<PAGE>
As filed with the Securities and Exchange Commission on January 8, 2001
Registration No. 333-46494
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
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 Primary Standard Industrial (I.R.S. Employer
Jurisdiction Classification Code Number Identification No.)
of Incorporation or
Organization)
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)
--------------
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: As soon as practicable
after the effective date of this Registration Statement.
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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities To Be Amount To Be Offering Price Aggregate Registration
Registered Registered Per Share Offering Price Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 19,660,453(1) $0.16(2) $3,145,672.40 $830.46
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Total Amount Due........ $830.46
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</TABLE>
(1) Shares of common stock of the registrant being distributed to
securityholders 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.
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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--------------------------------------------------------------------------------
<PAGE>
Subject to Completion, Dated January 8, 2001
PROSPECTUS
PRIMAL SOLUTIONS, INC.
13,189,931 Shares of Common Stock
This prospectus relates to the distribution by Avery Communications, Inc.,
of 13,189,931 shares of our common stock to the holders of record on October
23, 2000, of shares of Avery's common stock, series a, b, c, d and e preferred
stock and convertible note. 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.
As a result of making the distribution, Avery may be deemed to be an
underwriter of the Primal shares.
After the distribution, we will be a separate company, no longer owned in
any way by Avery.
Certificates evidencing the 13,189,931 shares of our common stock will be
distributed by mail within a reasonable time after the distribution date,
currently anticipated to be by January , 2001.
There is no current market for our shares of common stock.
----------------
Ownership of our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 3.
----------------
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.
----------------
The date of this prospectus is
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY.................................................................... 1
RISK FACTORS............................................................... 3
A NOTE ABOUT FORWARD--LOOKING STATEMENTS................................... 12
USE OF PROCEEDS............................................................ 12
CAPITALIZATION............................................................. 13
THE PRIMAL DISTRIBUTION.................................................... 14
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
TO AVERY'S STOCKHOLDERS.................................................... 33
MARKET INFORMATION......................................................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................. 35
BUSINESS................................................................... 42
LEGAL PROCEEDINGS.......................................................... 52
MANAGEMENT................................................................. 53
NAME AND PRINCIPAL POSITION................................................ 54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 56
LIMITATION OF LIABILITY AND INDEMNIFICATION................................ 56
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
HOLDERS.................................................................... 59
DESCRIPTION OF CAPITAL STOCK............................................... 61
WHERE YOU CAN FIND MORE INFORMATION........................................ 61
EXPERTS.................................................................... 61
</TABLE>
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SUMMARY
Primal, and its subsidiary Wireless Billing Systems, develops, markets and
supports customer management and billing software (CM&B), customer analytics
software, and switch mediation software for providers of voice and data over IP
and wireless networks. Voice over IP, also known as Internet Telephony, is the
transmission of voice communications over public or private networks, using
Internet Protocol, commonly referred to as IP. Internet Protocol is the process
by which data is transmitted from one computer to another on the Internet.
Wireless communications, such as cellular and paging, utilize radio frequency
to transmit and receive voice and data services.
Primal's software products, Connect CCB(TM) for customer management and
billing, Access IM(TM) for switch mediation, and Outfront CRM(TM) for customer
analytics, form an integrated product suite which enables communications
service providers to manage all aspects of the customer relationship from one
system, including mission critical functions such as account creation, service
initiation, customer care and billing. It also collects the data necessary to
track and analyze service usage on an individual customer basis. Primal's
integrated product suite can support both start-up service providers, with few
customers, as well as large established service providers with millions of
customers, across both IP and Wireless networks. Primal software operates with
telecommunications equipment from major manufacturers such as Cisco Systems,
Inc., Lucent Technologies Inc., and Nortel Networks Inc. Primal's products
currently support more than eleven million customers across our current base of
more than 16 customers worldwide.
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.
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 6,207,026 shares
of our common stock in redemption for 4,799,259 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, who referred to
collectively in this prospectus 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 the reasons for the distribution, see page 14. Please
note that our business will not substantially change as a result of the
distribution.
1
<PAGE>
Q: Do I have to pay federal income taxes on the receipt of Primal common stock?
A: You may be required to pay federal income taxes on receipt of your common
stock. The distribution will be treated as a dividend for federal income tax
purposes. You should read the discussion under the caption "Material Federal
Income Tax Consequences of the Distribution to Primal's Stockholders" for a
more detailed description of the federal income tax consequences of the
distribution.
Q: Where will Primal common stock be quoted?
A: We expect that our common stock will be quoted on the OTC Bulletin Board. In
order for our common stock to be eligible to be traded on the OTC Bulletin
Board we will need to make filings pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 and be sponsored by a broker-dealer who is a
member of the National Association of Securities Dealers, Inc.
Q: When will the distribution occur?
A: We expect the distribution to occur on or about January , 2001.
Q: What will our business be after the distribution?
A: Following the distribution, Primal 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 businesses that each company plans to pursue, there
will be no direct competition between Avery and Primal.
2
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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.
Risks related to our business
We have a limited history as a provider of customer management and billing,
switch mediation, and customer analytics software. As a result it is difficult
to evaluate our business and prospects.
We were founded in 1996. We received our first revenues from licensing our
customer management and billing, switch mediation, and customer analytics
software products and performing related services in 1999. Until 1999,
substantially all of our revenues were derived from performing consulting
services unrelated to our software products. Sales of our software products and
related services accounted for substantially all of our revenues in 1999 and
2000. Because we have a limited operating history as a provider of customer
management and billing, switch mediation, and customer analytics software, it
is difficult to evaluate our business and prospects.
We have not achieved profitability and expect to continue to incur net losses
for at least the next several quarters.
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 $3,300,923 for the nine months ended September 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 to Primal
for the three months ended December 31, 1999, and the nine months ended
September 30, 2000. We had an accumulated deficit of $2,342,164 as of September
30, 2000. We have not achieved profitability and expect to continue to incur
net losses for the foreseeable future.
In addition, we will need to generate significant revenues from the sales of
Primal Connect CCB, Access IM, and Outfront CRM and reduce operating costs 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 may 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 may need additional funds to expand or meet all
of our operating needs. We are actively seeking additional funds primarily
through additional private equity or debt financings, as well as strategic
financial partners. If we raise additional funds through the issuance of
equity, equity-related or debt securities, such securities may have rights,
preferences or privileges senior to those of the rights of our common stock.
The sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders. In addition, the issuance of debt
securities could increase the risk or perceived risk of our company. We cannot,
however, be certain that additional financing will be available to us on
acceptable terms when required, or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
3
<PAGE>
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:
. The timing of orders for our software. Customers typically order our
products and services only after other vendors have provided the
infrastructure for their telecommunications network. There can be delays
in that process. It is therefore difficult for us to predict the timing
of orders for our products and services by customers;
. The ability of our customers to expand their telecommunications
operations and increase their subscriber base, including their ability to
obtain financing;
. Changes in our pricing policies or competitive pricing by our
competitors;
. The timing of releases of new products by manufacturers of
telecommunications equipment with which our products operate; and
. The timing of product introductions by competitors.
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 markets for these products are in their early stages of development and are
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, the cancellation 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.
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 lengthy sales cycle makes it difficult to anticipate the timing of sales,
and revenue may vary from period to period.
The sales cycle associated with the purchase of our products is lengthy, and
the time between the initial proposal to a prospective customer and the signing
of a license agreement can be as long as one year. Our products involve a
commitment of capital that may be significant to the customer, with attendant
delays frequently associated with large capital expenditures and implementation
procedures within an organization. These delays may reduce our revenue in a
particular period without a corresponding reduction in our costs, which could
hurt our results of operations for that period.
Our growth depends on the commercial acceptance of our recently introduced
products, Connect CCB, Access IM, and Outfront CRM, and it is uncertain to what
extent the market will accept these products.
Our future growth depends on the commercial success of Connect CCB, Access
IM, and Outfront CRM. Substantially all of our revenues are derived from
licenses of Connect CCB, Access IM, and Outfront CRM, and related services. Our
business will be harmed if our target customers do not adopt and purchase these
software products. The market for Internet-based customer management and
billing, switch mediation and customer analytics 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 these software products. We are not certain that our
target customers will widely adopt and deploy these software products in their
telecommunications operations. 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.
4
<PAGE>
Our business may suffer if we do not increase market awareness of our products
by expanding our sales capabilities.
We sell our software products primarily through our direct sales force. Our
financial success and our ability to increase revenues in the future may depend
considerably upon the growth and productivity of our direct sales force, which
has historically generated the majority of our revenues. This productivity and
growth will depend to a large degree on our success in recruiting, training,
and retaining sales people. There is a shortage of direct sales personnel with
the skills and expertise necessary to sell our software products. Our ability
to increase revenues significantly will suffer if we fail to hire or retain
qualified sales personnel, or if newly hired salespeople fail to develop the
necessary sales skills or develop these skills more slowly than we anticipate.
Upon the raising of additional financing, we expect to increase the size of our
sales force to expand our capabilities.
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.
We may not be able to attract or retain a sufficient number of highly qualified
professional services personnel, who assist our customers with the
implementation of our software products.
We believe that growth in our software product sales depends on our ability
to provide our customers with professional services to assist with support,
training, consulting and initial implementation of our software products and to
educate third-party systems integrators in the use of our software products. As
a result, we may need 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. 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
implementing our products.
We have recently reduced operating costs in part by reducing staff. As a
result, we may suffer further attrition and/or may not be able to recruit
qualified personnel.
In reducing our operating costs, we have recently reduced the size of our
staff to levels more consistent with expected level of new business. The
reduction in staff could result in further attrition of qualified personnel. In
addition, in the future we may not be able to recruit the needed qualified
personnel if the reduction causes our company to be perceived as an unstable
employment environment. As a result, we may not be able to provide customers
with the needed level of professional services which could result in the loss
of customers and reduction in sales revenues.
We may be unable to maintain our existing customers and/or generate new sales
if our software products do not continue to be enhanced and continue to
integrate and operate successfully with the telecommunications equipment of the
leading manufacturers.
If we do not continue to improve our software products and develop new
software 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 maintain
existing customers and/or attract new customers.
5
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Additionally, the success of our software products depends upon the
continued successful integration and operation of our software products with
the telecommunications equipment of the leading manufacturers. We currently
target a customer base that uses a wide variety of telecommunications network
infrastructure equipment and software platforms, which are constantly changing.
As such, we must continually modify our software products as new
telecommunications equipment is introduced. If our products fail to satisfy
these demanding and rapidly changing technical challenges, our existing
customers will be dissatisfied. As a result, we may be unable to generate
future sales and our business will be materially adversely affected.
We have in the past experienced delays in releasing new software 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 software products.
We incorporate software licensed from third parties into our customer
management and billing and customer analytics software products, and any
significant interruption in the availability of these third-party software
products or defects in these products could harm our business in the short-
term.
