As filed with the Securities and Exchange Commission on September 30, 1998
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AVERY COMMUNICATIONS, INC.
(Exact name of Small Business Issuer in its Charter)
DELAWARE 4899 12-2227079
(State or Other Jurisdiction of Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization Classification Code Number Identification No.)
---------------
190 SOUTH LASALLE STREET
SUITE 1710
CHICAGO, ILLINOIS 60603
(312) 419-0077
(Address and telephone number
of Principal Executive Offices)
--------------
SCOT M. MCCORMICK
AVERY COMMUNICATIONS, INC.
190 SOUTH LASALLE STREET
SUITE 1710
CHICAGO, ILLINOIS 60603
(312) 419-0077
(Name, Address and Telephone Number of Agent for Service)
---------------
With a copy to:
BRUCE A. CHEATHAM
WINSTEAD SECHREST & MINICK P.C.
5400 RENAISSANCE TOWER
1201 ELM STREET
DALLAS, TEXAS 75270
(214) 745-5213
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
<PAGE>
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
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS TO BE OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING FEE
PRICE(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock.................................... 11,788,186 $2.0625 $24,313,134 $7,173
- --------------------------------------------------------------------------------------------------------------------
- ---------------------------------
<FN>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c).
</FN>
</TABLE>
Pursuant to Rule 416, there are also being registered hereby such
additional indeterminate number of shares of such Common Stock as may become
issuable by reason of stock splits, stock dividends, and similar adjustments as
set forth in the provisions of the derivative securities described herein.
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.
<PAGE>
Subject to Completion, Dated September 30, 1998
PROSPECTUS
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
AVERY COMMUNICATIONS, INC.
11,788,186 SHARES OF COMMON STOCK
This Prospectus relates to (i) the offer and sale or other distribution
from time to time of up to 2,790,572 shares (collectively, the "Warrant Shares")
of common stock, par value $0.01 per share (the "Common Stock"), of Avery
Communications, Inc., a Delaware corporation (the "Company"), if, and to the
extent that, holders of the Company's presently outstanding common stock
purchase warrants (collectively, the "Warrants"), exercise the Warrants and
purchase up to 2,790,572 Warrant Shares, (ii) the offer and sale or other
distribution from time to time of up to 7,011,948 shares (collectively, the
"Restricted Shares") of the presently outstanding Common Stock of the Company by
the holders thereof, (iii) the offer and sale or other distribution from time to
time of up to 1,705,666 shares (collectively, the "Preferred Conversion Shares")
of the Common Stock of the Company if, and to the extent that, holders of shares
(collectively, the "Convertible Preferred Shares") of the Company's presently
outstanding series of convertible preferred stock convert the Convertible
Preferred Shares into up to 1,705,666 Conversion Shares, (iv) the offer and sale
or other distribution from time to time of up to 280,000 shares (the "Note
Conversion Shares," and collectively with the Preferred Conversion Shares, the
"Conversion Shares") of the Common Stock of the Company if, and to the extent
that, holders of a $350,000 convertible promissory note (the "Convertible Note,"
and collectively with the Convertible Preferred Shares, the "Convertible
Securities") convert the Convertible Note into Note Shares, and (v) the offer
and sale or other distribution from time to time of 8,076,054 shares
constituting a part of the Warrant Shares, Restricted Shares or Conversion
Shares (collectively, the "Affiliate Shares," and collectively with the Warrant
Shares, the Restricted Shares and the Conversion Shares, the "Secondary Shares")
of the Common Stock of the Company constituting a part of the Secondary Shares,
held by persons who may be affiliates of the Company (such persons, together
with the holders of the Restricted Shares and the Conversion Shares, the
"Selling Stockholders"). See "Selling Stockholders" and "Plan of Distribution."
The Company has registered the Secondary Shares to provide the holders thereof
with freely tradeable securities, but the registration of such shares does not
necessarily mean that any of such shares will be offered or sold by the holders
thereof.
The Selling Stockholders may from time to time offer and sell all or a
portion of the Secondary Shares in the over-the-counter market, in negotiated
transactions or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The Secondary Shares may be sold
directly or through brokers or dealers, or in a distribution by one or more
underwriters on a firm commitment or best efforts basis. To the extent required,
the names of any agent or broker-dealer and applicable commissions or discounts
and any other required information with respect to any particular offer will be
set forth in an accompanying Prospectus Supplement. See "Plan of Distribution."
Each of the Selling Stockholders reserves the sole right to accept or reject, in
whole or in part, any proposed purchase of the Secondary Shares to be made
directly or through agents.
The Selling Stockholders and any agents or broker-dealers that
participate with the Selling Stockholders in the distribution of Secondary
Shares may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), and any commissions received by
them and any profit on the resale of the Secondary Shares may be deemed to be
underwriting commissions or discounts under the Securities Act.
The Company will not receive any of the proceeds from the sale of any
Secondary Shares by the Selling Stockholders but has agreed to bear the expenses
of registration of the Secondary Shares, other than commissions and discounts of
agents or broker-dealers and transfer taxes, if any.
<PAGE>
The Common Stock of the Company is traded in the over-the-counter
market and is quoted on the OTC Electronic Bulletin Board operated by the
National Association of Securities Dealers, Inc. ("NASD") under the symbol
"ATEX." On September 25, 1998, the reported sale price was $2.0625.
----------------------
THIS INVESTMENT IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE
INVESTORS SHOULD BE FINANCIALLY ABLE TO AFFORD A LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------------
The date of this Prospectus is _______________, 1998
- 2 -
<PAGE>
AVAILABLE INFORMATION
----------------------
Prior to filing the registration statement on Form SB-2 of which this
Prospectus is a part, the Company has not been subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
The Company has filed with the Commission a registration statement on
Form SB-2 of which this Prospectus is a part. This registration statement or any
part thereof may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Judiciary Plaza,
Washington, D.C. 20549. Copies of such material may be obtained from the Public
Reference Section of the Commission's Washington, D.C. office at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov.
INFORMATION TO SECURITY HOLDERS
Following completion of the Offering, the Company will furnish to
holders of record of the Shares an annual report, which will include audited
consolidated financial statements. The first such annual report will be for the
year ending December 31, 1998.
- 3 -
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Prospectus contains forward-looking statements
that involve risks and uncertainties. A number of important factors could cause
the Company's actual results for 1997 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
as well as those discussed elsewhere in this Prospectus.
Investors should carefully consider the information set forth under
"Risk Factors" on page 5.
THE COMPANY
The Company is a telecommunications service company which, through its
operating subsidiary, Hold Billing Services, Ltd. ("HBS") is engaged in billing
and collection services for inter-exchange carriers ("IXCs") and long-distance
resellers.
HBS provides local exchange carrier ("LEC") billing services for
approximately fifty-two long-distance resellers and has billing and collection
contracts with 1,300 telephone companies, including the seven regional Bell
operating companies, the General Telephone Operating Companies ("GTE") and
Sprint Incorporated ("Sprint"). These agreements provide HBS with the capability
to bill approximately 98% of the households in the United States. The contracts
permit HBS's customers to (i) bill their end users through LECs and (ii) have
the LECs collect their long distance charges from end users. One advantage of
billing through the LECs is the consumer receives one bill including charges for
both local and long distance services, instead of separate bills for each.
Another benefit is higher collection rates due to the LECs' ability to
discontinue local telephone services for non-payment of long-distance charges.
As a result, the majority of HBS's customers have bad debts in the range of 3%
of revenue. In addition, HBS provides certain customers with an Advanced Payment
Program. This pays the customer a percentage of its gross amount due upon
receipt of its records for processing, eliminating a 50-60 day wait for the LECs
to remit. Currently, HBS has 18 customers which take advantage of this program.
See "Business."
The Company is a holding company that was incorporated in the state of
Delaware in 1977 under the name Fine Art Corporation of America, Inc. In
November 1994, the Company acquired (accounted for as a reverse acquisition) all
of the outstanding stock of Avery Communications, Inc., a Texas corporation
("Avery Texas"), which, through its subsidiaries, provided a variety of
telecommunication services. The principal executive offices of the Company are
located at 190 South LaSalle Street, Suite 1710, Chicago, Illinois 60603, and
its telephone number at that address is (312) 419-0077.
- 4 -
<PAGE>
RISK FACTORS
Prospective purchasers of the Secondary Shares should consider
carefully the factors set forth below, as well as other information contained in
this Prospectus, before making a decision to invest in the Secondary Shares.
LIMITED OPERATING HISTORY; HISTORICAL OPERATING LOSSES
Since 1995, the Company has generated limited revenue and incurred
operating losses. During the period January 1, 1995, through June 30, 1998, the
Company has incurred a cumulative net loss of $5,394,433, of which $3,052,770
and $1,480,205 are attributable to the years ended December 31, 1996 and 1997,
respectively. During the six months ended June 30, 1998, the Company had net
income of $631,314. There can be no assurance that the Company will be
profitable in the future. Failure of the Company to operate profitably will have
a negative impact upon the value of the Shares, and the Company's ability to pay
cash dividends.
The losses to date have been funded by loans and equity contributions.
If the Company does not maintain and increase its profits, it will require, but
may not be able to obtain, additional financing. Even if the Company is able to
obtain additional financing, the terms of such financing may dilute or otherwise
adversely affect the investment of holders of the Shares.
Currently, all of the Company's revenues are from HBS's long-distance
billing clearinghouse services. HBS was acquired in November 1996.
ABILITY TO ACQUIRE OTHER TELECOMMUNICATION PROVIDERS
The Company has instituted and is presently actively engaged in an
acquisition program, focusing primarily on the acquisition of billing companies
and other telecommunication service providers. One or more of such acquisitions
could result in a substantial change in the Company's operations and financial
condition. The success of the Company's acquisition program will depend, among
other things, on the availability of acquisition candidates, the Company's
ability to compete successfully with other potential acquirors seeking similar
acquisition candidates, the availability of funds to finance acquisitions and
the availability of management resources to oversee the operation of acquired
businesses. The Company has limited resources and no assurance can be given that
the Company will succeed in consummating any additional acquisitions or that the
Company will be able to successfully integrate and manage any acquisitions.
As consideration for any acquisitions, in addition to or in lieu of the
payment of cash, the Company may issue Common Stock, preferred stock,
convertible debt or other securities that could result in substantial dilution
of the percentage ownership of its stockholders. The Company does not intend to
seek stockholder approval for any such acquisitions or security issuance unless
required by applicable law or regulations. See "Description of Capital Stock."
NEED FOR ADDITIONAL FINANCING
Companies that perform long-distance billing clearinghouse services
typically will offer an additional service of factoring its customer's
receivables. HBS anticipates it will need to raise additional capital over the
next 12 months in order to provide appropriate factoring services to its
customers and in order to attract new customers.
To fund its planned growth through additional acquisitions as described
herein, the Company will need substantial additional financing. The Company has
not yet obtained or received commitments for any such financing, and there can
be no assurance the Company will be able to obtain such financing or that such
financing will be adequate to fund the Company's plans. If the Company is not
able to obtain such financing on terms that the Company determines are
economical, the Company will be required to modify its development plans. There
can be no assurance that the Company will generate sufficient cash flow to fund
its future working capital requirements and growth. In such event, the Company
may be required to seek additional financing through additional debt or equity
offerings. There can be no assurance that any such financing will be available
to the Company, or if available, that the terms of such financing will be
acceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results
- 5 -
<PAGE>
of Operations." To the extent that the Company obtains additional equity
financing or debt financing which is convertible into equity securities, such
financing may be dilutive to the holders of the Shares. To the extent that the
Company obtains additional debt financing, the holders of such debt financing
would have a higher priority claim on the assets of the Company than would the
holders of the Shares. To obtain such financing, future investors or lenders may
require concessions that could include, among others, liquidation or dividend
preferences, restrictions on dividends, pledges of assets or sinking funds.
ABILITY TO MANAGE GROWTH
The Company's strategy of continued growth and expansion will place
additional demands on the Company's current management and other resources and
will require additional working capital, information systems, and management,
operational and other financial resources. No assurance can be given that the
Company will be able to manage its expanding operations. The failure of the
Company's management to manage growth effectively could have a material adverse
effect on the Company's financial condition and results of operations. See
"--Dependence on Senior Management and Skilled Personnel," "Business --
Strategy" and "Management."
HIGHLY LEVERAGED INVESTMENT
One of the reasons that the Company has not operated profitably in the
past is the cost of servicing the Company's indebtedness. As of June 30, 1998,
the Company's current portion of notes payable was $554,104, and the Company's
aggregate long-term portion of notes payable was $699,112. During the calendar
years ended December 31, 1996 and 1997, the Company incurred $296,170 and
$412,145, respectively, in interest expense and incurred $1,310,616 and
$902,350, respectively, in financing fees, and during the six months ended June
30, 1998, the Company incurred $236,687 in interest expense and incurred $91,000
in financing fees. Further, the Company may need to incur additional debt in
attempting to accomplish its growth objectives through additional acquisitions.
Since the Company's creditors have a prior claim on its assets, the failure of
the Company to meet its debt service obligations could adversely affect the
amounts, if any, to be received by the holders of the Shares upon liquidation of
the Company.
COMPETITION
The LEC billing clearinghouse industry is a competitive industry. HBS's
major competitors in the LEC billing clearinghouse industry are Billing Concepts
Corp., which was spun-off from U.S. Long Distance Corp. on August 2, 1996, and
OAN Services, Inc., a wholly owned subsidiary of TeleCom Holdings, Inc.
Competition among the LEC billing clearinghouses is based on the quality of
information reporting, collection history, the speed of collections (including
the ability to factor a long-distance reseller's accounts) and the price of
services. HBS's competitors have greater name recognition and have, or have
access to, substantially greater financial and personnel resources than those
available to HBS. There can be no assurance that HBS will be able to compete
successfully with existing or future competitors. See "Business--HBS."
