a capital gain.
Avery stockholders that are corporations generally will qualify for the
70% corporate dividends-received deduction subject to satisfaction of the
requisite minimum holding period and other applicable requirements. If the
dividend is an "extraordinary dividend," as defined by Section 1059(c) of the
Internal Revenue Code, a corporate stockholder generally will be required to
reduce its basis in its Avery common stock by the amount of the
dividends-received deduction it was allowed. An "extraordinary dividend" with
respect to common stock is one in which the amount of such dividend equals or
exceeds 10% of the stockholder's adjusted basis in its Avery common stock (5% in
the case of stock which is preferred as to dividends) and the corporate
stockholder had not held the Avery common stock for more than two years as of
August 10, 2000 (the date the distribution was first announced publicly).
Each stockholder's basis in the shares of Primal common stock he or she
receives will be equal to the fair market value of these shares on the date of
the distribution. Each stockholder's holding period for tax purposes under the
Internal Revenue Code for the shares of Primal common stock received in the
distribution will begin on the day after the date of the distribution.
Payments to a stockholder in connection with the distribution may be
subject to "backup withholding" at a rate of 31%, unless the stockholder is a
o corporation or comes within certain exempt categories and,
when required, demonstrates this fact, or
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o provides a correct tax identification number to the payor,
certifies as to no loss of exemption from backup withholding
and otherwise complies with the applicable requirements of the
backup withholding rules.
A stockholder who does not provide a correct tax identification number may be
subject to penalties imposed by the IRS. Any amount withheld as backup
withholding does not constitute an additional tax and will be creditable against
the stockholder's federal income tax liability provided the required information
is provided to the IRS.
Payment to foreign stockholders may be subject to withholding on the
portion of the distribution treated as a dividend for U.S. income tax purposes.
Because individual circumstances may differ, each stockholder should
consult such stockholder's own tax advisor concerning the summary of the
material U.S. federal income tax consequences set forth above to determine the
applicability of the rules discussed above and the particular tax effects to
such stockholder of the distribution, including the application and effect of
state, local, foreign and other income tax laws and changes thereto.
MARKET INFORMATION
There is currently no public trading market for our securities. No
amount of our authorized common stock is subject to outstanding options or
warrants to purchase, or securities convertible into, our common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and related notes and the other financial
information included elsewhere in this prospectus.
SELECTED FINANCIAL INFORMATION LINE ITEM EXPLANATIONS
Primal's revenues are primarily derived from the sale of software
licenses and related services to telecommunications and Internet carriers.
Primal's revenues are derived from 16 customers located throughout the world.
System revenues consist of software license fees charged to Primal's
customers for their use of its software. Software license fees include one time
and recurring license charges, and license upgrade charges for Primal's customer
management and billing, intelligent switch mediation, and customer analytics
products. Software license fees are volume sensitive and generally are based on
the number of subscribers, call records, or number of users.
Service revenues are generated by Primal providing services relating to
its software products. These services include maintenance fees, installation
services, training, and custom software development.
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 ("SOP 97-2"), 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.
System cost of revenues includes hardware costs and software license
fees paid to third-parties under equipment
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resale and technology license arrangements.
Service cost of revenues includes 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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
The following table sets forth selected income statement lines in
thousands of actual dollars. The 1999 figures are for Primal System, Inc., which
is the predecessor company. The 2000 figures are for Primal Solutions, Inc.,
which is the successor company.
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<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
SIX MONTHS ENDED
JUNE 30
-----------------------------------------
1999 2000
(Predecessor) (Successor)
REVENUES:
<S> <C> <C>
System revenue $ 712 $ 1,180
Service revenue 3,073 2,888
-----------------------------------------
Total Revenues 3,785 4,068
-----------------------------------------
COST OF REVENUES:
System revenue 46 92
Service revenue 2,423 1,944
-----------------------------------------
Total cost of revenues 2,469 2,036
-----------------------------------------
GROSS MARGIN 1,316 2,032
------------------- --------------------
OPERATING EXPENSES:
Research and development 405 1,885
Sales and marketing 657 1,257
General and administrative 1,047 1,364
-----------------------------------------
Total operating expenses 2,109 4,506
-----------------------------------------
INCOME (LOSS) FROM OPERATIONS (793) (2,474)
INTEREST AND OTHER EXPENSE (32) (78)
-----------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (825) (2,552)
INCOME TAX PROVISION (BENEFIT) 1 (668)
-----------------------------------------
NET INCOME (LOSS) $ (826) $ (1,884)
=========================================
</TABLE>
TOTAL REVENUE
Total revenue increased to $4.1 million for the six months ended June
30, 2000, from $3.8 million for the six months ended June 30, 1999.
System revenue increased to $1.2 million, or 29% of total revenues, for
the six months ended June 30, 2000, from $0.7 million, or 19% of total revenues,
for the six months ended June 30, 1999. The increase in the dollar amount of
system revenues resulted primarily from an increase in license renewals and
upgrades.
Service revenue decreased to $2.9 million, or 71% of total revenues,
for the six months ended June 30, 2000, from $3.1 million, or 81% of revenues,
for the six months ended June 30, 1999. The net decrease in the dollar amount of
service revenues resulted from a decrease in customization revenues and an
increase in maintenance contract revenues. The relative amount of service
revenue as compared to system revenue has varied based on the volume of license
fees for software solutions compared to the volume of license fees for
additional users and additional subscribers, which generally do not require
services. In addition, the amount of services we provide for a software solution
can vary greatly depending on the solution which has been licensed, the
complexity of the customer's information technology environment, the resources
directed by the customers to their implementation projects, the number of users
and subscribers licensed and the extent to which consulting organizations
provide services directly to customers.
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COST OF REVENUES
Total cost of revenues decreased to $2.0 million, or 50% of total
revenues, for the six months ending June 30, 2000, from $2.4 million, or 65% of
total revenues, for the six months ended June 30, 1999. The increased percentage
in 1999 was due to the higher than expected installation costs related primarily
to one customer.
Cost of system revenue consists primarily of computer hardware resale
and license fees paid to third parties under technology license arrangements and
have not been significant to date. The increase in system cost of revenue as a
percentage of system revenue from 6% of revenues for the six months ended June
30, 1999, to 8% of revenues for the six months ended June 30, 2000 is primarily
due to the sales mix of software license versus hardware and third party
products.
Cost of service revenue consists primarily of the costs of consulting
and customer service and support. Cost of service revenue decreased to $1.9
million, or 67% of service revenue, for the six months ending June 30, 2000 from
$2.4 million, or 79% of service revenues, for the six months ending June 30,
1999. The gross margins in 2000 increased to expected levels and were not
impacted by any higher than expected installation costs as experienced in 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel, and
related costs associated with our product development efforts. Research and
development expenses increased to $1.9 million, or 46% of total revenues, for
the six months ended June 30, 2000, from $0.4 million, or 11% of total revenues
for the six months ended June 30, 1999. The increase is primarily due to
increased staffing around our Outfront CRM software product and our continuing
efforts to upgrade our Connect CCB product. We believe that investment in
product development is essential to our future success and expect that the
absolute dollar amount of research and development expenses will increase in
future periods.
SALES AND MARKETING
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the cost of trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expenses
increased to $1.3 million, or 31% of total revenues, for the six months ending
June 30, 2000, from $0.7 million, or 17% of total revenues, for the six months
ending June 30, 1999. The increase in dollar amount is primarily due to an
increase in the number of direct sales, pre-sales support and marketing
employees. We expect the dollar amount of sales and marketing expenses to
continue to increase due to the planned growth of our sales force, and expected
increases in marketing programs and promotional efforts around our products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of employee
salaries and related expenses for executive, finance, administrative, facilities
and information services personnel. General and administrative expenses expenses
increased to $1.4 million ,or 34% of total revenues for the six months ending
June 30, 2000 from $1.0 million, or 28% of total revenues for the six months
ended December 31, 1999 due to the additional goodwill amortization from the
Avery acquisition. We expect general and administrative expenses to increase in
absolute dollars in future periods.
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INTEREST AND OTHER EXPENSE, NET
Other expense increased to $78,000 for the six months ending June 30,
2000, from $32,000 for the six months ending June 30, 1999. The increase is
primarily due to an increase in interest expense related to a note payable to
Corsair Communications, Inc.
INCOME TAX PROVISION
The income tax provision for the six months ended June 30, 1999
consisted of minimum state taxes due to the operating loss for the period. The
income tax benefit for the six months ended June 30, 2000 was due to the
carryback of previously recorded income taxes due the operating loss for the
period.
OTHER
Depreciation and amortization expense included in the results of
operations for the six months ended June 30, 1999 and 2000 was $147,000 and
$544,000, respectively.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
The following table sets forth selected income statement lines in
thousands of actual dollars. The Statement of Operations Data is derived from
our audited calendar 1999 and 1998 financial statements. The 1998 figures are
for Primal System, Inc., which is the predecessor company. The 1999 figures are
for Primal Solutions, Inc., which is the successor company, for the three months
ended December 31, 1999 and for Primal Systems, Inc. for the 9 months ended
September 30, 1999.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
Year Ended
December, 31,
-----------------------------------------
1998 1999
REVENUES:
<S> <C> <C>
System revenue $ 1,459 $ 2,782
Service revenue - 8,357
-----------------------------------------
Total revenues 1,459 11,139
-----------------------------------------
COST OF REVENUES:
System revenue 1,044 104
Service revenue - 4,480
-----------------------------------------
Total cost of revenue 1,044 4,584
-----------------------------------------
GROSS MARGIN 415 6,555
-----------------------------------------
OPERATING EXPENSES:
Research and development 276 1,331
Sales and marketing 191 1,539
General and administrative 182 2,589
-----------------------------------------
Total operating expenses 649 5,459
-----------------------------------------
INCOME (LOSS) FROM OPERATIONS (234) 1,096
INTEREST AND OTHER EXPENSE (31) (146)
-----------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (265) 950
INCOME TAX PROVISION (1) (669)
-----------------------------------------
NET INCOME LOSS $ (266) $ 281
=========================================
</TABLE>
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TOTAL REVENUE
Total revenue increased to $11.1 million for the year ended December
31, 1999, from $1.5 million for the year ended December 31, 1998.
System revenue increased to $2.8 million, or 25% of total revenues, for
the year ended December 31, 1999, from $1.5 million, or 100% of total revenues,
for the year ended December 31, 1998. The increase in the dollar amount of
system revenues resulted primarily from an increase in license renewals and
upgrades.
Service revenue increased to $8.4 million, or 75% of total revenues,
for the year ended December 31, 1999. There was no service revenue in 1998. The
increase in the service revenue resulted primarily from the increase in number
of licenses sold to new customers. The relative amount of service revenue as
compared to system revenue has varied based on the volume of license fees for
software solutions compared to the volume of license fees for additional users
and additional subscribers, which generally do not require services. In
addition, the amount of services we provide for a software solution can vary
greatly depending on the solution which has been licensed, the complexity of the
customer's information technology environment, the resources directed by the
customers to their implementation projects, the number of users and subscribers
licensed and the extent to which consulting organizations provide services
directly to customers.
COST OF REVENUES
Total cost of revenue increased to $4.6 million, or 41% of total
revenues, for the year ended December 31, 1999, from $1.0 million, or 72% of
total revenues, for the year ended December 31, 1998.
Changes in system cost of revenue as a percentage of system revenues
from 1998 to 1999 are a result of changes in Primal's business model. In 1998,
cost of revenue was primarily the cost of third party database software which
was resold. In 1999, the revenue stream changed from selling third party
software to selling software developed by Primal. In 1999, cost of system
revenue consists primarily of computer hardware resale and license fees paid to
third parties under technology license arrangements and were not significant.
Cost of service revenue consists primarily of the costs of consulting
and customer service and support. Service revenue and cost of revenue increased
in 1999 due to the expansion of our business.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel, and
related costs associated with our product development efforts. Research and
development expenses increased to $1.3 million, or 12% of total revenues, for
the year ended December 31, 1999, from $0.3 million, or 19% of total revenues
for the year ended December 31, 1998. The increase is primarily due to increased
staffing for our Outfront CRM software product and upgrading our Connect CCB
product. We believe that investment in product development is essential to our
future success and expect that the absolute dollar amount of research and
development expenses will increase in future periods.
SALES AND MARKETING
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the cost of trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expenses
increased to $1.5 million, or 14% of total revenues, for the year ended December
31, 1999, from $0.2 million, or 13% of total revenues, for the year ended
December 31, 1998. The increase in dollar amount is primarily due to an increase
in the number of direct sales, pre-sales support and marketing employees. We
expect the dollar amount of sales and marketing expenses to continue to increase
due to the planned growth of our sales force, and expected increases in
marketing programs and promotional efforts around our products.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of employee
salaries and related expenses for executive, finance, administrative, facilities
and information services personnel. General and administrative expenses
increased to $2.6 million, or 23% of revenue for the year ended December 31,
1999 from $0.2 million, or 12% of revenue for the year ended December 31, 1998.
The increase in dollar amount was primarily attributable to an increase in the
number of executive, finance, information services, facilities, and
administrative employees due to expansion of our business and an increase in
goodwill amortizaion. We expect general and administrative expenses to increase
in absolute dollars in future periods.
INTEREST AND OTHER EXPENSE, NET
Other expense increased to $146,000 for the year ended December 31,
1999, from $31,000 for the year ended December 31, 1998. The increase is
primarily due to in increase in interest expense related to a note payable to
Corsair Communications, Inc.
INCOME TAX PROVISION (BENEFIT)
We generated a loss in 1998 and since the utilization of these losses
in future periods could not be assured, no income tax benefits were recorded for
the year ended December 31, 1998. The income tax provision of $669,000 for 1999
was computed based on the income generated during the three months ended
December 31, 1999 after the Avery acquisition. The provision was computed as if
Primal was a separate tax payer.
OTHER
Depreciation and amortization expense included in the results of
operation for 1998 and 1999 was $14,000 and $426,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance decreased to $156,000 at June 30, 2000, from
$1,711,000 at December 31, 1999, primarily due to operating requirements offset
slightly by Avery's advances and addition to paid in capital. Our working
capital deficit at June 30, 2000 was $966,000 compared to $245,000 as of
December 31, 1999. The decrease in working capital is primarily due to a
$1,555,000 decrease in cash, a $863,000 increase in deferred revenue and a
$93,000 increase in accounts payable and accrued expenses offset by a $824,000
increase in trade receivables, a $247,000 increase in prepaid items and other
current assets and a decrease in income taxes payable of $668,000. Net cash used
in operating activities was $2,112,000 for the six months ending June 30, 2000,
as compared to cash provided by operating activities of $1,391,000 for 1999.
