<PAGE>
EXHIBIT 99.1
Executive Summary Appraisal of the
Per Share Fair Market Value
---------------------------
of a
Common Stock Marketable Minority Interest
of
Primal Solutions, Inc.
-----------------------
as of
September 15, 2000
SE Biz Val, LLC
737-B Little Neck Road
Virginia Beach, VA 23452
Phone (757) 463-2071
(800) 766-9056
Fax (757) 498-7029
Date of Executive Summary Report: November 15, 2000
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TABLE OF CONTENTS
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Transmittal Letter and Executive Summary................................... 1
Description of Assignment................................................. 1
Acquisition of Primal by Avery - September 30, 1999....................... 1
Planned Spin-off of Primal by Avery to be Consummated October 31, 2000.... 1
The Spin-off Will Result In Taxable Income To The Avery Shareholders...... 2
Expected Equity Capital Structure of Primal Solutions Post Spin-off....... 2
Primal's Stock Will Be Traded On The OTCBB Market......................... 3
Appraisal Performed in Conformance to Professional Standards of Practice.. 4
Standard, Definition and Premise of Value................................. 4
Valuation Terms and Conditions............................................ 5
Information Considered.................................................... 5
The Use of Projected Forward-Looking Statements........................... 6
Summary Description of the General Economic Environment................... 7
Summary Description of the Telecommunications Industry.................... 7
Summary Description of Primal Solutions, Inc.............................. 8
Summary of Valuation Methods Utilized..................................... 8
The Discounted Cash Flow Valuation Method............................... 9
The Publicly Traded Guideline Valuation Method.......................... 12
Appraisal Conclusion...................................................... 13
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Transmittal Letter and Executive Summary
----------------------------------------
SE Biz Val, LLC
737-B Little Neck Road
Virginia Beach, VA 23452
Tel. (757) 463-2071 / Fax (757) 498-7029
November 15, 2000
The Board of Directors
Avery Communications, Inc.
190 South LaSalle Street, Suite 1410
Chicago, IL 60603
Gentlemen:
Description of Assignment
The reason for our engagement is to provide you with our independent, objective
professional Opinion of Per Share Fair Market Value of the common stock of
Primal Solutions, Inc. ("Primal" or "the Company"), a Delaware corporation and
one of the operating subsidiaries of Avery Communications, Inc. ("Avery"), also
a Delaware corporation. The valuation date shall be "current" as of September
15, 2000, the date of the original appraisal report.
SE Biz Val, LLC was retained by Avery to appraise the per share fair market
value of the common stock of Primal Solutions, Inc. as of the date of its spin-
off, to serve as a basis for establishing the amount of any taxable gain to
Avery and the Primal dividend and capital gain value to Avery stockholders
resulting from the spin-off. The spin-off transaction is expected to be
consummated on October 31, 2000. If necessary, we will update this September
15th appraisal of the per share fair market value of Primal's capital stock
received in the spin-off as of the actual spin-off date of record.
Acquisition of Primal by Avery - September 30, 1999
In March 1999, Primal Systems, Inc. and a wholly-owned subsidiary of Avery
(Primal Solutions, Inc.) entered into a merger agreement. Pursuant to this
agreement, Primal was purchased effective after the close of business on
September 30, 1999. As part of this merger, Avery also acquired Wireless
Billing Solutions, Primal's subsidiary, which sells and supports convergent
billing, customer care and mediation system software products. The transaction
was accounted for using the purchase method of accounting with revenues and
expenses of Primal being included in Avery's operations from the acquisition
date.
At the time of the merger, Avery issued 3,945,175 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 were held in escrow, to be issued to
Primal's shareholders based upon the operating performance of Primal, as
defined. Upon the meeting of certain operating performance thresholds by
Primal, the Primal shareholders would receive up to a maximum of 4,000,000
additional shares of Avery convertible preferred stock as additional
consideration for the merger. In addition, upon Primal's satisfaction of
certain operating performance levels during this period, certain shareholders of
Primal will have the right in September and 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.
Planned Spin-off of Primal by Avery to be Consummated October 31, 2000
On July 30, 2000, the Board of Directors of Avery approved the spin-off of
Primal Solutions, Inc. (see Primal Solutions, Inc. Preliminary Distribution
Agreement, dated July 31, 2000). The decision revised the plan announced
February 29, 2000 to spin-off HBS Billing Services Company ("HBS") its local
exchange carrier billing clearing house business. Avery is spinning-off
Primal's common stock pursuant to the terms of the Primal Solutions, Inc.
Preliminary Distribution Agreement, dated July 31, 2000 (the "Distribution
Agreement"), by and among Avery, Primal, and certain Avery stockholders, and
"Old Primal Stockholders."