INDUSTRY EXPANSION
As regulation of the local telephone industry evolves, greater numbers
of local providers are likely to enter the industry. The Company's business is
dependent upon contracting with these local providers. There can be no assurance
that the Company will be able to contract with additional local providers as the
industry expansion occurs.
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. The Company believes that its future success will depend on its
ability to anticipate such changes and to offer on a timely basis market
responsive services that meet these evolving industry standards. There can be no
assurance that the Company will have sufficient resources to make the
investments necessary to acquire new technology or to introduce new services
that would satisfy an expanded range of customer needs.
- 6 -
<PAGE>
INCREASED EXPENDITURES FOR ANTICIPATED EXPANSION
To facilitate and support the growth anticipated in its business, the
Company will need to expand its level of operations significantly, thus
increasing its personnel and facilities expenses. Due to the increases in the
Company's overhead and operating expenses resulting from this expansion, the
Company's financial condition and results of operations may be adversely
affected.
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends, and will continue to depend, upon the services of
Patrick J. Haynes, III, its Chairman of the Board, President and Chief Executive
Officer, and Scot M. McCormick, its Chief Financial Officer. The Company
depends, and will continue to depend, upon Harold D. Box and David W. Mechler
for the operations of HBS. The loss of the services of any of such persons, or
the Company's inability to attract additional management personnel in the
future, could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF LOW-PRICED STOCKS
The Company's Common Stock may be defined as a "penny stock" under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and rules
of the Securities and Exchange Commission thereunder. The Exchange Act and such
penny stock rules generally impose additional sales practice and disclosure
requirements upon broker-dealers who sell the Company's securities to persons
other than certain "accredited investors" (generally, institutions with assets
in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 jointly with spouse) or in
transactions not recommended by the broker-dealer. For transactions covered by
the penny stock rules, the broker-dealer must make a suitability determination
for each purchaser and receive the purchaser's written agreement prior to the
sale. In addition, the broker-dealer must make certain mandated disclosures in
penny stock transactions, including the actual sale or purchase price and actual
bid and offer quotations, the compensation to be received by the broker-dealer
and certain associated persons, and deliver certain disclosures required by the
Securities and Exchange Commission. Consequently, the penny stock rules may
affect the ability of broker-dealers to make a market in or trade the Company's
shares and thus may also affect the ability of purchasers of shares to resell
those shares in the public markets.
NO ACTIVE TRADING MARKET; VOLATILITY
The Company's shares are traded on the OTC Electronic Bulletin Board, a
screen-based trading system operated by the National Association of Securities
Dealers, Inc. Securities traded on the OTC Electronic Bulletin Board are, for
the most part thinly traded and, as the preceding Risk Factor indicates, subject
to special regulations not imposed on securities listed or traded on The Nasdaq
Stock Market or on a national securities exchange. The Company's shares have
experienced in the past and are expected to experience in the future significant
price and volume volatility, increasing the risk of ownership to investors.
MARKET OVERHANG OF REGISTERED STOCK
Due to the lack of an active trading market and past volatility of the
Common Stock, sales by holders of any of the shares may have an adverse effect
on the trading price of and market for the Common Stock. Sales of significant
numbers of the Shares into the open market may have a depressive effect on the
market for and trading price of the Common Stock, but the Company cannot predict
the likely timing or extent of any such sales or the long- or short-term market
effect of any sales.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price for the Company's Common Stock,
which could have a direct impact on the value of the Shares.
- 7 -
<PAGE>
DIVIDEND POLICY
The Company, in its present line of business, has never declared or
paid any cash dividends on the Common Stock. For the foreseeable future, the
Company expects to retain any earnings to finance the operation and expansion of
the Company's business. In addition, it is anticipated that the terms of future
debt and/or equity financings may restrict the payment of cash dividends.
Therefore, the payment of any cash dividends on the Common Stock is unlikely.
See "Dividend Policy."
- 8 -
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the offer and sale or other distribution
from time to time of up to 2,790,572 Warrant Shares if, and to the extent that,
holders of the Warrants exercise the Warrants and purchase up to 2,790,572
Warrant Shares, (ii) the offer and sale or other distribution from time to time
of up to 7,011,948 Restricted Shares by the holders thereof, (iii) the offer and
sale or other distribution from time to time of up to 1,985,666 Conversion
Shares if, and to the extent that, holders of Convertible Securities convert the
Convertible Securities into up to 1,985,666 Conversion Shares, and (iv) the
offer and sale or other distribution from time to time of the Affiliate Shares
constituting a part of the Warrant Shares, the Restricted Shares or the
Conversion Shares held by the Selling Stockholders who are affiliates of the
Company. The Company has registered the Secondary Shares to provide the holders
thereof with freely tradeable securities, but the registration of such shares
does not necessarily mean that any of such shares will be offered or sold by the
holders thereof.
The Company will not receive any proceeds from the offering of the
Secondary Shares by the Selling Stockholders. The Selling Stockholders may from
time to time sell all or a portion of the Secondary Shares in the
over-the-counter market, in negotiated transactions or otherwise, at prices then
prevailing or related to the then current market price or at negotiated prices.
The Secondary Shares may be sold directly or through brokers or dealers, or in a
distribution by one or more underwriters on a firm commitment or best-efforts
basis. The methods by which the Secondary Shares may be sold include (i) a block
trade (which may involve crosses) in which the broker or dealer so engaged will
attempt to sell the securities as agent but may position and resell a portion of
the block as principal to facilitate the transaction, (ii) purchases by a broker
or dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus, (iii) ordinary brokerage transactions and
transactions in which the broker solicits purchasers, and (iv) privately
negotiated transactions. The Selling Stockholders may from time to time deliver
all or a portion of the Secondary Shares to cover a short sale or sales made
after the date of this Prospectus, or upon the exercise or closing of a call
equivalent position or a put equivalent position entered or established after
the date of this Prospectus. The Selling Stockholders and any broker-dealers
participating in the distribution of the Secondary Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the Secondary Shares by the Selling Stockholders and any commissions
received by any such broker-dealers may be deemed to be underwriting commissions
or discounts under the Securities Act. The Selling Stockholders may sell all or
any portion of the Secondary Shares in reliance upon Rule 144 under the
Securities Act.
At a time a particular offer of Secondary Shares is made, a Prospectus
Supplement, if required, will be distributed that will set forth the name of any
dealers or agents and any commissions and other terms constituting compensation
from the Selling Stockholders and any other required information. The Secondary
Shares may be sold from time to time at varying prices determined at the time of
sale or at negotiated prices.
In order to comply with the securities laws of certain states, if
applicable, the Secondary Shares may in such circumstances be sold only through
registered or licensed brokers or dealers. In addition, in certain states, the
Secondary Shares may not be sold unless they have been registered or qualified
for sale in such state or an exemption from such registration or qualification
requirement is available and is complied with.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price for the Company's Common Stock,
which could have a direct impact on the value of the Shares.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned restricted securities for at least one
year, and a person who may be deemed to be an "affiliate" of the Company, as
that term is defined under Rule 144, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i) 1%
of the then outstanding shares of the Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which the notice of the sale is filed with the Commission. Generally,
sales by affiliates and owners of restricted securities held for less than two
years may not be made under Rule 144 until 90 days after the date of this
Prospectus and will be subject to the foregoing volume
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<PAGE>
limitations and to certain manner of sale provisions, notice requirements, and
the availability of current public information about the Company. However, a
person who is not an affiliate of the Company at any time within 90 days
preceding a sale, and who has beneficially owned shares for at least two years,
would be entitled immediately to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, and notice and
current public information requirements. Similarly, securities acquired from an
issuer for consideration consisting solely of other securities of the same
issuer surrendered for conversion are deemed to have been acquired at the same
time as the securities surrendered for conversion. Therefore, in general, upon
conversion of the Convertible Securities into Common Stock, such Common Stock
may be resold under Rule 144 within one year after the date on which the
Preferred Stock was acquired from the Company subject to the volume limitations
of Rule 144 and two years after such date without regard to the volume
limitations under Rule 144(k).
SELLING STOCKHOLDERS
The following table sets forth the name, number of Shares of Common
Stock and the number of Shares underlying the Warrants and Convertible
Securities owned by each Selling Stockholder. Since the Selling Stockholders may
sell all, a portion or none of their Shares, no estimate can be made of the
aggregate number of Shares that are offered hereby or that will be owned by each
Selling Stockholder upon completion of the offering to which this Prospectus
relates.
The Shares offered by this Prospectus may be offered from time to time
by the Selling Stockholders named below (based on the Common Stock, the
Convertible Securities and the Warrants held at September 28, 1998).
<TABLE>
<CAPTION>
COMMON STOCK UNDERLYING
-----------------------------------
TOTAL
CONVERTIBLE COMMON SHARES TO BE
NAME WARRANTS SECURITIES STOCK SOLD
- ------------------------------------ ------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Aguilar, Betty 10,000 10,000
Aikman, Robert Edwin 8,000 30,000 38,000
Asset Management Partners, Inc. 2,910 2,910
Axelrod, Cecil 10,000 10,000
Bank One of Texas 1,036,664 1,036,664
Bard, Ralph M. III 7,154 7,154
Bellgate Nominees LTDA WII 133,333 133,333
Blancas, Steve 1,000 1,000
Box, Harold D. 111,111 111,111
Brown, Eric 7,238 7,238
Brown, Eric and Ian 25,000 25,000
Brown, Ian 7,238 7,238
Brown, Spencer 75,000 75,000
Brown, Stephen 100,000 100,000
Burquin, Mary B. 6,965 6,965
Burroughs, Anita 500 500
Camomille Limited 100,000 100,000
Cannon, Edith 10,000 10,000
Cornerhouse Limited Partnership 30,000 83,419 113,419
Curiel, Giulio 9,000 9,000
Danilan Investments Inc. 133,333 133,333
Davilla, Mercedes 3,500 3,500
Davis, Carol 25,000 14,476 39,476
Deloitte & Touche 50,000 50,000
Der Uto Bank 190,037 190,037
Dickson, Katharine B. 6,965 6,965
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK UNDERLYING
-----------------------------------
TOTAL
CONVERTIBLE COMMON SHARES TO BE
NAME WARRANTS SECURITIES STOCK SOLD
- ------------------------------------ ------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Downs, Paul 33,333 33,333
Dunn, Edward L. 101,852 101,852
Dunn, Philip S. 18,518 18,518
Eastern Virginia SBIC 91,000 280,000 245,000 616,000
Edelman, Carol 10,000 10,000
El Camino Real 1,875 1,875
Fay, Margaret H., Trustee 8,000 10,000 18,000
Felberbaum, Roger 20,000 22,619 42,619
Fisher, Mark 40,000 9,829 49,829
Franklin Holding Corp., The 350,000 1,383,338 1,733,338
Gaines, John Joseph 3,333 5,024 8,357
Goldsmith, Bret 1,000 1,000
Gorum, Renee 2,500 2,500
Goss, Dianne 2,500 2,500
Greenbaum, John 75,000 75,000
Griffith, H. Tom Trustee UTA 10,542 10,542
Haberman, Barry 10,000 10,000
Hande lsfinaz - CCF Bank 33,333 33,333
Hanley, William 10,000 10,000
Harrison, Edward J. III 45,286 92,511 137,797
Hayes, James E. Trustee UTA 10,542 10,542
Hickman, Carla 500 500
Horkey, Jill 1,500 1,500
Isham, Robert T., Jr. 120,284 3,333 13,460 137,077
Isham, Robert T., Trustee UTA 21,084 21,084
Isham, Robert T. Jr., Trustee UTA 21,084 21,084
Joseph, Arleen 3,333 3,333
Keene, Tom 1,000 1,000
Keil, Bryant L. 42,168 42,168
Keisel, Christina 500 500
Kent, Irwin 3,333 3,333
Koch, Sidney 2,667 3,333 6,000
Kownatzki, Vickie 1,000 1,000
Lake, Walter J. Sr. 15,000 15,000
Lamare Investments Limited 622,097 622,097
Lennox Property & Trading Co. 53,336 53,336
Leshman, Henry 10,000 10,000
Lindauer, Alan 75,000 75,000
Lowy, John 55,000 4,000 59,000
Lyons, Thomas M. /Jeffrey P. Lyons 7,000 7,000
Lyons, Thomas M. /Mary M. Lyons 700 700
Manolita S.A. 33,333 33,333
McCormick, Scot 75,000 20,000 95,000
McNitt, Willard 8,000 72,168 80,168
McNitt, Willard FBO 5,000 5,000
Mechler, David W. 101,852 101,852
</TABLE>
- 11 -
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK UNDERLYING
-----------------------------------
TOTAL
CONVERTIBLE COMMON SHARES TO BE
NAME WARRANTS SECURITIES STOCK SOLD
- ------------------------------------ ------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Mendelsohn, Alfred 50,000 50,000
Mews, Inc. 24,615 24,615
Mitchell United Fin Services 1,875 1,875
MJ Capital Partners 17,500 17,500
Montgomery, Tom 90,000 90,000
Muensler, Katherine 2,500 2,500
Musicant, David 25,790 25,790
Olympic Capital Group, The 25,000 3,167 28,167
Orb, John A. 42,168 42,168
Pearlman, Leonard 16,000 44,468 60,468
Peipers, David 10,000 27,818 37,818
Phipps, Norman 55,000 55,000
Propp, Rodney M. 67,857 67,857
Ramirez, M.F. 1,875 1,875
RILAR Family Associates L.P. 125,573 125,573
Rosen, Leonard 10,000 10,000
Sabina International S.A. 42,500 60,000 90,632 193,132
Safra Bank 33,333 33,333
Saidel, Larry 12,000 12,000
Salizar, Luz 3,000 3,000
Savage, Stephen 20,000 20,000
Schneider, Amy 21,500 21,500
Schneider, Henry N. 16,256 181,756 198,012
Schneider, Lawrence I. 16,256 49,450 65,706
Schneider, Rita 21,500 21,500
Schneider, Scott 21,500 21,500
Schneider, Henry, Amy , Scot 100,000 100,000
Serapioni, Sergio 133,333 133,333
Shapiro, Norman 10,000 10,000
Smith Barney 8,436 8,436
Custodian for the IRA of
John J. Gaines III
Smith Barney 3,333 13,460 16,793
Custodian for the IRA of
John Leonard Huff
Stanley Associates 34,000 94,497 128,497
Stern, Russel T., Jr 153,036 90,000 118,116 361,152
Stern, William 10,000 5,790 15,790
Swift, Bryan M. 42,168 42,168
Swift, John S. III 24,500 17,668 42,168
Swift, Stewart G. 49,000 35,336 84,336
Swiss Bank Corporation 133,333 133,333
Teman, Wade 20,000 20,000
Terivian Enterprises, Inc. 266,666 266,666
Thurston Group, Inc. 580,000 850,000 219,437 1,649,437
Thurston Interests, L.L.C. 41,746 41,746
Valle, Beatrice 1,500 1,500
</TABLE>
- 11 -
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK UNDERLYING
-----------------------------------
TOTAL
CONVERTIBLE COMMON SHARES TO BE
NAME WARRANTS SECURITIES STOCK SOLD
- ------------------------------------ ------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Waveland, LLC 565,286 101,000 666,286
Weaver, Deborah 5,000 5,000
Webb, Joseph W. 64,815 64,815
Weidenbaum, Walter 10,000 10,000
Welsh, Mary E. 850 850
Yael AG Finanzund Handel 133,333 133,333
Ybarra, Thresa 1,000 1,000
Young, James A. 64,815 64,815
Zavala, Hector 5,000 5,000
---------------- ---------------- ---------------- ---------------
2,790,572 1,985,666 7,011,948 11,788,186
================ ================ ================ ===============
</TABLE>
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted and traded on a limited and sporadic basis
on the OTC Electronic Bulletin Board of the NASD under the trading symbol
"ATEX." The limited and sporadic trading does not constitute, nor should it be
considered, an established public trading market for the Common Stock. See "Risk
Factors -- Illiquid Investments" and "Shares Eligible for Future Sale." The
following table sets forth the high ask and low bid as reported on the OTC
Electronic Bulletin Board of the NASD for the periods indicated, as reported by
the National Quotation Bureau LLC. Such quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Closing Bid* Closing Ask*
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
First Quarter** 2.375 1.625 3.25 2.375
Second Quarter 4.5 2.25 5 2.5
Third Quarter 4 2.5 4.5 3
Fourth Quarter 2.375 1.6875 3 1.75
YEAR ENDED DECEMBER 31, 1997
First Quarter 1.9375 1.375 2.25 1.75
Second Quarter 2.25 1.25 2.75 1.625
Third Quarter 2 .875 2.25 1
Fourth Quarter 2.5625 1 2.75 1.25
YEAR ENDING DECEMBER 31, 1998
First Quarter 3.5625 1.75 3.9375 2.25
Second Quarter 3.1875 2.125 3.375 2.375
Third Quarter*** 3.21875 2 3.375 2.25
- -------------------------------------------------------------------------------------------------------------------
<FN>
* Prices reflect intraday high and low bid and asked prices.