We generated cash from the repayment of advances to Avery of $360,000
and an additional investment of $751,000 during 2000, whereas during 1999, we
advanced Avery funds of $370,000. We also received cash of $401,000 from the
Avery acquisition.
We acquired property and equipment valued at $615,000 during 2000 and
$871,000 during 1999. Of the $615,000 and $871,000 in property and equipment
acquired in 2000 and 1999, $438,000 and $12,000 were acquired through capital
leases for computer equipment and software.
Our cash balance increased to $1,711,000 at December 31, 1999, from
$28,000 at December 31, 1998, primarily due to operating activities offset by
decreases resulting from investing and financing activities. Our working capital
deficit at December 31, 1999 was $245,000 compared to a $80,000 as of December
31, 1998. Net cash provided by operating activities was $3,198,000 for the year
ended December 31, 1999, as compared to cash used in operating activities of
$105,000 for 1998. The net cash provided by operating activities during 1999 was
primarily due to a $1,012,000 decrease in accounts receivable, a $1,242,000
increase in accounts payable and accrued liabilities, a $458,000 decrease in
other assets and net income of $281,000. The net cash used by operating
activities during 1998 was primarily due to a $266,000 net loss, a $101,000
increase in accounts receivable and prepaid expenses offset by a $174,000
increase in accounts payable and accrued liabilities.
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We used cash in investing activities of $828,000 during 1999 versus
$3,000 during 1998, by purchasing property and equipment for $860,000 in cash
and advancing funds to Avery of $370,000. These uses of cash were offset by
$401,000 of cash received from the Avery acquisition.
We used cash in financing activities of $286,000 in 1999 versus cash
provided by financing activities of $96,000 in 1998. During 1999, we repaid
long-term borrowings by $301,000 while during 1998 borrowed an additional
$100,000.
As of June 30, 2000, our principal sources of liquidity include $4.0
million in additional paid in capital by Avery, half of which we received in
August of 2000 with the remainder to be received in October of 2000, $156,000 of
cash and cash equivalents, and cash generated from operations. We believe that
existing cash balances, cash flow from operations and available sources of
financing will be sufficient to support our working capital requirements through
at least the second quarter of 2001. We are actively seeking bridge and
permanent financing. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders. We cannot
assure you that any financing arrangements will be available in amounts or on
terms acceptable to it in the future.
RECENTLY ISSUED ACCOUNTING PROCEDURES
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which Primal is
required to adopt effective in its fiscal Year 2001. SFAS No. 133 will
require Primal to record all derivatives on the balance sheet at fair value.
Primal does not currently engage in hedging activities but will continue to
evaluate the effects of adopting SFAS No. 133. Primal will adopt SFAS No. 133 in
its fiscal Year 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC and was effective the first
fiscal quarter of fiscal years beginning after December 15, 1999, and requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board opinion No. 20, Accounting Changes. Subsequently, SAB No. 101A
and No. 101B were issued to delay the implementation of SAB No. 101. It will be
effective for Primal in the fourth quarter of fiscal 2001. Primal is currently
evaluating the impact, if any, SAB No. 101 will have on its financial position
or results of operations.
BUSINESS
BUSINESS OVERVIEW
Primal develops, markets and supports customer management and billing
software, commonly referred to as CM&B, customer analytics software, and
intelligent switch mediation software to support the converging requirements of
wireless, voice over Internet protocol, commonly referred to as VoIP, and data
communications service providers. Service providers using Internet protocol,
commonly referred to as IP, networks transmit voice and data communications
using the IP either over the Internet, or private networks, while wireless
telecommunications operators utilize radio frequency to transmit and receive
cellular and messaging communications.
Primal's Operational Support System, or OSS Suite, comprised of Connect
CCB(TM), Access IM(TM), and Outfront CRM(TM), enable communications service
providers to manage all aspects of the subscriber relationship from "switch to
bill," for wireless or IP networks. This includes mission critical functions
including account creation, event mediation, provisioning, usage tracking,
rating, billing, customer management, reporting and marketing analysis. Primal's
integrated OSS Suite provides a comprehensive "quick start" platform for
start-up providers as well as a field proven scalability to support millions of
subscribers for existing service providers. Primal's experience in managing and
billing a wide variety of telephony and data services across wireless and IP
networks provides a level of depth and flexibility not typically found in
solutions developed specifically for a single type of service. Primal's OSS
products currently support more than eleven million subscribers worldwide across
our current base of more than 16 customers worldwide.
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Primal's comprehensive and field proven platform, in conjunction with
its open architecture, and knowledge of wireless and IP domains, facilitates the
rapid development of new services that can quickly integrate with both existing
and new software and hardware platforms.
INDUSTRY BACKGROUND
The growth of the global telecommunications market has been explosive,
with revenues for the industry more than doubling every year since 1996, which
was the year the local exchange market was deregulated by the Telecommunications
Act of 1996. In addition to the events in the United States, there have been
similar deregulation and privatization trends in Canada, Latin America, Europe
and Asia, which have increased competition worldwide by allowing new entrants
into the market.
These vast changes in the communications environment, particularly the
growth of Internet usage and other data services, have spawned a new generation
of integrated communications service providers, or ICPs, that bundle a variety
of communications services. This merging of formerly separate services, known as
convergence, has created the framework for new market entrants and incumbent
providers to aggressively move toward multi-service market offerings. Today's
ICPs can be incumbent service providers, such as AT&T, Worldcom, Sprint and
BellSouth, who historically offered a single service but are adding cable
television, wireless telephony, Internet access or other services, as well as
new market entrants, such as Level 3 Communications and Qwest Communications
International and other emerging regional ICPs.
As customers seek the best value for these new communications services,
the rate of customer turnover, or "churn," has increased dramatically. To win
new and retain existing customers, ICP are striving to distinguish themselves
from their competitors by focusing on rapid new service deployment, increased
and highly focused marketing activities, attractive new rate programs and
creative discounting and bundling. The business systems needed to support these
efforts are required to provide an unprecedented level of flexibility and
scalability.
CURRENT INDUSTRY TRENDS
The emerging IP and wireless market place for IP based services is set
to attain explosive growth over the next 5 years, based on the opportunity to
bring low cost, traditional and enhanced voice and data services to businesses
and consumers alike. For example, VoIP, a segment of this market, is expected to
grow from 600 million billable minutes in 1999 to 2.4 billion billable minutes
in 2000, with a 300% per year growth there after. These services allow ICPs to
offer stand alone, additional or convergent services either to attract new
customers or "lock in" existing subscribers with robust and competitive
solutions.
IP services are comprised of voice and data communications transmitted
in IP packets over public or private Internet networks. Additional bandwidth
availability allows ICPs to offer additional enhanced services such as:
o VoIP;
o unified messaging/communications;
o video streaming;
o on-demand internet content (education, documentation, etc.);
o mobile commerce
o wireless Internet service provider; and
o personal computer to personal computer telephony (click to
phone, etc.)
The technology engaged in IP networks offers superior bandwidth and
price/performance over traditional circuit
45
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switched telephone networks and allow both existing and emerging ICPs to offer
highly competitive services that benefit from low cost deployment.
Several network manufacturers, notably Cisco, Nortel and Lucent
Technologies, are providing bridge technology to provide both fixed wireline
providers and wireless service providers the ability to capitalize on IP
networks. These manufacturers introduction of gateway products that convert
wireless and wireline voice and data traffic into IP packets is now resulting in
a convergent marketplace where ICPs can offer a range of competing services.
The result is demand for OSS software products that can manage and
leverage traditional circuit switched telephone networks, wireless, and IP
technology in a variety of combinations to offer robust and innovative services
to both businesses and consumers. Emerging service providers are utilizing
combinations to provide better, more flexible and cost effective service
offerings. Some examples include:
o VoIP - lower cost for local and long distance services;
o unified messaging - A central message center for voice mail,
fax, email, local, long distance and wireless communications;
and
o WAP Access to IP services - hand held device access to email,
voicemail, fax, service ordering, content and other services.
Emerging third generation technology solutions for wireless networks
combined with IP gateways offer a multitude of new opportunities for ICPs to
fully embrace mobile commerce as a mainstream service offering. Third generation
networks offer vastly improved bandwidth over traditional analog and digital
networks which make advanced mobile services a reality providing real time
unwired access to wireless, IP, internet and visual networks.
These emerging markets invite unique combinations for convergent
service offerings which bridge network technologies and further fuel growth in
the communications industry.
COMMUNICATIONS OPERATIONAL SUPPORT SYSTEMS
At the heart of a ICP business is its operation support systems. These
systems play a mission-critical role in the organization because they manage
such key functions as activating a customer's service, tracking and billing for
usage, and managing the provider-customer relationship. Limitations in a
provider's information system can increase the provider's operating costs, as
well as prevent it from offering new services or marketing programs. Inflexible
systems impair the service provider's competitiveness and financial performance.
Three key components of a service provider's business systems include:
o customer management and billing system;
o network mediation; and
o customer analytics.
CUSTOMER MANAGEMENT AND BILLING SYSTEMS
Customer management and billing systems, commonly referred to as CM&B
systems, are critical components of any ICPs infrastructure because they enable
the execution of key business functions including customer relationship
management, service activation, marketing and rate plan development, and
tracking and billing for usage.
Today, an intensely competitive telecommunications market typically
offers very little differentiation in basic voice and data services.
Sophisticated customer management and billing software can provide a competitive
advantage as service
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providers attempt to differentiate themselves by providing superior features,
like mobile commerce, volume discounting, innovative rate plans, and online bill
presentment and payment.
As providers of IP-based services continue to expand their service
offerings, and as wireless service providers continue to offer Internet-based
services over mobile devices, they will increasingly need products that allow
them to monitor and bill their subscribers based on the type and content of
services provided over either, or both networks. As a result, we believe this
trend will increase the demand for sophisticated customer management and billing
products with broad capabilities in both IP and wireless markets.
Traditional CM&B systems are typically:
o Designed to support a particular type of service provider,
such as either IP or wireline, or wireless only. As a result,
they generally are unable to support multiple services or
convergent networks efficiently;
o Require system integration with third party mediation
products;
o Designed to support a specific size of network. Therefore,
these systems can be very costly to accommodate a growing
subscriber base and a more diverse product offering;
o Limited to periodic or "batch-oriented" processing, and cannot
provide the real-time processing typically required by
providers of IP-based services. Conversely, these systems may
also be designed for real-time processing only, which often
requires excessive hardware to provide reasonable processing
capabilities; and
o Are unable to provide the flexibility necessary to introduce
new products and service across convergent networks.
Service providers offering voice and data over IP and/or IP-wireless
convergent services typically require CM&B solutions that:
o Can handle authentication, authorization and customer
management needs in real-time in order to determine the types
of services to which the subscriber is entitled, as well as
any applicable limits to the availability of the services;
o Provide interoperability with the IP telecommunications
equipment of major manufacturers in order to accommodate IP
network infrastructures that are composed of equipment of
multiple vendors;
o Provide interoperability with the wireless telecommunications
equipment of major manufacturers in order to accommodate
wireless network infrastructures that are composed of
equipment of multiple vendors;
o Can be easily scaled to support changes in the size and
configuration of a VoIP provider's system; and
o Can be easily adapted to support emerging products and services.
CUSTOMER ANALYTICS
Customers continue to have greater freedom of choice for their
communications needs and, consequently, core communications services have become
commodities in this highly competitive market. As customers seek the best value
for communications services, the rate of customer turnover, or "churn," has
increased dramatically. As a result, service providers must find new ways to
distinguish themselves from their competitors to win new customers as well as
retain their existing customers. Service providers are seeking to acquire new
customers by focusing on rapid new service deployment, increased and focused
marketing activities, attractive new rate programs and creative discounting.
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Customer intelligence is required for enterprises to develop
customer-focused business models founded on a comprehensive understanding of
individual customer relationships. Traditionally, businesses have managed these
relationships by functional departments, such as marketing, sales and customer
support, and customer information has been isolated within these departments. In
contrast, competition today dictates that service providers must integrate
customer isolated within these departments. In contrast, competition today
dictates that service providers must integrate customer information across
functional departments to maximize the value of the entire customer lifecycle,
from initial identification through acquisition and retention. By using real
time and historic customer intelligence to personalize the subscriber
relationship, service providers can maximize loyalty and profitability
throughout the customer lifecycle.
Traditional operational support systems such as CM&B and mediation
systems capture large volumes of important customer and operational data. This
increase in data sources makes the challenge of integrating and analyzing the
information generated throughout the customer lifecycle more difficult. The
sheer volume and variety of customer data, however, creates a competitive
opportunity for businesses that can effectively integrate, analyze and act on
this information. Traditionally, businesses tried to analyze this valuable data
by piecing together generic products that addressed narrow and discrete
analytical needs. These products include data extraction tools to access data,
online analytical processing tools to analyze and model data, data mining
technologies to identify patterns in data, and report generators to present the
information. Piecing together these disparate tools to create a piecemeal system
typically requires significant amount of time and system integration, resulting
in a solution that is difficult to maintain and poorly suited to quickly adapt
to new business requirements.
Historically, the ICP has also been challenged to translate the data
and reporting into actions quickly to ensure the customer needs are met in a
manner that best supports their retention and profitability. The ability to
automate these actions to ensure their timely execution is critical to
developing and retaining longstanding relationships with the customer.
With the increase in competition in the communications market brought
on by deregulation and technology increases, service providers are challenged
continually to acquire more customers and, to maximize profitability, retain
them. We believe that today's carriers are looking for ways to differentiate
themselves from the competition by personalizing their service to customers and
understanding individual behavior patterns. We also believe that what is
fundamentally needed is the ability to gather information from various business
operations into one database, and proactively use that data to address important
issues including customer valuation, retention, revenue assurance and marketing
campaign effectiveness.
MEDIATION
Mediation software plays a key role in any ICP's infrastructure. These
mission critical systems are designed to enable the collection and aggregation
of network usage, traffic and transaction data from network elements, such as
routers, switches, firewalls, servers and gateways. These systems also
synthesize the data into the information and formats required by the billing,
customer care, price modeling, customer retention, fraud management, service
level verification and other operations and business support systems of the
service providers.
Service providers can use this real-time data to offer and charge
appropriately for network services based on factors, such as usage time,
transactions, events, content or volume. These network services include voice
telephony, web hosting, application renting, video conferencing, movies/video on
demand, audio over IP, unified messaging, network games, virtual private
networking, voice-mail, fax over IP, e-mail and file transfers. This detailed
network information can also be used to support customer relationship
management, customer retention and fraud management applications.