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The reason for the Primal spin--off is that Primal's parent, Avery
Communications, 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. Avery's board of directors believes that separating Primal's
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.
The spin-off is conditioned upon the satisfaction of certain conditions
necessary to consummate the spin-off. In particular, Avery and Primal must have
obtained all orders, rulings, consents or approvals, governmental or otherwise,
necessary to consummate the spin-off. Avery and Primal must furnish to the
other all documents and certificates, including assignments and conveyances,
necessary to consummate the spin-off; and the Primal common stock shall have
been registered under the 1934 Act. The Avery board of directors has the right
to cancel or defer the spin-off, at its sole discretion, even if the conditions
to the spin-off are met.
The spin-off will be recorded at book value for accounting purposes, since
Primal is an ongoing business. The valuation of the Primal stock to be
distributed, which will be determinative for the assessment of taxes payable on
any realized taxable income or capital gain, will be determined through this
appraisal of Primal's business being performed by SE Biz Val.
The Spin-off Will Result In Taxable Income To The Avery Shareholders
As a result of the spin-off, each holder of Avery common stock will be
considered to have received a taxable dividend in an amount equal to the fair
market value of the shares of Primal's common stock received in the spin-off.
Each holder of Avery series g preferred stock will be deemed to have received an
amount equal to the fair market value of the shares of Primal's 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. For federal income
tax purposes, the distribution of Primal's 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. The actual fair market
value of Primal's common shares will be determined based upon this appraisal (as
updated if necessary).
Expected Equity Capital Structure of Primal Solutions Post Spin-off
Under the terms of the spin-off agreement with Primal, each common shareholder
of Avery Communications on the record date of the spin-off 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 spin-off. The exercise and conversion
price of outstanding stock warrants, options and convertible securities will be
adjusted to reflect the spin-off. The spin-off will be a taxable transaction
for federal income tax purposes.
The spin-off transaction will involve the distribution by Avery of 11,547,264
shares of Primal's common stock as a dividend to the holders of record of Avery
common stock, the issuance of 1,662,667 shares of Primal stock to the holders of
Avery's preferred stock Series A-E, the issuance of 280,000 shares of Primal
stock to the holder of Avery's convertible debt, and the issuance to "former
Primal shareholders" of 6,207,026 shares of Primal stock known as the "Primal
Consideration" under the terms of the spin-off agreement. The 19,696,957 shares
of Primal's common stock will constitutes all of Primal's post spin-off issued
and outstanding shares of common stock (see the schedule below).
After the spin-off, Primal will be a separate company, no longer owned in any
way by Avery. Certificates evidencing the 19,696,957 shares of Primal's common
stock will be distributed by mail within a reasonable time after the
Distribution Date.
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As part of the spin-off transaction, the original Primal owners, have agreed to
receive 15% and 32% of Avery and Primal, respectively, on fully diluted basis.
In addition, the former Primal shareholders have agreed to waive their right for
Avery to repurchase $3.9 million of their Avery stock and Avery has agreed to
provide $4.0 million in working capital to Primal prior to the spin-off. The
schedule below presents the equity ownership of Primal post spin-off:
Avery Communications, Inc.
Primal Distribution Shares
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<CAPTION>
<S> <C>
Avery common stock to receive Primal distribution 11,547,264
---------------
Preferred Stock (Common Stock Equivalents) Preferred Conversion
Shares Factor
--------- ----------
Series A 391,667 2.5 156,667
Series B 390,000 1.0 390,000
Series C 40,000 2.5 16,000
Series D 1,500,000 2.0 750,000
Series E 350,000 1.0 350,000
---------------
1,662,667
---------------
Converbible Debt $350,000 1.25 280,000
---------------
Shares to registered under the Primal SB-2 13,489,931
Total Primal consideration 6,207,026
---------------
Total Primal shares after distribution 19,696,957
===============
</TABLE>
Primal's Stock Will Be Traded On The OTCBB Market
Primal will file a registration statement to register all shares of Primal
common stock held by the former 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, Primal 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.
Primal's common stock is therefore expected to commence trading upon the OTCBB
market (the over-the-counter bulletin board market) subsequent to the spin-off.
The OTCBB market consists of publicly traded securities whose companies are not
large enough or well capitalized enough to meet the qualifications to trade on
the larger more organized stock markets, such as the Nasdaq National Market, the
American and New York exchanges. A limited number of "market makers" are
available on the OTCBB for any particular stock issue, and trading activity can
be "thin" and sporadic. As a result, investors holding OTCBB traded securities
do not enjoy the same level of liquidity as investors in securities traded on
the larger stock exchanges.