** Excluding January 8, 1996.
*** Through September 28, 1998.
</FN>
</TABLE>
- 13 -
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. For the foreseeable future, the Company expects to retain any earnings to
finance the operation and expansion of the Company's business. In addition, it
is anticipated that the terms of future debt and/or equity financings may
restrict the payment of cash dividends. Therefore, the payment of any cash
dividends on the Common Stock is unlikely. See "Description of Capital Stock."
RECAPITALIZATION OF THE COMPANY
On January 31, 1996, the Company engaged Phipps, Teman & Company,
L.L.C. ("PTC") to deliver to the Board of Directors a letter of recommendation
with respect to the feasibility of recapitalizing the Company's balance sheet
and restructuring certain financial arrangements, by means, among others, of (i)
converting certain debt instruments into equity and/or equity-linked securities,
and (ii) reducing the exercise prices of certain classes of warrants then
outstanding. By letter dated February 14, 1996 (the "PTC Recommendation"), PTC
recommended that the Company should offer the following: (i) to the holders of
the Company's $800,000 secured bridge loan note (the "Bridge Loan Note") with
warrants (the "Bridge Loan Warrants"), the right to exchange the Bridge Loan
Note for a new series of cumulative convertible redeemable preferred stock that
would pay cumulative preferential dividends at the rate of 10% per annum, and a
reduction in the exercise price of the Bridge Loan Warrants from $0.875 to $0.60
per share; (ii) to the holders of the Company's working capital notes in the
aggregate principal amount of $340,000 (the "WC Notes") with warrants (the "WC
Warrants"), the right to exchange the WC Notes for a new series of cumulative
convertible redeemable preferred stock that would pay cumulative preferential
dividends at the rate of 12% per annum, and a reduction in the exercise price of
the WC Warrants from $3.00 to $1.50 per share; (iii) to the holders of the
Company's $1,050,000 secured promissory note (the "BC Note") with warrants (the
"BC Warrants"), the right to exchange the BC Note for a new series of cumulative
convertible redeemable preferred stock that would pay a cumulative preferential
dividend at the rate of 12% per annum, and no reduction in the $0.10 per share
exercise price of the BC Warrants; and (iv) to the holders of all other existing
options and warrants with an exercise price per share greater than $0.50 per
share (304,000 warrants (the "$1.31 Warrants") at $1.31 per share; 150,000
warrants at $1.50 per share; 150,000 warrants (the "$2.50 Warrants") at $2.50
per share; and 50,000 warrants at $1.50 per share), a reduction of the exercise
price to $0.50 per share. On February 14, 1996, the date of the PTC
Recommendation, the last reported sale price of the Company Common Stock was
$2.50. Norman M. Phipps, a principal of PTC, is a director of the Company. See
"Certain Transactions."
The Board of Directors of the Company accepted the PTC Recommendation,
and authorized the proposed recapitalization upon the terms hereinafter
described (the "Company Recapitalization"). On March 12, 1996, the Company
entered into agreements with the holders of the $1.31 Warrants and the $2.50
Warrants to exercise such warrants at the reduced exercise price of $0.50 per
share, resulting in the Company's issuing 454,000 restricted shares of the
Company's Common Stock and receiving gross proceeds in the amount of $227,000.
The Company also entered into agreements with certain of the holders of
the Bridge Loan Note, the WC Notes and the BC Note to exchange such notes on
terms substantially similar to those set forth in the PTC Recommendation. The
Bridge Loan Note was exchanged for 800,000 shares of the Company's Series A
Junior Convertible Redeemable Preferred Stock (the "Series A Junior Preferred
Stock"). The exercise price of the Bridge Loan Warrant was reduced from $0.875
per share to $0.60 per share, and the Bridge Loan Warrant was exercised by the
holders of the Bridge Loan Warrant, resulting in the Company's issuing 720,500
shares of Common Stock which are included in the Secondary Shares and receiving
gross proceeds of $432,300. The WC Notes have been exchanged for 76,667 shares
of the Company's Series C Junior Convertible Redeemable Preferred Stock (the
"Series C Junior Preferred Stock"). The exercise price of the WC Warrants was
reduced from $3.00 per share to $1.50 per share, and the WC Warrants have been
exercised by the holders of the WC Warrants, resulting in the Company's issuing
38,333 shares of Common Stock which are included in the Secondary Shares and
receiving $57,500 gross proceeds. The BC Note was exchanged for 850,000 shares
of the Company's Series B Junior Convertible Redeemable Preferred Stock (the
"Series B Junior Preferred Stock"). The exercise price of the BC Warrants
remained at $0.10 per share, and the BC Warrants were exercised by the holders
of the BC Warrants, resulting in the Company's issuing 475,000 shares of Common
Stock
- 14 -
<PAGE>
which are included in the Secondary Shares and receiving gross proceeds of
$47,500. See "Description of Capital Stock -- Junior Preferred Stock" for more
detailed information regarding the terms of the Series A Junior Preferred Stock,
Series B Junior Preferred Stock and Series C Junior Preferred Stock.
- 15 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company, the Notes thereto and the
other financial information included elsewhere in this Report.
GENERAL
The Company was incorporated in 1977 under the name Fine Art
Corporation of America, Inc., and acquired all of the stock of Avery Texas in
November 1994. Prior to November 1994, the Company was the public shell Class,
Inc., which had no operating assets. The Company's current business was operated
by Avery Texas prior to November 1994.
Through December 31, 1995, the Company's business consisted of: Telco
Group, Inc., a Texas corporation ("Telco"), an alternate access provider,
America Networks, Inc., a Texas corporation ("American"), a LAN/WAN design and
installation business, Commnet Services, Inc., a Texas corporation ("Commnet"),
a telecommunications consulting practice, ATAC and BorderComm. Effective January
1, 1996, the Company transferred Telco, American and Commnet to its previous
owners in exchange for Common Stock of the Company.
As of November 1, 1996, the Company acquired 100% of HBS.
Effective January 1, 1998, BorderComm was sold to a group led by Mr.
Thomas Lyons, former president of the Company, in exchange for cash and Common
Stock of the Company. In addition, ATAC was sold to Mr. Lyons at this time. See
"Certain Transactions".
Subsequent to these divestitures, the Company's only business is
providing billing and collection services to IXCs and long distance resellers
(HBS). The Company's only operating subsidiary is HBS.
SELECTED FINANCIAL INFORMATION LINE ITEM EXPLANATIONS
The Company's revenues are primarily derived from the provision of
billing clearinghouse services to direct dial long distance carriers ("Local
Exchange Carrier billing" or "LEC billing"). Revenues are also derived from
billing enhanced services for companies that offer non-regulated
telecommunications equipment and services. HBS's revenues are derived from 52
long distance resellers and enhanced services providers throughout the country.
LEC billing fees charged by the Company include processing and customer service
inquiry fees. Processing fees are assessed to customers either as a fee charged
for each telephone call record or other transaction processed or as a percentage
of the customer's revenue that is submitted by the Company to local telephone
companies for billing and collection. Processing fees also include any charges
assessed to the Company by local telephone companies for billing and collection
services that are passed through to the customer. Customer service inquiry fees
are assessed to customers for each billing inquiry made by end-users.
Cost of revenues includes billing and collection fees charged to the
Company by local telephone companies, as well as all costs associated with the
customer service organization, including staffing expenses and costs associated
with telecommunications services. Billing and collection fees charged by the
local telephone companies include fees that are assessed for each record
submitted and for each bill rendered to its end-user customers. The Company
achieves discounted billing costs due to its aggregated volumes and can pass
these discounted costs on to its customers.
Operating expenses are comprised of sales and marketing costs and
general and administrative costs. Sales and marketing costs include salaries and
benefits, commissions, advertising and promotional and presentation materials.
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.
Advance funding program income and expense consist of income and
expenses related to the Company's financing certain customers' accounts
receivable. Typically, 50% to 75% of the amount receivable from the LEC is
- 16 -
<PAGE>
advanced to the customer upon acceptance of its call records. When the LEC
remits payment of the receivable, the Company is repaid the advance and receives
a financing fee which generates the "Advance funding program income". The
Company maintains a line of credit to provide the funds to finance the advance
funding program. The costs associated with this line of credit produce the
"Advance funding program expenses". See "Advance Payment Program and Receivable
Financing Facility."
Depreciation and amortization expenses are incurred with respect to
certain assets, including computer hardware, software, office equipment,
furniture, costs incurred in securing contracts with local telephone companies,
goodwill and other intangibles. Asset lives range between three and fifteen
years.
Since the components of "Other income net" change on a period to period
basis, the items included in this line are explained in the analysis below.
The results on the "Discontinued operations" represent the results of
operations for the respective periods for BorderComm and ATAC which were
divested effective January 1, 1998.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The following table sets forth selected income statement lines in
thousands of actual dollars. The Statement of Operations Data is derived from
the Company's unaudited June 30, 1998 and June 30, 1997 financial statements.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
June 30 June 30,
1997 1998
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Operating revenues $ 3,552 $ 10,016
Cost of revenues 2,629 7,496
---------------- ----------------
Gross profit 923 2,520
Operation expenses (excluding DD&A) 1,356 1,784
Advance funding program income (271) (688)
Advance funding program expense 265 253
Depreciation and amorization expense (DD&A) 232 214
---------------- ----------------
Income (loss) from operations (659) 957
Other income (expense), net (876) (326)
Discontinued operations 243 ---
---------------- ----------------
Net income (loss) $ (1,292) $ 631
================ ================
</TABLE>
OPERATING REVENUES
Revenues for the six months ended June 30, 1998 increased $6,464,000 or
182% compared to the six months ended June 30, 1997. The revenue increase is
primarily attributable to an increase in the number of telephone call records
processed and billed on behalf of direct dial long distance customers and to a
lesser extent increases in enhanced billing services and customer service
volumes. Direct dial long distance billing services revenues have exceeded prior
period revenues on a quarterly basis since the inception of this business in
1994. The number of direct dial long distance call records processed increased
156% from 18.7 million in the first six months of calendar 1997 to 47.9 million
for the same period in 1998. Enhanced billing services records processed
increased 143% from 323,000 to 784,000, respectively, for the same periods.