Portions of our customer management and billing and customer analytics
software products incorporate software developed and maintained by third-party
software vendors, such as operating systems, tools and database vendors. Any
significant interruption in the availability of these third-party software
products or defects in these products or future products could harm our sales
unless and until we can secure another source. We may not be able to replace
the functionality provided by the third-party software currently offered with
our products if that software becomes obsolete, defective or incompatible with
future versions of our software products or is not adequately maintained or
updated. The absence of, or any significant delay in, the replacement of that
functionality could result in delayed or lost sales and increased costs and
could harm our business in the short-term.
We face intense competition from companies that may have greater resources than
we do.
The market for our products is very competitive. We expect competition to
increase in the future. Our principal competitors include billing and customer
care system providers, operation support system providers, system integrators
and service bureaus, and the internal information technology departments of
larger communications companies, which may elect to develop functionality's
similar to those provided by our product in-house rather than buying them from
outside suppliers.
Many of our current and future competitors may have advantages over us,
including:
. longer operating histories;
. larger customer bases;
. substantially greater financial, technical, sales and marketing
resources;
. greater name recognition; and
. ability to provide more easily a comprehensive hardware and software
solution.
Our current and potential competitors have established, and may continue to
establish in the future, cooperative relationships among themselves or with
third-parties that would increase their ability to compete with us. In
addition, competitors may be able to adapt more quickly than we can to new or
emerging technologies and changes in customer needs, or to devote more
resources to promoting and selling their products. If we fail to adapt to
market demands and to compete successfully with existing and new competitors,
our business and financial performance would suffer.
6
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We depend on our intellectual property, and litigation regarding our
intellectual property could harm our business.
Unauthorized use or misappropriation of our intellectual property could
seriously harm 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. 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.
Claims by others that we infringe their proprietary technology could divert our
resources, result in unexpected license fees and harm our business.
Third parties could claim that our current or future products or technology
infringe their proprietary rights. An infringement claim against us could be
costly even if the claim is invalid, and could distract our management from the
operation of our business. Furthermore, a judgment against us could require us
to pay substantial damages and could also include an injunction or other court
order that could prevent us from selling our product offering. If we faced a
claim relating to proprietary technology or information, we might seek to
license technology or information, or develop our own, but we might not be able
to do so. Our failure to obtain the necessary licenses or other rights or to
develop non-infringing technology could prevent us from selling our products
and could seriously harm our business.
Our business will suffer if our software contains errors or our software
product development is delayed.
We face possible claims and higher costs as a result of the complexity of
our software products and the potential for undetected errors. Due to the
importance of our Connect CCB customer management and billing software product
to our customers' operations, undetected errors are of particular concern.
Computer software such as ours always contains undetected errors. The
implementation of Connect CCB, which we accomplish through our services
division, typically involves working with sophisticated software, computing and
communications systems. If we experience difficulties with an implementation or
do not meet project milestones in a timely manner, we could be obligated to
devote more customer support, engineering and other resources to a particular
project and to provide these services at reduced or no cost. If our software
contains significant undetected errors or we fail to meet our customers'
expectations or project milestones in a timely manner we could experience loss
of or delay in revenues, loss of customers, injury to our reputation, legal
actions by customers against us, and increased service and warranty costs.
Our license agreements with our customers generally contain provisions
designed to limit our exposure to potential product liability claims, such as
disclaimers of warranties and limitations on liability for special,
consequential and incidental damages. In addition, our license agreements
generally cap the amounts recoverable for damages to the amount paid by the
licensee to us for the product or service giving rise to the damages. However,
all domestic and international jurisdictions may not enforce these limitations.
We may encounter product liability claims in the future. Product liability
claims, whether or not successful, 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.
Our revenues are generated from a limited number of customers and our customer
base is concentrated and the loss of one or more of our customers could cause
our business to suffer.
A substantial portion of our license and services revenues has been, and is
expected to continue to be, generated from a limited number of customers with
large financial commitments. Our total revenues from our
7
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two largest customers during the year ended December 31, 1999, represented
approximately 45% of total revenues. Two customers accounted for approximately
10% or more each of our total revenues for the nine months ended September 30,
2000. As a result, if a large contract is cancelled or deferred or an
anticipated contract does not materialize, our business would be harmed.
With additional financing, our future success will depend on our ability to
attract and retain additional personnel, particularly qualified sales
personnel.
With additional financing, we expect to hire additional sales, support,
marketing, administrative and research and development personnel. Competition
for these individuals is intense, and we may not be able to attract,
assimilate or retain highly qualified personnel in the future. Our business
will not be able to grow if we cannot attract qualified personnel. Hiring
qualified personnel is very competitive in our industry, 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 telecommunications industry.
Barriers to international expansion could limit our future growth.
With additional financing, we expect 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 26% of our total revenue for the nine months ended September 30, 2000. We
conduct our international sales primarily through direct sales from our
offices in the United States. Any expansion of our existing international
operations and entry into additional international markets will require
additional financing and significant management attention.
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:
. difficulties and costs of staffing and managing international operations;
. language and cultural differences;
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonal business activity in certain parts of the world;
. fluctuations in currency exchange rates;
. legal and governmental regulatory requirements;
. trade barriers; and
. 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
8
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dollar. We have not engaged in any foreign exchange hedging transactions, and
we are therefore subject to foreign currency risk.
Following additional financing, we will need to manage our growth effectively.
With additional financing, we expect our growth will place significant
demands on management as well as on our administrative, operational and
financial resources and controls. If we fail to manage our growth effectively,
our business could be adversely affected. If we cannot effectively establish
and improve our processes, we may not be able to manage our growth
successfully.
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 may decide 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
companies.
Risks related to customer management and billing, switch mediation, and
customer analytics markets
If we fail to modify or improve our software products in response to evolving
industry standards, our software products could rapidly become obsolete, which
would harm our business.
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.
The telecommunications industry is experiencing consolidation, which may reduce
the number of potential clients for our software.
We cannot be certain that we will not lose clients as a result of industry
consolidation. The telecommunications industry is experiencing significant
consolidation. In the future, there may be fewer potential clients requiring
customer management and billing, switch mediation, and customer analytics
software products, increasing the level of competition for new customers. In
addition, larger consolidated
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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. We have sought to
address this situation by continuing to market our products and services to new
clients and by working with major carriers to provide products and services
that they need to remain competitive.
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 the Internet or the
telecommunications industry could 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 markets, or otherwise have a
materially adverse effect on our business, financial condition, results of
operations and cash flows.
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
services, such as wireless, wireline, data, and video. Those changes could in
turn subject us to increased pricing pressures, decrease the demand for our
products and services, increase our cost of doing business or otherwise have a
materially adverse effect on our business, financial condition, results of
operations and cash flows.
Government regulation of the collection and use of personal data could reduce
demand for our Outfront CRM, our customer analytics product.
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 regulations that
limit our customers' use of this information could reduce the demand for this
product. 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 Outfront CRM
operates, and could restrict the use of Outfront CRM in some e-commerce
applications. This could reduce demand for Outfront CRM.
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Risks related to this offering
Future sales of our common stock, including those shares issued in this
offering, may depress our stock price.
A significant number of shares of our common stock will be freely tradeable
after the distribution date. If any of 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
software 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 39.3% of
our voting stock, the voting power of other stockholders may be limited.
After this offering, it is anticipated that our executive officers and
directors will beneficially own or control, directly or indirectly, outstanding
shares of common stock, which in the aggregate will represent approximately
39.3% of the outstanding shares of common stock. As a result, if some of these
persons or entities act together, they may 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 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 Primal.
Our certificate of incorporation and bylaws contain provisions that could
make it harder for a third party to acquire Primal without the consent of 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.
Furthermore, 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
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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.
Our common stock may become subject to penny stock rules, which may make it
more difficult for our stockholders to sell their common stock.
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks generally are equity securities with a price
of less than $5.00 per share. The penny stock rules require a broker-dealer,
prior to a purchase or sale of a penny stock not otherwise exempt from the
rules, to deliver to the customer a standardized risk disclosure document that
provides information about penny stocks and the risks in the penny stock
market. The broker-dealer also must provide the customer with current bid and
offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules generally require that prior to a transaction in a penny
stock the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have
the effect of reducing the level of trading activity in the secondary market
for a stock that becomes subject to the penny stock rules.
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:
. the passage of legislation or court decisions adversely affecting the
telecommunications industry;
. competition in the telecommunications industry; and
. 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.
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CAPITALIZATION
The following table describes our long-term debt and capitalization as of
September 30, 2000,
. On an actual basis, and
. On a pro forma basis to reflect the effects of the distribution agreement
as if the distribution occurred on September 30, 2000.
You should read this table along with Management's Discussion and Analysis
of Financial Condition and Results of Operations, our consolidated financial
statements and the related notes to them and the other financial information in
this prospectus.
<TABLE>
<CAPTION>
September 30, 2000
------------------------
Actual Pro Forma
----------- -----------
(In thousands, except
share and per share
data)
<S> <C> <C>
Long-term debt, including current maturities......... $ 2,255,915 $ 2,255,915
Stockholders' equity:
Preferred stock, $0.01 par value per share, 5,000,000
shares authorized as pro forma; no shares issued and
outstanding, pro forma.............................. -- --
Common stock, $0.01 par value per share, 1,000 shares
authorized, 1,000 shares issued and outstanding,
actual; $0.01 par value per share, 95,000,000 shares
authorized, 20,346,957 outstanding, pro forma....... 10 203,470
Additional paid-in capital........................... 9,936,076 11,732,616
Accumulated deficit.................................. (2,342,164) (2,342,164)
----------- -----------
Total stockholders' equity........................... 7,593,922 9,593,922
----------- -----------
Total long-term debt and capitalization.............. $ 9,849,837 $11,849,837
=========== ===========
</TABLE>
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THE PRIMAL DISTRIBUTION
The board of directors of Avery has approved the distribution of all the
shares of Primal, its wholly owned subsidiary, to the stockholders of Avery.
The distribution of the Primal shares will be taxable to Avery's
securityholders. See "Material Federal Income Tax Consequences of the
Distribution to Avery's Stockholders."
Reasons for the Distribution
Avery has advised Primal that it is making the distribution for the
following reasons.
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. Avery believes 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 has advised Primal that its 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 each of the businesses. 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 business. To date, discussions with potential investors have
been focused on one or the other business for strategic reasons. Separating the
businesses may improve the possibility of financing the 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. Primal is a
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software company located in California where stock options are an integral
portion of compensation. In order for Primal's compensation to be competitive,
the potential value of its stock options must be clear in relation to its
competition. Since most of the companies with which Primal competes for talent
are only in the software business, it is difficult to explain to prospective
employees the combined potential value of a local exchange carrier billing
business and a software business in relation to a business that is only in the
software industry. This issue has been raised many times by Primal job
candidates.
Record Date, Effective Date and Regulatory Requirements
The Avery board set the record date for the distribution as October 23,
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 January 31, 2001.