There are numerous studies that show significant discounts for lack of
marketability exist for stock that is restricted as to its marketability. The
summary of the Restricted Stock Studies indicated a median discount of 36%. In
the Emory Studies, it was 45%. In the Willamette it was 40%-45%.
Page 3
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Since Primal's common stock will be traded on the OTCBB market, common
shareholders post spin-off may well face a relatively high degree of price
uncertainty and consequent market illiquidity at least for the first 12 months
of trading. Accordingly we determined the discount for lack of marketability to
be 15% for the common stock shares of the Company over the price level that
might be expected to obtain in a larger more organized and active trading
environment of the Nasdaq NM or other similar stock exchanges (see the report
section entitled "Discount for Lack of Marketability Investment Risk" for a
detailed analysis of this issue).
Appraisal Performed in Conformance to Professional Standards of Practice
This appraisal was performed in accordance with the Uniform Standards of
Professional Appraisal Practice (USPAP), as promulgated by The Appraisal
Foundation. We also followed the procedures established by the American Society
of Appraisers, the American Institute of Certified Public Accountants, and the
Institute of Business Appraisers (IBA).
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.
Standard, Definition and Premise of Value
The standard of value for this appraisal is fair market value (FMV). IRS
Revenue Ruling 59-60 defines fair market value as:
The price at which the property would change hands between a willing buyer and
a willing seller when the former is not under any compulsion to buy and the
latter is not under any compulsion to sell, both parties having reasonable
knowledge of the relevant facts.
Therefore, for purposes of this appraisal, the term "fair market value" is
defined as the amount per share at which a minority interest in the common stock
of Primal Solutions, Inc. would change hands between a willing buyer and willing
seller, both having reasonable knowledge of the relevant facts, neither being
under any compulsion to act, with equity to all, and under the marketability
benefit and constraints of the OTCBB stock market. Hence, we consider the per
share "fair market value" of Primal's common stock to represent a "marketable
minority interest."
A minority interest is an interest that has no control. Therefore, our
appraisal has taken into account those discounts that would be experienced by a
seller selling a minority interest assuming a reasonable exposure to the market.
The business was also appraised under the appraisal premise of value in
continued use, as part of a going concern entity. Furthermore, for purposes of
this appraisal, we have assumed that after the spin-off, the outstanding shares
of Primal common stock will have been fully distributed, and information
concerning Primal, of the type normally available concerning publicly-traded
companies, will have been appropriately disseminated. The Primal Solutions,
Inc. common stock will be registered with the Securities and Exchange Commission
("SEC") and traded on the Over-the-Counter Bulletin Board market ("OTCBB
market"), and Primal's common shareholders post spin-off may well face a
relatively high degree of price uncertainty and consequent market illiquidity at
least for the first 12 months of trading.
This appraisal took into account, among other factors, those factors required to
be considered by Internal Revenue Ruling 59-60:
1. The nature of the business and the history of the company.
2. The economic outlook in general and the outlook of the telecommunications
industry in particular.
3. The book value and the financial condition of Primal.
4. The earning capacity of the company.
5. The dividend-paying capacity of the company.
6. Whether or not the company has goodwill or other intangible value.
7. Sales of shares of stock and the size of the block to be valued.
8. The market price of stocks of corporations engaged in the same or similar
lines of business as the company and whose stocks are actively traded in a
free and open market, whether on an exchange or over-the-counter.
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We have appraised Primal Solutions, Inc. as a going concern and assumed that the
purchase price for a minority interest block of stock would be paid in cash at
closing.
Valuation Terms and Conditions
During the appraisal, we were provided with audited and internal Company
financial information with respect to Primal Solutions, Inc. We have accepted
these statements without independent verification or audit.
We are independent of Primal Solutions, Inc. and have no interest in the
business being valued, and our fee is not contingent on the outcome of this
appraisal nor was it influenced by it.
This valuation report is prepared solely for the purposes herein stated and is
intended for no other purpose, and individuals not informed of proper valuation
procedures should not draw any conclusion from this report.
The attached certification, statement of limiting condition, and qualification
of the principals of SE Biz Val, LLC, are integral parts of the appraisal
opinion. A copy of this report and the working papers from which it was
prepared will be kept in our files for five years.
Information Considered
Primal's management gave us information and materials ("information") pertaining
to Primal that included, but was not necessarily limited to, the following:
. Primal's audited financial statements for the fiscal years ending
December 31, 1997-1999 prepared by the company's CPAs, Deloitte & Touche.
. Relevant SEC filings of Avery Communications, Inc.
. A list of all current management employees showing their annual salaries.
. A list of the ownership of stock by principal shareholders.
. Personal meetings with key members of the management team.