- 17 -
<PAGE>
COST OF REVENUES
Gross profit margin of 25.2% was achieved for the first six months of
calendar 1998 versus 26.0% for the same period in 1997. The slight decline in
gross profit margin was principally due to a higher level of quantity discounts
granted as mature customers advanced up the quantity discount price list.
OPERATING EXPENSES
Consolidated operating expense (excluding the depreciation and
amortization expense) for the first half of 1998 was $1,784,000 versus
$1,356,000 for the same period in the prior year.
The HBS portions of these amounts are $1,327,000 and $835,000 for the
1998 and 1997 periods, respectively. Consolidated operating expenses (excluding
the depreciation and amortization expense) in the first half of 1998 represent
17.8% of revenues while they represent 38.1% of the first half of 1997 revenues.
The percentage of revenue reduction is directly attributable to efficiencies
associated with significant revenue growth.
The corporate office expense included in consolidated operating expense
(excluding the depreciation and amortization expense) is $457,000 for the first
half of 1998 and $521,000 for the same period in 1997. The $64,000 period to
period reduction stemmed from lower payroll costs in 1998. Corporate expenses
are primarily comprised of salaries, insurance, professional fees and travel and
entertainment expenses.
ADVANCE FUNDING PROGRAM INCOME AND EXPENSE
Advance funding program income was $688,000 in the first half of 1998
compared with $271,000 in the first half of 1997. The period-to-period increase
was primarily the result of financing a higher level of customer receivables
under the Company's advance funding program (see "Advance Funding Program and
Receivable Financing Facility" below).
Advance funding program expense was $253,000 in the six months ended
June 30, 1998, compared with $265,000 for the same period in 1997. In addition
to declining from 1998 to 1997, advance funding program expense in 1997 and 1996
declined relative to advance funding program income reported in the respective
periods. This decrease was primarily attributable to the Company financing a
higher level of customer receivables with internally generated funds rather than
with funds borrowed through the Company's revolving credit facility.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $214,000 in the first half of
1998 compared with $232,000 in the first half of 1997. The decrease is due to
LEC contracts becoming fully amortized in 1997.
INCOME (LOSS) FROM OPERATIONS
Income from operations was $631,000 during the six months ended June
30, 1998 versus a loss of $1,292,000 for the six months ended June 30, 1997. The
period-to-period increase results from significant increases in volume in all
areas of the business and the related fixed cost leverage.
OTHER INCOME (EXPENSE), NET
Net other expense of $326,000 during the first half of 1998 compares to
$876,000 of expense for the same period in 1997. Interest expense included in
each of these amounts is approximately $230,000 and the remaining expense
relates to financing costs. Therefore, the entire $550,000 reduction is related
to financing costs. Financing costs primarily consist of warrant exercise price
reductions and the non-cash expenses recorded in conjunction with issuing
warrants with below market value exercise prices. There was more of this
activity in the 1997 period than in the 1998 period.
- 18 -
<PAGE>
DISCONTINUED OPERATIONS
Discontinued operations represents the results of BorderComm and ATAC
for the six months ended June 30, 1997. Both of these operations were divested
effective January 1, 1998. Therefore, no amount appears in the June 30, 1998
column.
INCOME TAXES
The Company has a net operating loss carryforward of $4.8 million as of
December 31, 1997. This will be used to offset taxable income for the first six
months of calendar 1998. Therefore, no income taxes are reflected in the income
statement for this period.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
The following table sets forth selected income statement lines in
thousands of actual dollars. The Statement of Operations Data is derived from
the Company's audited calendar 1997 and 1996 financial statements. The 1996
figures include HBS for the two months ended December 31, 1996, since this
operation was acquired on November 1, 1996.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
1996 1997
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Operating revenues $ 709 $ 11,643
Cost of revenues 506 8,592
---------------- ----------------
Gross profit 203 3,051
Operation expenses (excluding DD&A) 2,200 3,104
Advance funding program income --- (832)
Advance funding program expense --- 567
Depreciation and amorization expense (DD&A) 56 409
---------------- ----------------
Income (loss) from operations (2,053) (197)
Other income (expense), net (1,664) (1,305)
Discontinued operations 664 22
---------------- ----------------
Net loss $ (3,053) $ (1,480)
================ ================
</TABLE>
OPERATING REVENUES
Revenues for calendar 1997 increased $7.4 million or 174% compared to
the last two months of 1996 annualized. The revenue increase is primarily
attributable to an increase in the number of telephone call records processed
and billed on behalf of direct dial long distance customers and to a lesser
extent increases in the number of enhanced billing services and customer service
volumes. Direct dial long distance billing services revenues have exceeded prior
period revenues on a quarterly basis since the inception of this business in
1994. The number of direct dial long distance call records processed increased
from 17.0 million in calendar 1996 to 57.0 million for 1997. Enhances billing
services records processed increased from 140,00 to 1,630,000, respectively, for
the same periods.
- 19 -
<PAGE>
COST OF REVENUES
Gross profit margin of 26.2% was achieved for calendar 1997 versus
28.6% for 1996. The decline resulted from commencing customer service operations
in 1997 and a higher level of quantity discounts as mature customers advanced up
the quantity discount price list.
OPERATING EXPENSES
Consolidated Operating expenses (excluding the depreciation and
amortization expense) increased from $2,200,000 in 1996 to $3,104,000 in 1997.
HBS's operating expenses included in these amounts are $1,982,000 and
$240,000 for 1997 and 1996, respectively. Operating expenses for HBS represent
17.0 % of 1997 revenues compared to 33.9% of 1996 revenues. The percentage of
revenue reduction is directly attributable to efficiencies associated with
significant revenue growth.
The corporate office expense included in consolidated operating expense
(excluding the depreciation and amortization expense) is $1,122,000 and
$1,960,000 for 1997 and 1996, respectively. Corporate expenses are primarily
comprised of salaries, insurance, professional fees and travel and entertainment
expenses. The $838,000 period to period reduction stemmed from various
non-recurring expenses reported in 1996, including the expense associated with
the elimination of a consulting agreement in return for $650,000 of the
Company's common stock.
ADVANCE FUNDING PROGRAM INCOME AND EXPENSE
Advance funding program income was $832,000 in calendar 1997 compared
with $0 in calendar 1996. The period-to-period increase was the result of
financing a higher level of customer receivables under the Company's advance
funding program in 1997 (see "Advance Funding Program and Receivable Financing
Facility" below). Advance funding program expense was $567,000 in calendar 1997
and increased over 1996 for the same reason.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $409,000 in 1997 compared
with $56,000 in 1996. The increase was primarily due to amortization of
purchased goodwill in 1997 and less than a full year of HBS depreciation in
1996, as well as, the purchase of computer equipment and software in 1997.
INCOME (LOSS) FROM OPERATIONS
The loss from operations was $197,000 during calendar 1997 versus
$2,053,000 for the prior year. The period to period improvement results from
significant increases in volume in all areas of the business and the related
fixed cost leverage, as well as, the reduction in corporate expense between 1996
and 1997.
OTHER INCOME (EXPENSE), NET
Net other expense of $1,305,000 during 1997 compares to net other
expense of $1,664,000 for the same period in 1996. Interest expense included in
these amounts is $412,000 and $296,000 for 1997 and 1996, respectively. The
year-to-year interest increase results primarily from securing a $1,000,000 loan
on May 30, 1997 which bore interest at 10%. The remaining expense in each year
relates to financing costs. Financing costs primarily consist of warrant
exercise price reductions and the non-cash charges associated with issuing
warrants with below market value exercise prices. There was more of this
activity in 1996 than in 1997.
DISCONTINUED OPERATIONS
Discontinued operations represents the results for BorderComm and ATAC
for 1997 and 1996, respectively. Both of these operations were divested
effective January 1, 1998.
- 20 -
<PAGE>
INCOME TAXES
The Company generated a loss in both 1997 and 1996. Since the utilization of
these losses in future periods can not be assured, no income tax benefits have
been recorded. The Company has a net operating loss carryforward of $4.8 million
as of December 31, 1997.
INFLATION
Inflation is not a material factor affecting the Company's business.
Prices charged to the Company by local telephone companies and third-party
vendors for billing, collection and transmission services have not increased
significantly during the past year. General operating expenses such as salaries,
employee benefits and occupancy costs are, however, subject to normal
inflationary pressures.
LIQUIDITY
The Company's cash balance declined to $99,000 at June 30, 1998, from
$352,000 at June 30, 1997. Large fluctuations in daily cash balances are normal
due to the large amount of customer receivables that the Company collects on
behalf of its customers. In addition, the Company utilizes excess cash to pay
down its revolving line of credit. Timing of these payments also produces large
movements in day to day cash balances. The Company's working capital position at
June 30, 1998 was a negative $3.1 million compared to a $2.2 million deficit as
of June 30, 1997. Hold back reserves of $6.7 million and $5.0 million as of June
30, 1998 and June 30, 1997, respectively, were classified as current
liabilities. While proper accounting treatment dictates this classification,
these amounts will not be paid unless the Company experiences a decline in
volume. Management expects these reserves to increase in step with higher volume
in the future. Net cash used by operating activities was $1.8 million for the
first half of 1998 versus $2.0 million for the first half of 1997. Both
increases principally result from significant increases in the amount of
customers' receivables which were financed in the respective periods, offset
partually by increases in deposits and other payables. Adding non-cash expenses
to HBS's net income produces $1,877,000 and $94,000 of cash flow for the periods
ending June 30, 1998 and 1997, respectively.
The Company's cash balance increased to $988,000 at December 31, 1997,
from $828,000 at December 31, 1996. Large fluctuations in daily cash balances
are normal due to the large amount of customer receivables that the Company
collects on behalf of its customers. The Company's working capital position at
December 31, 1997 was a negative $2.6 million compared to a $2.5 million deficit
as of December 31, 1996. Hold back reserves of $5.5 million as of December 31,
1997 were classified as current liabilities. While proper accounting treatment
dictates this classification, these amounts will not be paid unless the Company
experiences a decline in volume. Management expects these reserves to increase
in step with higher volume in the future. The December 31, 1996 deficit resulted
from $3.0 million of current notes payable all of which were subsequently paid,
refinanced or converted into preferred stock. Net cash used by operating
activities, excluding discontinued operations, was $2.2 million for calendar
1997 versus $.5 million for 1996. The 1997 figure is principally a result of the
large increase in the amount of customers' receivables which were financed in
1997, offset by increases in deposits and other payables and trade and accrued
payables. The 1996 figure resulted primarily from the 1996 net loss and
receivables increases, offset by increases in deposits and other payables and
trade and accrued payables. Adding non-cash expenses to HBS's net income
produces $1,438,000 and ($82,000) of cash flow in 1997 and 1996, respectively.
In March of 1997, the Company obtained a $7.5 million revolving line of
credit facility with a certain lender primarily to draw upon to advance funds to
its billing customers prior to collection of the funds from the local telephone
companies. This new credit facility terminates on March 25, 2000. Borrowings
under the credit facility are limited to a portion of the Company's eligible
receivables. Management believes that the capacity of the lender will be
sufficient to fund advances to its billing customers for the foreseeable future
and that the amount of the line will be increased as volume dictates. Effective
March 20, 1998, the line was increased to $10.0 million. The amount borrowed by
the Company under its credit facility to finance the advance funding program was
$7.0 million at June 30, 1998 and $5.0 million at December 31, 1997. At June 30,
1998 and December 31, 1997, the amounts available under the Company's credit
facility were $3.0 million and $2.5 million, respectively.
The Company generated proceeds from the sale of common and preferred
stock of $2,057,000, $1,789,0000, $1,539,000 and $ 35,000 for the years ended
December 31, 1996, and 1997, and the six months ended June 30, 1998 and 1997,
respectedly. The Company paid dividends of and redeemed preferred stock in
amounts totalling $773,000, $533,000 and $1,606,000 for the year ended December
31, 1997 and the six months ended June 30, 1998 and 1997, repectively.
Capital expenditures amounted to $395,000 in the first half of 1998 and
$160,000 in the first half of 1997. Expenditures for both periods relate
primarily to the purchase of computer equipment and software and to a lesser
extent furniture and fixtures. Capital expenditures amounted to $298,000 in 1997
and $74,000 in 1996 relating primarily to
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<PAGE>
the purchase of computer equipment and software. The Company does not anticipate
spending significant additional amounts on current operations over the next
twelve months. Management believes that they will be able to fund future capital
expenditures with internally generated funds and borrowings, but there can be no
assurance that such funds will be available or expended.
The Company received $1,600,000 in the six months ended June 30, 1998
in connection with the sale of Bordercomm; during the year ended December 31,
1996, the Company paid $1,431,000 in connection with the purchase of HBS.
The Company's operating cash requirements consist principally of
working capital requirements, requirements under its advance funding program,
scheduled payments of principal on its outstanding indebtedness and capital
expenditures. The Company believes that cash flows generated from operations and
periodic borrowings under its receivable financing facility, will be sufficient
to fund capital expenditures, advance funding requirements, working capital
needs and debt repayment requirements for the foreseeable future.
ADVANCE FUNDING PROGRAM AND RECEIVABLE FINANCING FACILITY
Since it generally takes 40 to 90 days to collect receivables from the
local telephone companies, customers can significantly accelerate cash receipts
by utilizing the Company's advance funding program. The Company offers
participation in this program to qualifying customers through its Advance
Payment Agreement. Under the terms of this agreement, the Company purchases the
customer's accounts receivable for an amount equal to the face amount of the
billing records submitted to the local telephone companies by the Company for
billing and collection, less certain deductions. The purchase price is remitted
by the Company to its customers in two payments.