Avery has advised Primal that 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 50% 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 has advised Primal thatAvery 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
In March 1999, Avery entered into a merger agreement with Primal and the
principal stockholders of Primal, one of whom, Mark J. Nielsen, was a director
and the President and Chief Executive Officer of Avery and the Chairman of the
Board of Primal.
The acquisition price and the other terms of the Primal transaction were
determined through extensive arm's-length negotiations between representatives
of Primal and Avery. The executive officers of Avery other than Mr. Nielsen
were designated by Avery's board of directors to represent Avery in the
negotiations for the acquisition of Primal. Avery's board of directors also
instructed Mr. Nielsen not to participate in the negotiations for Avery,
although he did represent his own interests as a principal stockholder of
Primal. The acquisition price determination was based upon a multiple of
Primal's estimated projected future revenues. To determine the appropriate
multiple, Avery used the market value of comparable public companies divided by
such companies' reported revenues.
In contemplation of entering into an agreement for the acquisition of Primal
Systems, Avery made a $100,000 working capital loan to Primal Systems on
December 15, 1998. The loan was secured by a first lien on the accounts
receivable of Primal Systems. On January 25, 1999, the working capital loan was
increased to $180,000. This loan was replaced with the loan described in the
following paragraph.
On February 3, 1999, Avery agreed to loan Primal Systems up to $1,000,000 on
a revolving credit basis in replacement of the then-outstanding $180,000 loan
described above. This loan was secured by a pledge of all the stock of Wireless
Billing Systems, a wholly owned subsidiary of Primal Systems, and by a security
interest in all of the accounts receivable and general intangibles, including
all intellectual property, of Primal Systems. As part of this extension of
credit, representatives of Avery were elected as a majority of the members of
the board of directors of Wireless Billing Systems. This revolving credit
facility was paid in full prior to Avery's acquisition of Primal.
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.
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At the time of the merger, Avery issued 3,890,363 shares of Avery's series f
convertible preferred stock to the Old Primal Stockholders in exchange for all
of the issued and outstanding shares of Primal. Of this amount, 1,945,188
shares were held in escrow to satisfy the indemnification obligations of the
principal stockholders of Primal, Messrs. Faltys, Simrell, D. Haynes and
Nielsen, under the merger agreement. Any shares not returned to Avery under the
indemnification provisions were to be released to the Old Primal Stockholders
based upon the consolidated operating performance of Primal and Primal's wholly
owned subsidiary, Wireless Billing Systems, from August 1, 1999, through July
31, 2000, as described below.
The Old Primal Stockholders were also entitled to receive up to a maximum
4,000,000 additional shares of Avery's series f convertible preferred stock as
additional consideration for the merger based on the consolidated operating
performance of Primal and Wireless Billing Systems from August 1, 1999, through
July 31, 2000, as described below.
The shares of the series f convertible preferred stock issued and issuable
by Avery were convertible into Avery common stock on a one-for-one basis.
The consolidated operating performance of Primal and Wireless Billing
Systems was to be based upon the consolidated revenues and actual operating
losses of Primal and Wireless Billing Systems during the period from August 1,
1999, through July 31, 2000. To receive the minimum additional shares under the
merger agreement, Primal and Wireless Billing Systems were required to record
consolidated revenues during this period of at least $6,660,000. To receive the
maximum number of shares under the merger agreement, Primal and Wireless
Billing Systems were required to record consolidated revenues during this
period of at least $15,540,000. There were eight revenue and operating loss
thresholds between the minimum and maximum thresholds that provided for the
release of a pro rata number of shares between the minimum and maximum amounts.
The number of shares were subject to reduction in each case if the actual
consolidated operating loss of Primal and Wireless Billing Systems for such
period exceeded the consolidated operating loss specified in the merger
agreement for the corresponding consolidated revenue amount.
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 beneficially owned
approximately 34% of Avery's common stock, assuming the exercise of all options
and warrants and the conversion of all convertible securities. 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 outstanding 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.
In addition, Old Primal Stockholders were to have the right during September
and October 2000 to require Avery to repurchase up to 1,550,000 shares of
Avery's common stock issued upon the conversion of Avery's series f preferred
stock received in the merger for the purchase price of $2.50 per share if
Primal and Wireless Billing Systems had consolidated gross revenues of at least
$8,325,000 and their consolidated operating loss did not exceed $1,082,000
during the period beginning August 1, 1999, and ending July 31, 2000. Assuming
that Mr. Nielsen were still employed by Avery on August 15, 2000, which he was
not, the number of shares required to be repurchased would have been reduced by
the total number of shares received by Mr. Nielsen in the Primal merger. If
this repurchase right were fully exercised, the aggregate purchase price would
be $3.875 million.
At the time of the merger, Avery entered into employment agreements with
Messrs. Faltys, Simrell and David Haynes and entered into an agreement to
register the underlying shares of Avery common stock into which the Avery
series f convertible preferred stock was convertible.
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<PAGE>
The Old Primal Stockholders also had the right for a period of two years to
designate one member on Avery's board if Mr. Nielsen were no longer serving in
such capacity. Mr. Nielsen continued to serve as a director of Avery until the
distribution agreement was entered. In addition, the Old Primal Stockholders
also had the right to have a representative attend Avery board meetings in an
observer capacity.
A Note About Calculations
The discussion that follows will make references to percentages of ownership
of the outstanding common stock of Avery and Primal. All the references to
percentages used in this discussion 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 were exercised and that the
underlying shares of common stock were issued and outstanding, and that all
securities that are convertible into or exchangeable for shares of the common
stock of Avery or Primal were converted into or exchanged for shares of the
common stock of Avery or Primal and that these shares of common stock were
issued and outstanding.
The Distribution Agreement
On July 31, 2000, the Primal Solutions, Inc. Preliminary Distribution
Agreement was entered. It was necessary to enter into this agreement for the
purpose of formally amending the Primal merger agreements as described below.
It was necessary to enter into this agreement for the purpose of formally
amending the Primal merger agreements as described below. The parties to the
distribution agreement are as follows:
. Avery;
. Primal;
. the Old Primal Stockholders, who are John Faltys, Joseph R. Simrell,
David Haynes, Mark J. Nielsen, Arun Anand, Murari Cholappadi, and Sanjay
Gupta;
. Thurston Group, Inc.;
. Patrick J. Haynes, III, the Chairman of Avery and the President of
Thurston Group; and
. 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. David
Haynes and Patrick J. Haynes, III are not related.
The Old Primal Stockholders required that Thurston Group and P. Haynes and
McCormick, the principal executive officers of Avery, become parties to the
distribution agreement for the purposes of their agreeing to use their best
efforts to effectuate the distribution and their joining in the indemnification
and mutual releases provisions of the distribution agreement.
The purposes of the distribution agreement are
. to amend and settle by mutual agreement all remaining issues under the
Primal merger agreements, and
. to return effective control of Primal and Avery to the persons who
controlled such companies prior to the Primal merger.
The Distribution; Pre-Distribution Covenants
The Distribution. The parties will use their best efforts to cause the
distribution of the Primal common stock to Avery's securityholders to be made
as soon as is reasonably practicable and otherwise to give effect to the
transactions described in the distribution agreement.
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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.
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, which, if converted into Avery common stock,
would represent 15% of the outstanding shares of the Avery common stock, and
the other securityholders of Avery will collectively own 85% of the outstanding
shares of the Avery common stock.
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. By agreeing to release these escrowed shares, Avery effectively
waived its right to assert any claims under the indemnification provisions of
the Primal merger agreement. All the financial conditions of the escrow
agreement would have been satisfied for the release of these shares.
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. Under the
terms of the Primal merger agreement, approximately 1,250,000 shares would have
been earned. The remainder of the shares were issued as partial consideration
for eliminating Avery's obligation to repurchase 1,550,000 shares of Avery's
common stock from the Old Primal Stockholders at $2.50 per share, or a total of
$3.875 million.
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
. the Avery series g preferred stock has 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,
. the Avery series g preferred stock is not entitled to participate in the
distribution by Avery of the shares of the Primal common stock to Avery's
securityholders, and
. the Avery series g preferred stock is not convertible into Avery's common
stock until the earlier of the date of the distribution or the
termination of the distribution agreement.
The series f preferred stock had no voting rights, would have been entitled
to participate in the distribution, and was immediately convertible.
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Redemptions. Immediately prior to the date of the distribution, Avery will
distribute to the Old Primal Stockholders 6,207,026 shares, or 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, when converted into Avery common stock, would represent
15% of Avery's common stock.
Adjustments to Avery's Options and Convertible Securities in the Distribution
As described more fully under the caption "The Primal Distribution--
Appraisal of Primal," the parties agreed that Primal represented approximately
40%, or 2/5, of the value of Avery on a pre-distribution consolidated basis.
Accordingly, the parties agreed that Avery's outstanding options, warrants and
convertible securities should be adjusted to give effect to the distribution as
follows:
Incentive Stock Options. All outstanding 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.
All other 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 adjusted 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
. the per share exercise price will equal the original per share exercise
price multiplied by the "Avery ratio," as described below, and
. 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.
The "Avery ratio" is a fraction. The numerator of this fraction is 3. The
denominator of this fraction is 5. Expressed as a decimal, this fraction is
equal to .6; expressed as a percentage this fraction is equal to 60%.
Non-Qualified Stock Options and Common Stock Purchase Warrants. Nielsen's
options to purchase 925,000 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 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
. the per share exercise price will equal the original per share exercise
price multiplied by the Avery ratio, and
. 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 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.
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A different adjustment, however, is required for the Avery series g
preferred stock. Because the outstanding shares of this series are supposed to
be equal to, if all such shares were converted into Avery common stock, 15% of
the outstanding Avery common stock both before and after the distribution, in
each case, assuming the exercise of all options and warrants and the conversion
of all convertible securities, 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's
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 sum of
the number of outstanding shares of Avery common stock plus all shares of
Avery's common stock issuable upon exercise of options and warrants and upon
conversion of all Avery's convertible securities 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 plus
all shares of Avery's common stock issuable upon exercise of options and
warrants and upon conversion of all Avery's convertible securities on the
distribution date, excluding the shares of Avery common stock reserved for
issuance upon conversion of the series g preferred stock.
Avery's Convertible Note. Avery's outstanding convertible note will be
adjusted 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.
This convertible note is held by Waterside Capital Corporation, a publicly
held small business investment company.
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 common 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
whom, was initially Spencer L. Brown, 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 best efforts to fill the vacancy on the board for an independent
member as soon as is reasonably practicable. The other independent director has
not been selected. 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. Rule
4200(a)(14) defines an independent director to be a person other than an
officer or employee of a company or its subsidiaries or any other individual
having a relationship which, in the opinion of that company's board of
directors, would interfere with the exercise of independent judgement in
carrying out the responsibilities of a director. Important to such a
determination is an individual's financial relationship with a company or a
familial relationship to an executive officer or director. Faltys, Simrell, D.