Information on the outlook of the U.S. Economy was derived from the following
sources:
. Economic Report of the President, 1998/1999
. Wall Street Journal
. Business Week On-line
. Federal Reserve Bank Publications On-line
. Shannon Pratt's Business Valuation Update
. Various publicly available Internet sources
For information on the software service business to telecommunications
providers, we relied on the following:
. Hoovers' On-line
. Robert Morris Associates. Annual Statement Studies. 1999
. Personal interviews with senior management of Primal
. World Merger and Acquisitions, Done Deals 1999
. Almanac of Financial Ratios - 1999
. Encyclopedia of American Industry, 1998.
. Various publicly available Internet sources
In preparing our opinion, we have relied on and assumed the accuracy and
completeness of the information given to us by Primal's management as well as
the sources we utilized. We have accepted the information as fairly reflecting
the operations, trends, and financial position of Primal. We have neither
independently investigated nor otherwise verified the accuracy or completeness
of the information given to us and express no opinion or other form of assurance
as to its accuracy or completeness. Furthermore, we have relied on
representations of Primal's management that all information given to us is not
false, inaccurate, incomplete, or misleading; and that no fact or information
that would have had material bearing on our conclusions has been withheld or
otherwise omitted.
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We hereby make reference to all SEC filings made by Avery Communications, Inc.
in regards to the 1999 acquisition, subsequent operation and current spin-off of
Primal Solutions, Inc. We specifically refer the reader of this appraisal
report to the information contained in the prospectus "Form SB-2 Registration
Statement Under the Securities Act of 1933 -- Primal Solutions, Inc." We
consider the information contained in these SEC filing documents to be an
integral part of our valuation analyses.
The following summary discussions of the telecommunications software services
industry, Primal Solutions operations and the associated investment risks are
taken in whole or in part from Avery Communication and Primal SEC filings,
Company public relations material, management discussions and other publicly
available industry writings. We will not make specific attribution nor
notification of direct quotes, though much of these discussions will be direct
copies or paraphrases of the same discussions in the aforementioned SEC filings,
promotional material and industry literature.
The Use of Projected Forward-Looking Statements
A fundamental tenant of investment value is that such value is based upon
expected future returns to the investor. Hence, forming an appropriate and
reasonable vision or outlook for the future financial performance of the Subject
Company is required by anyone who seeks to invest in the Company's securities.
Therefore, whether an investor seeks to evaluate the price of such an investment
in terms of comparing the investment in the Subject Company to similar
opportunities in the stock market (i.e., the Market Approach), or by directly
evaluating the expected returns to be obtained from such an investment (i.e.,
the Income Approach), no basis for rational comparison exists without
considering such a reasonable vision or outlook for the Subject Company.
Since forming a reasonable outlook for the Subject Company's future financial
performance is so essential in the valuation of an investment in the Company, it
is of paramount importance that investors have a meaningful method by which to
assess any such projection or forecast put forward by the Company's management.
Under the Securities and Exchange Commission's Regulation S-B (Integrated
Disclosure System for Small Business Issuers), Item 10(d)(3), such a requirement
is expressed as follows:
"Investor Understanding - Disclosures accompanying the projections
----------------------
should facilitate investor understanding of the basis for and
limitations of projections. The Commission believes that investor
understanding would be enhanced by disclosure of the assumptions which
in management's opinion are most significant to the projections or are
the key factors upon which the financial results of the enterprise
depend and encourages disclosure of assumptions in a manner that will
provide a frame-work for analysis of the projection. Management also
should consider whether disclosure of the accuracy or inaccuracy of
previous projections would provide investors with important insights
into the limitations of projections."
Since forming a reasonable outlook for the Subject Company is so crucial to the
rational valuation of the Company's equity securities, we have depicted a
variety of forward-looking statements in our analyses of the general economy,
the specific industry, and our analysis of the Subject Company itself. Such
forward-looking statements in this appraisal report generally can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"intend," "estimate," "anticipate," "plan," "seek," "believe," "project," or
"forecast."
We believe that the expectations for the Subject Company reflected in such
forward-looking statements contained in this valuation are reasonable. However,
we cannot assure the reader that such expectations will occur. The Company's
actual future performance could differ materially from such statements. Factors
that could cause or contribute to such differences include, but are not limited
to:
. the passage of legislation or court decisions adversely affecting the
telecommunications industry;
. competition in the telecommunications industry; and
. the advent of new technology.
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The reader should therefore not unduly rely on these forward-looking statements,
which speak only as of the date of this appraisal. 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 appraisal 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
"Risk Factors" and elsewhere in this appraisal report.