Within five days from receiving a customer's records, an initial
payment is made to the customer based on a percentage of the value of the
customer's call records submitted to the local telephone companies. This
percentage is established by the Advance Payment Agreement and generally ranges
between 50% and 75%. The Company pays the remaining balance of the purchase
price upon collection of funds from the local telephone companies. A portion of
the funds used to make the advance payments may be borrowed under the Company's
revolving line of credit facility. The amount borrowed by the Company under this
credit facility to finance the advance funding program was $7.0 million at June
30, 1998 and $5.0 million at December 31, 1997.
Service fees charged to customers by the Company are recorded as
Advance Funding Program Income and are computed at a rate above the prime rate
on the amount of advances (initial payments) outstanding to a customer during
the period commencing from the date the initial payment is made until the
Company recoups the full amount of the initial payment from local telephone
companies. The rate charged to the customer by the Company is higher than the
interest rate charged to the Company, in part to cover the administrative
expenses incurred in providing this service. Borrowing costs related to the line
of credit are based on the amount of borrowings outstanding during the period
commencing from the date the funds are borrowed until the loan is repaid by the
Company. Borrowing costs are recorded as Advance Funding Program Expense. The
result of these financing activities is the generation of a net amount of
Advance Funding Program Income that contributes to the net income of the
Company.
As part of the Advance Payment Agreement, the Company contractually
purchases the customer accounts receivable upon which funds are advanced.
Further, the customer may grant a first lien security interest in other customer
accounts and assets and will take other action as may be required to perfect the
Company's first lien security interest in such assets. Under the terms of the
credit facility agreement, the Company is obligated to repay amounts borrowed
whether or not the purchased accounts receivable are actually collected.
NEW ACCOUNTING STANDARDS
Management of the Company does not anticipate the adoption of any new
standards recently issued by the Financial Accounting Standards Board will have
a material impact on the Company's financial position or results of operations.
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<PAGE>
BUSINESS
GENERAL
The Company is a telecommunications service company which, through its
operating subsidiary HBS, is engaged in billing and collection services for IXCs
and long-distance resellers.
HBS
General
HBS is a third-party billing clearinghouse for the telecommunications
industry. HBS's customers consist primarily of direct dial long distance
telephone companies. HBS maintains contractual billing arrangements with
approximately 1,300 telephone companies that provide access lines to, and
collect for services from, end-users of telecommunication services. HBS
processes transaction records and collects the related end-user charges from
these telephone companies on behalf of its customers.
HBS's customers use HBS as a billing clearinghouse for processing
records generated by their end-users. Although such carriers can bill end-users
directly, HBS provides these carriers with a cost-effective means of billing and
collecting residential and small commercial accounts.
HBS acts as an aggregator of telephone call records and other
transactions from various sources, and, due to its large volume, it receives
discounted billing costs from the telephone companies and can pass on these
discounts to its customers. Additionally, HBS can provide its services to those
long distance resellers that would otherwise not be able to make the investments
necessary to meet the minimum fees, systems, infrastructure and volume
commitments required to establish and maintain relationships with the telephone
companies. HBS is obligated to pay minimum usage charges over the lifetime of
most LEC billing contracts. Each contract has a minimum usage amount which
relates to HBS's customers' sales volume to be processed through the LEC. The
remaining minimum usage for significant contracts at December 31, 1997 totals
$12.1 million through June 22, 2001. Customers' sales processed by HBS in
August, 1998 were approximately $13.0 million. The billing and collection
agreements do not provide for any penalties other than payment of the obligation
should the usage levels not be met. HBS has met all such volume commitments in
the past and anticipates exceeding the minimum usage volumes with all of these
vendors.
In 1996, HBS began providing enhanced billing services for transactions
related to providers of premium services or products that can be billed through
the local telephone companies, such as internet access, voice mail services, and
other telecommunications charges.
Industry Background
Billing clearinghouses in the telecommunications industry developed out
of the 1984 breakup of American Telephone & Telegraph and the Bell System. In
connection with the breakup, the local telephone companies that make up the
Regional Bell Operating Companies, Southern New England Telephone, Cincinnati
Bell and the General Telephone Operating Companies ("GTE"), were required to
provide billing and collection services on a nondiscriminatory basis to all
carriers that provided telecommunication services to their end-user customers.
Due to both the cost of acquiring and the minimum charges associated with many
of the local telephone company billing and collection agreements, only the
largest long distance carriers, including AT&T Corp. ("AT&T"), MCI
Telecommunications Corporation ("MCI") and Sprint Incorporated ("Sprint"), could
afford the option of billing directly through the local telephone companies.
Several companies, including HBS, entered into these billing and collection
agreements and became aggregators of telephone call records and third-tier long
distance companies, thereby becoming "third-party clearinghouses." Today, HBS
provides billing clearinghouse services to approximately 52 customers in the
telecommunications industry.
Third-party clearinghouses such as HBS process these telephone call
records and other transactions and submit them to the local telephone companies
for inclusion in their monthly bills to end-users. Generally, as the local
telephone
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<PAGE>
companies collect payments from end-users, they remit them to the third-party
clearinghouses who, in turn, remit payments to their customers.
Development of Business
In 1996, Avery acquired HBS and its billing and collection agreements
with several local telephone companies, including the Regional Bell Operating
Companies, GTE and other independent local telephone companies. HBS has billing
and collection agreements with local telephone companies having access lines
into approximately 98% of the United States.
A key factor in the evolution of HBS's business has been the ongoing
development of its information management systems. HBS has developed a
comprehensive information system capable of processing, tracing and accounting
for communications transactions (see "Business - Operations"). Also in 1995, HBS
began offering to finance its customers' accounts receivable (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Advance Funding Program and Receivable Funding Facility").
In 1996, HBS began offering enhanced billing clearinghouse services to
other businesses within the telecommunications industry. These businesses
include telecommunications equipment providers, information providers and other
communication services providers of nonregulated services and products such as
internet access, paging services, voice mail services and other
telecommunications services. Management believes that billing for such
nonregulated products and services represents a significant expansion
opportunity for HBS.
Billing Clearinghouse Services
In general, HBS performs billing clearinghouse services under billing
and collection agreements with the local telephone companies. HBS performs
direct dial long distance billing, which is the billing of "1+" long distance
telephone calls to individual residential customers and small commercial
accounts. In addition, HBS performs enhanced billing clearinghouse services
whereby it bills a wide array of charges that can be applied to a local
telephone company telephone bill, including charges for internet access, paging
services, voice mail services and other telecommunications services.
Billing Process
Local telephone company billing relates to billing for transactions
that are included in the monthly local telephone bill of the end-user as opposed
to a direct bill that the end-user would receive directly from the
telecommunications or other services provider. HBS's customers submit telephone
call record data in batches on a daily to monthly basis, but typically in weekly
intervals. The data is submitted electronically. HBS, through its proprietary
software, sets-up an account receivable for each batch of call records that it
processes and processes the record to determine its validity. HBS then submits
the relevant billable telephone call records and other transactions to the
appropriate local telephone company for billing and collection. HBS monitors and
tracks each account receivable by customer and by batch throughout the billing
and collection process. The local telephone companies then include the charges
for these telephone call records and other transactions in their monthly local
telephone bills, collect the payments and remit the collected funds to HBS for
payment to its customers. The complete cycle can take up to 18 months from the
time the records are submitted for billing until all bad debt reserves are
"trued up" with actual bad debt experience. However, the billing and collection
agreements provide for the local telephone companies to purchase the accounts
receivable, with recourse, within a 42- to 90-day period. The payment cycle from
the time call records are transmitted to the local telephone companies to the
initial receipt of funds by HBS is, on average, approximately 50 days.
HBS does not record an allowance for doubtful accounts for customer
receivables but does accrue for end-user customer service refunds, holdback
reserves and certain adjustments charged to HBS by the local telephone
companies. HBS reviews the activity of its customer base to detect potential
losses. If there is uncertainty with respect to an account in an amount which
exceeds their holdback reserve, HBS can discontinue paying the customer in order
to hold funds to cover future end-user customer service refunds, bad debt and
unbillable adjustments. If a customer discontinues
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<PAGE>
doing business with HBS and there are insufficient funds being held to cover
future refunds and adjustments, HBS's only recourse is through legal action. An
allowance for doubtful accounts is not necessary for trade receivables since
these receivables are collected from the funds received from the local telephone
company before remittance is made to the customer.
HBS processes the tax records associated with each customer's submitted
telephone call records and other transactions and files certain federal excise
and state and local telecommunications-related tax returns covering such records
and transactions on behalf of many of its customers. HBS currently submits state
and local tax returns on behalf of its customers in over 500 taxing
jurisdictions.
HBS provides end-user inquiry and management information reports
(customer service) for billed telephone records. This service allows end-users
to make inquiries regarding transactions for which they were billed. HBS's
customer service telephone number is included in the local telephone company
bill to the end-user, and HBS's customer service representatives are authorized
to resolve end-user disputes regarding such transactions.
HBS's operating revenues consist of (i) a processing fee that is
assessed to customers either as a fee charged for each telephone call record or
other transaction processed, and (ii) a customer service inquiry fee that is
assessed to customers as a fee charged for each billing inquiry made by
end-users. Any fees charged to HBS by local telephone companies for billing and
collection services are also included in revenues and are passed through to the
customer.
Through its advance funding program, HBS offers its customers the
option to receive 50-75% of the value of their records, within seven business
days of the customer's submission of records to HBS, a significant portion of
the revenue associated with such records. The customer pays interest to HBS for
the period of time between the purchase of records by HBS and the time HBS
settles with its customers for the subject records. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Advance Funding
Program and Receivable Financing Facility."
Operations
HBS's billing clearinghouse services are highly automated through HBS's
proprietary computer software. Except for the end-user inquiry and investigation
service (customer service), the staff required to provide HBS's billing
clearinghouse and information management services is largely administrative and
the number of employees is not directly volume sensitive. Most of the services
offered by HBS are automated and electronic by nature and require a minimal
amount of human intervention. Many of HBS's customers submit their records to
HBS using electronic transmission protocols directly into HBS's electronic
bulletin board. These records are automatically accessed by HBS's proprietary
software, processed, and submitted to the local telephone companies. Upon
completion of the billing process, HBS provides reports relating to billable
records and returns any unbillable records to its customers electronically
through the bulletin board.
HBS has made a significant investment in computer systems so that its
customers' call records are processed and submitted to the local telephone
companies in a timely manner, generally within 24 hours of receipt by HBS.
HBS's contracts with its customers provide for the billing services
required by the customer, specifying, among other things, the services to be
provided and the cost and term of the services. Once the customer executes an
agreement, HBS updates tables within each of the local telephone companies'
billing systems to control the type of records processed, the products or
services allowed by the local telephone companies, and the printing of the
customer's name on the end-user's monthly bill. While these local telephone
company tables are being updated, HBS's technical support staff tests the
customer's records through its proprietary software to ensure that the records
can be transmitted to the local telephone companies.
HBS maintains a relatively small direct sales force and accomplishes
most of its marketing efforts through active participation in telecommunications
industry trade shows and advertising in trade journals and other industry
publications.
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<PAGE>
Customers
HBS provides billing and information management services to the
following categories of telecommunications services providers:
o Interexchange Carriers or Long Distance Companies: Facilities
based carriers that possess their own telecommunications
switching equipment and networks and that provide traditional
(land line) direct dial telecommunications services. Charges
for these calls are billed to the end-user by the local
telephone company.
o Switchless Resellers: Marketing organizations, affinity
groups, or even aggregator operations that buy direct dial
long distance services in volume at wholesale rates from a
facilities based long distance company and sell it back to
individual customers at market rates. These calls are billed
to the end-user by the local telephone company in the case of
residential and small commercial accounts.
o Information Providers: Companies that provide various forms of
information or voice mail services to subscribers. These
services are typically billed to the end-user by the local
telephone company based on a monthly recurring service fee.
Other customers include suppliers of various forms of
telecommunications equipment, internet services and paging companies.
Competition
HBS operates in a highly competitive segment of the telecommunications
industry. Except for Billing Concepts Corp. ("BCC"), all other third-party
clearinghouses are either privately held or are part of a larger parent company.
Management believes that BCC is presently the largest participant in the
third-party clearinghouse industry in the United States, followed by OAN
Services, Inc. These competitors and other third-party clearinghouses have
greater name recognition than HBS, and have, or have access to, substantially
greater financial and personnel resources than those available to HBS.
Competition among the clearinghouses is based on the quality of information
reporting, program flexibility, collection history, the speed of collections and
the price of services.
HBS believes that there are several significant challenges that face
potential new entrants in the local telephone company billing services industry.
The cost to acquire the necessary billing and collection agreements is
significant, as is the cost to develop and implement the required systems for
processing telephone call records and other transactions. Additionally, most
billing and collection agreements require a user to make substantial monthly or
annual volume commitments. Given these factors, the average cost of billing and
collecting a record could hinder efforts to compete effectively on price until a
new entrant could generate sufficient volume. The price charged by most local
telephone companies for billing and collection services is based on volume
commitments and actual volumes being processed. As a large user of LEC billing
services, HBS enjoys favorable rates and passes the benefits of its buying power
on to its customers.
Since most customers in the billing clearinghouse industry are under
contract with HBS or one of its competitors, management believes that the
existing market is already committed for up to one year. In addition, a new
entrant must be financially sound and have system integrity because funds
collected by the local telephone companies flow through the third-party
clearinghouse, which then distributes the cash to the customer whose traffic is
being billed. Management believes that HBS enjoys a good reputation within the
industry for the timeliness and accuracy of its collections and disbursements to
customers.