Haynes 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 were John Faltys, David Haynes, William Salway, Spencer L. Brown, J. Alan
Lindauer and Norman M. Phipps. Messrs. Faltys and D. Haynes were the designees
of Faltys, Simrell, D. Haynes and Nielsen, Mr. Brown was Franklin Capital's
designee, and Messrs. Lindauer
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and Phipps were Avery's designees. On December 11, 2000, Mr. Brown resigned
from the Primal board, and Messrs. 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.
The number of shares of series g preferred stock pledged to secure the loans
and the estimated value of such shares are as follows: Faltys (2,172,713
shares/$2,783,789); Simrell (1,539,403 shares/$1,972,360); D. Haynes (1,539,403
shares/$1,972,360); Nielsen (1,175,715 shares/$1,506,385); Anand (233,220
shares/ $298,813); Cholappadi (233,220 shares/$298,813); and Gupta (233,220
shares/$298,813). The estimated value is based on the closing sale price of
Avery's common stock on November 28, 2000, which was $1.28125. Each share of
the series g preferred stock is presently convertible into one share of Avery
common stock. The loans were made as part of the consideration for amending the
investors rights agreement to eliminate Avery's obligation to repurchase
1,550,000 shares of Avery's common stock at $2.50 per share, or $3.875 million,
from the Old Primal Stockholders.
Capital Contributions to New Primal
Avery has contributed to Primal $4 million to use for general corporate and
working capital purposes. Avery contributed $2,000,000 to Primal on August 1,
2000, and contributed the remaining $2,000,000 to Primal on October 29, 2000.
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 the registration statement of which this
prospectus is a part to register all shares of Primal common stock to be issued
to Avery's securityholders in the distribution under the Securities Act and
under all applicable state securities laws as soon as reasonably practicable,
and agreed to use its best efforts to cause the 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 best efforts to
cooperate with Avery. Avery will pay all costs and expenses in connection with
the registration statement. Avery agreed to provide Faltys, Simrell, D. Haynes
and
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Nielsen with a reasonable opportunity to review and comment upon the
registration statement and any amendments thereto, and to keep Faltys, Simrell,
D. Haynes and Nielsen reasonably apprized 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 best efforts to cause such registration statement to be
declared effective by the SEC, and will pay all related costs and expenses.
Avery 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 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 best efforts to cause such
registration statement to be declared effective by the SEC, and will pay all
related costs and expenses. Primal 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 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 the
President 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 Systems immediately
prior to its acquisition by Avery approve the taking of any such action. These
percentages were as follows:
. Faltys--30.4861%
. Simrell and D. Haynes--21.5999% each
. Nielsen--16.4969%
. 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.
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By exchanging these proxies, effective control of Primal will be returned to
the Old Primal Stockholders, and effective control of Avery was returned to
Thurston Group and its affiliates. This will restore effective control of
Primal and Avery to the persons who had such control prior to the Primal
merger.
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--Voting
Control."
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.
Releases
The parties to the distribution agreement have mutually released one another
from all claims arising 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 not to sue one another. Any claim or proceeding
based upon a breach of the distribution agreement, however, is 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
. the distribution has not occurred on or before December 31, 2000,
. the failure of the distribution to have occurred on or before such date
is due to the failure of Avery, Thurston Group, P. Haynes and McCormick,
or any one or more of 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
. 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.
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Faltys, Simrell or D. Haynes at Fault. If
. the distribution has not occurred on or before December 31, 2000,
. 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
. 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
Systems 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.
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 Systems 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
. the distribution has not occurred on or before December 31, 2000,
. 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
. 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 Systems 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.
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 Systems 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
. the distribution has not occurred on or before December 31, 2000,
. 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
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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
. 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 Systems 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.
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 Systems 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
. the distribution has not occurred on or before December 31, 2000, and
. the failure of the distribution to have occurred on or before such date
is due to
. the failure of two or more, but less than all, of
. Avery, Thurston Group, P. Haynes and McCormick or any one or more
of Avery, Thurston Group, P. Haynes or McCormick, or
. Faltys, Simrell and D. Haynes, or any one or more of Faltys,
Simrell or D. Haynes, or
. Nielsen, or
. 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
. 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 Systems 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
. the distribution has not occurred on or before December 31, 2000, and
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. the failure of the distribution to have occurred on or before such date
is due to
. 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
. 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
. 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 Systems
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.
Determination of Parties At Fault. If the parties cannot mutually agree as
to whom or which party is at fault, the determination will most likely be made
in a lawsuit filed for such purpose.
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.
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 may not be amended except by a written agreement
executed by the party to be charged with the amendment. Any action required or
permitted to be taken under the distribution agreement, other than any
amendment of the distribution agreement, but including voting of any proxy
referred to in the
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distribution agreement, by Faltys, Simrell, D. Haynes and Nielsen or the Old
Primal Stockholders may be taken if the former holders of at least 66% of the
issued and outstanding shares of Primal Systems immediately prior to
acquisition by Avery approve the taking of any such action.
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 September 15, 2000, to serve as a basis for establishing the
amount of any taxable gain to Avery and the Primal dividend and redemption
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, the term "fair market value" was defined as
the amount per share at which a minority interest in the common stock of Primal
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. 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, the
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, it has been assumed that after the distribution, 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 common stock will be registered with the Securities and Exchange
Commission and quoted on the OTCBB, and Primal's common stockholders post
distribution may well face a relatively high degree of price uncertainty and
consequent market illiquidity at least for the first 12 months of trading.
The full text of the written Executive Summary Appraisal of Primal describes
the assumptions made, matters considered and limits on the review undertaken.
You are urged to read the Executive Summary Appraisal carefully and in its
entirety. The summary of the appraisal of SE Biz Val described in this
prospectus is qualified in its entirety by reference to the full text of such
Executive Summary.
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.
27
<PAGE>
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:
. meetings with certain members of the senior management of Avery and
Primal to discuss the operations, financial condition, prospects and
projected operations and financial performance of Primal;
. visits to certain facilities and business offices of Primal;
. 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;
. the audited separate company financial statements for Primal's business
for the three fiscal years ended December 31, 1999, and the nine months
ended September 30, 1999, as well as the unaudited interim financial
statements for the nine months ended September 30, 2000;
. 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;
. the historical market prices and trading volume for Avery stock;
. publicly available financial data for certain companies that SE Biz Val
deemed comparable to Primal;
. publicly available information concerning the general economy and the
telecommunications industry; and
. such other studies, analyses and inquiries as SE Biz Val deemed
appropriate.
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 a company
is required by anyone who seeks to invest in that company's securities.
Therefore, whether an investor seeks to evaluate the price of such an
investment in terms of comparing the investment in that 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 that company.
Since forming a reasonable outlook for a company's future financial
performance is so essential in the valuation of an investment in that company,
it is of paramount importance that investors have a meaningful method by which
to assess any such projection or forecast put forward by that 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 a company is so crucial to the
rational valuation of that 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 Primal 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."
28
<PAGE>
We believe that the expectations for Primal reflected in such forward-
looking statements contained in this valuation are reasonable. However, we
cannot assure the reader that such expectations will occur. Primal'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.
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." The reader is urged to review the detailed
assumptions underlying Primal's projected future financial performance as
depicted in the Executive Summary Appraisal report, filed as an exhibit to the
registration statement of which this prospectus is a part.
The financial forecasts and projections for the fiscal years ended December
31, 2000 and 2001, prepared by Primal's management with respect to Primal, were
based upon the historical financial results of Primal's business and Primal's
business plan through fiscal 2001 as of September 15, 2000.
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.
Review of Stock Price Performance of Avery Communications, Inc.
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 19.7 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
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.
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
29
<PAGE>
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 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" of Primal's 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" market capitalization value of $2.7 million.
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
30
<PAGE>
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.
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 not 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 multiples 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 "market capitalization" of
Primal's equity on a freely tradable minority interest basis was $4.9 million.
This market capitalization 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 $4 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
Solutions' equity would have a "thinly traded" market capitalization value of
$4.2 million.
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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's common stock after the distribution would be
$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>
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 $3.15 million, or $0.16 per share based on 19,696,957shares of common
stock issued and outstanding after the distribution. 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 its use in connection with
its review and evaluation of the distribution. Pursuant to its engagement
letter, SE Biz Val received 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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MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO
AVERY'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 $3.15 million, or $.16 per
share based on a minimum of 19,696,957 shares of Primal common stock
outstanding after the distribution. Therefore, based on the SE Biz Val
appraisal, the fair market value of Primal would be $.16 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, which are estimated to be $0.015
per share. 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.
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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
. corporation or comes within certain exempt categories and, when required,
demonstrates this fact, or
. 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.
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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 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.
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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 nine months ended September 30, 1999 and 2000
The following table sets forth selected income statement lines in thousands
of actual dollars. The 1999 figures are for Primal Systems, Inc., which is the
predecessor company. The 2000 figures are for Primal Solutions, Inc., which is
the successor company.
Statement of Operations Data
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------
1999 2000
------------ ----------
(Predecessor) (Successor)
<S> <C> <C>
REVENUES:
System revenue........................................ $1,143 $ 2,051
Service revenue....................................... 5,448 4,203
Total Revenues........................................ 6,591 6,254
COST OF REVENUES:
System revenue........................................ 60 202
Service revenue....................................... 3,455 3,021
Total cost of revenues................................ 3,515 3,223
GROSS MARGIN.......................................... 3,076 3,031
OPERATING EXPENSES:
Research and development.............................. 787 2,853
Sales and marketing................................... 1,107 1,661
General and administrative............................ 1,778 2,356
Total operating expenses.............................. 3,672 6,870
INCOME (LOSS) FROM OPERATIONS......................... (596) (3,839)
INTEREST AND OTHER EXPENSE............................ ( 81) (130)
INCOME (LOSS) BEFORE INCOME TAXES..................... (677) (3,969)
INCOME TAX PROVISION (BENEFIT)........................ 1 (668)
NET INCOME (LOSS)..................................... $ (678) $(3,301)
</TABLE>
Total Revenue
Total revenue decreased to $6.3 million for the nine months ended September
30, 2000, from $6.6 million for the nine months ended September 30, 1999.
System revenue increased to $2.1 million, or 33% of total revenues, for the
nine months ended September 30, 2000, from $1.1 million, or 17% of total
revenues, for the nine months ended September 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 $4.2 million, or 67% of total revenues, for the
nine months ended September 30, 2000, from $5.4 million, or 83% of revenues,
for the nine months ended September 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
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<PAGE>
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 revenues decreased to $3.2 million, or 52% of total revenues,
for the nine months ending September 30, 2000, from $3.5 million, or 53% of
total revenues, for the nine months ended September 30, 1999.
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 5% of revenues for the nine months ended
September 30, 1999, to 10% of revenues for the nine months ended September 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 $3.0
million, or 63% of service revenue, for the nine months ending September 30,
2000 from $3.5 million, or 72% of service revenues, for the nine months ending
September 30, 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 $2.9 million, or 46% of total revenues, for
the nine months ended September 30, 2000, from $0.8 million, or 12% of total
revenues for the nine months ended September 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.