Summary Description of the General Economic Environment
Overall, we assess the current General Economic Environment as having a
relatively neutral impact on the value of Primal Solutions. Increased economic
growth will generate more demand for the Company's services, but increased input
cost (labor and capital) will tend to hamper growth and profit margins. Stock
market volatility and a return to "earnings" as a basis for valuing stock will
hamper the Company in the short run as it tries to establish itself as a new
listing on the OTCBB, but should help it in the long-run if it can generate a
positive earnings history.
Summary Description of the Telecommunications Industry
The U.S. telecommunications industry has seen the proliferation of new products
and services with the evolution of wireless, internet and traditional wireline
technologies. The Telecommunications Act of 1996, which deregulated the local
exchange market, has given a boost to competition. 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. Annual global spending on
telecom services, already $726 billion, is expected to grow to $1 trillion by
2001. The defining feature of today's telecommunications market is change,
spurred by technological advances and deregulation.
The overall market for information technology (IT) services to the "new economy"
is very much in the developmental phase. Right now communication service
providers (CSPs), network equipment manufacturers, IT service providers and
consultancies are coming together to create operational support systems (OSS)
solutions. "Coopetition" (cooperative competition) is currently the norm, as
CSPs seek to expand their telecommunication service offerings into the new
Internet based economy. Fast-growing OSS services reflect the importance of
support technologies that enable a proactive, self-service support model and
highlight the movement in the support industry to transform the support
organization from a reactive cost center to a valuable, important, and revenue-
generating business model. However, competition is expected to heat up soon,
and IT service providers will be faced with challenges involving technology,
customers, business modes, and industry structure.
The current nature of the marketplace for Primal's products and services leads
to (1) an expensive but necessary product development process, (2) a long lead
time in sales, (3) shortened product life-cycles, (4) intense competition from a
variety of competitors (some better capitalized with access to more resources),
(5) need for highly skilled and increasingly scarce employees, and (6)
vulnerability of the enterprise's primary asset - its intellectual capital.
Thus, we would characterize the IT service providers segment of the
telecommunications industry as one that has strong potential growth accompanied
by rapid technological evolution, but constrained by increasing competition,
market turmoil, a deficiency of trained skilled workers, and lack of global
communication standards. The adaptive and regenerative capabilities of an IT
service provider's management team will be as essential to success as its
capabilities of providing next-generation OSS processes to its telecommunication
industry customer base.
The structure of the market for suppliers of telecommunication software and IT
products/services is highly fragmented, with no one company providing more that
10% of the demand for any product category. Another characteristic of these
companies is that most of them are still in their "start-up" phase of their life
cycle, being less than five years old. Because of the early stage of their life
cycles, the changing nature of the marketplace itself as it rapidly evolves, the
need to continually develop new product, and the cost of penetrating the
expanding market, these software suppliers have been losing substantial amounts
of income. Hence, a chronic condition for these "start-up" companies is a
continual need for new capital to fund current losses and future growth. Equity
investments in this economic sector are therefore bearing substantial risk, more
akin to venture capital than established going concerns.
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Summary Description of Primal Solutions, Inc.
Primal Solutions, Inc. 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. Through the acquisition of
assets from Corsair in February 1999, Primal acquired the capability to design,
develop, and support 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.
Currently Primal is an information technology (IT) company that provides
software products and systems support services primarily to the
telecommunications industry. The Company develops, markets and supports
customer management and billing software (CM&B), customer analytics software,
and intelligent switch mediation software to support the converging requirements
of wireless, Voice over Internet Protocol (VoIP), and data communications
service providers (CSPs). Service providers using Internet Protocol (IP)
networks transmit voice and data communications via 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 (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
the Company's current base of more than 16 major 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. Primal's principal executive offices are
located at 18881 Von Karman, Suite 450, Irvine, California 92612, and their
telephone number at that address is (949) 221-8550.
Hence, in summary, we would characterize Primal Solutions, Inc. as being an
information technology (IT) company that provides web-based customer management
solutions that enable wireless and internet communications providers to acquire,
manage and analyze key customer data within the organization, and take action
based on this intelligence. Established in 1996, the Company is young and still
in the "start-up" phase of its life cycle.
The telecommunication software products/services market Primal competes in is
highly chaotic, with fast changing and evolving technology coupled with a highly
competitive and diverse marketplace. Staying on top of technological and market
changes is the key to success in this industry. Doing that requires hiring and
retaining highly skilled employees in an era in which such high technology
talent is in short supply.
Summary of Valuation Methods Utilized
In determining the aggregate fair market value on an OTCBB marketable minority
interest basis of the 19.7 million shares of Primal common stock that will be
outstanding after the spin-off, we 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.