HBS Business Strategy
As the markets for HBS's services continue to develop and its target
market continues to demand increasingly sophisticated billing clearinghouse
services, HBS believes there exists significant opportunities to continue the
expansion of its business base as new and existing customers seek to outsource
these services. HBS's business strategy contains the following key elements:
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<PAGE>
EXPAND EXISTING CUSTOMER BASE. Management believes that HBS's
reputation for high quality services will make it an important resource for
providers of services and products, such as calling cards, paging services,
voice mail services, Internet services and other telecommunications services.
Like HBS's existing customers, these services providers are likely candidates
not only for the core services of billing clearinghouse and information
management, but also for the full package of services that includes customer
service and advanced payment for receivables. Management believes that the high
growth potential of these service providers may present significant potential
opportunities for HBS.
PROVIDE NEW AND ENHANCED SERVICES. HBS believes that the market for
expanded customer service offerings will grow in the near term because of the
rapid development of new technologies, internet services and the deregulation
afforded by the new telecommunications act.
MAINTAIN RESPECT OF COMMUNICATIONS PROVIDERS. HBS believes it has
developed the respect of communications providers. Its services include managing
relations with the local telephone companies, developing automated reporting,
providing cost efficient customer service operations and offering cash flow
alternatives through its advanced payment program. The combination of these
service offerings has positioned HBS as a total solution for the management of a
customer's billing and information management function. HBS's services are
currently utilized by approximately 52 customers, and management believes that
HBS will maintain and expand its position of respect in the industry.
Employees
At June 30, 1998, HBS had 59 full-time employees, including two
executive officers, three sales and marketing personnel, ten technical and
operations personnel, eight accounting, administrative and support personnel,
and 36 customer service representatives and related support personnel. None of
HBS's employees are represented by a union. HBS believes that its employee
relations are good.
COMPANY'S BUSINESS STRATEGY
The strategy to continue the exponential growth of the Company and to
enhance shareholder value is as follows.
HIRE TELECOMMUNICATIONS/SOFTWARE CEO. The Company plans to hire a new
CEO with extensive telecommunications, service bureau and software development
experience to guide it through the next growth phase. The new CEO will be
charged with the responsibility of entering new markets, developing strategic
relationships to enhance the current business and to manage the significant
growth of the current business.
ACQUIRE TELECOMMUNICATIONS SERVICE PROVIDERS. The Company plans to
acquire telecommunications service providers which are complimentary to and
augment its existing operations.
ACQUIRE DECISION SUPPORT SOFTWARE. Management believes that significant
opportunity exists in software designed to mine data warehouses. This software,
known as decision support software (DSS), has many and varied applications. It
is particularly useful in enterprises which generate huge volumes of data, such
as utilities, insurance companies and consumer products concerns. One of the
uses of the software is to determine patterns in data which are then used to
support decisions concerning the data, hence the term DSS. Initially this effort
will be focused on the telecommunications industry, in the fraud management,
operations and marketing areas. Expansion to other industries is planned for the
future.
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<PAGE>
EMPLOYEES
As of the date of this Prospectus, the Company had 61 full-time
employees. None of the employees of the Company are represented by a
collective-bargaining agreement. Management believes that it maintains good
relations with its employees.
PROPERTIES
HBS leases approximately 8,677 square feet of general and
administrative office space in San Antonio, Texas. The Company's monthly rent is
approximately $9,039. HBS's lease expires December 31, 2002.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Patrick J. Haynes, III 49 Director, Chairman of the Board, President and Chief Executive Officer
Scot M. McCormick 45 Vice President, Director, Chief Financial Officer and Secretary
Norman M. Phipps 38 Director
J. Alan Lindauer 59 Director
Stephen L. Brown 60 Director and Vice Chairman of the Board
Spencer L. Brown 33 Director
Robert T. Isham, Jr. 46 Director
</TABLE>
PATRICK J. HAYNES, III has served as a director and Chairman of the
Board and Chief Executive Officer of the Company since November 1995. Mr. Haynes
was elected President in July 1998. In 1992, Mr. Haynes founded and became
President of American Communications Services, Inc. ("ACSI"), a start up, fiber
optic, competitive access provider telephone company. Mr. Haynes directed
development of the strategic plan, put management in place and operated the
company on a day-to-day basis for 18 months. He also advised and consulted in
connection with the placement of $52 million in equity and $81 million in debt.
ACSI is now a NASDAQ-listed company with a market capitalization in excess of
$400 million. Mr. Haynes is the Senior Managing Director of the Thurston Group,
Inc., a private merchant bank in Chicago. Mr. Haynes and Russell T. Stern, Jr.
founded the Thurston Group in 1987. Previously, Mr. Haynes was associated with
Merrill Lynch, Oppenheimer & Company, and Lehman Brothers as an investment
banker.
SCOT M. MCCORMICK has served as Vice President, Chief Financial Officer
and Assistant Secretary of the Company since July 1996. Mr. McCormick was
elected as a director and to the office of Secretary in July 1998. Prior to
becoming the Chief Financial Officer of the Company, Mr. McCormick was a
consultant to the Company from 1995 through June 1996. From 1993 to 1995, Mr.
McCormick served as Chief Financial Officer and Secretary of The Park
Corporation in Barrington, Illinois. From 1990 to 1993, he served as Chief
Financial and Administrative Officer and Secretary of Whitestar Graphics, Inc.
From 1978 to 1990, Mr. McCormick was associated with the Crown organization in
Chicago, including Controller of American Envelope Company from 1980 to 1990.
From 1976 to 1978, Mr. McCormick worked for Coopers & Lybrand.
NORMAN M. PHIPPS has served as a director of the Company since November
1995, and has been a principal of PTC, a private investment banking firm since
1993. Prior to forming PTC, Mr. Phipps served as the Managing General Partner of
CP Capital Partners, a private investment firm, from 1991 to 1993. From 1988
until 1990, Mr. Phipps served as Vice President of Mergers and Acquisitions
Department of Wood Grundy Corp. From 1984 and until 1988, Mr. Phipps served as a
Vice President of Citicorp North America.
J. ALAN LINDAUER 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
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<PAGE>
Bank of Virginia since 1986 and serves as chair of Loan Committee, Norfolk
Division, and a member of the Executive, Trust, Marketing, Compensation, and
Mergers & Acquisition Committees. Mr. Lindauer served as director of Citizens
Trust Bank from 1982 to 1985 as well as a member of its Trust and Loan
Committees. Mr. Lindauer founded Minute-Man Fuels in 1963 and managed Minute-Man
Fuels until 1985.
STEPHEN L. BROWN has served as Chairman of the Board of Directors and
Chief Executive Officer of Franklin Capital Corporation ("Franklin") since
October 1986. Since June 1984, Mr. Brown has been Chairman of SLB & Co., Inc., a
private investment firm. Mr. Brown is a director of Copley Financial Services
Corporation (advisor to Copley Fund, Inc., a mutual fund).
SPENCER L. BROWN has been Senior Vice President of Franklin since
November 1995, Secretary of Franklin since October 1994 and was Vice President
of Franklin from August 1994 to November 1995. From September 1993 to July 1994
Mr. Brown was an attorney with the firm of Wilson, Elser, Moskowitz, Edelman &
Dicker and from September 1991 to September 1993 he was an attorney with the
firm of Weil, Gotshal & Manges LLP. Mr. Brown is the son of Mr. Stephen L.
Brown, the Chairman and Chief Executive Officer of Franklin.
ROBERT T. ISHAM, JR. has served as a director of the Company originally
from November 1995 to March 1996, and then rejoined the Board in July 1998. Mr.
Isham is currently a managing director of the Thurston Group, Inc., a private
merchant bank based in Chicago. Previously, he ran his own commercial law
practice in Chicago and, before that, he was a partner with the law firm of
McDermott, Will & Emery.
No arrangement or understanding exists between any director or
executive officer or any other person pursuant to which any director or
executive officer was selected as a director or executive officer of the
Company. Executive officers of the Company are elected or appointed by the Board
of Directors and hold office until their successors are elected, or until the
earlier of their death, resignation or removal.
SIGNIFICANT EMPLOYEES
HAROLD D. ("RICK") BOX is Vice President of Operations and Marketing of
HBS. Mr. Box has been involved in the telecommunications industry since 1983 in
areas such as paging, long distance and LEC clearing house services. He served
as Director of Client Relations for HBS's major competitor, Zero Plus Dialing (a
subsidiary of Billing Concepts, Inc.) from 1988 to 1993. He was a Vice President
of Operations of Home Owners Long Distance Incorporated from 1993 and 1994 and a
founding partner of HBS. Mr. Box holds a Bachelor's Degree in Business
Administration from North Texas State University.
DAVID W. MECHLER, JR. is Vice President of Finance of HBS. Mr. Mechler
has been involved in various facets of the telecommunications industry since
1978. His experience includes long distance, fiber optic networks, cellular
licenses, data processing, communications receivable factoring and LEC
clearinghouse operations. He was the Director of Finance of Home Owners Long
Distance Incorporated. Mr. Mechler holds bachelors and masters degrees in
accounting and is a certified public accountant.
COMPENSATION OF DIRECTORS
Each member of the Board receives a one-time warrant to purchase 75,000
shares of Common Stock at an exercise price determined by the Board at the time
of issuance. The directors of the Company do not receive any other consideration
for serving on the Board.
EXECUTIVE COMPENSATION
The following table summarizes certain information relating to the
compensation paid or accrued by the Company for services rendered during the
years ended December 31, 1997, 1996 and 1995 to each person serving as its Chief
Executive Officer and each of the Company's four other most highly paid
executive officers whose total annual salary and bonus for the year ended
December 31, 1997, exceeded $100,000 (collectively, the "Named Executive
Officers").
- 30 -
<PAGE>
<TABLE>
<CAPTION>
SUMMARY EXECUTIVE COMPENSATION TABLE
Annual Compensation
Long-Term
---------
Name and Principal Fiscal Other Annual Compensation
- ---- --- --------- ------ ----- ------ ------------
Position Year Salary ($) Bonus ($) Compensation ($) Awards/Options ($)
-------- ---- ------ --- ----- --- ------------ --------------
<S> <C> <C> <C> <C> <C>
Patrick J. Haynes, III(1) 1997 $ -- $ -- $30,000 300,000
Chairman of the Board, 1996 -- -- -- --
President and Chief 1995 -- -- -- --
Executive Officer
- ------------------------------------------------------------------------------------------------------------------------
Scot M. McCormick 1997 $108,000 $35,000 -- 75,000
Vice President, Chief 1996 54,000 35,000 -- --
Financial Officer and 1995 -- -- -- --
Secretary
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Represents monthly automobile allowance and premium on health and major
medical insurance.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
Effective as of July 1, 1998, Mr. Haynes entered into an employment
agreement (the "Haynes Employment Agreement") with the Company. Under Haynes'
Employment Agreement, Mr. Haynes will serve as Chairman of the Board, President
and Chief Executive Officer, subject to the Board of Directors power to elect
and remove officers of the Company. The Haynes Employment Agreement expires June
30, 2003. Mr. Haynes initial base salary is $200,000 annually. In addition, Mr.
Haynes is entitled (i) to receive bonuses and stock options; (ii) to participate
in applicable incentive plans established by the Company; (iii) participate in
the Company's hospitalization and major medical plans, or, at his option, be
reimbursed for amounts paid by Mr. Haynes for comparable coverage; and (iv) to
an automobile of his choice. Mr. Haynes also received a ten-year warrant to
purchase 420,000 shares of Common Stock at $3.00 per share.
Effective November 1, 1996, David W. Mechler entered into an employment
and noncompetition agreement (the "Mechler Employment Agreement") with HBS.
Under the Mechler Employment Agreement, Mr. Mechler will serve as Vice
President-Finance of HBS, subject to the general partners power to elect and
remove officers of HBS. Mechler Employment Agreement expires on December 31,
2000 and will automatically be renewed for additional terms of one year unless
either party notifies the other prior to January of a given year that they do
not wish to renew this Agreement. Pursuant to the Mechler Employment Agreement,
Mr. Mechler is entitled to receive an annual Salary of
- 31 -
<PAGE>
$100,000, subject to standard payroll deductions, and is entitled to receive the
benefits as HBS provides to other employees at comparable salaries and
responsibilities to those of Mr. Mechler. In addition, Mr. Mechler is entitled
to (i) participate in HBS's profit sharing plan; (ii) entitled to receive up to
83,333 shares of the Company Common Stock in each of calendar years 1998, 1999,
2000 and 2001 if HBS's pre-tax earnings equal or exceeds certain specified
targets for the respective preceding year; and (iii) such other bonuses as the
Company may determine.
Effective November 1, 1996, Harold D. Box entered into an employment
and noncompetition agreement (the "Box Employment Agreement") with HBS. Under
the Box Employment Agreement, Mr. Box will serve as Vice President-Sales of HBS,
subject to the general partners power to elect and remove officers of HBS. Box's
Employment Agreement expires on December 31, 2000 and will automatically be
renewed for additional terms of one year unless either party notifies the other
prior to January of a given year that they do not wish to renew this Agreement.
Pursuant to the Box's Employment Agreement, Mr. Box is entitled to receive an
annual Salary of $100,000, subject to standard payroll deductions, and is
entitled to receive the benefits as HBS provides to other employees at
comparable salaries and responsibilities to those of Mr. Box. In addition, Mr.
Box is entitled to (i) participate in HBS's profit sharing plan; (ii) entitled
to receive up to 83,333 shares of Common Stock in each of calendar years 1998,
1999, 2000 and 2001 if HBS's pre-tax earnings equal or exceeds certain specified
targets for the respective preceding year; and (iii) such other bonuses as the
Company may determine.