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 $1.7 million, or 27% of total revenues, for the nine months ending
September 30, 2000, from $1.1 million, or 17% of total revenues, for the nine
months ending September 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.
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 $2.4 million, or 38% of total revenues for the nine months ending September
30, 2000 from $1.8 million, or 27% of total revenues for the nine months ended
September 30, 1999 primarily due to the goodwill amortization from the Avery
acquisition.
Interest and Other Expense, net
Other expense increased to $130,000 for the nine months ending September 30,
2000, from $81,000 for the nine months ending September 30, 1999. The increase
is primarily due to an increase in interest expense related to a note payable
to Corsair Communications, Inc.
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Income Tax Provision
The income tax provision for the nine months ended September 30, 1999
consisted of minimum state taxes due to the operating loss for the period. The
income tax benefit for the nine months ended September 30, 2000 was due to the
carryback of previously recorded income taxes due to the operating loss for the
period.
Other
Depreciation and amortization expense included in the results of operations
for the nine months ended September 30, 1999 and 2000 was $233,000 and
$934,000, 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.
Statement of Operations Data
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
REVENUES:
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>
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
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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.
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.
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 amortization.
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.
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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 were 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 $1.3 million at September 30, 2000, from $1.7
million at December 31, 1999, primarily due to operating requirements offset by
the $2.0 million additional capital contributions from Avery. Our working
capital deficit at September 30, 2000 was $135,000 compared to $245,000 as of
December 31, 1999. The increase in working capital was primarily due to an
increase in accounts receivable of $255,000, an increase in prepaid expenses of
$413,000, a decrease in income tax payable of $668,000 offset by an increase in
deferred revenue of $943,000. Net cash used in operating activities was $2.7
million for the nine months ending September 30, 2000, as compared to cash
provided by operating activities of $3.2 million for 1999.
We generated cash from the collection of advances to Avery of $336,000 and
an additional investment of $2.8 million 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 $735,000 during 2000 and
$871,000 during 1999. Of the $735,000 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 $1.7 million 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 $3.2 million
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 $1.0 million decrease in accounts
receivable, a $1.2 million 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.
We believe that existing cash balances, combined with cash generated from
operations and a reduction in our operating expenses, will be sufficient to
support our working capital requirements through the next twelve months. We are
actively seeking additional financing that includes a working capital line of
credit, bridge and permanent financing and strategic financial partners. If we
raise additional funds through the issuance of equity, equity-related or debt
securities, such securities may have rights, preferences or privileges senior
to those of the rights of our common stock. We cannot, however, be certain that
additional financing will be available to us on acceptable terms when required,
or at all.
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 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.
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BUSINESS
Business Overview
Primal, and its subsidiary Wireless Billing Systems, develop, market and
support customer management and billing software (CM&B), customer analytics
software, and switch mediation software for providers of voice and data
transmission services using the Internet and wireless networks. Voice over IP,
also known as Internet telephony, is the transmission of voice communications
over public or private networks, using Internet protocol, commonly referred to
as IP. Internet protocol is the process by which data is transmitted from one
computer to another on the Internet. Wireless communications, such as cellular
and paging, utilize radio frequencies to transmit and receive voice and data
services.
Primal's software products, Connect CCB(TM) for customer management and
billing, Access IM(TM) for switch mediation, and Outfront CRM(TM) for customer
analytics, form an integrated product suite which enables communications
service providers to manage all aspects of the customer relationship from one
system, including mission critical functions such as account creation, service
initiation, customer care and billing. It also collects the data necessary to
track and analyze service usage on an individual customer basis. Primal's
integrated product suite can support both start-up service providers, with few
customers, as well as large established service providers with millions of
customers, across both IP and Wireless networks. Primal software operates with
telecommunications equipment from major manufacturers such as Cisco Systems,
Inc., Lucent Technologies Inc., and Nortel Networks Inc. Primal's products
currently support more than eleven million customers across our current base of
more than 16 customers worldwide.
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, known as ICPs, that bundle a
variety of communications services for sale to their customers. 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. 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 telecommunications, 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, also known as "customer churn," has increased
dramatically. To win new and retain existing customers, ICPs 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 price discounting and product bundling. The business
systems needed to support these efforts are required to provide an
unprecedented level of flexibility to meet changing business requirements and
system scalability associated with the increasing number of customers and
associated transactions.
Current Industry Trends
We believe the emerging IP and wireless marketplace for IP based services is
set to attain explosive growth over the next five years, based on the
opportunity to bring low cost, traditional and enhanced voice and
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data services to businesses and consumers alike. These services allow ICPs to
offer stand alone, additional or convergent services either to attract new
customers or "lock in" existing customers with robust and competitive
solutions.
The Yankee Group projects the overall market opportunity for vendors of
CM&B, switch mediation, and analytics software for IP based services to grow
from $300 million dollars in 1999 to $7.7 billion dollars by 2004.
Traditional telephone communications are transmitted through networks based
on circuit switching technology that requires an open connection to be
established and maintained between calling parties for the entire path and
duration of a call. Communications using IP are transmitted through the public
Internet and private networks based on Internet protocol that was initially
developed for transmitting data, such as e-mail. These networks do not require
an open circuit for the entire path or duration of the transmission. In a
network using IP technology, the data is divided into compressed packets that
are sent to a final destination where they are reassembled back to their
original order. In this type of network, multiple streams of information can
travel through different paths in the network, allowing a more efficient use of
the network. In recent years, the improvements in the technologies used in IP
networks have led to an increase in the use of this type of network to transmit
both voice and data over what are known as convergent networks.
Communications transmitted over IP networks offer a number of advantages to
customers over traditional telecommunications networks. Providers of voice over
IP services can offer their customers enhanced voice and data communications
services and applications. The technology engaged in IP networks offers
superior bandwidth and lower capital costs than traditional telecommunications
networks and allow both existing and emerging ICPs to offer highly competitive
services that benefit from low cost deployment. ICPs using IP networks can
offer additional enhanced services such as:
. voice over Internet protocol;
. unified communications (single source retrieval of voice mail, faxes,
emails, through the Internet or by phone);
. mobile commerce (using a wireless device such as a cellular phone to
connect to the Internet to purchase goods or services);
. wireless Internet service provider (receiving internet data such as
email, on a mobile device such as a cellular phone or pager); and
. personal computer to phone service (permit a customer to place a call
through a personal computer and speak to another party on a standard
telephone).
Several network manufacturers, notably Cisco, Nortel and Lucent
Technologies, are providing bridge technology to provide both fixed land line
communications providers and wireless communications service providers the
ability to capitalize on IP networks. These manufacturers' introduction of
products that convert wireless and land line 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 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.
Communications Operational Support Systems
At the heart of an ICP business is its' operational support systems,
commonly referred to as OSS. These systems play a 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.
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Limitations in a provider's operational support systems can increase the
provider's operating costs, as well as prevent it from offering new services or
marketing programs. Inflexible systems can impair the service provider's
competitiveness and financial performance.
Three key components of a service provider's overall operational support
systems include:
. customer management and billing systems;
. customer analytics; and
. network mediation.
Customer Management and Billing Systems
Customer management and billing systems, commonly referred to as CM&B
systems, are critical components of any ICPs system infrastructure because they
enable the execution of key business functions such as 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 providers attempt to differentiate themselves by providing superior
features, like mobile commerce, pricing discounts based on the volume of
service usage, innovative rate plans, and bill presentment and payment over the
Internet.
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 customers 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:
. Designed to support a particular type of service provider, such as either
IP or land line, or wireless only. As a result, they generally are unable
to support multiple services or convergent networks efficiently;
. Require system integration with other vendor's products to collect usage
data from the ICP's network. This process of collecting data from the
ICP's network is commonly referred to as mediation;
. Designed to support a specific size of network. Therefore, these systems
can be very costly to accommodate a growing customer base and a more
diverse product offering;
. Limited to periodic, or "batch-oriented", processing, and cannot provide
the instant, or "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
. Unable to provide the flexibility necessary to introduce new products and
service across convergent networks.
Service providers offering voice and data services over IP and-wireless
networks typically require CM&B solutions that:
. Can handle authentication, authorization and customer management needs in
real-time in order to determine the types of services to which the
customer is entitled, as well as any applicable limits to the
availability of the services;
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. 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;
. 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;
. Can be easily increased to support changes in the size and configuration
of a voice over IP provider's system; and
. Can be easily adapted to support new 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
"customer 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 deployment of new
services, increased and focused marketing activities, attractive new rate
programs and creative price discounting.
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 information across functional departments to maximize the value of the
entire customer lifecycle, from initial identification through acquisition and
retention. By using current and historic customer intelligence to personalize
the customer relationship, service providers can maximize loyalty and
profitability throughout the customer lifecycle.
Traditional operational support systems such as CM&B and switch 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 amounts 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, to maximize profitability, and 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.
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Mediation
Mediation software plays a key role in any ICP's network infrastructure.
These 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, and servers. 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 ICP.
ICPs can use this real-time data to charge appropriately for network
services based on factors such as usage time, transactions, events, content or
volume. These network services include voice communications, web-site hosting,
application renting, video conferencing, movies/video on demand, audio over IP,
unified messaging, network games, 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, which are the software systems that utilize information provided
by the mediation system. Should any of these downstream systems be down or
offline, the mediation platform must store the event records until the systems
are back up and running properly.
Mediation platforms play a critical role in the introduction of additional
services. The flexibility and speed at which interfaces can be provided to new
network elements or switches has a serious impact on the service provider's
ability to introduce new services and subsequently bill and collect revenues.
The Primal Solution
Primal's software suite, Connect CCB, Access IM, and Outfront CRM, are
specifically designed to address the complex provisioning, customer management,
reporting and marketing needs of providers of IP and wireless communications
services. Our 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 these key business benefits:
Integrated Solution. Connect CCB, Access IM and Outfront CRM have been
designed to address the business requirements of the new generation of
emerging convergent communications providers, including voice over IP and
wireless communications. The key OSS requirements for mediation, customer
management, billing, and customer analytics are provided in Primal's
integrated software solution. This integrated approach:
. 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;
. 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;
. Simplifies the information system infrastructure resulting in more
efficient system management;
. 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; and
. Ensures a smooth product upgrade across multiple product sets.
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Reduced Costs. Connect CCB, Access IM, and Outfront CRM provide a packaged
OSS solution for ICP's to manage the customer relationship from collecting
the usage information from the network 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 because the services are already configured in
the system. Customers 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 solution
also reduces the licensing and maintenance costs associated with buying
separate software products from different vendors.
Improved customer service and customer retention. Connect CCB, Access IM,
and Outfront CRM enable a service provider to improve customer service, and
thus customer retention providing access to more critical business
information on their customers, from a single system. With Connect CCB,
service providers can 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 customer care and
responsiveness through real-time access to all necessary customer 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 view of customer
lifecycle, from initial customer identification through acquisition and
retention. Our products then allow businesses to translate this analysis
into specific actions such as targeting profitable customers, 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 assist businesses in
building long-lasting and profitable customer relationships.