Mediation software also serves to act as a buffer for the downstream
applications. Should any of these downstream systems be down or offline, the
mediation platform must store the event records until the systems are back up.
Mediation platforms are also critical in the context of introducing
additional services. The flexibility and speed at which interfaces can be
provided to new network elements has a serious impact on the service provider's
ability to introduce new services and subsequently bill and collect revenues.
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THE PRIMAL SOLUTION
Primal's OSS Suite - Connect CCB, Access IM, and Outfront CRM, are
specifically designed to meet the complex, mission-critical provisioning,
customer management, reporting and marketing needs of providers of VoIP and
wireless communications. Our real time "switch to bill" solution is designed for
flexibility and scalability and addresses the business critical needs for highly
efficient, reliable, and integrated OSS systems.
Connect CCB, Access IM, and Outfront CRM are designed to enable service
providers to capture the key business benefits:
"Switch to Bill" - Integrated Solution. Connect CCB, Access IM and
----------------------------------------
Outfront CRM have been designed as a next-generation, convergent
software solution to provide the key OSS requirements for mediation,
customer management, billing, and customer analytics for providers of
VoIP and wireless communications services. Primal's OSS Suite is one of
the few products designed for VoIP and wireless communications that
offers complete "switch to bill" functionality. This integrated
approach:
o Increases revenues by shortening the initial time required for
a new market entrant to launch its business by reducing system
integration requirements and implementation time frames.
o Provides broad functionality to support a broader range of
services including voice and data over wireless networks,
voice and data over IP networks, as well as convergent
services such as mobile commerce and wireless Internet
services.
o Simplifies the operational support topology within the
information system infrastructure resulting in more efficient
system management.
o Simplifies the vendor-customer relationship by having a single
point of customer support for problems rather than a number of
vendors trying to decide who is responsible for addressing a
particular issue.
o Ensures a smooth product upgrade across multiple product sets.
Reduced Costs. Connect CCB, Access IM, and Outfront CRM provide a
--------------
complete OSS solution from the network element layer to customer
payment, providing a comprehensive suite of functions and the ability
to offer multiple, convergent communications services within a single,
unified invoice. In addition, Connect CCB is available in
pre-configured "quick start" packages, which enable providers to launch
services rapidly with minimal system implementation costs. Subscribers
may access their services and billing information and make payments
over the Internet, which reduces the degree of costly person-to-person
service required to satisfy a customer. Outfront CRM extends the
versatility of Connect CCB and Access IM by providing an integrated
customer analytics capability to assist in identifying high-value
customers, high-margin products and services, and improving customer
retention through better personalized service. This comprehensive
"switch to bill" solution also reduces the costs associated with
licensing and maintenance.
Improved customer service and customer retention. Connect CCB, Access
-------------------------------------------------
IM, and Outfront CRM enable a service provider to offer superior
customer relationships, thus increasing customer retention. With
Connect CCB, service providers can easily tailor their offerings across
multiple services, create flexible invoices for all segments of their
customer bases, and provide cross-service volume discounting. In
addition, Connect CCB enables a customer service representative to
provide superior customer care and responsiveness through real-time
access to all necessary subscriber account information. Customers are
also able to access their own account information 24 hours per day over
the Internet. Outfront CRM integrates information from numerous points
of customer interaction, or touch points, by pulling information from
multiple data sources and transforming it into a standard format that
can be analyzed. Our software then analyzes this reformatted
information to provide a comprehensive understanding of the customer
lifecycle from initial identification through acquisition and
retention. Our products then allow businesses to translate this
analysis into specific actions such as targeting profitable customers,
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personalizing customer interactions and identifying opportunities to
sell complementary or higher-end products and services. By integrating,
analyzing and acting on valuable customer information, our products
enable businesses to build long-lasting and profitable customer
relationships.
Interoperability. Currently there are few homogenous telecommunications
----------------
networks. Primal's OSS Suite is interoperable with the
telecommunications equipment of most leading manufacturers including
Cisco, Lucent, Nortel, Motorola, and Alcatel. This broad
interoperability enables our customers to use networks composed of
equipment from multiple manufacturers. It also allows providers to
upgrade network equipment without significant impact to mediation and
CM&B systems. In addition, Connect CCB, Access IM, and Outfront CRM
were also designed as next-generation OSS software platforms, enabling
seamless integration with other applications in a service provider's
enterprise operations environment. Our standards-based, open
application programming interfaces allow Primal's products to
interoperate with other software programs without writing custom
interfaces.
Flexibility. Primal's OSS Suite of products are modular, table driven
-----------
software products designed for both wireless and IP service providers.
As a result, each service provider is able to tailor its deployment of
Connect CCB, Access IM, and Outfront CRM to its specific business
model. In addition, the service provider can utilize this flexibility
to quickly introduce new offerings without the need for extensive
customization.
Scalability. This architecture is benchmarked and customer proven to
-----------
scale well into the millions of subscribers. Providers are able to
distribute database information and processing across multiple servers,
which minimizes the impact of a server failure and maximizes system
availability and reliability.
THE PRIMAL STRATEGY
Our strategy is to establish Primal's Connect CCB and Access IM,
coupled with Outfront CRM, as the OSS solution of choice for VoIP and
wireless-IP convergent communications providers. Key elements of this strategy
are:
Establish Market Leadership Position
------------------------------------
Our objective is to establish our position as a leader in this emerging
market to establish Primal as the vendor of choice for providers of voice over
IP and convergent IP-wireless communications services. We intend to take
advantage of our technological leadership, deep product functionality, strategic
partnerships, significant customer relationships, sales and marketing efforts
and scalable business model to establish, retain, and grow a widespread base of
satisfied customers.
Target Leading Providers Worldwide
----------------------------------
The scalability, flexibility, and deep functionality of our products
and services enables us to target high growth providers of VoIP and wireless-IP
convergent services.
Build a high-ROI Business Model
-------------------------------
The scalability and comprehensive functionality of our products,
combined with our strategic partnerships, are designed to allow us to achieve
and maintain a high margin, rapid growth business.
Leverage Strategic Partnerships and Alliances
---------------------------------------------
We have established a program of strategic partnerships and alliances
with current and emerging industry leaders, such as Cisco Systems, Inc., Nortel
Networks, Intertech, Sun Microsystems, SilverStream and Group One Software. We
believe that our partnership strategy provides us with a resource multiplier
that leverages our own internal capabilities.
Customer Relationships
----------------------
Our strategy is to maximize opportunities for long-term revenue growth
by targeting service providers with
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excellent growth prospects and developing strong business relationships. Primal
currently enjoys strong relationships with our current customers, allowing a
continuing stream of additional sales opportunities through the addition of
subscribers, add-on component sales, additional service revenues and maintenance
and support agreements.
PRIMAL'S PRODUCTS AND SERVICES
Product Overview
----------------
Primal's OSS Suite - Connect CCB, Access IM, and Outfront CRM, are
specifically designed to meet the complex, mission-critical provisioning,
customer management, reporting and marketing needs of providers of VoIP and
wireless communications. Our real time "switch to bill" solution is designed for
flexibility and scalability and addresses the business critical needs for highly
efficient, reliable, and integrated OSS systems.
Connect CCB is a next-generation CM&B software platform that provides
integration of complex, mission-critical functions such as account and service
provisioning, customer management, rating, billing and payment processing.
Connect CCB's design gives service providers the ability to rapidly and cost
effectively deploy a convergent service offering -- including multiple,
usage-based services, such as mobile commerce, VoIP and wireless internet
services. It provides for a single, unified invoice accessible and payable by
the subscriber over the Internet. Connect CCB's flexible, distributed
architecture supports the Windows NT and Unix operating systems. Its industry
standard-based APIs allow rapid integration with a variety of operational and
business support systems.
Access IM directly interfaces with switches, gateways, and enhanced
service platforms. It collects, reformats, routes, and guarantees delivery in
real time of data to one or more business applications. It is capable of
handling multiple input and output devices simultaneously, including different
switch types, network elements, services, systems, and all of their different
protocols. Access IM's interface software provides an extensible tool for
interfacing with every major wireless communications switch or network element.
It currently supports interfaces from Cisco, Nortel, Lucent, Motorola, Glenayre,
and Alcatel. Its architecture is designed to be highly configurable, enabling
automated processes and eliminating significant manual intervention.
Outfront CRM provides customer and business intelligence necessary for
service providers to develop customer-focused business models founded on a
comprehensive understanding of individual customer relationships. It collects
customer information across functional departments, normalizes it, and provides
analysis capabilities to provide insight into individual behavior patterns and
business issues including customer valuation, retention, profitability, revenue
assurance and marketing campaign effectiveness. Once this customer intelligence
has been developed, the service provider can initiate the necessary or
appropriate actions to ensure that customer needs are met in a manner that best
supports their retention and profitability.
In addition to licensing the above components together in a product
suite, clients may, if desired, acquire licenses to separate modules.
PRICING
Primal has structured the pricing of its products to accommodate its
target customer segments, which range from start-ups to large communications
carriers with millions of subscribers. Primal typically prices its products on a
per subscriber basis or per call detail record basis, with customary volume
discounts for the upfront purchase of a large number of licenses. Supplemental
purchases of additional components are also priced the same basis, while
maintenance and support contracts are priced as a percentage of the associated
license revenues. Primal's initial sales of licenses and associated services,
maintenance and support generally range from the low hundreds of thousands to
several million dollars.
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CUSTOMER SERVICE AND TECHNICAL SUPPORT
Our customer services are designed to provide customers with superior
support while giving them the tools and knowledge they need to independently run
their day-to-day operations. We provide the following services:
Professional consulting services. Primal provides a variety of
-----------------------------------
professional consulting services to assist customers in the implementation,
modification and customization of Primal's OSS product suite. We work with
customers to establish business models and processes that utilize Primal's
products to increase their market power and lower their operating costs.
Training. We offer training programs for system operators, billing
--------
administrators and supervisors of customer service representatives. Our training
programs are designed to provide customers with the tools and education they
need to be able to train their own personnel for maximum effectiveness.
Maintenance. We have a comprehensive maintenance and support program
-----------
that provides customers with timely and high-quality maintenance and support
services for our products. These services are generally provided under
maintenance agreements between our customers and us. These agreements entitle
our customers to multiple levels of telephone technical support for prompt and
professional response to customer questions or problems and maintenance. We also
provide customer self-service capabilities 24 hours per day through our on-line
maintenance tracking system.
Third-party software and hardware fulfillment. When our customers
-------------------------------------------------
require it, we provide a complete solution by offering third-party software and
hardware products they may need to rapidly implement their systems. We provide
enabling platform products, such as the Windows NT operating system and Sun
Microsystems hardware that complement and integrate with the Primal OSS Suite.
MARKETING AND SALES
Marketing
---------
Our marketing programs are focused on creating awareness, interest and
preference for our products and services. We engage in a variety of marketing
activities, including:
o Identifying industry trends;
o Providing industry updates to Company management and other key
personnel;
o Developing and supporting strategic marketing alliances;
o Conducting seminars and participating in trade shows and other
special events;
o Creating and placing advertisements;
o Creating direct mail and direct response programs;
o Conducting ongoing public and press relations programs;
o Creating, managing and maintaining our web site;
o Participating in key trade organizations and partnership
programs with industry leaders; and
o Establishing and maintaining close relationships with
recognized industry analysts;
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Sales
-----
Our sales strategy is focused on targeting established and emerging
VoIP and wireless-IP convergent service providers, including carriers. Through
our direct sales approach, we have developed relationships with service
providers through a problem-solving sales process and work closely with them to
define and determine how our products can fulfill their needs. Through our
indirect sales channel approach, we have developed relationships with leading
manufacturers of wireless and IP network infrastructure that can provide joint
and independent sales opportunities. In addition, we have developed
relationships with professional services providers focused on the
telecommunications market that can recommend and influence sales opportunities.
In addition, we have developed relationships with other leading
communications-focused companies that offer products complementary to ours, and
who can sell our products jointly with their solutions.
Due to the sophisticated nature of our products and services as well as
the rapid growth and rate of technological change in the marketplace, the
duration of a sales cycle can range anywhere from 30 days to over one year. We
intend to gradually increase the size of our direct sales organization while
also focusing on the ongoing development of the indirect sales channel through
our marketing alliances.
Another key aspect of our sales plan is leveraging our existing
customer base. Our customers include several industry leaders and many emerging
leaders. We plan to continue to provide excellent service and responsiveness,
and continue to develop understanding of their changing requirements. As our
customers grow organically or through acquisition, our business should grow with
them.
STRATEGIC PARTNERSHIPS
We have established a program of strategic partnerships and alliances
with current and emerging industry leaders, such as Cisco Systems, Nortel
Networks, Intertech, Sun Microsystems, SilverStream and Group One Software. We
believe that our partnership strategy provides us with a resource multiplier
that leverages our own internal capabilities. For example, we have agreed to
participate in the Cisco's new world Ecosystem program. This partner program was
established to facilitate a network of vendors of complementary products and
services that are interoperable with Cisco equipment and each other, resulting
in a series of comprehensive solutions being offered to ICPs.
COMPETITION
The markets in which we compete are relatively new, intensely
competitive, highly fragmented and rapidly changing. We expect this trend to
continue and intensify and direct competition to increase accordingly.
Our products compete on the basis of functionality, performance,
scalability, extensibility, ease of integration and cost of ownership. The
principal competitive factors in our market include responsiveness to the needs
of our customers, product features, timeliness of implementation, quality and
reliability of products, price, project management capability and technical
expertise. We believe that our product features and our pricing strategy offer
our customers significant reasons to buy from us.
We believe that our ability to compete depends primarily on how well we
can anticipate market trends, develop effective strategies and execute those
strategies. We perform in depth competitive analysis to identify our
competition, to understand their sales plans and to develop and implement
strategies to defeat their plans. This analysis includes examining the
performance of the competition, including:
o The technology level of their products;
o Their pricing;
o Customer satisfaction criteria; and
o Success criteria on hiring, motivating and retaining key
personnel.
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Primal faces competition from providers of traditional CM&B software
such as Amdocs (which has recently acquired Solect Technology) and Kenan Systems
Corporation, a subsidiary of Lucent Technologies Inc., as well as emerging
providers of Internet-specific billing software, such as Portal Software, Daleen
Technologies, Mind CTI, and Belle Systems.