LIMITATION OF LIABILITY AND INDEMNIFICATION
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
- 32 -
<PAGE>
that indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in subsections (a) and (b) of Section 145. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors designated by
majority vote of such directors, even though less than a quorum, or (3) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
Certificate of Incorporation
The Certificate of Incorporation of the Company, as amended, provides
that a director of the Company shall not be liable to the Company or its
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 the
Company or its 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 the Company will indemnify all
persons whom it may indemnify to the fullest extent permitted by the DGCL.
Amended and Restated Bylaws
The Amended and Restated Bylaws of the Company, provide that each
person who at any time is or was a director of the Company, 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
a director of the Company, or is or was serving at the request of the Company 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 the Company,
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 best interests of the Company, 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.
D&O Insurance
The Company has a directors' and officers' liability insurance policy
to insure its directors and officers against losses resulting from wrongful acts
committed by them in their capacities as directors and officers of the Company,
including liabilities arising under the Securities Act.
- 33 -
<PAGE>
CERTAIN TRANSACTIONS
On December 23, 1996, Thurston Bridge Fund L.P. ("Thurston Bridge
Fund") loaned $500,000 to the Company (the "First Thurston Loan"). The First
Thurston Loan bore an interest rate of 10%. Thurston Bridge Fund also received a
seven year warrant to purchase 350,000 shares of Common Stock at an exercise
price of $1.50 per share. The First Thurston Loan was secured (i) by Company's
HBS, Inc. stock, (ii) the Company's BorderComm stock, (iii) the Company's
partnership interests in HBS, (iv) HBS Inc.'s partnership interests in HBS and
(v) the accounts that HBS purchases from its customers. The First Thurston Loan
was paid-off in full in connection with the FINOVA financing. (Describe Second
Thurston Loan.)
Mr. Haynes and Robert T. Isham, who was a director of the Company at
the time of the First Thurston Loan, own a portion of of the general and limited
partnership interests of Thurston Bridge Fund.
On December 23, 1996, Eastern Virginia Small Business Investment
Corporation ("EVSBIC") loaned $350,000 to the Company (the "EVSBIC Loan"). The
EVSBIC Loan bore an interest rate of 10%. EVSBIC also received a seven year
warrant (the "EVSBIC Warrant") to purchase 245,000 shares of Common Stock at an
exercise price of $1.50 per share. The EVSBIC Loan was guaranteed by HBS and
secured by the accounts that HBS purchases from its customers.
The EVSBIC Loan was paid-off in full in connection with the FINOVA financing.
On January 14, 1997, Thurston Bridge Fund loaned $240,000 to HBS. The
loan was guaranteed by the Company and bore interest at the rate of 14% per
annum. Thurston Bridge Fund also received a four year warrant to purchase 48,000
shares of Common Stock at an exercise price of $1.50 per share. The loan was due
January 31, 1997, and was paid off in full in connection with the FINOVA
financing in March, 1997. In conjunction with the extension of this loan, an
additional four year warrant to purchase 86,000 shares of Common Stock at an
exercise price of $1.50 per share was issued to Thurston Bridge Fund.
In March 1997, the Company negotiated a financing transaction which
required that a portion of the collateral securing the existing loans be
released. Thurston Bridge Fund received a warrant to purchase 80,000 and 38,400
shares of Common Stock for the First and Second Thurston Loans, respectively, in
consideration for release of this collateral. In addition, EVSBIC received a
warrant to purchase 56,000 shares of Common Stock as a result of this
transaction.
On July 2, 1997, the exercise price on the EVSBIC Warrant was reduced
to $1.02 per share and was fully exercised.
On June 25, 1997, Mr. Lindauer was elected to the Company's Board of
Directors. Mr. Lindauer is the President and a director of EVSBIC.
On May 30, 1997, the Company and Franklin Capital Corporation (then
named The Franklin Holding Corporation (Delaware) ) ("Franklin") entered into an
Investment Agreement (the "Investment Agreement") whereby Franklin made an
investment of $2,500,000 in the Company. The investment partially consisted of a
$1,000,000 loan, represented by a note with a maturity of three years that earns
interest at the rate of 10.0% per annum. The first year's interest payment of
$100,000 was made at the time the loan was made. In additional consideration for
this loan, the Company issued to Franklin warrants to purchase 666,666 shares of
Common Stock at $1.50 per share. These warrants are immediately exercisable and
expire five years from the date of issuance. The remainder of the $1,500,000
investment purchased 7.5 units. Each unit consisted of 133,333 shares of Common
Stock and 200,000 shares of Series D Preferred Stock. Also, as part of the
transaction, Messrs. Stephen L. Brown, Spencer L. Brown and John Greenbaum were
appointed to the Company's six person Board of Directors. Also, under the
Investment Agreement, Franklin will be entitled to a Management Fee equal to
$150,000 per year after the Franklin's Series E Preferred Stock are
automatically converted into Common Stock following a Qualified Public Offering
(as defined in the Series E Preferred Stock Certificate of Designation) until
May 30, 1999. In July 1998, Franklin sold the note evidencing the $1,000,000
loan, all 1,500,000 shares of the Series D Preferred Stock and 280,000 of the
warrants to Thurston Group, Inc.
In addition, Haynes Interests LLC, an affiliate of Mr. Haynes and
Lawrence I. Schneider, each received $112,500 in cash for their efforts in
arranging Franklin's investment in the Company.
- 34 -
<PAGE>
STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
The table following sets forth information regarding the beneficial
ownership of Common Stock (i) for each person who is known by the Company to be
the beneficial owner of more than five percent of the Company's voting
securities, (ii) for each director and named executive officer of the Company,
and (iii) all directors and executive officers of the Company as a group. Unless
otherwise indicated in the footnotes, each person named below has sole voting
and investment power over the shares indicated.
NAME OF BENEFICIAL OWNER(1) NUMBER OF SHARES PERCENT OF CLASS
Franklin Capital Corporation(2) 1,733,338 17.5%
Waterside Capital(3) 616,000 6.2%
Thurston Group, Inc.(4) 1,691,183 15.4%
Waveland, LLC(4) 666,286 6.6%
Lamare Investments Limited(5) 622,097 6.5%
Bank One, Texas, N.A.(6) 1,036,664(7) 10.9%
Patrick J. Haynes, III(4) 3,394,133(8) 29.3%
Scot M. McCormick 95,000 1.0%
Norman M. Phipps 75,000 0.8%
J. Alan Lindauer(3) 691,000(9) 6.9%
Stephen L. Brown(2) 1,833,338(10) 18.4%
Spencer L. Brown(2) 1,808,338(10) 18.2%
Robert T. Isham, Jr. 179,245 1.8%
All executive officers and 8,076,054(7)(8)(9)(10) 55.7%
directors as a group
(1) All information is as of September 28, 1998. As of such date, 9,536,596
shares of Common Stock were 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 (i) through the exercise of any
option, warrant or right; (ii) through the conversion of any security;
(iii) pursuant to the power to revoke a trust, discretionary account,
or similar arrangement; or (iv) pursuant to the automatic termination
of a trust, discretionary account or similar arrangement.
(2) The business address for this person is 450 Park Avenue, 10th Floor,
New York, NY 10022.
(3) The business address for this person is 300 East Main Street, Suite
1380, Norfolk, VA 23510.
(4) The business address for this person is 190 South LaSalle Street, Suite
1710, Chicago, IL 60603.
(5) The business address for this person is
(6) The business address for this person is 8111 Preston Road, 2nd Floor,
Dallas, TX 75225.
(7) All of these shares are held in escrow pursuant to the terms of
agreements pursuant to which the Company acquired HBS for the benefit
of the former owners of HBS. These shares are the subject of the
earn-out agreements described under "Management Employment Agreements."
(8) Includes an aggregate of 1,294,964 shares of Common Stock beneficially
owned by Bank One, Texas, N.A. and Charles Havens for which Mr. Haynes
holds an irrevocable proxy pursuant to a Settlement Agreement with Mr.
Havens.
(9) Includes all the shares beneficially owned by Waterside Capital, of
which Mr. Lindauer is the President.
(10) Includes all the shares beneficially owned by Franklin Capital
Corporation, of which Stephen L. Brown is Chairman of the Board and
Chief Executive Officer and Spencer L. Brown is Senior Vice President.
- 35 -
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Amended Articles of Incorporation authorize 20,000,000
shares of Common Stock, par value $0.01 per share, and 20,000,000 shares of
preferred stock, par value $0.01 per share (the "Preferred Stock"). As of
September 28, 1998, the Company had 9,536,596 shares of Common Stock issued and
outstanding held by approximately 373 record holders. In addition, the Company
has issued and outstanding 400,000 shares of Series A Convertible Preferred
Stock, 415,000 shares of Series B Convertible Preferred Stock, 76,667 shares of
Series C Convertible Preferred Stock, 1,500,000 shares of Series D Convertible
Preferred Stock and 350,000 shares of Series E Convertible Preferred Stock.
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. Directors of the Company 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. See "Management -- the Company Directors and Officers" and
"Certain Transactions." 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 the Company's Board of Directors out of funds legally available
therefor, subject to the dividend and liquidation rights of the HBS Senior
Preferred Stock, the Junior Preferred Stock and any other series of Preferred
Stock that may be issued (and subject to any dividend restriction contained in
any credit facility which the Company 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. See "Risk Factors --Dividend Policy" and "Dividend Policy."
SENIOR PREFERRED STOCK
The Board of Directors has designated 1,500,000 shares of Preferred
Stock as the Series D Senior Cumulative Convertible Redeemable Preferred Stock
(the "Senior Preferred Stock"), all of which are issued and outstanding. The
holders of the Senior Preferred Stock are entitled to preferential quarterly
dividends to the Common Stock payable at the rate of $.025 per share. Upon
liquidation, dissolution or winding-up of the Company, holders of the Senior
Preferred Stock are each entitled to receive a liquidation distribution of
$1.00, plus any unpaid accumulated dividends to date in preference to the
holders of the Common Stock, but subject to liquidation preference of the Senior
Preferred Stock and any other senior Preferred Stock which may be designated in
the future. The Company is obligated to offer to repurchase the Senior Preferred
Stock in the event the Company makes a disposition of HBS. At the option of the
holders of the Senior Preferred Stock or upon the vote or written consent of the
holders of at least 2/3 of the outstanding of the shares of the respective
series or upon the closing of a firm commitment underwritten public offering
registered under the Act (with certain exceptions) at a price of $5.00 or more
per share and the aggregate proceeds from such offering exceeds $7 million, the
Senior Preferred Stock may be converted into Common Stock at a rate equal to .5
share of Common Stock per share. If the audited balance sheet of the Company at
the ending of any fiscal year ending on or after December 31, 1997 indicates
that the stockholders equity of the Company is $7 million or more greater than
the stockholder's equity as indicated on the Company's audited balance sheet on
December 31, 1996, the Senior Preferred Stock is to be redeemed at its
liquidation value plus any unpaid accumulated dividends to that date. The shares
of Senior Preferred Stock are entitled to one vote per share on all matters
submitted to the holders of Common Stock and vote with the holders of Common
Stock as a single class any voting rights, except as otherwise required by law.
JUNIOR PREFERRED STOCK
The Board of Directors has designated four other series of Preferred
Stock: Series A Junior Convertible Redeemable Preferred Stock (the "Series A
Junior Preferred Stock"), Series B Junior Convertible Redeemable Preferred Stock
(the "Series B Junior Preferred Stock"), Series C Junior Convertible Redeemable
Preferred Stock ("Series C Junior Preferred Stock") and the Series E Junior
Convertible Redeemable Preferred Stock (the "Series E Junior Preferred Stock,"
and, collectively with the Series A Junior Preferred Stock, Series B Junior
Preferred Stock and Series C Junior Preferred Stock, the "Junior Preferred
Stock"). The Board of Directors has designated 800,000 shares of Preferred Stock
to be Series A Junior Preferred Stock, 1,050,000 shares of Series B Junior
Preferred Stock, 340,000 shares of Series C Junior Preferred Stock and 350,000
shares of the Series E Junior Preferred Stock. As of the date of this
Prospectus, there are 400,000 shares of Series A Junior Preferred Stock issued
and outstanding, 415,000 shares of Series B Junior Preferred Stock issued and
outstanding, 76,667 shares of Series C Junior Preferred Stock issued and
outstanding, and
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<PAGE>
350,000 shares of the Series E Junior Preferred Stock issued and outstanding.
The holders of the Junior Preferred Stock are entitled to preferential dividends
to the Common Stock but subordinate to the Senior Preferred Stock and any other
senior Preferred Stock that may be designated in the future. Holders of the
Series A, Series B, Series C and Series E Junior Preferred Stock are entitled to
quarterly dividends payable at the rate of $.025, $.03, $.03 and $.03 per share
per fiscal quarter, respectively. Upon liquidation, dissolution or winding-up of
the Company, holders of the Series A, Series B, Series C and Series E Junior
Preferred Stock are each entitled to receive a liquidation distribution of
$1.00, plus any unpaid accumulated dividends to date in preference to the
holders of the Common Stock, but subject to liquidation preference of the Senior
Preferred Stock and any other senior Preferred Stock which may be designated in
the future. At the option of the holders of the Series A, Series B, Series C and
Series E Junior Preferred Stock or upon the vote or written consent of the
holders of at least 2/3 of the outstanding of the shares of the respective
series or upon the closing of a firm commitment underwritten public offering
registered under the Act (with certain exceptions) at a price of $5.00 or more
per share and the aggregate proceeds from such offering exceeds $7 million, the
Series A, Series B, Series C and Series E Junior Preferred Stock may be
converted into Common Stock at a rate equal to .4 share of Common Stock per
share, one share of Common Stock per share,.4 share of Common Stock per share
and one share of Common Stock per share, respectively. If the audited balance
sheet of the Company at the ending of any fiscal year ending on or after
December 31, 1997 indicates that the stockholders equity of the Company is $7
million or more greater than the stockholder's equity as indicated on the
Company's audited balance sheet on December 31, 1996, the Series A, Series B,
Series C and Series E Junior Preferred Stock is to be redeemed at its
liquidation value plus any unpaid accumulated dividends to that date. The shares
of Junior Preferred Stock do not have any voting rights, except as otherwise
required by law.