Interoperability. Primal's OSS Suite is interoperable with the
telecommunications equipment of most leading manufacturers, including
Cisco, Lucent, Nortel, Motorola, Glenayre, and Alcatel. This
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 designed to
integrate with other applications. Our industry standards-based, open
application programming interfaces, allow Primal's products to operate with
other software programs without writing expensive custom software
interfaces.
Flexibility. Primal's suite of products supports 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
tailoring capability to quickly introduce new offerings without the need
for extensive software customization.
Scalability. Primal's suite of products is benchmarked on equipment from
leading manufacturers, such as Sun Microsystems, and is proven through
production use by existing clients handling transactions for millions of
customers. 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 goal is to establish Primal's Connect CCB and Access IM, coupled with
Outfront CRM, as the OSS software solution of choice for voice over IP and
wireless-IP convergent communications providers. Key elements of this strategy
are:
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Establish Market Leadership Position
Our objective is to establish Primal as a leading provider of customer
management, switch mediation, and customer analytics software for the emerging
communications market of providers of voice over IP and convergent IP-wireless
communications services. We intend to accomplish this by taking advantage of
our technological product advantages, comprehensive product functionality,
strategic business partnerships, existing customer relationships, additional
sales and marketing efforts, and scalable business model to establish, retain,
and grow a widespread base of satisfied customers.
Target Leading Communications Providers Worldwide
The scalability, flexibility, and functionality of our products and services
which we have proven through our existing customer installations will enable us
to target new high growth providers of voice over IP and wireless-IP convergent
services.
Leverage Partnerships and Alliances
We intend to leverage our business partners' capabilities with our internal
capabilities to allow us to rapidly grow our business volume and focus on high
margin software license sales. We have established partnerships and alliances
with current and emerging industry leaders, such as Cisco Systems, Inc., Nortel
Networks, Sun Microsystems, SilverStream and Group One Software. We believe
that these partnerships will provide us with an effective method to extend our
own internal service and development capabilities, as well as provide an
additional funnel for sales opportunities.
Customer Relationships
Our strategy is to maximize opportunities for long-term revenue growth by
targeting service providers with excellent growth prospects and developing
strong business relationships with them. We currently enjoy strong
relationships with our current customers, allowing a continuing stream of
additional sales opportunities through the addition of customers, add-on
software sales, additional service revenues and software maintenance and
support agreements.
Primal's Products and Services
Product Overview
Connect CCB provides integration of complex business functions such as
account and service provisioning, customer management, rating, billing and
payment processing. Connect CCB's design gives service providers the ability to
deploy a convergent service offering, including multiple, usage-based services,
such as mobile commerce, voice over IP and wireless Internet services. It
provides for a single, unified invoice accessible and payable by the customer
over the Internet. Connect CCB supports the Windows NT and Unix operating
systems. Its industry standard-based APIs allow integration with a variety of
operational and business support systems.
Access IM directly interfaces with communications switches, network
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 communications with multiple input and output devices
simultaneously, including different switch types, network elements, services,
systems, and communications protocols. Access IM currently supports interfaces
with wireless communications switches and network elements from companies such
as Cisco, Nortel, Lucent, Motorola, Glenayre, and Alcatel. Its architecture is
designed to be configurable to automate processes that otherwise would require
significant human 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
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relationships. It collects customer information across functional departments
and provides analysis capabilities to provide insight into individual behavior
patterns and business issues such as 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 our software products as a product suite, clients
may, if desired, acquire individual licenses for each software application.
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 customers. Primal typically prices its products on a per
customer basis or per call detail record basis, with customary volume discounts
for the up front purchase of a large number of licenses. Supplemental purchases
of additional software applications are also priced on the same basis, while
maintenance and support contracts are priced as a percentage of the associated
license revenues.
Customer Service and Technical Support
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 product suite.
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 on the effective
use of our software products.
Maintenance. We offer programs that provide customers with 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 to customer
questions or problems and routine software maintenance releases. We also
provide customer self-service capabilities 24 hours per day through our
maintenance tracking system which is accessible over the Internet.
Third-party software and hardware fulfillment. When our customers require
it, we provide third-party software and hardware products they may need to
implement their systems. We provide products, such as the Windows NT operating
system and Sun Microsystems hardware, that are used to run 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:
. Identifying industry trends;
. Providing industry updates to company management and other key personnel;
. Developing and supporting strategic marketing alliances;
. Creating direct mail and direct response programs;
. Conducting ongoing public and press relations programs;
. Creating, managing and maintaining our web site;
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. Participating in key trade organizations and partnership programs with
industry leaders; and
. Establishing and maintaining close relationships with recognized industry
analysts.
Sales
Our sales strategy is focused on targeting established and emerging voice
over IP and wireless-IP convergent service providers, including carriers as new
customers. Through our direct sales approach, we develop 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 develop relationships with leading
manufacturers of wireless and IP network infrastructure that can provide joint
and independent sales opportunities. In addition, we develop relationships with
professional services providers focused on the telecommunications market that
can recommend our products and influence sales opportunities. In addition, we
develop relationships with other leading communications-focused companies that
offer products complementary to ours, and which 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.
Another key aspect of our sales plan is leveraging our existing customer
base. We plan to continue to provide excellent service and responsiveness, and
continue to focus on understanding their evolving business requirements. As our
customers grow organically or through acquisition, our business should grow
with them.
Business Partnerships
We have established partnerships and alliances with current and emerging
industry leaders, such as Cisco Systems, Nortel Networks, Sun Microsystems,
SilverStream and Group One Software. We believe that these partnerships provide
us with a method to extend our own internal service and development
capabilities. For example, we have agreed to participate in Cisco's New World
Ecosystem partner program. This program, which also includes many of our
competitors such as Portal Software and Daleen, was established by Cisco to
facilitate a network of vendors of complementary products and services that are
interoperable with Cisco equipment and each other.
Competition
The market for our products is very competitive. We expect competition to
increase in the future. Our principal competitors include billing and customer
care system providers, operation support system providers, system integrators
and service bureaus, and the internal information technology departments of
larger communications companies, which may elect to develop operations support
systems similar to those provided by our product rather than buying them from
outside suppliers.
Many of our current and future competitors may have advantages over us,
including:
. longer operating histories;
. larger customer bases;
. substantially greater financial, technical, sales and marketing
resources;
. greater name recognition; and
. the ability to provide more easily a comprehensive hardware and software
solution.
Our current and potential competitors have established, and may continue to
establish in the future, cooperative relationships among themselves or with
third-parties that would increase their ability to compete
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with us. In addition, competitors may be able to adapt more quickly than we can
to new or emerging technologies and changes in customer needs, or to devote
more resources to promoting and selling their products.
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 products were designed using an open architecture philosophy, which
uses industry standards-based application programming interfaces, or APIs, to
enable 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 architecture allows different software
modules to be installed on different servers, providing for efficient software
management and system growth. This capability permits a service provider to
expand processing capability as its level of business grows without the need
for an expensive re-design of the system or wholesale hardware replacement.
Servers can be added to only the software 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 has been developed to
interface with a wide variety of communications equipment. 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.
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. Primal products support
more than eleven million customers. The average number of customers per client
is over 600,000. Our smallest client has over 12,000 customers, and we have
four clients with over one million customers.
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
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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 there is a
bankruptcy proceeding by or against Primal, Primal ceases to do business
without a successor, or 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.
Employees
As of January 5, 2001, Primal, and its subsidiary Wireless Billing Systems,
had 87 full-time employees. Neither Primal's nor Wireless Billing Systems'
employees are represented by a union. Primal and Wireless Billing Systems each
believes that its relationship with its 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. This is due to the limited
number of people available with the necessary technical skills and
understanding of the communications and Internet industries. 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. In November 2000, Primal entered
into a new lease arrangement for its current office space. The new lease begins
in May 2001 and expires in April 2007. The monthly rent will initially be
approximately $63,000.
LEGAL PROCEEDINGS
Primal is not currently a party to any material legal proceeding.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of Primal:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William Salway.............. 61 Chief Executive Officer, President, Chief
Operating Officer, and Director
Joseph R. Simrell........... 43 Chief Financial Officer, Vice President Finance
and Administration, and Secretary
John Faltys................. 37 Chief Technology Officer and Executive Vice
President, and Chairman of the Board of
Directors
David Haynes................ 35 Vice President Marketing, and Director
John R. Czapko.............. 59 Vice President Sales
J. Alan Lindauer............ 61 Director
Norman M. Phipps............ 40 Director
</TABLE>
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 Vice President and 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 Sales and 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.
John R. Czapko. Mr. Czapko joined Primal in November 2000 as Vice President
of Sales. Prior to Primal, Mr. Czapko served as an executive recruiter,
focusing on identifying and recruiting sales and marketing executives for
high-growth technology companies. From 1997 to 1999, Mr. Czapko was Vice
President of Sales and Marketing at OpTel, Inc. where he was responsible for
the sales and marketing of telephone, HSDS high-speed Broadband Internet, and
cable services in 14 major markets. From 1995 to 1997, Mr. Czapko was Director
of Spectrum Management at PCS PrimeCo (now Verizon).
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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.
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 non-employee member of our board receives 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 three next most highly
compensated executive officers who earned more than $100,000 for the fiscal
year ended December 31, 1999.
Summary Executive Compensation Table
<TABLE>
<CAPTION>
Fiscal Salary Bonus
Name and Principal Position Year Ended ($) ($)
--------------------------- ---------- -------- -------
<S> <C> <C> <C>
William Salway(1)................................. 2000 $183,300 $87,500
Chief Executive Officer and President 1999 $135,000 $72,250
John Faltys....................................... 2000 $144,800 $72,400
Chief Technology Officer and Executive Vice 1999 $144,800 $78,788
President
David Haynes...................................... 2000 $124,800 $62,400
Vice President Marketing and Business Development 1999 $124,800 $76,882
Joseph R. Simrell................................. 2000 $124,800 $62,400
Chief Financial Officer and Vice President of 1999 $124,800 $76,882
Finance and Administration
</TABLE>
--------
(1) In addition to the amounts set forth in this table, Mr. Salway is entitled
to receive approximately 400,000 shares of Primal's common stock upon
completion of the distribution. At $0.15 per share, the aggregate value of
these shares would be approximately $60,000. Mr. Salway will also be
granted options to purchase an additional 400,000 shares of Primal's common
stock upon completion of the distribution.
Employment Agreements
Effective October 1, 1999, Mr. Salway entered into an employment agreement
with Primal. Under his employment agreement, Mr. Salway serves 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 was to
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have expired October 1, 2000, has been renewed through December 31, 2002. Mr.
Salway will also serve as our Chief Executive Officer. 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.
Effective September 30, 1999, Mr. Faltys entered into an employment
agreement with Primal. Under his employment agreement, Mr. Faltys serves 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 serves 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 serves 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.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Notes Payable to Officers
From January 1998 through December 1999, Faltys, Simrell, and D. Haynes
advanced funds to Primal to provide working capital as needed. The notes
payable aggregated $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.