Our analytical CRM product, Outfront CRM, faces competition from
providers of pre-packaged and services-based analysis solutions, such as
E.piphany, Lightbridge, Broadbase, and Athene Software, and from in-house
development efforts by potential customers using traditional and generic
decision support tools.
Our intelligent mediation product, Access IM, faces competition from
providers of circuit-based mediation solutions, such as Acecomm, MSI, and
Comptel, and from IP-based mediation product companies such as Narus and Xacct.
We also may compete with other organizations, such as service bureaus
and the internal information technology departments of large communications
companies, who may elect to develop functionalities such as those provided by
our product in-house rather than buying them from outside suppliers.
A number of our competitors have long operating histories, large
customer bases, substantial financial, technical, sales and marketing resources,
and significant name recognition. No competitor is dominant, and none of
companies with whom we directly compete holds more than a 10% share of the
market.
We anticipate continued growth and competition in the communications
industry and the entrance of new competitors into the billing and customer care
software market, and that the market for our products will remain intensely
competitive. In addition, as we expand, we will market our products and services
to prospects in geographic markets and industry segments that we do not
currently serve. Upon our entrance into these markets, we expect to encounter
new competitors, who may possess substantial resources and significant market
experience.
RESEARCH AND DEVELOPMENT
Our research and develop organization is responsible for developing new
software products, product architecture, core technologies, product testing,
quality assurance and ensuring the compatibility of our products with hardware,
switch network, and software platforms. In addition, this organization supports
some pre-sales and customer support activities. Our research and development
organization is divided into teams based around our products, Connect CCB,
Outfront CRM, and Access IM. In addition, our professional services staff helps
our research and development organization identify potential new product
features.
TECHNOLOGY
Primal's OSS Suite of products was developed using an open architecture
philosophy. Industry standards-based application programming interfaces, or
APIs, enables efficient integration with other software applications. This
design philosophy also utilizes object oriented programming techniques, which
enables the design and implementation of software based on reusable business
objects rather than complex business code. Our multi-layered, or N-tier,
architecture provides for implementing the solutions in a distributed
environment. This allows different modules to be installed on different servers,
providing for efficient software management and scalability. This capability
permits a service provider to scale as its level of business grows without the
need for system re-designs or wholesale hardware replacement. Servers can be
added to only the modules that require additional processing capability. Our
architecture allows service providers to purchase the entire suite of products,
or only those applications they may require at the time. In addition, Primal's
OSS Suite of products have been developed with the knowledge of the importance
of interoperability with a wide variety of other hardware platforms. These
interfaces can typically be developed very quickly due to our unique switch
interface software, which is designed to facilitate introduction of new network
elements with a minimum of custom programming. This efficiency offers our
customers a distinct competitive advantage.
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CUSTOMERS
Our typical customers are providers of multiple communications services
including local, long distance, messaging and wireless voice communications,
Internet access and other data communications services. We believe our customers
benefit from our product's design for multiple, convergent services, as well as
scalability, flexibility, and interoperability. As of June 30, 2000, Primal
products are installed in over 16 markets, and support more than 11 million
subscribers. The average number of subscribers per client is over 600,000. Our
smallest client has over 12,000 subscribers, and we have four clients with over
1 million subscribers.
As of June 30, 2000, we had over 16 customers worldwide, including:
British Telecom, Metrocall, BellSouth International, Hutchison Orange, Alltel,
Motorola, and Western Wireless.
Although Primal's customers include both small and large providers of
communications services, a substantial portion of Primal's license and service
revenues in any given quarter has, and is expected to continue to be, generated
from a limited number of customers with large financial commitment contracts. As
a result, if a contract is canceled or deferred or an anticipated contract does
not materialize, our revenues would be materially adversely affected.
INTELLECTUAL PROPERTY
Primal relies upon a combination of patent, copyright, trade secret and
trademark law to protect its intellectual property. Primal currently has two
U.S. patents related to its billing technology. In addition, Primal has eleven
U.S. registered trademarks and five U.S. trademark applications pending. While
Primal relies on patent, copyright, trade secret and trademark law to protect
its technology, Primal believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements and reliable product maintenance are more essential to establishing
and maintaining a technology leadership position. There can be no assurance that
others will not develop technologies that are similar or superior to Primal's
technology.
Primal generally enters into confidentiality or license agreements with
its employees, consultants and corporate partners, and generally controls access
to and distribution of its software, documentation and other proprietary
information. Despite Primal's efforts to protect proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use its
products or technology or to develop products with the same functionality as
Primal's products. Policing unauthorized use of its products is difficult, and
Primal cannot be certain that the steps it has taken will prevent
misappropriation of its technology, particularly in foreign countries where the
laws may not protect proprietary rights as fully as do the laws of the United
States. In addition, certain of Primal's license agreements require it to place
the source code for its products into escrow. Such agreements generally provide
that these parties will have a limited, non-exclusive right to use this code if
(1) there is a bankruptcy proceeding by or against Primal, (2) Primal ceases to
do business without a successor or (3) Primal discontinues providing maintenance
and support.
Substantial litigation regarding intellectual property rights exists in
the software industry. Primal expects that software products may be increasingly
subject to third-party infringement claims as the number of competitors in its
industry segments grows and the functionality of products in different industry
segments overlaps. Some of Primal's competitors in the market for CM&B software
may have filed or may intend to file patent applications covering aspects of
their technology that they may claim Primal's technology infringes. Primal
cannot be certain that any of these competitors will not make a claim of
infringement against it with respect to its products and technology.
Primal's success and ability to compete are substantially dependent
upon its internally developed technology. However, portions of our products
incorporate software developed and maintained by third-party software vendors,
such as operating systems, tools and database vendors. Primal may have to rely
on third-party software vendors and developers to a larger degree in future
products. Although Primal believes it could find other sources for these
products, any significant interruption in the supply of these products could
adversely impact Primal's sales unless and until it can secure another source.
55
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EMPLOYEES
As of September 22, 2000, Primal, and its subsidiary Primal Billing
Solutions, had 107 full-time employees, including 3 executive officers, 10 sales
and marketing personnel, 73 technical and operations personnel, 10 accounting,
administrative and support personnel, and 11 customer service representatives
and related support personnel. Neither Primal's nor Primal Billing Solutions'
employees are represented by a union. Primal and Primal Billing Solutions each
believe that their relationship with their employees is good. The loss of the
services of one or more of Primal's key employees could harm its business.
Primal's future success also depends on its continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for such personnel is intense, particularly in the Orange County,
California area where Primal is headquartered, due to the limited number of
people available with the necessary technical skills and understanding of the
communications and Internet industries, and there can be no assurance that
Primal can retain or attract key personnel in the future.
PROPERTIES
Primal leases approximately 27,000 square feet of general and
administrative office space in Irvine, California. Primal's monthly rent is
approximately $39,000. Primal's lease expires in April 2001.
Primal believes that the facilities it currently leases are not
sufficient to meet its needs after the expiration of the current lease term.
Primal believes it may require up to 14,000 additional square feet of office
space after that time and is currently seeking facilities totaling 41,000 square
feet in the same geographic area as Irvine, California.
LEGAL PROCEEDINGS
Primal is not currently a party to any material legal proceeding.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the
executive officers and directors of Primal as of September 22, 2000:
Name Age Position
---- --- --------
William Salway 61 Chief Executive Officer, President, Chief
Operating Officer, and Director
Joseph R. Simrell 42 Chief Financial Officer, Vice President Finance
and Administration, and Secretary
John Faltys 35 Chief Technology Officer and Executive Vice
President, and Chairman of the Board of Directors
David Haynes 35 Vice President Marketing, and Director
Michael Fowler 37 Senior Director of Product Development
Stephen Combe 35 Senior Director of Product Management
Roger Thornton 55 Senior Director of Sales
Spencer L. Brown 35 Director
J. Alan Lindauer 61 Director
Norman M. Phipps 40 Director
William L. Salway. Mr. Salway joined Primal in February 1999 as Vice
President and General Manager, and became President and Chief Operating Officer
in January 2000. From 1997 to January 1999, Mr. Salway served as President and
Chief Operating Officer of GDI, Inc., an information technology company. From
1989 to 1997, Mr. Salway served as
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President of Cair Systems, a software products company focused on the insurance
industry. From 1986 to 1989, Mr. Salway served as President of DP Communications
Corp., a telecommunications consulting company. Prior to 1986, Mr. Salway held
various management positions at CTEL, Inc., United Technologies Corp., Lexar
Corp., Citibank, and RCA Corp.
Joseph R. Simrell. Mr. Simrell joined Primal in January 1999 as Chief
Financial Officer and Vice President of Finance and Administration. From August
1997 to December 1998, Mr. Simrell served as an outside consultant to Primal.
From November 1991 to July 1997, Mr. Simrell served as Executive Vice President
and Chief Financial Officer of GDI, Inc. Prior to 1991, Mr. Simrell held various
management positions at BellSouth, InteGroup, and SCI.
John Faltys. Mr. Faltys founded Primal in November 1996 and has been
Chief Technology Officer and a Director since its inception. In addition, Mr.
Faltys served as President from inception to September 1999. Prior to founding
Primal, Mr. Faltys was Vice President of Software Development for GDI, Inc., an
information technology company, from November 1991 to September 1996.
David Haynes. Mr. Haynes joined Primal in August 1997 as Vice President
of Sales and has served as Vice President of Marketing since May 2000. From May
1997 to September 1997, Mr. Haynes served as Senior Business Development
Manager, at Deloitte & Touche Consulting Group/DRT Systems, a consulting firm.
From January 1995 to April 1997, Mr. Haynes was Director of Sales at GDI. From
December 1988 to January 1995, Mr. Haynes was one of the founding associates of
ITX Technologies, a software company.
Michael G. Fowler. Mr. Fowler joined Primal via the asset acquisition
with Corsair Communications, Inc. in February 1999. While at Corsair
Communications, Mr. Fowler served as Senior Director of Development for the
Billing and Mediation product lines from August 1989 to January 1999. Since
January 2000, Mr. Fowler has served as Senior Director of Development of Primal.
From December 1987 to August 1989, Mr. Fowler served as Senior Support
Specialist of Televideo Systems, an information technology company. From July
1981 to July 1987, Mr. Fowler served as Product Manager and Dealer Marketing
Manager of Integrity Business Software, a software company.
Stephen Combe. Mr. Combe joined Primal in November 1998 as Senior
Director of Product Management. From April 1994 to November 1998, Mr. Combe
served as Director of Development of Subscriber Computing, Inc., a software
company. From February 1992 to April 1994, Mr. Combe served as Development
Manager of CSC Intellicom. From July 1990 to February 1992, Mr. Combe served as
a Senior Consultant for Oracle.
Roger Thornton. Mr. Thornton joined Primal in May 2000 as Senior
Director of Sales. From September 1998 to April 2000, Mr. Thornton served as
Vice President Sales, North America for USHA Communications Technology, a
technology company. From August 1996 to September 1998, Mr. Thornton served as
National Account Manager of Illuminet, a wireless company. From February 1993 to
August 1996, Mr. Thornton served as Northern Regional Manager, Business
Development of U.S. Intelco Networks, a wireless company. Prior to February
1993, Mr. Thornton held various management positions at U.S. West Marketing
Resources Group, National Photographers Company and The Group Incorporated,
Realtors.
Spencer L. Brown. Mr. Brown has served as a director of Primal since
August 2000, as a director of Avery since 1996, and has been Senior Vice
President of Franklin Capital since November 1995, Secretary of Franklin Capital
since October 1994 and was Vice President of Franklin Capital from August 1994
to November 1995. From September 1993 to July 1994 Mr. Brown was an attorney
with the firm of Wilson, Elser, Moskowitz, Edelman & Dicker, and from September
1991 to September 1993, he was an attorney with the firm of Weil, Gotshal &
Manges LLP. Mr. Brown is the son of Mr. Stephen L. Brown, the Chairman and Chief
Executive Officer of Franklin.
J. Alan Lindauer. Mr. Lindauer has served as a director of Primal since
August 2000 and as a director of Avery since November 1995. Mr. Lindauer also
currently serves as President of Waterside Capital and has served as President
of Waterside Management, Inc., a business consulting firm, since 1986. Mr.
Lindauer has also served as a director of Commerce Bank of Virginia from 1986 to
1996 and served as chair of its Loan Committee, Norfolk Division, and a member
of the Executive, Trust, Marketing, Compensation, and Mergers & Acquisition
Committees. Mr. Lindauer served as a director of Citizens Trust Bank from 1982
to 1985 as well as a member of its Trust and Loan Committees. Mr. Lindauer
founded Minute-Man Fuels in 1963 and managed Minute-Man Fuels until 1985.
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Norman M. Phipps. Mr. Phipps has served as a director of Primal since
August 2000 and as a director of Avery since November 1995. Mr. Phipps is also a
director of LogiMetrics, Inc., a company primarily involved in the manufacture
of infrastructure equipment for the wireless broadband telecommunications
market. Since July 2000, Mr. Phipps has served as Senior Vice President of
Administration of LogiMetrics. Mr. Phipps has served as the President and Chief
Operating Officer of LogiMetrics from April 1997 until July 2000, and also as
interim Chief Financial Officer from March 1998 until July 2000. From May 1996
to April 1997, Mr. Phipps served as Chairman of the Board and Acting President
of LogiMetrics. Mr. Phipps has served as a principal of two private investment
firms, Phipps, Teman & Company, L.L.C. (from January 1994 to December 1997) and
CP Capital Partners (from January 1991 to December 1993).
COMPENSATION OF DIRECTORS
Each member of our board receive a one-time warrant to purchase 50,000
shares of common stock at an exercise price determined by our board at the time
of issuance. The non-employee directors of Primal will also receive an annual
stipend of $10,000, and $1,000 for each meeting attended, plus reimbursement of
travel expenses.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation of our Chief Executive Officer and our four next most highly
compensated executive officers who earned more than $100,000 for the fiscal year
ended December 31, 1999.
<TABLE>
<CAPTION>
Summary Executive Compensation Table
FISCAL YEAR
NAME AND PRINCIPAL POSITION ENDED SALARY ($) BONUS ($)
<S> <C> <C> <C>
William Salway 1999 135,000 $72,250
Chief Executive Officer and President
John Faltys 1999 144,800 $78,788
Chief Technology Officer and
Executive Vice President
David Haynes 1999 124,800 $76,882
Vice President Marketing and
Business Development
Joseph R. Simrell 1999 124,800 $76,882
Chief Financial Officer and Vice
President of Finance and
Administration
</TABLE>
EMPLOYMENT AGREEMENTS
Effective October 1, 1999, Mr. Salway entered into an employment
agreement with Primal. Under his employment agreement, Mr. Salway will serve as
our President and Chief Operating Officer, subject to the power of the Board of
Directors to elect and remove officers of Primal. The employment agreement,
which expires October 1, 2000, has been renewed until December 31, 2002. Mr.