We did not use any method under the Asset Approach due to the material level of
unidentified going concern intangible assets employed by the Company.
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The Discounted Cash Flow Valuation Method
The discounted cash flow ("DCF") valuation method under the Income Approach
requires; (1) estimates of future cash flows, (2) identification of a discount
rate that reflects the rate of return required by investors in alternative
investments exhibiting similar characteristics of risk and reward in terms of
both predictability of income and expected growth of income and/or capital
appreciation, and (3) the "discounting" to present value of the projected future
cash flows.
In preparing the DCF analysis, estimates of prospective operational performance
and financial results were compiled principally from discussions with and
assumptions furnished by the company's management but with consideration of
historical results, published industry statistics, and our own understanding of
the economics of industrial contracting firms. Nothing came to the attention of
the personnel assigned to this engagement in the course thereof that would cause
us to believe that the assumptions, when taken in their entirety, are
unreasonable. We felt that the estimated profits used to determine value were
indicative of the future. After assessing the Company's "market value" under
this method, a final adjustment to account for the restricted marketability
inherent in being traded on the OTCBB market was then applied to determine the
fair market value of the company's common equity. We believe this assessment is
a reliable indication of fair market value.
In the cost of capital based discounted projected cash flow method, we
determined Primal Solutions' 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 the Company would be operated on
a "survival mode" basis, growing with internally generated funds.
In our analysis of the Subject Company, we performed a detailed analysis of
Primal's historical financial performance. In addition, we have reviewed
management's forecast for the years 2000 and 2001 and have adopted them for the
first two years of our projections. We have then taken those projections out
seven more years to a "stabilized" level of financial performance.
At management's request we valued Primal on the basis that there would be no
"new money" invested to fund future growth (other than the already committed $4
million from Avery prior to the spin-off). Hence, with this key assumption, the
Company's potential growth is limited to what cash flows it can generate
internally to fund future growth. Our projected financial statements reflect
this fundamental constraint.
Our assessment of the degree of uncertainty concerning the projected future
financial performance of Primal is therefore dependent upon the following
observations:
. Overall, we assess the current general economic environment as having a
relatively neutral impact on the value of Primal Solutions. Increased
economic growth will generate more demand for the Company's services, but
increased input cost (labor and capital) will tend to hamper growth and
profit margins.
. The growth of the global telecommunications market has been strong. Annual
global spending on telecom services, already $726 billion, is expected to
grow to $1 trillion by 2001.
. We would characterize the IT service providers segment of the
telecommunications industry as one that has strong potential growth
accompanied by rapid technological evolution, but constrained by increasing
competition, market turmoil, a deficiency of trained skilled workers, and
lack of global communication standards.
. Because of the early stage of their life cycles, the changing nature of the
marketplace itself as it rapidly evolves, the need to continually develop
new product, and the cost of penetrating the expanding market, these
software suppliers have been losing substantial amounts of income. Hence, a
chronic condition for these "start-up" companies is a continual need for new
capital to fund current losses and future growth. Equity investments in this
economic sector are therefore bearing substantial risk, more akin to venture
capital than established going concerns.
. Stock market volatility and a return to "earnings" as a basis for valuing
stock will hamper the Company in the short run as it tries to establish
itself as a new listing on the OTCBB, but should help it in the long-run if
it can generate a positive earnings history.
. Primal was incorporated in June of 1996, thus providing only three full
years of financial performance history.
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. Historical sales growth has been very high, increasing from basically zero
in June, 1996, to $11.1 million in 1999. Annual compound sales growth
averaged 126% over the most recent 2-1/2 year period measured from 1-1-98
through 6-30-00 (using fiscal year 1997's sales of $1.1 million as a base).
Sales grew 153% for the latest 12 months ended 6-30-00. Such strong sales
growth is typical of a start-up firm penetrating a new market. We expect
future percentage growth in sales to decline as the Company increases in
size.
. Profitability for the three fiscal years ended December 31, 1997, 1998, 1999
and the latest 12 months ended June 30, 2000, was highly variable, with only
FY1999 posting a net profit margin of 2.5% (the 3-1/2 year average net
profit margin was a -14.8%, with a -12.7% posted for the latest 12 months
ended 6-30-00). However, such negative profit margins are to be expected for
such a start-up service company experiencing strong growth in a dynamic and
evolving marketplace.
. Since its inception, Primal has acquired almost $4.4 million in equity
financial support, providing the necessary funding to build the Company's
business. Primal is in need of an additional $4 million in such funding
which its parent company, Avery Communications, has committed to provide
prior to the spin-off. Management believes this will be sufficient financial
support to fund the Company to the point of profitability and internal cash
flows sufficient to finance future growth, though at a more moderate pace.