The Distribution Agreement
The Primal distribution is a related party transaction. Please read the
discussion under the caption "The Primal Distribution" for information
regarding this transaction.
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
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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:
. by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum;
. by a committee of such directors designated by majority vote of such
directors, even though less than a quorum;
. if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion; or
. 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.
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
. a breach of the director's duty of loyalty to us or our stockholders,
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. liability for unlawful dividend payments or stock purchases or
redemptions, or
. 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.
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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 will provide our directors
and executive officers with indemnification to the maximum extent permitted by
law. These agreements also will 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.
58
<PAGE>
STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
Beneficial Ownership
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, 20,346,957
shares of common stock will be outstanding.
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>
Number of Percent
Name of Beneficial Owner Shares of Class
------------------------ --------- --------
<S> <C> <C>
Mark J. Nielsen(1).............................. 3,119,227(2) 15.3%
Arun Anand(3)................................... 2,033,379(2) 10.0%
Mauari Cholappadi(4)............................ 2,033,379(2) 10.0%
Sanjay Gupta(5)................................. 2,033,379(2) 10.0%
Patrick J. Haynes, III(6)....................... 1,830,260(7) 9.0%
Franklin Capital Corporation(8)................. 1,533,938 7.5%
Stephen L. Brown(8)............................. 1,533,938(9) 7.5%
Thurston Group, Inc............................. 1,025,917 5.0%
William Salway(10).............................. 700,000(11) 3.4%
John Faltys(10)................................. 3,722,540(2) 18.3%
Joseph R. Simrell(10)........................... 3,170,971(2) 15.6%
David Haynes(10)................................ 3,170,971(2) 15.6%
J. Alan Lindauer(12)............................ 812,867(13) 4.0%
Norman M. Phipps(14)............................ 75,000 0.4%
All executive officers and directors as a group
(6 persons).................................... 7,991,829(11)(15) 39.3%
</TABLE>
--------
(1)The business address for this person is 27126-B Paseo Espada, Suite 725,
San Juan Capistrano, California 92675.
(2) Includes 1,830,260 shares for which this person has shared voting power.
See "The Primal Distribution--The Distribution Agreement--Irrevocable
Proxies" for additional information regarding this shared voting power.
(3) The business address for this person is 2920 Shadowbriar Drive, Houston,
Texas 77082.
(4) The business address for this person is 2121 Crossing Way, Wayne, New
Jersey 07470.
(5) The business address for this person is 90 N. Michigan Avenue, #205,
Pasadena, California 91106
(6) The business address for this person is 190 South LaSalle Street, Suite
1710, Chicago, Illinois 60603.
(7) Includes the 1,025,917 shares beneficially owned by Thurston Group, Inc.
An irrevocable proxy to vote all these shares has been granted to the Old
Primal Stockholders. See Note 2.
(8) The business address for this person is 450 Park Avenue, 10th Floor, New
York, New York 10022.
(9) Includes 1,533,938 shares owned by Franklin Capital Corporation. Stephen
L. Brown is the Chairman of the Board and Chief Executive Officer of
Franklin Capital Corporation. Spencer L. Brown is the Senior Vice
President of Franklin Capital Corporation and the son of Stephen L. Brown.
59
<PAGE>
(10) The business address for this person is 18881 Von Karman Avenue, Suite
450, Irvine, California 92612.
(11) Includes 400,000 shares to be issued to Mr. Salway after the distribution.
(12) The business address for this person is 300 Main Street, Suite 1380,
Norfolk, Virginia 23510.
(13) All of these shares are owned by Waterside Capital Corporation. Mr.
Lindauer is the President of Waterside Capital Corporation.
(14) The business address for this person is 435 Moreland Road, Hauppauge, New
York 11788.
(15) Includes 1,830,260 shares for which Messrs. Faltys, Simrell and D. Haynes
have shared voting power. See Note 2.
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 P. Haynes, granted to the Old Primal Stockholders,
Faltys, Simrell, D. Haynes, Nielsen, Anand, Cholappadi and 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, the proxy granted to the Old Primal
Stockholders would cover an aggregate of 1,830,260 shares, or approximately
9.0%, of the Primal common stock that would be outstanding following the
distribution. 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. If the distribution were effective today, the Old Primal
Stockholders would have the right to vote or to direct the voting of an
aggregate of 8,037,286 shares, or approximately 39.5%, 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:
. John Faltys--30.4861%
. Joseph R. Simrell and David Haynes--21.5999% each
. Mark J. Nielsen--16.4969%
. Arun Anand, Murari Cholappadi and Sanjay Gupta--3.2724% each
This means that Faltys and any two of Simrell, D. Haynes or Nielsen can
control the voting of these proxies.
In the event the distribution is not completed, all the proxies will
automatically terminate.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our amended and restated articles of incorporation authorize 95,000,000
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 December 6, 2000, Primal had
1,000 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.
61
<PAGE>
PRIMAL SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report.............................................. F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 1998 (Predecessor) and 1999
(Successor) and September 30, 2000 (Actual) (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 nine months ended September 30, 2000 (Successor) (unaudited)....... F-4
Consolidated Statements of Capital for the year ended December 31, 1998
(Predecessor) and 1999 (Successor) and the nine months ended September
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 nine months ended September 30, 2000 (Successor) (unaudited)....... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
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>
PRIMAL SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30, 2000
------------------------- ------------------------
1998 1999 (actual) Pro forma
(predecessor) (successor) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............. $ 28,375 $1,710,996 $ 1,311,690 $ 3,311,690
Accounts and notes
receivable, net of
allowance for doubtful
accounts of $6,261
(1998), $102,580 (1999),
and $127,347 (2000)..... 177,414 993,406 1,248,296 1,248,296
Prepaid expenses and
other current assets.... 35,029 366,088 779,130 779,130
--------- ---------- ----------- -----------
Total current assets... 240,818 3,070,490 3,339,116 5,339,116
PROPERTY AND EQUIPMENT,
net....................... 42,149 1,608,845 2,014,957 2,014,957
RECEIVABLE FROM AVERY
COMMUNICATIONS, INC........ -- 370,000 34,335 34,335
GOODWILL, net.............. -- 4,563,581 7,533,208 7,533,208
OTHER ASSETS............... 1,553 61,552 61,285 61,285
--------- ---------- ----------- -----------
$ 284,520 $9,674,468 $12,982,901 $14,982,901
========= ========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable......... $ 178,279 $ 346,932 $ 215,708 $ 215,708
Accrued liabilities...... 43,614 287,182 506,638 506,638
Accrued salaries and
benefits................ 54,217 427,261 444,214 444,214
Income taxes payable..... -- 667,809 -- --
Deferred revenue......... -- 1,023,605 1,966,504 1,966,504
Stockholder settlement
liability............... 33,000 -- -- --
Current portion of
Corsair note payable.... -- 384,919 141,443 141,443
Current portion of
capital lease
obligations............. 11,866 89,577 138,946 138,946
Current portion of note
payable to officer, net
of discount............. - 88,333 60,699 60,699
--------- ---------- ----------- -----------
Total current
liabilities........... 320,976 3,315,618 3,474,152 3,474,152
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 69,268 69,268
NOTE PAYABLE TO CORSAIR.... -- 1,645,866 1,604,275 1,604,275
--------- ---------- ----------- -----------
Total liabilities...... 589,755 5,105,772 5,388,979 5,388,979
COMMITMENTS AND
CONTINGENCIES (Notes 3, 4
and 10)
STOCKHOLDERS' EQUITY
(DEFICIT)
Preferred stock, $0.01
par value, 5,000,000
shares authorized as pro
forma................... -- -- -- --
Common stock, zero, $0.01
and $0.01 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 September 30, 2000,
respectively; pro forma
$0.01 par value,
95,000,000 shares
authorized, 20,346,957
shares outstanding...... 61,098 10 10 203,470
Additional paid-in
capital................. -- 3,609,927 9,936,076 11,732,616
Retained earnings
(deficit)............... (366,333) 958,759 (2,342,164) (2,342,164)
--------- ---------- ----------- -----------
Total stockholders'
equity (deficit)...... (305,235) 4,568,696 7,593,922 9,593,922
--------- ---------- ----------- -----------
$ 284,520 $9,674,468 $12,982,901 $14,982,901
========= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PRIMAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months Three months Nine months
Year ended ended ended ended
December 31, September 30, December 31, September 30,
1998 1999 1999 2000
------------- ------------- ------------ -------------
(predecessor) (predecessor) (successor) (successor)
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
System revenue........ $1,458,924 $1,143,034 $ 1,639,314 $ 2,051,363
Service revenue....... 5,448,364 2,908,389 4,202,794
---------- ---------- ----------- -----------
Total revenue....... 1,458,924 6,591,398 4,547,703 6,254,157
COST OF REVENUES........ 1,044,344 3,515,082 1,069,108 3,223,551
---------- ---------- ----------- -----------
GROSS MARGIN............ 414,580 3,076,316 3,478,595 3,030,606
OPERATING EXPENSES:
Research and
development.......... 276,029 787,359 543,525 2,853,349
Sales and marketing... 191,317 1,107,410 431,856 1,660,529
General and
administrative....... 181,809 1,777,178 811,860 2,355,323
---------- ---------- ----------- -----------
Total cost and
expenses........... 649,155 3,671,947 1,787,241 6,869,201
---------- ---------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS............. (234,575) (595,631) 1,691,354 (3,838,595)
INTEREST AND OTHER
EXPENSE, net........... (31,104) (81,408) (64,786) (130,137)
---------- ---------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... (265,679) (677,039) 1,626,568 (3,968,732)
INCOME TAX PROVISION
(BENEFIT).............. 800 800 667,809 (667,809)
---------- ---------- ----------- -----------
NET INCOME (LOSS)....... $ (266,479) $ (677,839) $ 958,759 $(3,300,923)
========== ========== =========== ===========
Basic and diluted net
income (loss) per
share.................. $ 958.76 $ (3,300.92)
Weighted average basic
and diluted common
shares outstanding..... 1,000 1,000
Pro forma basic and
diluted net income
(loss) per share....... $ 0.05 $ (0.16)
Pro forma weighted
average basic and
diluted common shares
outstanding............ 20,346,957 20,346,957
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PRIMAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CAPITAL
<TABLE>
<CAPTION>
Total
Common stock Additional Retained stockholders'
--------------------- paid-in earnings equity
Shares Amount capital (deficit) (deficit)
----------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Primal Systems, Inc.