Salway will serve as Chief Executive Officer in addition to his current titles.
Mr. Salway's initial base salary under the renewed agreement is $200,000
annually. In addition, Mr. Salway is entitled to receive bonuses based on
performance goals established by the Board, to receive stock options, to
participate in applicable incentive plans established by Primal, participate in
Primal's hospitalization and major medical plans, or, at his option, be
reimbursed for amounts paid by Mr. Salway for comparable coverage, rental of
living accommodations in the Irvine, California area, monthly auto allowance,
and such other bonuses as the Board may determine in its sole discretion. Mr.
Salway also will receive a stock grant equal to 2% of the fully diluted shares
of Primal on the date of distribution, and ten-year stock options equal to 2% of
the fully diluted shares of Primal on the date of distribution. The strike price
for the stock options will be determined on the date of grant. Primal will be
responsible for the tax impact to Mr. Salway for the stock grant on the date of
distribution.
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Effective September 30, 1999, Mr. Faltys entered into an employment
agreement with Primal. Under his employment agreement, Mr. Faltys will serve as
Executive Vice President and Chief Technology Officer of Primal, subject to the
power of the Board of Directors to elect and remove officers of Primal. The
employment agreement expires September 30, 2001. Mr. Faltys' initial base salary
is $144,800 annually. In addition, Mr. Faltys is entitled to receive bonuses
based on performance goals established by the Board, to receive stock options,
to participate in applicable incentive plans established by Primal, participate
in Primal's hospitalization and major medical plans, or, at his option, be
reimbursed for amounts paid by Mr. Faltys for comparable coverage, and such
other bonuses as the Board may determine in its sole discretion.
Effective September 30, 1999, Mr. Simrell entered into an employment
agreement with Primal. Under his employment agreement, Mr. Simrell will serve as
Vice President of Finance and Administration and Chief Financial Officer of
Primal, subject to the power of the Board of Directors to elect and remove
officers of Primal. The employment agreement expires September 30, 2001. Mr.
Simrell's initial base salary is $124,800 annually. In addition, Mr. Simrell is
entitled to receive bonuses based on performance goals established by the Board,
to receive stock options, to participate in applicable incentive plans
established by Primal, participate in Primal's hospitalization and major medical
plans, or, at his option, be reimbursed for amounts paid by Mr. Simrell for
comparable coverage, and such other bonuses as the Board may determine in its
sole discretion.
Effective September 30, 1999, Mr. Haynes entered into an employment
agreement with Primal. Under his employment agreement, Mr. Haynes will serve as
Vice President of Sales of Primal, subject to the power of the Board of
Directors to elect and remove officers of Primal. The employment agreement
expires September 30, 2001. Mr. Haynes' initial base salary is $124,800
annually. In addition, Mr. Haynes is entitled to receive bonuses based on
performance goals established by the Board, to receive stock options, to
participate in applicable incentive plans established by Primal, participate in
Primal's hospitalization and major medical plans, or, at his option, be
reimbursed for amounts paid by Mr. Haynes for comparable coverage, and such
other bonuses as the Board may determine in its sole discretion.
The employment agreements with Mr. Salway, Mr. Faltys, Mr. Simrell, and
Mr. Haynes contain certain covenants by such employees not to compete with the
business of Primal. A state court may determine not to enforce, or only
partially enforce, these covenants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NOTES PAYABLE TO OFFICERS
From January 1998 through December 1999, Faltys, Simrell, and D. Haynes
advanced funds to the Company to provide working capital as needed. The notes
payable aggregate to $170,575 and $165,146 at December 31, 1999 and 1998,
respectively. The notes bear interest at a rate of 6% per annum (effective rate
at 10%). The principal and interest is payable in quarterly installments with
all unpaid principal and interest due on September 30, 2001.
DISTRIBUTION AGREEMENT LOANS
On August 1, 2000, Avery loaned $398,000 to Faltys, $377,000 to each of
Simrell and D. Haynes, $287,000 to Nielsen, and $41,500 to each of Anand,
Cholappadi and Gupta. The loans are non-recourse, and none of the old Primal
Stockholders will have any personal liability for their repayment in excess of
the collateral pledged to secure the repayment of the loans. To secure the
repayment of the loans, however, each of the old Primal Stockholders pledged to
Avery, and granted to Avery a first priority security interest in, all shares of
Avery series f preferred stock and Avery series g preferred stock beneficially
owned by him on August 1 or thereafter acquired pursuant to the distribution
agreement. Each of the loans bears interest at the rate of 6.6% per annum, the
minimum applicable federal rate required to prevent imputed interest from being
recognized for federal income tax purposes. Each of the loans is due and payable
in full on August 1, 2002. From and after the distribution date, each of the old
Primal Stockholders will be permitted to sell the shares of Avery's preferred
stock pledged as collateral to secure repayment of the loans if, and only if,
all proceeds received upon any such sale are first applied to pay all accrued
but unpaid interest on the loans and then to reduce the outstanding principal
amount of the loans then outstanding.
59
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
SECTION 145 OF THE DELAWARE GENERAL CORPORATION LAW
Section 145(a) provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 145(c) provides that to the extent that a present or former
director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with such defense.
Section 145(d) provides that any indemnification under subsections (a)
and (b) of Section 145, unless ordered by a court, shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent is
proper in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b) of Section 145. Such determination
shall be made, with respect to a person who is a director or officer at the time
of such determination:
o by a majority vote of the directors who are not parties to such
action, suit or proceeding, even though less than a quorum;
o by a committee of such directors designated by majority vote of such
directors, even though less than a quorum;
o if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion; or
o by the stockholders.
Section 145(e) provides that expenses, including attorneys' fees, incurred
by an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or for such director or officer to repay such amount if it
shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in Section 145. Such expenses,
including attorneys' fees, incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation deems appropriate.
60
<PAGE>
CERTIFICATE OF INCORPORATION
Our certificate of incorporation provides that a director shall not be
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, unless the breach involves
o a breach of the director's duty of loyalty to us or our stockholders,
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o liability for unlawful dividend payments or stock purchases or
redemptions, or
o a transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation provides that we shall indemnify all
persons whom we may indemnify to the fullest extent permitted by law.
BYLAWS
Our bylaws generally make mandatory the provisions of Section 145 of the
Delaware General Corporation Law discussed above, including the advancement of
expenses reasonably incurred in defending a claim prior to its final resolution,
and provide that our directors and officers will at all times be indemnified to
the maximum extent permitted by law.
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with each of our
directors and executive officers. These agreements provide our directors and
executive officers with indemnification to the maximum extent permitted by law.
These agreements also include provisions requiring advancement of expenses,
establishing procedures and standards for resolving claims, and providing for
indemnification following a change of control of our company.
D&O INSURANCE
We intend to have a directors' and officers' liability insurance policy to
insure our directors and officers against losses resulting from wrongful acts
committed by them in their capacities our directors and officers, including
liabilities arising under the Securities Act.
SEC POLICY ON INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS
AND PRINCIPAL HOLDERS
The table following sets forth information regarding the beneficial
ownership of common stock for each person who is known by us to be the
beneficial owner of more than five percent of our voting securities, for each of
our directors and named executive officers, and all of our directors and
executive officers as a group. Unless otherwise indicated in the footnotes, each
person named below has sole voting and investment power over the shares
indicated.
All information is as of the distribution date. As of such date, 19,660,453
shares of common stock will be outstanding.
61
<PAGE>
For purposes of this table, a person is deemed to be the "beneficial owner" of
the number of shares of common stock that such person has the right to acquire
within 60 days of the date of this prospectus through the exercise of any
option, warrant or right, through the conversion of any security, through the
power to revoke a trust, discretionary account, or similar arrangement, or
through the automatic termination of a trust, discretionary account or similar
arrangement.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
------------------------ ---------------- ----------------
<S> <C> <C>
Franklin Capital Corporation (1) 1,645,938 8.4%
Thurston Group, Inc. (2) 1,775,917 (3) 9.0%
Patrick J. Haynes, III (4) 3,388,877 (5) 17.2%
Mark J. Nielsen (6) 3,939,984 (8) (11) 20.0%
J. Alan Lindauer (7) 783,700 (8) 4.0%
Stephen L. Brown (9) 1,770,938 (10) 9.0%
Spencer L. Brown (9) 1,742,188 (10) 8.9%
David Haynes 4,747,801 (11) 24.1%
Joseph R. Simrell 4,747,801 (11) 24.1%
John Faltys 5,306,863 (11) 27.0%
Arun Anand 3,594,755 (11) 18.3%
Murari Cholappadi 3,594,755 (13) 18.3%
Sanjay Gupta 3,594,755 (13) 18.3%
William Salway N/A N/A
Michael Fowler N/A N/A
Stephen Combe N/A N/A
Roger Thornton N/A N/A
Norman M. Phipps 55,000 0.2%
All executive officers and directors as a group 10,625,599 18.3%
-------------------------------------------------------------------------------------------
<FN>
(1) The business address for this person is 450 Park Avenue, 10th Floor, New
York, NY 10022.
(2) The business address for this person is 190 South LaSalle Street, Suite
1710, Chicago, IL 60603.
(3) The ultimate beneficial owner of these shares is Patrick J. Haynes, III.
(4) The business address for this person is 190 South LaSalle Street, Suite
1710, Chicago, IL 60603.
(5) This includes 1,085,917 shares beneficially owned by the Thurston Group,
Inc., 566,286 shares beneficially owned by Waveland, LLC, and 836,664
shares beneficially owned by Bank One, Texas, N.A., for which Mr. Haynes
holds an irrevocable proxy.
(6) The business address for this person is 18881 Von Karman Avenue, Suite 450,
Irvine, CA 92612.
(7) The business address for this person is 300 Main Street, Suite 1380,
Norfolk, VA 23510.
62
<PAGE>
(8) Includes 616,000 shares beneficially owned by Waterside Capital Corporation
of which Mr. Lindauer is the President.
(9) The business address for this person is 450 Park Avenue, 10th Floor, New
York, NY 10022.
(10) Includes 1,733,338 shares beneficially owned by Franklin Capital
Corporation, of which Stephen L. Brown is Chairman of the Board and Chief
Executive Officer and Spencer L. Brown is Senior Vice President.
(11) Includes 3,388,877 shares beneficially owned by Patrick J. Haynes, III,
Waveland, LLC, and Thurston Group, Inc., proxies for which have been given
collectively to the Old Primal Stockholders.
</FN>
</TABLE>
VOTING CONTROL
As part of the distribution agreement providing for Avery to distribute all
the shares of its, Primal to Avery's securityholders, Thurston Group, Inc.
acquired a proxy to vote 7,126,894 shares of Avery's series g voting preferred
stock.
In consideration for the grant of a proxy to vote the 7,126,894 shares of
Avery's series g voting preferred stock, Thurston Group and Patrick J. Haynes
III, and each of their affiliates, including Waveland, LLC, a limited liability
company wholly owned by Mr. Haynes, granted to the original seven stockholders
of Primal, John Faltys, Joseph R. Simrell, David Haynes, Mark J. Nielsen, Arun
Anand, Murari Cholappadi, and Sanjay Gupta, an irrevocable proxy to vote all the
shares of the Primal common stock that any of them will receive in the
distribution of the Primal common stock to the stockholders of Avery as
contemplated by the distribution agreement. If the distribution were effective
today, and assuming Mr. Haynes and his affiliates do not exercise any of their
options or warrants to purchase any shares of Avery's common stock, the proxy
granted to the former Primal stockholders would cover an aggregate of 3,610,255
shares, or approximately 22.6%, of the Primal common stock that would be
outstanding following the distribution and the issuance of 250,000 additional
shares of the Primal common stock to Mr. Nielsen as contemplated by the
distribution agreement. As more fully described elsewhere in this prospectus,
the former Primal stockholders will also receive 32% of the Primal common stock
as part of the distribution, calculated before the issuance of 250,000
additional shares of the Primal common stock to Mr. Nielsen as contemplated by
the distribution agreement. If the distribution were effective today, and
assuming the 250,000 additional shares of the Primal common stock were issued to
Mr. Nielsen as contemplated by the distribution agreement, the former Primal
stockholders would have the right to vote or to direct the voting of an
aggregate of 8,895,385 shares, or approximately 55.7%, of the Primal common
stock outstanding after the distribution.
Each of the proxies covering shares of the Primal common stock provides
that any action required or permitted to be taken pursuant to the proxy by John
Faltys, Joseph R. Simrell, David Haynes, Mark J. Nielsen, Arun Anand, Murari
Cholappadi and Sanjay Gupta, including any voting of the shares covered thereby,
may be so taken if the former holders of at least 66% of the issued and
outstanding shares of Primal immediately prior to its acquisition by Avery
approve the taking of any such action. These percentages were as follows:
o John Faltys - 30.4861%
o Joseph R. Simrell and David Haynes - 21.5999% each
o Mark J. Nielsen - 16.4969%
o Arun Anand, Murari Cholappadi and Sanjay Gupta - 3.2724% each
This means that Mr. Faltys and any two of Messrs. Simrell, David Haynes or
Nielsen can control the voting of these proxies.
In the event the distribution is not completed, all the proxies will
automatically terminate.
DESCRIPTION OF CAPITAL STOCK
Our amended and restated articles of incorporation authorize 40,000,000
shares of common stock, par value $0.01 per share, and 5,000,000 shares of
preferred stock, par value $0.01 per share. As of September 22, 2000, Primal had
1,000
63
<PAGE>
shares of common stock issued and outstanding. All of these shares are owned by
Avery.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote of the
outstanding shares present at a stockholders' meeting is required for most
actions to be taken by stockholders. Our directors are elected by a plurality.
The holders of the common stock do not have cumulative voting rights.
Accordingly, the holders of a majority of the voting power of the shares voting
for the election of directors can elect all of the directors if they choose to
do so. The common stock bears no preemptive rights, and is not subject to
redemption, sinking fund or conversion provisions.
Holders of common stock are entitled to receive dividends if, as and when
declared by our board of directors out of funds legally available for dividends,
subject to the dividend and liquidation rights of any series of preferred stock
that may be issued in the future and subject to any dividend restriction
contained in any credit facility which Primal may enter into in the future. Any
dividends declared with respect to shares of common stock will be paid pro rata
in accordance with the number of shares of common stock held by each
stockholder.