. Primal's management has generated forecasts and budgets in the past.
However, subsequent Company performance has rarely met those projections,
sometimes falling below them and sometimes exceeding them. This is also
typical of a start-up firm in which future activity is difficult to predict.
However, as the Company matures and increases in size, predictability of
future sales and profits should improve.
As of the writing of this valuation report, Primal's management was working from
a financial performance business plan for the two fiscal years ended December
31, 2000 and 2001. The Company's management has also reviewed the basic
assumptions concerning the long-term outlook. Primal's management has stated
that the approximate 1-1/4 year projections for 2000/2001 and the longer-term
projections provided below seem reasonable. However, as with all forward
looking statements, there can be no guarantee that Primal will actually perform
as indicated. Taking into consideration all of the factors reviewed and
analyzed so far in this valuation, we have made the following basic assumptions
as to the future financial performance of Primal:
1. Sales Growth Assumptions - Expected growth in revenues is probably the most
important valuation factor for high growth start-up service companies such
as Primal. Penetrating new market niches and building a lasting base of
business is the greatest strategic challenge for such firms. Management's
current business plan through FY2001 indicates that based primarily on
business already sold, sales are expected to be somewhat down in FY2000 at
$9-10 million. However, based upon follow-on work plus new product roll-
outs, the Company expects sales to increase to $15 million in FY2001, the
second year of its current budget plan. Subsequent to FY2001, the Company
sales growth is projected to substantially moderate to an average of about
20% per year over the following five years, very much in-line with overall
industry growth expectations. Primal is expected to attain the $30 million
sales level within five years. Given the nature of the chaotic evolving and
highly competitive telecommunications services markets Primal participates
in, such future expectations contain a high degree of uncertainty and
therefore generate a high degree of risk relative to the equity investors.
2. Profitability Assumptions - Net profitability is one of the most important
indicators of value, especially for service firms which do not employ a high
degree of operating leverage. High growth service companies almost always
experience negative current period profit margins due to the need to
continually "invest in the future" by hiring new people to develop and
support the products and services that will generate the next period's
growth. As a firm becomes larger and subsequent future growth moderates,
profitability should turn positive. As with such high-growth service firms
in general, so it should be with Primal. Management's current budget plan
calls for a loss of over $5 million in FY2000, followed by a loss of almost
$4 million in FY2001. As growth moderates starting in FY2002, the Company
should attain positive profitability, improving to a stabilized net profit
margin range of 5% to 6% of sales, modest but appropriate in this highly
competitive industry. Given Primal's stage in its life-cycle, the Company
must achieve profitability by FY2002 or before, or the Company will be
forced to find additional equity funding. This situation therefore indicates
that current equity investors have assumed a high degree of risk.
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<PAGE>
3. Asset Utilization & Reinvestment Assumptions - A key consideration in the
valuation of any going concern enterprise is the efficiency with which the
firm utilizes its productive asset base (i.e., the left-hand side of the
balance sheet). The productive assets of telecommunication service companies
are generally composed of cash and accounts receivable, office equipment,
and a group of intangible assets including installed workforce, customer
relationships, proprietary service technologies and going concern goodwill.
The intangible assets generally provide most of the going concern value of
such service companies, and generally are not "booked" on the balance sheet
(unless the firm has acquired another company in excess of book value as
didAvery in its acquisition of Primal in September of 1999). Under
management's current business plan, it is projected that total asset
turnover (including some $4.2 of booked goodwill due to the Corsair
acquisition) will improve from about 0.9 times to almost 2 times five to
seven years from now. This will be based on growth and reinvestments funded
internally after receiving the $4 million of additional funding from Avery
Communications and after achieving profitability in FY2002. A stabilized
total asset turnover ratio of 2 times over the long-term is not an
aggressive assumption.
4. Financial Leverage Assumptions - Another key valuation consideration is the
management of the funding side of the balance sheet (i.e., the right-hand
side which contains the funding sources of all liabilities and equity
together). As an enterprise grows, it reinvests in its productive asset base
in order to sustain that growth. Equity holders help fund that reinvestment
through purchasing additional equity stock and through the retention of
earnings. Debt is also used to assist in funding the growth of the
productive asset base. The more debt a company uses, the more financial risk
is incurred by the company and the riskier an investment in that firm's
equity becomes. Under management's current business plan, it is projected
that equity as a percent of total booked assets will improve from about 30%
as of June 30, 2000 to about 40% as of December 31, 2000 as a result of
Avery's $4 million of additional funding. However, due to the $4 million of
projected losses for FY2001, Primal's equity funding is projected to
"bottom-out" at less than 2% of total assets, before climbing due to
achieving profitability to a stabilized sustainable level of 35% to 40% over
the long-term. The projected level of equity of less than 2% as of FYE2001
indicates that the Company and current equity holders will be facing
substantial financial risk.