(predecessor)
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)
Cancelation 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:
Goodwill related to
original purchase of
Primal by Avery........ 3,575,000 3,575,000
Capital contribution.... 2,751,149 2,751,149
Net loss................ (3,300,923) (3,300,923)
----------- -------- ---------- ----------- -----------
BALANCE, September 30,
2000................... 1,000 $ 10 $9,936,076 $(2,342,164) $ 7,593,922
=========== ======== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PRIMAL SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months Three months Nine months
Year ended ended ended ended
December 31, September 30, December 31, September 30,
1998 1999 1999 2000
------------- ------------- ------------ -------------
(predecessor) (predecessor) (successor) (successor)
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $(266,479) $ (677,839) $ 958,759 $(3,300,923)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 14,257 232,512 192,642 934,164
Common stock for
services.............. 53,098 -- -- --
Amortization of loan
payable discount...... 15,070 5,300 727 3,559
Provision for doubtful
accounts.............. 6,261 170,392 57,271 8,946
Changes in operating
assets and
liabilities:
Accounts receivable... (79,167) 14,695 997,320 (263,836)
Prepaid expenses and
other current
assets............... (21,685) (155,385) (152,265) (413,042)
Other assets.......... (347) 76,613 381,107 267
Accounts payable,
accrued expenses, and
income taxes......... 173,501 403,850 837,662 (562,624)
Deferred revenue...... -- 1,095,644 (1,241,005) 942,899
--------- ---------- ----------- -----------
Net cash provided by
(used in) operating
activities........... (105,491) 1,165,782 2,032,218 (2,650,590)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment......... (3,327) (559,611) (299,879) (297,013)
(Repayment from)
advance to Avery
Communications, Inc... -- -- (370,000) 335,665
Cash acquired through
asset acquisition..... -- -- 401,081 --
--------- ---------- ----------- -----------
Net cash provided by
(used in) investing
activities.......... (3,327) (559,611) (268,798) 38,652
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings on long-term
obligations........... 100,000 -- -- --
Payments on long-term
obligations........... (3,847) (249,266) (52,424) (538,517)
Capital contributions.. 2,751,149
Exercise of employee
stock options......... -- 15,801 -- --
--------- ---------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... 96,153 (233,465) (52,424) 2,212,632
--------- ---------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (12,665) 372,706 1,710,996 (399,306)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 41,040 28,375 -- 1,710,996
--------- ---------- ----------- -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 28,375 $ 401,081 $ 1,710,996 $ 1,311,690
========= ========== =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION--
Cash paid during the
period for:
Interest.............. $ 30,412 $ 105,050 $ 67,265 $ 186,061
========= ========== =========== ===========
Income taxes.......... $ 800 $ 800 $ -- $ 800
========= ========== =========== ===========
NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of property
through capital lease.. $ 12,000 $ 437,890
=========== ===========
Issuance of note payable
to Corsair for
acquisition............ $2,238,242
==========
Assets acquired, net of
cash................... $4,581,889 $ 9,003,167
========== ===========
Liabilities assumed..... $2,343,647 $ 5,393,230
========== ===========
Capital contributions--
Issuance of Avery stock
and transaction costs.. $ 3,609,937
===========
Goodwill related to
original purchase of
Primal by Avery........ $ 3,575,000
===========
</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 spin-off 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, and E convertible preferred stock and the holder
of Avery's convertible note will receive Primal common stock, in the amount of
the preferred stock's common stock equivalent and the convertible note common
stock equivalent held on the record date of the spin-off. The Distribution will
be accounted for at historical cost.
Also in August 2000 in connection with the distribution agreement, 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
. 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,
. the Avery Series G preferred stock will not be entitled to participate in
the distribution by Avery of the shares of Primal common stock to Avery's
securityholders, and
. 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.
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 September 30, 2000,
reflects the effects of the distribution agreement including the remaining $2.0
million to be received from Avery, option cancellation and share issuance as
further discussed in Note 11. Such agreements will result in a maximum amount
of 20,346,957 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--(Continued)
Unaudited Information--The information set forth in these financial
statements as of September 30, 2000 (Successor) and for the nine months ended
September 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.
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:
<TABLE>
<C> <S>
Computer and office equipment.. 5 years
Furniture and fixtures......... 7 years
Leasehold improvements......... Shorter of the estimated useful life or
life of the lease
</TABLE>
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.
F-8
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets--Goodwill (net of accumulated amortization of $169,214 at
December 31, 1999 and $752,356 at September 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.
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 September 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 September
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.
F-9
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended December 31, 1998 and 1999, and the nine months ended
September 30, 1999 and 2000, three, two and four and two customers,
respectively, 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 September 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.
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 nine-month period ended September 30, 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.
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.
F-10
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1998 1999 2000
------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Computer and office equipment......... $53,141 $1,524,626 $2,256,098
Furniture and fixtures................ 11,573 87,802 90,966
Leasehold improvements................ -- 19,848 19,848
------- ---------- ----------
64,714 1,632,276 2,366,912
Less accumulated depreciation and
amortization......................... (22,565) (23,431) (351,955)
------- ---------- ----------
Property and equipment, net........... $42,149 $1,608,845 $2,014,957
======= ========== ==========
</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 September 30, 2000.
Accumulated depreciation related to equipment under capital leases amounted
to $19,684, $13,111, and $80,937 at December 31, 1998, 1999, and September 30,
2000, respectively.
3. LEASE COMMITMENTS
The Company leases office space and certain equipment under various
noncancelable 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
--------- --------
<S> <C> <C>
Year ending December 31:
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, and $356,107
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 nine-month period
ended September 30, 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-11
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $129,967 at December 31, 1998, 1999, and September 30, 2000,
respectively, and are net of discounts of $12,119, $6,091, and $2,533 at
December 31, 1998, 1999, and September 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:
<TABLE>
<S> <C>
2000............................................................. $ 88,333
2001............................................................. 88,333
Less discount.................................................... (6,091)
--------
170,575
Less current portion............................................. (88,333)
--------
Long-term portion................................................ $ 82,242
========
</TABLE>
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 nine months ended September 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.
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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
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....................... $ -- $ --
======== ========
</TABLE>
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.
F-12
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
average
Options Price of 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
Cancelled............................... (2,355,193) $0.0150
----------
BALANCE, December 31, 1999 and September
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. As a result of the distribution
agreement, these options became 50% vested. As a result, 284,210 of the options
were exercised and the remaining 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-13
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-14
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 nine-month period ended September 30, 2000, was as follows:
<TABLE>
<CAPTION>
Systems Services Total
---------- ---------- ----------
<S> <C> <C> <C>
Year ended December 31, 1998:
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
========== ========== ==========
Nine months ended September 30, 2000
(unaudited):
Revenues................................... $2,051,363 $4,202,794 $6,254,157
Cost of revenues........................... 202,017 3,021,534 3,223,551
---------- ---------- ----------
Gross margin............................. $1,849,346 $1,181,260 $3,030,606
========== ========== ==========
</TABLE>
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
States Asia/Pacific Europe Total
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31,
1998:
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
Nine months ended September
30, 2000 (unaudited):
Revenues................. $ 4,597,617 $ 927,235 $ 729,305 $ 6,254,157
Gross profit............. 2,227,889 449,315 353,402 3,030,606
Income (loss) from
operations.............. (2,426,607) (489,392) (384,924) (3,300,923)
Long-lived assets........ 2,014,957 -- -- 2,014,957
</TABLE>
F-15
<PAGE>
PRIMAL SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. GOODWILL
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 3,236,531 shares of Series F preferred 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 balance sheet as of September 30, 2000.
11. DISTRIBUTION AGREEMENT
As discussed in Note 1, the Board of Directors of Avery, in August 2000,
approved the spin-off 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, of which
$2,000,000 is reflected as a capital contribution in the September 30,
2000 balance sheet and the remaining $2,000,000 is reflected as an
additional capital contribution in the September 30, 2000 pro forma
balance sheet.
. The former Primal shareholders waived the repurchase right discussed in
Note 10 and an additional 1,986,531 shares of Avery Series F preferred
stock were issued to those shareholders.
. The former chief executive officer of Avery, an Old Primal Stockholder,
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.
Also, as part of the compensation agreement with the new chief executive
officer of Primal, Primal agreed to issue approximately 400,000 shares of the
Company after the distribution. Such actual share amounts will be determined at
the date of distribution. The cash contribution, the option cancellation and
share issuance transactions have been reflected in the Primal pro forma balance
sheet of September 30, 2000 as an equity adjustment.
Also, as a result of the distribution agreement, the unvested options to
purchase Avery common stock held by Company employees became 50% vested. Such
employees subsequently exercised 284,210 options with the remaining balance of
options canceled.
F-16
<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
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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.
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 (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 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 intend to enter 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
will also provide for the advancement of certain expenses to such directors and
officers in connection with any such suit or proceeding.
Insurance
We intend to obtain 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.
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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.
<TABLE>
<S> <C>
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
</TABLE>
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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 (filed as Exhibit 3.2 hereto and
incorporated by reference herein)
5.1 Opinion of Bryan Cave LLP (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)
</TABLE>
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<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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
10.7* Form of Master Software License Agreement
21.1 Subsidiaries of Registrant
23.1* Consent of Deloitte & Touche LLP
23.2 Consent of Bryan Cave LLP (to be filed as Exhibit 5.1 hereto and
incorporated by reference herein)
24.1 Power of Attorney (included on the 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 Nine Months Ended September 30, 2000
99.1 SE Biz Val, LLC Executive Summary Appraisal of Primal Solutions, Inc.
</TABLE>
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* Filed with Amendment No. 1 to this Registration Statement.
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.
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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 Irvine, State of California, on January 8, 2001.
PRIMAL SOLUTIONS, INC.
/s/ Joseph R. Simrell
By: _________________________________
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, January 8, 2001
______________________________________ President, Chief
William Salway Operating Officer, and
Director (Principal
Executive Officer)
/s/ John Faltys* Chief Technology Officer, January 8, 2001
______________________________________ Executive Vice President,
John Faltys Chairman of the Board of
Directors and Director
/s/ Joseph R. Simrell Chief Financial Officer, January 8, 2001
______________________________________ Vice President of Finance
Joseph R. Simrell and Administration, and
Secretary (Principal
Financial and Accounting
Officer
/s/ David Haynes* Vice President of January 8, 2001
______________________________________ Marketing and Director
David Haynes
/s/ J. Alan Lindauer* Director January 8, 2001
______________________________________
J. Alan Lindauer
/s/ Norman Phipps* Director January 8, 2001
______________________________________
Norman Phipps
*By: /s/ Joseph R. Simrell January 8, 2001
______________________________________
Joseph R. Simrell
Attorney-in-Fact
</TABLE>
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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 (filed as Exhibit 3.2 hereto and
incorporated by reference herein)
5.1 Opinion of Bryan Cave LLP (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
10.5 Employment Agreement for Joseph R. Simrell
10.6 Employment Agreement for David Haynes
10.7* Form of Master Software License Agreement
21.1 Subsidiaries of Registrant
23.1* Consent of Deloitte & Touche LLP
23.2 Consent of Bryan Cave LLP (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 Nine Months Ended September 30, 2000
99.1* SE Biz Val, LLC Executive Summary Appraisal of Primal Solutions, Inc.
</TABLE>
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* Filed with Amendment No. 1 to this Registration Statement.
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