PREFERRED STOCK
Primal has no present intention to issue any shares of its preferred stock.
WHERE YOU CAN FIND MORE INFORMATION
Prior to the date of this prospectus, we were not required to file any
reports with the Securities and Exchange Commission. After the date of this
prospectus, however, we will be required to file annual, quarterly and current
reports, proxy statements and other information with the SEC. In addition, our
complete registration statement with all exhibits is filed with the SEC.
You may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding us
and other issuers that file electronically with the SEC. The address of the
SEC's Internet site is http://www.sec.gov.
-------------------
Please note that our registration statement, of which this prospectus is
only a part, contains additional information about us. In addition, our
registration statement includes numerous exhibits containing information about
us. Copies of our complete registration statement may be obtained from the SEC
by following the procedures described above.
EXPERTS
The Consolidated Financial Statements of Primal Solutions, Inc. as of December
31, 1998 (Predecessor), the year ended December 31, 1998 (Predecessor), the nine
months ended September 30, 1999 (Predecessor), as of December 31, 1999
(Successor) and the three months ended December 31, 1999 (Successor) included in
this prospectus and registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
have been so included in reliance upon such report of such firm given upon their
authority as experts in accounting and auditing.
64
<PAGE>
PRIMAL SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditor's Report.................................................F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 1998 (Predecessor) and 1999
(Successor) and June 30, 2000 (Successor) (unaudited)........................F-3
Consolidated Statements of Operations for the year ended December 31, 1998
(Predecessor) the nine months ended September 30, 1999 (Predecessor), the
three months ended December 31, 1999 (Successor) and the six months ended
June 30, 1999 (Predecessor) (unaudited) and 2000 (Successor)
(unaudited)..................................................................F-4
Consolidated Statements of Capital for the year ended December 31, 1998
(Predecessor) and 1999 (Successor) and the six months ended June 30, 2000
(Successor) (unaudited)......................................................F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1998
(Predecessor), the nine months ended September 30, 1999 (Predecessor), the
three months ended December 31, 1999 (Successor) and the six months ended
June 30, 1999 (Predecessor) (unaudited) and 2000 (Successor)
(unaudited)..................................................................F-6
Notes to Consolidated Financial Statements...................................F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Primal Solutions, Inc.
We have audited the consolidated balance sheets of Primal Systems, Inc. and
subsidiary (Predecessor) as of December 31, 1998 and of Primal Solutions, Inc.
and subsidiary (a wholly owned subsidiary of Avery Communications, Inc.) (the
Company) (Successor) as of December 31, 1999, and the related consolidated
statements of operations, capital and cash flows for the year ended December 31,
1998 (Predecessor), the nine-month period ended September 30, 1999
(Predecessor), and the three-month period ended December 31, 1999 (Successor).
These consolidated financial statements are the responsibility of the companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Predecessor and its subsidiary
at December 31, 1998 and of the Successor and its subsidiary at December 31,
1999, and the results of their operations and their cash flows for the year
ended December 31, 1998 (Predecessor), the nine-month period ended September 30,
1999 (Predecessor), and the three-month period ended December 31, 1999
(Successor), in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 10, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
PRIMAL SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, June 30, 2000
---------------------------- -----------------------------
1998 1999 (successor) Pro forma
(predecessor) (successor) (unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 28,375 $ 1,710,996 $ 156,481 $ 4,156,481
Accounts and notes receivable, net of
allowance for doubtful accounts of $6,261
(1998), $102,580 (1999), and $111,526 (2000) 177,414 993,406 1,808,870 1,808,870
Prepaid expenses and other current assets 35,029 366,088 613,030 613,030
------------ -------------- -----------------------------
Total current assets 240,818 3,070,490 2,578,381 6,578,381
PROPERTY AND EQUIPMENT, net 42,149 1,608,845 2,019,616 2,019,616
RECEIVABLE FROM AVERY
COMMUNICATIONS, INC. - 370,000 10,463 10,463
GOODWILL, net - 4,563,581 4,224,034 7,799,034
OTHER ASSETS 1,553 61,552 61,375 61,375
------------ -------------- -----------------------------
$ 284,520 $ 9,674,468 $ 8,893,869 $ 16,468,869
============ ============== =============================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 178,279 $ 346,932 $ 266,679 $ 266,679
Accrued liabilities 43,614 287,182 554,412 554,412
Accrued salaries and benefits 54,217 427,261 332,912 332,912
Income taxes payable 667,809
Deferred revenue - 1,023,605 1,886,298 1,886,298
Stockholder settlement liability 33,000 -
Current portion of Corsair note payable - 384,919 238,841 238,841
Current portion of capital lease obligations 11,866 89,577 204,364 204,364
Current portion of note payable to officer,
net of discount - 88,333 60,699 60,699
------------ -------------- -----------------------------
Total current liabilities 320,976 3,315,618 3,544,205 3,544,205
CAPITAL LEASE OBLIGATIONS, less
current portion 3,633 62,046 241,284 241,284
NOTE PAYABLE TO AVERY 100,000 -
NOTES PAYABLE TO OFFICERS,
net of discount 165,146 82,242 68,635 68,635
NOTE PAYABLE TO CORSAIR - 1,645,866 1,604,275 1,604,275
------------ -------------- -----------------------------
Total liabilities 589,755 5,105,772 5,458,399 5,458,399
COMMITMENTS AND CONTINGENCIES
(Notes 3, 4 and 10)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value,
5,000,00 shares authorized as pro forma
Common stock, zero, $0.10 and $0.10 par
value, 50,000,000, 1,000 and 1,000
shares authorized, 8,956,003, 1,000, and
1,000 shares issued and outstanding as
of December 31, 1998, 1999, and June 30,
2000, respectively; pro forma $.01 par
value, 40,000,000 shares authorized,
20,410,453 shares outstanding $ 61,098 $ 10 $ 10 $ 222,715
Additional paid-in capital - 3,609,927 4,361,076 11,713,371
Retained earnings (deficit) (366,333) 958,759 (925,616) (925,616)
------------ -------------- -----------------------------
Total stockholders' equity (deficit) (305,235) 4,568,696 3,435,470 11,010,470
------------ -------------- -----------------------------
$ 284,520 $ 9,674,468 $ 8,893,869 $ 16,468,869
============ ============== =============================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PRIMAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three
Nine months months Six months Six months
Year ended ended ended ended ended
December 31, September 30, December 31, June 30, June 30,
1998 1999 1999 1999 2000
(predecessor) (predecessor) (successor) (predecessor) (successor)
-----------------------------
(unaudited)
REVENUES:
<S> <C> <C> <C> <C> <C>
System revenue $ 1,458,924 $ 1,143,034 $ 1,639,314 $ 711,742 $ 1,179,785
Service revenue 5,448,364 2,908,389 3,073,444 2,888,011
---------- ---------- ---------- ---------- ---------
Total revenue 1,458,924 6,591,398 4,547,703 3,785,186 4,067,796
COST OF REVENUES 1,044,344 3,515,082 1,069,108 2,468,583 2,036,257
---------- ---------- ---------- ---------- ---------
GROSS MARGIN 414,580 3,076,316 3,478,595 1,316,603 2,031,539
OPERATING EXPENSES:
Research and development 276,029 787,359 543,525 405,322 1,884,951
Sales and marketing 191,317 1,107,410 431,856 657,600 1,256,861
General and administrative 181,809 1,777,178 811,860 1,046,892 1,364,053
---------- ---------- ---------- ---------- ---------
Total cost and expenses 649,155 3,671,947 1,787,241 2,109,814 4,505,865
---------- ---------- ---------- ---------- ---------
INCOME (LOSS) FROM OPERATIONS (234,575) (595,631) 1,691,354 (793,211) (2,474,326)
INTEREST AND OTHER EXPENSE,
net (31,104) (81,408) (64,786) (31,665) (77,858)
---------- ---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (265,679) (677,039) 1,626,568 (824,876) (2,552,184)
INCOME TAX PROVISION
(BENEFIT) 800 800 667,809 800 (667,809)
---------- ---------- ---------- ---------- ---------
NET INCOME (LOSS) $ (266,479) $ (677,839) $ 958,759 $ (825,676) $ (1,884,375)
========== ========== ========== ========== =========
Basic and diluted net income (loss) per
share $ 958.76 $ (1,884.38)
Weighted average basic and diluted
common shares outstanding 1,000 1,000
Pro forma basic and diluted net income
(loss) per share $ 0.05 $ (0.09)
Pro forma weighted average basic and
diluted common shares outstanding 20,410,453 20,410,453
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PRIMAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CAPITAL
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
-------------------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
PRIMAL SYSTEMS, INC. (PREDECESSOR)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 1,636,000 $ 8,000 $ - $ (99,854) $ (91,854)
Common stock issued to officers and
consultants for services 7,320,003 53,098 53,098
Net loss (266,479) (266,479)
----------- --------- --------- -------------- -----------
BALANCE, December 31, 1998 8,956,003 61,098 (366,333) (305,235)
Exercise of stock options 2,042,693 15,801 15,801
Net loss (677,839) (677,839)
----------- --------- --------- -------------- -----------
BALANCE, September 30, 1999 10,998,696 $ 76,899 $ - $ (1,044,172) $ (967,273)
=========== ========= ========= ============== ===========
PRIMAL SOLUTIONS, INC.
(SUCCESSOR)
BALANCE, October 1, 1999 10,998,696 $ 76,899 $ - $ (1,044,172) $ (967,273)
Cancellation of equity accounts due to
acquisition (10,998,696) (76,899) 1,044,172 967,273
Contributed capital 1,000 10 3,609,927 3,609,937
Net income 958,759 958,759
----------- --------- --------- -------------- -----------
BALANCE, December 31, 1999 1,000 10 3,609,927 958,759 4,568,696
UNAUDITED:
Capital contribution 751,149 751,149
Net loss (1,884,375) (1,884,375)
----------- --------- --------- -------------- -----------
BALANCE, June 30, 2000 1,000 $ 10 $ 4,361,076 $ (925,616) $ 3,435,470
====== ===== ============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PRIMAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE
NINE MONTHS MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 1999 2000
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR) (SUCCESSOR)
-----------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (266,479) $ (677,839) $ 958,759 $ (825,676) $ (1,884,375)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 14,257 232,512 192,642 147,640 543,730
Common stock for services 53,098
Amortization of loan payable discount 15,070 5,300 727 3,533 2,926
Provision for doubtful accounts 6,261 170,392 57,271 98,989 8,946
Changes in operating assets and
liabilities:
Accounts receivable (79,167) 14,695 997,320 553,983 (824,410)
Prepaid expenses and other current
assets (21,685) (155,385) (152,265) (112,784) (246,942)
Other assets (347) 76,613 381,107 (90,193) 177
Accounts payable, accrued expenses,
and income taxes 173,501 403,850 837,662 375,701 (575,181)
Deferred revenue 1,095,644 (1,241,005) 1,240,197 862,693
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (105,491) 1,165,782 2,032,218 1,391,390 (2,112,436)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (3,327) (559,611) (299,879) (101,741) (177,064)
(Repayment from) advance to Avery
Communications, Inc. (370,000) (246,000) 359,537
Cash acquired 401,081 261,984
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (3,327) (559,611) (268,798) (85,757) 182,473
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings on long-term obligations 100,000
Payments on long-term obligations (3,847) (249,266) (52,424) (154,569) (375,701)
Capital contributions 751,149
Exercise of employee stock options 15,801
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 96,153 (233,465) (52,424) (154,569) 375,448
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ (12,665) $ 372,706 $ 1,710,996 $ 1,151,064 $ (1,554,515)
CASH AND CASH EQUIVALENTS,
beginning of period 41,040 28,375 28,375 1,710,996
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 28,375 $ 401,081 $ 1,710,996 $ 1,179,439 $ 156,481
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest $ 30,412 $ 105,050 $ 67,265 $ 45,334 $ 111,355
=========== =========== =========== =========== ===========
Income taxes $ 800 $ 800 $ - $ 800 $ 800
=========== =========== =========== =========== ===========
NONCASH INVESTING IN
FINANCING ITEMS
Acquisition of property through
capital lease $ 12,000 $ 437,890
============ ===========
Issuance of note payable to Corsair $ 2,238,242 $ 2,238,242
============ ===========
Assets acquired, net of cash $ 4,581,889 $ 9,003,167 $ 4,581,889
============ ============ ===========
Liabilities assumed $ 2,343,647 $ 5,393,230 $ 2,343,647
============ ============ ===========
Capital contributions - Issuance of
Avery stock and transaction costs $ 3,609,937
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations - Primal Systems, Inc. (Primal or the
Predecessor) was incorporated on June 28, 1996, to provide computer software
programming, customization, program maintenance and product marketing for a
variety of software languages and platforms. Primal also designs, develops, and
supports an integrated suite of client/server and browser-based software
solutions focusing on customer acquisition and retention in the
telecommunications industry, primarily utilizing decision support software and
internet technologies. Effective October 1, 1999, Primal was acquired by Avery
Communications, Inc. (Avery) and changed its name to Primal Solutions, Inc. (the
Successor) (Predecessor and Successor, collectively, the Company). Accordingly,
the financial statements as of December 31, 1999 and for the three months then
ended reflect the operations of the successor company, Primal Solutions, Inc.
The financial statements as of December 31, 1998, for the nine months ended
September 30, 1999, and the year ended December 31, 1998, reflect the operations
of the predecessor company, Primal Systems, Inc.
In August 2000, the Board of Directors of Avery approved the distribution of
Primal Solutions, Inc. (the Distribution). Under the terms of the Distribution
agreement with the Company, each common shareholder of Avery on the record date
of the Distribution will receive one share of Primal common stock for each share
of Avery's common stock held on that date. In addition, owners of shares of
Avery's Series A, B, C, D, or E convertible preferred stock will receive Primal
common stock, in the amount of the preferred stock's common stock equivalent for
each share of Avery preferred stock held on the record date of the distribution.
The Distribution will be accounted for at historical cost.
The valuation of the Company stock to be distributed will be determined through
an independent appraisal of the Company business. The Distribution will be a
taxable transaction for federal income tax purposes. As part of the transaction,
the original Primal owners, have agreed to receive 15% and 32% of Avery and the
Company, respectively, on a fully diluted basis.
Pro Forma Information - The pro forma balance sheet as of June 30, 2000,
reflects the resolution of certain contingencies from the original purchase of
Primal by Avery, and the effects of the distribution agreement as further
discussed in Note 10. Such agreements will result in a maximum amount of
20,410,453 shares of common stock to be outstanding.