The effects of these four basic financial performance assumptions is to generate
sales that are projected to grow to $15 million in 2001, $20 million in FY2002,
and increase almost to $60 million in FY2008. Net profitability is in the red
in both FY2000 and FY2001, but moves to "break-even" in FY2002 and expands to
over $3 million long-term. Total assets grow from $10 million at the end of
fiscal FY2000 to almost $30 million in FY2008, with equity expanding to almost
$12 million or 40% of total assets as of FY2008. Returns on equity move from
the red in FY2000 and FY2001 to a long-term stabilized return of about 27%.
Primal begins to generate a dividend paying capacity only in year FY2007,
stabilizing in FY2008 at about 50% of net income or $1.6 million.
Management's business plan through FY2001, and the subsequent projections
contain a high level of uncertainty, especially regarding projected sales growth
and achieving profitability. Uncertainty translates into investment risk as far
as equity holders are concerned. Hence, given the start-up stage of Primal's
life cycle, its need for additional funding in the future ($4 million of which
Avery Communications is providing), and the uncertainty surrounding its ability
to achieve future growth and profitability, we believe that an equity investment
in Primal would command a substantial "risk premium" over and above that
normally required for publicly held minority interest equity investments.
We therefore discounted these projected cash flows at an investment risk
adjusted discount rate of 25%, which has a substantial risk premium imbedded
(large capitalization publicly traded stocks have historically returned 12% to
15% per year, and small capitalization stocks 15% to 20% per year). The
selected discount rate reflects the rate of return that we estimate would be
reasonably required by providers of common equity capital to Primal Solutions 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 FY2008,
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 we determined that the "market
capitalization" ("MCAP") of Primal Solutions' common equity on a freely
tradeable minority interest basis was $3.1 million. We then took into account
Primal Solutions' 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, We concluded that the aggregate fair market value on an OTCBB
marketable minority interest basis of Primal Solutions' common equity would have
a "thinly traded" MCAP value of $2.7 million.
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<PAGE>
The Publicly Traded Guideline Valuation Method
The public company guideline valuation method under the Market Approach is a
method of determining the fair market value of a company's common stock 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 based on market capitalization
multiples of similar publicly traded companies. Certain normalization
adjustments for non-operating assets, interest-bearing debt, and preferred stock
dividend requirements are made to determine the representative level of funds
available to the common stock to be capitalized.
Such comparable publicly traded "Guideline" companies that 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 freely traded minority interest market
value. A final adjustment to account for the restricted marketability inherent
in being traded on the OTCBB market was then applied to determine the fair
market value of the company's common equity. We believe this assessment is a
reliable indication of fair market value.
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 Solutions' 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 ("EBIT") profits than Primal Solutions.
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 (only one of the seven guideline
companies achieved a positive EBITDA for the trailing 12 months), 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.
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<PAGE>
After performing a comparative analysis between Primal Solutions and these seven
Guideline companies, SE Biz Val determined that the "market capitalization"
("MCAP") of Primal Solutions' 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 contribution of $4
million of funding prior to the spin-off). 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 Solutions'
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 Solutions' equity would have a "thinly traded" MCAP value of
$4.2 million.
Appraisal Conclusion
After reviewing all of the relevant data, we 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, we weighted the income approach result more heavily than the
market approach result, thereby concluding that the fair market value of Primal
Solutions, common stock after the spin-off was $0.16 per share. The schedule
below presents this conclusion:
Primal Solutions, Inc.
Reconciliation of Fair Market Values - Common Stock
Conclusion of FMV Rounded to $0.01/share
<TABLE>
<CAPTION>
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
--------------
Sub-total $3,103,000
--------------
Per Share FMV (rounded to $.01) 19,696,957 shs equals $0.16/share
-------------- --------------
Resultant Aggregate Fair Market Value equals $3,151,513
--------------
</TABLE>
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<PAGE>
Therefore, based upon the investigation, premises, provisos, and relevant
analyses outlined above, as of September 15, 2000, our independent objective
opinion of the fair market value on an OTCBB marketable minority interest basis
of the capital stock of Primal Solutions, Inc. is to be reasonably stated in the
amount of $3.15 million, or $0.16 per share based on 19,696,957 shares of common
stock issued and outstanding after the spin-off. If necessary, we will update
our appraisal of the fair market value of Primal's common stock received as of
the spin-off 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 spin-off. 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.
For the Firm
SE Biz Val, LLC
John C. Hawthorne, ASA, CFA, FIBA, MCBA
Principal
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