Basis of Presentation - The accompanying financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America.
F-7
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Information - The information set forth in these financial statements
as of June 30, 2000 (Successor) and for the six months ended June 30, 1999
(Predecessor) and June 30, 2000 (Successor) is unaudited and reflects all
adjustments, consisting only of normal recurring adjustments, that, in the
opinion of management, are necessary to present fairly the information presented
herein. Results of operations for the interim periods are not necessarily
indicative of the results of operations for the full fiscal year.
Acquisition by Avery - In March 1999, Primal and a wholly owned subsidiary of
Avery entered into a merger agreement. Pursuant to this agreement, Primal was
purchased effective after the close of business on September 30, 1999. Pursuant
to the merger agreement, Avery issued 3,890,373 shares of Avery's convertible
preferred stock in exchange for all of the issued and outstanding shares of
Primal. Of this amount, 1,945,188 shares are held in escrow, to be issued to
Primal's shareholders based upon the operating performance of Primal, as
defined. Based on the high likelihood of meeting the performance thresholds
required for the shares escrowed, all of the 3,890,373 shares issued were
included in the initial consideration for the transaction. Upon the meeting of
certain additional operating performance thresholds by Primal, the Primal
shareholders could have received up to a maximum of 4,000,000 additional shares
of Avery convertible preferred stock as additional consideration for the merger
which will be recognized as additional purchase price when performance is
assured. In addition, upon Primal's satisfaction of certain operating
performance levels, as defined, certain shareholders of Primal had the right in
September through October 2000 to require Avery to repurchase up to 1,550,000
shares of Avery common stock issued upon the conversion of Avery preferred stock
received in the merger for the purchase price of $2.50 per share. The Company
recorded the acquisition under the purchase method of accounting. The value of
the preferred stock issued of $3,404,076 was recorded on the financial
statements of the Company. The purchase price, which included transaction costs
of $356,845, was allocated to acquired assets of $4,421,356, assumed liabilities
of $5,393,230, and $4,732,795 of goodwill, which is being amortized over seven
years. See Note 10 for information on the subsequent resolution of the
contingencies discussed above.
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of Primal Solutions, Inc. (Successor), Primal Systems, Inc.
(Predecessor), and their wholly owned subsidiary, Wireless Billing Systems. All
significant intercompany accounts and transactions have been eliminated.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
F-8
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment - Property and equipment are stated at cost. Depreciation
and amortization are provided on the straight-line method over the following
estimated useful lives:
Computer and office equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Shorter of the estimated useful
life or life of the lease
Long-Lived Assets - The Company accounts for the impairment and disposition of
long-lived assets in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 121, long-lived
assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. The Company's policy
is to review such assets annually for any impairment and there was no impairment
of the value of such assets at December 31, 1998 and 1999.
Intangible Assets - Goodwill (net of accumulated amortization of $169,214 at
December 31, 1999 and $508,761 at June 30, 2000) is amortized on a straight-line
basis over seven years. At least annually, management reviews intangible assets
for possible impairment based on several criteria, including, but not limited
to, sales trends, undiscounted operating cash flows and other operating factors.
Based upon its most recent assessment, there was no impairment at December 31,
1999.
Software Licenses, Services and Post-Contract Customer Support - Revenues from
sales of software licenses (systems revenue), which generally do not contain
multiple elements, are recognized upon shipment of the related product if the
requirements of SOP 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 service and post-contract
customer support is deferred and recognized ratably over the term of the
contract.
Software Programming and Customization Services - Revenues are recognized as
services are performed under the agreements and are included in system revenue
in the accompanying financial statements.
F-9
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Software Development Costs - Costs incurred in the research and development of
new software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been established. After
technological feasibility is established, any additional costs would be
capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed. Because the Company believes
that its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no software
development costs have been capitalized as of December 31, 1998, 1999, and June
30, 2000.
401(k) Plan - The Company has a contributory 401(k) plan which covers
substantially all employees. The Company has not made any contributions to the
plan, but is permitted to make discretionary contributions.
Income Taxes - Subsequent to the acquisition effective October 1, 1999, the
Successor will be included in the consolidated tax returns of Avery
Communications, Inc. and, under the terms of a tax sharing arrangement, will
record any income taxes as if it were a separate company. Income taxes are
accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. This
statement requires the recognition of deferred tax assets and liabilities to
reflect the future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Measurement of the deferred items
is based on enacted tax laws. In the event the future consequences of
differences between financial reporting bases and tax bases of the Company's
assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an
evaluation of the probability of being able to realize the future benefits
indicated by such assets. A valuation allowance related to a deferred tax asset
is recorded when it was more likely than not that some portion or all of the
deferred tax asset will not be realized. A full valuation allowance for deferred
tax assets has been provided at December 31, 1998, 1999, and June 30, 2000.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Concentration of Credit Risk - The Company sells its products primarily to large
commercial companies. Credit is extended based on an evaluation of the
Customer's financial condition, and collateral is generally not required. The
Company also evaluates its credit customers for potential credit losses.
For the years ended December 31, 1998 and 1999, and the six months ended June
30, 1999 and 2000, three, two and four and two customers had revenues greater
than 10% of total revenues.
Fair Value of Financial Instruments - The recorded amounts of financial assets
and liabilities at December 31, 1998, 1999, and June 30, 2000, approximate fair
value, based on the Company's incremental borrowing rate or due to the
relatively short period of time between origination of the instruments and their
expected realization.
F-10
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent 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.
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. There was no difference between the net income
(loss) and the comprehensive net income (loss) for the year ended December 31,
1998, the nine-month period ended September 30, 1999, the three-month period
ended December 31, 1999, and the six months ended June 30, 1999 and 2000.
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the Company
has disclosed in Note 9 the required information about the Company's operating
segments.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which the Company
is required to adopt effective in its fiscal Year 2001. SFAS No. 133 will
require the Company to record all derivatives on the balance sheet at fair
value. The Company does not currently engage in hedging activities but will
continue to evaluate the effects of adopting SFAS No. 133. The Company will
adopt SFAS No. 133 in its fiscal Year 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC and was effective the first fiscal quarter of
fiscal years beginning after December 15, 1999, and requires companies to report
any changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board opinion No. 20, Accounting Changes. Subsequently, SAB No. 101A and No.
101B were issued to delay the implementation of SAB No. 101. It will be
effective for the Company in the fourth quarter of fiscal 2001. The Company is
currently evaluating the impact, if any, SAB No. 101 will have on its financial
position or results of operations.
Net Income (Loss) Per Share and Pro Forma Net Income (Loss) Per Share - The
Company has computed net income (loss) per share in accordance with SFAS No.
128, Earnings Per Share. Basic earnings (loss) per share is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options,
if any, in the weighted average number of common shares outstanding for a
period, if dilutive.
F-11
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma basic and diluted net income (loss) per share was computed by dividing
the net income (loss), adjusted for the additional goodwill amortization, by the
weighted average shares outstanding for the applicable periods, adjusted for the
distribution ratios. These pro forma results are not indicative of future
amounts.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------------- 2000
1998 1999 (unaudited)
<S> <C> <C> <C>
Computer and office equipment $53,141 $1,524,626 $2,116,389
Furniture and fixtures 11,573 87,802 110,814
Leasehold improvements - 19,848 19,848
----------- ----------- -----------
64,714 1,632,276 2,247,051
Less accumulated depreciation and
amortization (22,565) (23,431) (227,435)
----------- ----------- -----------
Property and equipment, net $42,149 $1,608,845 $2,019,616
=========== =========== ===========
</TABLE>
Amortization of equipment purchased under capitalized lease obligations is
included in depreciation expense. Maintenance and repairs are charged to expense
as incurred. Renewals and improvements of a major nature are capitalized.
Included in property and equipment is equipment under capital leases of $46,605
at December 31, 1998, $209,782 at December 31, 1999, and $647,672 at June 30,
2000.
Accumulated depreciation related to equipment under capital leases amounted to
$19,684, $13,111, and $34,471 at December 31, 1998, 1999, and June 30, 2000,
respectively.
F-12
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LEASE COMMITMENTS
The Company leases office space and certain equipment under various
non-cancelable operating and capital leases. Future minimum lease payments
required under the operating and capital leases as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
Year ending December 31:
<S> <C> <C>
2000 $466,419 $107,010
2001 155,473 42,910
2002 - 28,261
--------- --------
Total minimum lease payments $ 621,892 178,181
Less amount representing interest ========= 26,558
--------
Present value of minimum lease payments 151,623
Less current portion at December 31, 1999 89,577
--------
Long-term obligation at December 31, 1999 $ 62,046
========
</TABLE>
Rent expense under such leases was $23,664, $343,620, $147,266, $226,250, and
$235,185 for the year ended December 31, 1998, the nine-month period ended
September 30, 1999, the three-month period ended December 31, 1999, and the six
months ended June 30, 1999 and 2000, respectively.
4. NOTE PAYABLE TO AVERY
At December 31, 1998, Primal had a note payable for $100,000 to Avery
Communications, Inc. (Avery) (Note 1). The note payable was collateralized by
substantially all of Primal's assets and bore interest at 10%. During 1999, all
amounts outstanding under the agreement were fully repaid.
F-13
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE TO OFFICERS
Certain officers of the Company have advanced funds to the Company to provide
working capital as needed. The notes payable aggregate to $165,146, $170,575,
and $129,334 at December 31, 1998, 1999, and June 30, 2000, respectively, and
are net of discounts of $12,119, $6,091, and $3,166 at December 31, 1998, 1999,
and June 30, 2000, respectively. The notes bear interest at a rate of 6% per
annum (effective rate at 10%). The principal and interest is payable in
quarterly installments with all unpaid principal and interest due on September
30, 2001.
Maturities of the notes payable to officers as of December 31, 1999 are as
follows:
2000 $ 88,333
2001 88,333
Less discount (6,091)
----------
170,575
Less current portion (88,333)
----------
Long-term portion $ 82,242
==========
6. INCOME TAXES
For three months ended December 31, 1999, the provision for income taxes is
comprised of current federal and state taxes of $819,011 partially offset by a
deferred benefit of $151,202. For the year ended December 31, 1998, and the nine
months ended September 30, 1999, the provision for income taxes is comprised of
current state taxes of $800 and $800, respectively. The benefit for income taxes
for the six months ended June 30, 2000 reflects the carryforward of the income
tax provision for the three months ended December 31, 1999 due to the Company's
net loss.
The major reconciling items between computed "expected" tax benefits are state
taxes, net of federal income tax benefit, and the change in the valuation
allowance.
F-14
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences used in determining the Company's
deferred tax assets and liabilities are presented below at December 31, 1999 and
1998:
1999 1998
Deferred tax assets:
Net operating losses $ 377,727 $ 128,653
Nondeductible amortization 65,864
Bad debt allowance 39,802 2,744
Accrued vacation 42,180 6,032
Other 2,714 39,495
--------- ---------
Total deferred tax assets 528,287 176,924
Less valuation allowance (528,287) (176,924)
--------- ---------
Net deferred tax asset/liability $ - $ -
========= =========
The valuation allowance was increased by $128,122 during the year ended December
31, 1998, and $351,363 during the nine months ended September 30, 1999.
As of December 31, 1999, the Company has a net operating loss (NOL) carryforward
for federal tax purposes of $969,139, which will expire in the years 2011
through 2014, and an NOL carryforward for California purposes of $979,814, which
will expire in 2005.
As a result of the acquisition of Primal by Avery (Note 1), the Company's annual
use of Primal's net operating losses will be limited under section 382 of the
Internal Revenue Code to approximately $285,000 annually.
7. STOCK OPTION PLAN
On December 2, 1998, Primal adopted a stock option plan (the Plan) pursuant to
which the Company's Board of Directors may grant stock options to officers and
key employees. The Plan authorizes grants of options to purchase up to 2,999,606
shares of authorized but unissued common stock. Stock options are granted with
an exercise price equal to the stock's fair market value at the date of grant.
For participants who own shares representing more than 10% of the voting shares
of Primal, stock options are granted with an exercise price equal to 110% of the
stocks' fair market value at the date of grant. Stock options have a contractual
life of 10 years. Shares vest on a pro rata basis and become fully exercisable
from 18 to 60 months from the date of grant.
F-15
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, there were 644,413 shares available for grant under the
Plan. The per share fair value of stock options granted during 1998 was not
significant on the date of grant using the Black-Scholes option-pricing model,
with risk-free interest rates ranging from 4.45% to 4.52% and expected lives of
one to five years and no volatility or dividends during the expected term.
The Company applies APB No. 25 for its Plan. Accordingly, no compensation cost
has been recognized in the financial statements for stock options as the fair
market value of the stock approximated the exercise price. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's pro forma net income (loss)
would not have significantly differed from reported net income (loss).
<TABLE>
<CAPTION>
WEIGHTED
PRICE OF AVERAGE
OPTIONS OPTION EXERCISE
OUTSTANDING GRANTS PRICE
<S> <C> <C> <C>
BALANCE, December 31, 1997 - $ - $ -
Granted 2,355,193 $ 0.0133-$0.0151 $ 0.0150
----------
BALANCE, December 31, 1998 2,355,193
Canceled (2,355,193) $ 0.0150
----------
BALANCE, December 31, 1999 and
June 30, 2000 (unaudited) -
==========
</TABLE>
There were no options exercisable at December 31, 1998.
Effective with the merger with Avery (Note 1), options for 310,000 shares of
Primal stock were converted to 109,627 options of Avery Communications, Inc.
common stock (54,815 options were granted with the remaining options to be
granted based on achieving certain operating levels, as defined) with an
exercise price of $0.875 per share. The remaining options to employee
stockholders were canceled as part of the merger transaction. Subsequent to the
merger, Avery granted 441,150 options (Avery Options) with an exercise price of
$1.625 per share to employees of the Company. The Avery Options were
subsequently canceled in connection with the Distribution (Note 1). Upon the
adoption of a new stock option plan by Primal Solutions, Inc., new options will
be issued to the Company's employees with canceled Avery options.
F-16
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ASSET ACQUISITION
On February 4, 1999, Corsair Communications, Inc. and its wholly owned
subsidiary, Subscriber Computing, Inc., sold substantially all of the assets
relating to Subscriber's Communication Resource Manager billing system and
Intelligent Message Router to Wireless Billing Systems, a newly-formed and
wholly owned subsidiary of Primal Systems, Inc. As consideration for the
agreement, the Company paid Corsair $2,238,242 by issuing a note payable to
Corsair. The note payable bears interest at 10% and is secured by substantially
all the Company's property and equipment. Principal and interest are payable
monthly with all unpaid principal and interest due May 2001. Principal payments
of $384,919 and $1,645,866 are due during 2000 and 2001, respectively. The
Company recorded the assets at fair value of $4,581,889 and assumed liabilities
of $2,343,647 in addition to the note payable to Corsair.
9. SEGMENT AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
The Company's reportable operating segments include Systems and Services. The
Systems operating segment develops and markets the Company's integrated suite of
client/server and browser-based software solutions. The Services segment
provides after-sale support for software products, programming, maintenance,
customization, and consulting services related to the Company's products and a
variety of software languages and platforms.
The Company does not separately allocate operating expenses to these segments,
nor does it allocate specific assets to these segments. Therefore, segment
information reported includes only revenues, cost of revenues, and gross margin
as this information is the only information provided to the chief operating
decision maker.
F-17
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating segment data for the year ended December 31, 1998, the nine-month
period ended September 30, 1999, the three-month period ended December 31, 1999,
and the six months ended June 30, 1999 and 2000, was as follows:
<TABLE>
<CAPTION>
SYSTEMS SERVICES TOTAL
Year ended December 31, 1998:
<S> <C> <C> <C>
Revenues $ 1,458,924 $ - $ 1,458,924
Cost of revenues 1,044,344 1,044,344
------------ ------------ -----------
Gross margin $ 414,580 $ - $ 414,580
============ ============ ===========
Nine-month period ended September 30, 1999:
Revenues $ 1,143,034 $ 5,448,364 $ 6,591,398
Cost of revenues 59,967 3,455,115 3,515,082
------------ ------------ -----------
Gross margin $ 1,083,067 $ 1,993,249 $ 3,076,316
============ ============ ===========
Three-month period ended December 31, 1999:
Revenues $ 1,639,314 $ 2,908,389 $ 4,547,703
Cost of revenues 44,494 1,024,614 1,069,108
------------ ------------ -----------
Gross margin $ 1,594,820 $ 1,883,775 $ 3,478,595
============ ============ ===========
Six months ended June 30, 1999 (unaudited):
Revenues $ 711,742 $ 3,073,444 $ 3,785,186
Cost of revenues 45,593 2,422,990 2,468,583
------------ ------------ -----------
Gross margin $ 666,149 $ 650,454 $ 1,316,603
============ ============ ===========
Six months ended June 30, 2000 (unaudited):
Revenues $ 1,179,785 $ 2,888,011 $ 4,067,796
Cost of revenues 92,307 1,943,950 2,036,257
------------ ------------ -----------
Gross margin $ 1,087,478 $ 944,061 $ 2,031,539
============ ============ ===========
</TABLE>
F-18
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues are attributed to geographic areas based on the location of the entity
to which the products or services were sold. Revenues, gross profit, income
(loss) from operations and long-lived assets concerning principal geographic
areas in which the Company operates as follows:
<TABLE>
<CAPTION>
United Asia /
States Pacific Europe Total
--------------------------------------------------------------------
Year ended December 31, 1998:
<S> <C> <C> <C> <C>
Revenues $ 1,458,924 $ - $ - $ 1,458,924
Gross profit 414,580 - - 414,580
Income (loss) from operations (234,575) - - (234,575)
Long-lived assets 42,149 - - 42,149
Nine months ended September 30, 1999:
Revenues $ 4,238,985 $ 852,190 $ 1,500,223 $ 6,591,398
Gross profit 1,997,023 361,255 718,038 3,076,316
Income (loss) from operations (364,438) (113,484) (117,709) (595,631)
Long-lived assets 1,308,966 - - 1,308,966
Three months ended December 31, 1999:
Revenues $ 2,133,956 $ 1,852,647 $ 561,100 $ 4,547,703
Gross profit 1,623,686 1,425,580 429,329 3,478,595
Income (loss) from operations 785,044 697,492 208,818 1,691,354
Long-lived assets 1,608,845 - - 1,608,845
Six months ended June 30,1999 (unaudited):
Revenues $ 2,475,230 $ 238,465 $ 1,071,491 $ 3,785,186
Gross profit 865,133 57,230 394,240 1,316,603
Income (loss) from operations (514,528) (75,688) (202,995) (793,211)
Long-lived assets 1,346,301 - - 1,346,301
Six months ended June 30, 2000 (unaudited):
Revenues $ 2,949,904 $ 577,947 $ 539,945 $ 4,067,796
Gross profit 1,477,598 272,030 281,911 2,031,539
Income (loss) from operations (1,789,987) (368,158) (316,181) (2,474,326)
Long-lived assets 2,019,616 - - 2,019,616
</TABLE>
F-19
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENTS
On July 31, 2000, certain contingencies relating to the original purchase of
Primal by Avery (Note 1) were resolved and resulted in the issuance of an
additional 1,250,000 shares of common stock and the recording of additional
goodwill of $3,575,000 related to the Purchase. The additional goodwill resulted
from the attainment by Primal of certain revenue and net loss targets and from
the satisfaction of the conditions relating to the repurchase of Avery shares
from former Primal shareholders described below.
An incremental 1,250,000 shares of Avery Series F preferred stock were issued to
former Primal shareholders valued at $1.00 per share which resulted in
$1,250,000 of additional goodwill. Additionally, the excess value of the $2.50
per share repurchase right over the $1.00 fair value of the 1,550,000 shares
resulted in $2,325,000 of goodwill. The total additional goodwill amounts are
recorded in the pro forma balance sheet as of June 30, 2000.
As discussed in Note 1, the Board of Directors of Avery, in August 2000,
approved the distribution of the Company as a separate public company. In
connection with the Distribution, certain agreements with the Company and the
former Primal shareholders were agreed to as follows: Avery agreed to provide
$4,000,000 of cash to the Company, which is reflected as a capital contribution
in the June 30, 2000 pro forma balance sheet. The former Primal shareholders
waived the repurchase right discussed above and an additional 1,986,531 shares
of Avery Series F preferred stock will be issued to those shareholders. The
former chief executive officer of Avery and a former Primal shareholder agreed
to cancel options to purchase 925,000 shares of Avery common stock in return for
the issuance of 250,000 shares of common stock of the Company's post
distribution. The new chief executive officer of Primal also agreed to cancel
options to purchase 300,000 shares of Avery common stock in exchange for the
issuance of approximately 400,000 shares of the Company after the distribution.
Such actual share amounts will be determined at the date of distribution. Both
of the option cancellation and share issuance transactions have been reflected
in the Primal pro forma balance sheet of June 30, 2000 as an equity adjustment.
Also as part of the distribution, Company employees who had options to purchase
shares of Avery common stock were canceled and new options will be issued in a
new Company stock option plan based, primarily, on the valuation of the Company
by an independent appraisal and 100,000 shares of common stock will be issued to
certain employees as part of the distribution agreement.
* * * * *
F-20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Delaware General Corporation Law
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present or
former director, officer, employee or agent of a corporation has been successful
on the merits or otherwise in defense of any action, suit or proceeding referred
to in subsections (a) and (b) of Section 145, or in defense of any claim, issue
or matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
Section 145(d) of the DGCL provides that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in subsections (a) and (b) of Section 145. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors designated by
majority vote of such directors, even though less than a quorum, or (3) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
II-1
<PAGE>
Certificate of Incorporation
Our Certificate of Incorporation, as amended, a copy of which is filed as
Exhibit 3.1 to the Registration Statement, provides that a director shall not be
liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, unless the breach involves (i) a breach of the director's
duty of loyalty to us or our stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) liability for unlawful dividend payments or stock purchases or redemptions
or (iv) for a transaction from which the director derived an improper personal
benefit. The Amended Certificate of Incorporation provides that we will
indemnify all persons whom we may indemnify to the fullest extent permitted by
the DGCL.
Amended and Restated Bylaws
Our Amended and Restated Bylaws, a copy of which is filed as Exhibit 3.2 to
the Registration Statement, provide that each person who at any time is or was
one of our directors, and is threatened to be or is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative (a "Proceeding"), by
reason of the fact that such person is or was one of our directors, or is or was
serving at our request as a director, officer, partner, venturer, proprietor,
member, employee, trustee, agent or similar functionary of another domestic or
foreign corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan or other for-profit or non-profit enterprise, whether the
basis of a Proceeding is alleged action in such person's official capacity or in
another capacity while holding such office, shall be indemnified and held
harmless by us, against costs, charges, expenses (including without limitation,
court costs and attorneys' fees), judgments, fines and amounts paid or to be
paid in settlement actually and reasonably incurred or suffered by such person
in connection with a Proceeding, so long as a majority of a quorum of
disinterested directors, the stockholders or legal counsel through a written
opinion do not determine that such person did not act in good faith or in a
manner he reasonably believed to be in or not opposed to the our interests of
Primal, and in the case of a criminal Proceeding, such person had reasonable
cause to believe his conduct was unlawful. The Amended and Restated Bylaws also
contain certain provisions designed to facilitate receipt of such benefits by
any such persons, including the prepayment of any such benefits.
Indemnification Agreements
We have entered into Indemnification Agreements pursuant to which we will
indemnify certain of our directors and officers against judgments, claims,
damages, losses and expenses incurred as a result of the fact that any director
or officer, in his capacity as such, is made or threatened to be made a party to
any suit or proceeding. Such persons will be indemnified to the fullest extent
now or hereafter permitted by the DGCL. The Indemnification Agreements also
provide for the advancement of certain expenses to such directors and officers
in connection with any such suit or proceeding.
Insurance
We have a directors' and officers' liability insurance policy to insure our
directors and officers against losses resulting from wrongful acts committed by
them in their capacities as directors and officers of Primal, including
liabilities arising under the Securities Act.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered hereby. All amounts are
estimated except the Commission registration fee.
II-2
<PAGE>
SEC registration fee............................ $ 830.46
Blue Sky fees and expenses...................... 20,000.00
Accounting fees and expenses.................... 30,000.00
Printing and engraving expenses................. 30,000.00
Legal fees and expenses......................... 75,000.00
Registrar and transfer agent's fees............. 3,000.00
Miscellaneous fees and expenses................. 5,000.00
-------------
Total......................................... $ 163,830.46
=============
Item 27. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
2.1 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)
2.2 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)
2.3 Form of Pledge Agreement, which is attached as Exhibit 5-B to the
Distribution Agreement (filed as Exhibit 2.3 to the Primal Form 8-K and
incorporated by reference herein)
2.4 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)
2.5 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)
2.6 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)
3.1 Amended and Restated Certificate of Incorporation (to be filed by
amendment)
3.2 Amended and Restated Bylaws
4.1 Amended and Restated Certificate of Incorporation (to be filed as
Exhibit 3.1 hereto and incorporated by reference herein)
4.2 Amended and Restated Bylaws (attached as Exhibit 3.2 hereto and
incorporated by reference herein)
5.1 Opinion of Winstead Sechrest & Minick P.C. (to be filed by amendment)
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
10.1 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 Avery's Registration Statement on Form SB-2
(Registration No. 333-65133) and incorporated by reference herein)
10.2 Form of Director and Officer Indemnification Agreement (to be filed by
amendment)
10.3 Employment Agreement for William Salway
10.4 Employment Agreement for John Faltys
10.5 Employment Agreement for Joseph R. Simrell
10.6 Employment Agreement for David Haynes
21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche
23.2 Consent of Winstead Sechrest & Minick P.C. (to be filed as Exhibit 5.1
hereto and incorporated by reference herein)
24.1 Power of Attorney (included on signature page of this Registration
Statement as originally filed)
27.1 Financial Data Schedule for Fiscal Year Ended December 31, 1999
27.2 Financial Data Schedule for Six Months Ended June 30, 2000
Item 28. Undertakings
Commission Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Primal pursuant to the foregoing provisions, or otherwise, Primal has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Primal will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Chicago,
State of Illinois, on September 22, 2000.
PRIMAL SOLUTIONS, INC.
By: /s/ Joseph R. Simrell
-------------------------------------
Each person whose signature appears below constitutes and appoints William
Salway, John Faltys and Joseph R. Simrell and each of them (with full power to
each of them to act alone), his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities to sign on his behalf individually and in
each capacity stated below any amendment, (including post-effective amendments)
to this Registration Statement and any Registration Statement (including any
amendment thereto) for this offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William Salway Chief Executive Officer, President, September 22, 2000
--------------
Chief Operating Officer, and Director
(Principal Executive Officer)
/s/ John Faltys Chief Technology Officer, Executive September 22, 2000
-----------
Vice President, Chairman of the Board
of Directors and Director
/s/ Joseph R. Simrell Chief Financial Officer, Vice President September 22, 2000
-----------------
of Finance and Administration, and
Secretary (Principal Financial and
Accounting Officer)
/s/ David Haynes Vice President of Marketing and September 22, 2000
------------
Director
/s/ Spencer Brown Director September 22, 2000
-------------
/s/ J. Alan Lindauer Director September 22, 2000
-----------------
/s/ Norman Phipps Director September 22, 2000
-------------
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
2.1 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)
2.2 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)
2.3 Form of Pledge Agreement, which is attached as Exhibit 5-B to the
Distribution Agreement (filed as Exhibit 2.3 to the Primal Form 8-K and
incorporated by reference herein)
2.4 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)
2.5 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)
2.6 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)
3.1 Amended and Restated Certificate of Incorporation (to be filed by
amendment)
3.2 Amended and Restated Bylaws
4.1 Amended and Restated Certificate of Incorporation (to be filed as
Exhibit 3.1 hereto and incorporated by reference herein)
4.2 Amended and Restated Bylaws (attached as Exhibit 3.2 hereto and
incorporated by reference herein)
5.1 Opinion of Winstead Sechrest & Minick P.C. (to be filed by amendment)
10.1 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 Avery's Registration Statement on Form SB-2
(Registration No. 333-65133) and incorporated by reference herein)
10.2 Form of Director and Officer Indemnification Agreement (to be filed by
amendment)
10.3 Employment Agreement for William Salway
10.4 Employment Agreement for John Faltys
II-6
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
10.5 Employment Agreement for Joseph R. Simrell
10.6 Employment Agreement for David Haynes
21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche
23.2 Consent of Winstead Sechrest & Minick P.C. (to be filed as exhibit 5.1
hereto and incorporated by reference herein)
24.1 Power of Attorney (included on signature page of this Registration
Statement as originally filed)
27.1 Financial Data Schedule for Fiscal Year Ended December 31, 1999
27.2 Financial Data Schedule for Six Months Ended June 30, 2000
II-7
<PAGE>