LEGAL PROCEEDINGS
Federal Trade Commission v. HOLD Billing Services, Ltd., et al., Civil
------- ----- ---------- -- ---- ------- --------- ---- -- --- -----
Action No. SA-988-CA-0629-FB, pending in the U.S. District Court for the Western
- ------ -- ----------------- ------- -- --- ---- -------- ----- --- --- -------
District of Texas in San Antonio, Texas. In July of 1998, HBS and the Company
- -------- -- ----- -- --- ------- -----
were named in a complaint for injunctive relief filed by the Federal Trade
Commission ("FTC") against Veterans of America Association ("VOAA") and certain
of its officers. Also named was Thomas M. Lyons ("Lyons"), former President of
HBS. The suit alleged that VOAA had caused unauthorized charges to appear on
end-user's bills based on deceptive marketing programs and seeks relief against
HBS, Avery and Lyons in connection with the billing and collection of those
charges. Several months prior to the filing of the suit, HBS terminated its
contract with VOAA based on suspicion of the same alleged by the FTC in its
suit. Since termination, HBS has voluntarily paid out approximately twice the
revenue it took in from this account in order to reimburse end-users for credits
due and owing. Attorneys for HBS, Avery and Lyons met with the FTC immediately
after suit was filed and offered full cooperation in its investigation. Without
admitting any liability or complicity in the alleged activities of its former
customer, HBS, Avery and Lyons agreed to a stipulated preliminary injunction
with terms consistent with existing HBS guidelines as revised before suit was
filed. The suit also seeks monetary fines and/or reimbursement to end-users from
all parties jointly and severally. No trial date has been set by the Court, and
while denying liability, HBS has offered to cooperate with the FTC in developing
new standards for the industry designed to better protect end-users.
Florence Hayes, et al., v. Discount Telecom, Inc., HOLD Billing
-------- ----- -- --- -- -------- ------- ---- ---- -------
Services, Ltd., et al., Civil Action No. SUCV98-03756E, pending in Massachusetts
- -------- ---- -- --- ----- ------ -- ------------- ------- -- -------------
Superior Court, Suffolk County. A class action suit was brought against HBS by
- -------- ----- ------- ------
the named plaintiff on behalf of herself and other similarly situated
individuals in Massachusetts who may have suffered financial harm as a result of
the alleged unauthorized switching of their long-distance telephone service by
Discount Telecom, Inc., a customer of HBS, or by any other customer of HBS
engaging in similar practices. The suit claims that as a result of the
unauthorized change in service, the representative plaintiff and all members of
the class have suffered actual damage and injury consisting of the difference
between the long-distance telephone charges that would have been incurred as a
result of the alleged unauthorized change of long-distance providers, together
with related surcharges and fees resulting therefrom. The action asserts claims
under the federal Telecommunications Act of 1996, claims for tortious
interference with contract, and violations of the Massachusetts Consumer Act for
unfair and deceptive acts and practices in the conduct of trade or commerce. The
trial court has not certified the class action status of the suit as of
September 28, 1998. HBS denies liability and plans to defend the suit
aggressively.
From time to time the Company is party to what it believes is routine
litigation and proceedings that may be considered as part of the ordinary course
of its business. Currently, the Company is not aware of any current or pending
litigation or proceedings that would have a material adverse effect on the
Company's business, results of operations or financial condition.
The Company has filed suit to collect the principal and interest owed
by Charles Havens loaned to him in connection with the Settlement Agreement. See
"Certain Transactions--Transactions with Havens and Lyons."
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<PAGE>
EXPERTS
The audited financial statements of the Company included in this
Prospectus, to the extent and for the periods indicated in their reports, have
been prepared by King, Griffin & Adamson, P.C. for the years ended December 31,
1996 and 1997, independent accountants, and are included herein in reliance upon
such reports given upon the authority of such firms as experts in accounting and
auditing.
- 38 -
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION........................................................3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS....................4
THE COMPANY..................................................................4
RISK FACTORS.................................................................5
PLAN OF DISTRIBUTION.........................................................9
SHARES ELIGIBLE FOR FUTURE SALE..............................................9
SELLING STOCKHOLDERS........................................................10
PRICE RANGE OF COMMON STOCK.................................................13
DIVIDEND POLICY.............................................................14
RECAPITALIZATION OF THE COMPANY.............................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................16
BUSINESS ...................................................................25
MANAGEMENT..................................................................31
CERTAIN TRANSACTIONS........................................................35
STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS ..............................37
DESCRIPTION OF CAPITAL STOCK................................................37
LEGAL PROCEEDINGS...........................................................39
EXPERTS ....................................................................39
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AVERY COMMUNICATIONS, INC.
DECEMBER 31, 1996 and 1997 and JUNE 30, 1998 (UNAUDITED)
<PAGE>
AVERY COMMUNICATIONS, INC.
Index
PAGE
Report of Independent Certified Public Accountants F-3
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity (Deficit) F-7
Consolidated Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-11
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Stockholders of
Avery Communications, Inc.
We have audited the accompanying consolidated balance sheets of Avery
Communications, Inc., and subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avery
Communications, Inc. and subsidiaries as of December 31, 1996 and 1997 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
June 19, 1998
Dallas, Texas
F-3
<PAGE>
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1997 and June 30, 1998 (unaudited)
ASSETS
December 31,
------------------------ June 30,
1996 1997 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 827,526 $ 988,020 $ 99,135
Trade accounts receivable 1,227,047 790,061 863,911
Advance payment receivables 3,755,262 13,545,346 16,582,075
Other receivables, net of allowance for doubtful
accounts of $0 and $50,000 at December 31, 1996 and 1997, respectively 277,731 214,515 -
Net current assets of discontinued operations 485,849 668,395 -
Other - 51,665 35,000
----------- ----------- ------------
Total current assets 6,573,415 16,258,002 17,580,121
----------- ----------- ------------
PROPERTY AND EQUIPMENT
Furniture, fixtures & equipment 203,081 541,376 936,618
Accumulated depreciation and amortization (29,016) (95,092) (152,226)
----------- ----------- ------------
Total equipment, net 174,065 446,284 784,392
----------- ----------- ------------
OTHER ASSETS
Goodwill, net 3,067,451 3,216,455 3,137,517
Purchased contracts, net 193,400 104,838 95,813
Net long term assets of discontinued operations 538,885 1,882,906 -
Deposits 90,800 547,969 1,005,817
Other 42,820 277,451 90,203
----------- ----------- ------------
Total other assets 3,933,356 6,029,619 4,329,350
----------- ----------- ------------
TOTAL ASSETS $ 10,680,836 $ 22,733,905 $ 22,693,863
=========== =========== ============
F-4
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Continued
December 31, 1996 and 1997 and June 30, 1998 (unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
------------------------ June 30,
1996 1997 1998
----------- ----------- ------------
(unaudited)
CURRENT LIABILITIES
Line of credit $ 566,000 $ 5,013,859 $ 6,962,488
Current portion of notes payable (including $1,390,926, $870,000 and $530,712
to related parties at December 31, 1996 and 1997 and June 30, 1998, respectively) 3,048,189 921,190 554,104
Trade accounts payable (including $282,600, $82,430 and $53,954 to related parties
at December 31, 1996 and 1997 and June 30, 1998, respectively) 1,542,620 6,069,872 5,029,653
Accrued liabilities 402,465 1,131,459 1,198,643
Deposits and other payables 3,476,125 5,477,647 6,715,951
Other - 200,000 250,500
----------- ----------- ------------
Total current liabilities 9,035,399 18,814,027 20,711,339
----------- ----------- ------------
LONG-TERM LIABILITIES
Long-term portion of notes payable (including $350,000, $882,819 and $699,112
to related parties at December 31, 1996 and 1997 and June 30, 1998, respectively) 350,000 917,546 699,112
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES (NOTE H and NOTE M (unaudited))
STOCKHOLDERS' EQUITY
Preferred stock (20,000,000 authorized):
HBS Series; cumulative, $0.01 par value, 5,000,000 shares authorized, 1,630,000,
600,000 and -0- shares issued and outstanding at December 31, 1996 and 1997 and
June 30,1998, respectively (liquidation preference of $1,630,000, $600,000 and
$0 at December 31, 1996 and 1997 and June 30, 1998, respectively) 16,300 6,000 -
HBS Exchange Series; $0.01 par value, 940,000 shares authorized, 640,000 shares
issued and outstanding at December 31, 1997 (liquidation preference of $640,000) - 6,400 -
Series A; $0.01 par value, 800,000 shares authorized, 700,000 shares issued and
outstanding at December 31, 1996 and 1997 and June 30, 1998 (liquidation
preference of $700,000) 7,000 7,000 7,000
Series B; $0.01 par value, 1,050,000 shares authorized, 850,000, 500,000,and 415,000
shares issued and outstanding at December 31, 1996 and 1997 and
June 30, 1998, respectively (liquidation preference of $850,000,
$500,000 and $415,000 at December 31, 1996 and 1997 and June 30, 1998,
respectively) 8,500 5,000 4,150
Series C; $0.01 par value, 340,000 shares authorized, 66,667, 276,667 and 76,667
shares issued and outstanding at December 31, 1996 and 1997 and
June 30, 1998, respectively (liquidation preference of $66,667, $276,667
and $76,667 at December 31, 1996 and 1997 and June 30, 1998,
respectively) 667 2,767 767
Series D; $0.01 par value, 1,500,000 authorized, issued and outstanding at
December 31, 1997 and June 30, 1998 (liquidation preference of $1,500,000) - 15,000 15,000
Series E; $0.01 par value, 350,000 authorized, issued and outstanding at
December 31, 1997 and June 30, 1998 (liquidation preference of $350,000) - 3,500 3,500
Common stock; $0.01 par value, 20,000,000 shares authorized, 6,350,769, 8,640,893
and 9,404,320 shares issued and outstanding at December 31, 1996 and 1997 and
June 30, 1998, respectively 63,507 86,410 94,043
Additional paid-in capital 6,731,159 9,882,156 8,439,539
Accumulated deficit (5,035,159) (6,515,364) (5,884,050)
Treasury stock, 550,000, 550,000 and 969,000 shares at December 31, 1996 and 1997
and June 30, 1998, respectively, at cost (496,537) (496,537) (1,396,537)
----------- ----------- ------------
Total stockholders' equity 1,295,437 3,002,332 1,283,412
----------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,680,836 $ 22,733,905 $ 22,693,863
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1996 and 1997 and Six Months Ended June 30, 1997 and 1998 (unaudited)
Years ended December 31, Six months ended June 30,
1996 1997 1997 1998
------------- ------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 709,145 $ 11,643,263 $ 3,552,202 $10,015,864
Cost of revenues 506,269 8,592,217 2,628,535 7,496,062
------------- ------------- ------------- ------------
Gross profit 202,876 3,051,046 923,667 2,519,799
Operating expenses (including $650,000 to related party in 1996) 2,255,641 3,512,754 1,588,078 1,998,176
Advance funding program income - (832,248) (270,874) (688,311)
Advance funding program costs - 566,859 265,447 253,226
------------- ------------- ------------- ------------
Operating loss (2,052,765) (196,319) (658,984) 956,708
------------- ------------- ------------- ------------
Other income (expense)
Interest expense (296,170) (412,145) (231,115) (236,687)
Financing fees and debt issuance costs (1,310,616) (902,350) (644,900) (91,000)
Other, net (57,432) 9,046 - 2,293
------------- ------------- ------------- ------------
Total other expense (1,664,218) (1,305,449) (876,015) (325,394)
------------- ------------- ------------- ------------
Net loss from continuing operations (3,716,983) (1,501,768) (1,534,999) 631,314
Discontinued operations:
Net earnings from discontinued operations,
net of income taxes of $0 664,213 163,744 243,243 -
Net estimated loss on disposal, net of income
taxes of $0 - (142,181) - -
------------- ------------- ------------- ------------
Net loss $ (3,052,770) $ (1,480,205) $ (1,291,756) $ 631,314
============= ============= ============= ============
Per share data
Basic income (loss) per share
Continuing operations $ (0.89) $ (0.24) (0.24) 0.05
Discontinued operations:
Earnings from operations 0.16 0.02 0.03 -
Estimated loss on disposal - (0.02) - -
------------- ------------- ------------- ------------
Net income (loss) $ (0.73) $ (0.24) (0.21) 0.05
============= ============= ============= ============
Diluted income (loss) per share
Continuing operations $ (0.89) $ (0.24) (0.24) 0.04
Discontinued operations:
Earnings from operations 0.16 0.02 0.03 -
Estimated loss on disposal - (0.02) - -
------------- ------------- ------------- ------------
Net income (loss) $ (0.73) $ (0.24) (0.21) 0.04
============= ============= ============= ============
Weighted Average Number of Common Shares
Basic common shares 4,264,002 7,818,338 7,182,508 9,258,852
============= ============= ============= ============
Diluted common shares 4,264,002 7,818,338 7,182,508 14,264,513
============= ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996 and 1997 and Six Months Ended June 30, 1998 (unaudited)
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 - $ - 2,834,500 $ 28,345 $ 1,378,411
Issuance of common stock for cash - - 20,000 200 9,800
Issuance of common stock for
consulting services - - 420,000 4,200 835,800
Issuance of common stock for cash
in connection with exercise
of warrants - - 1,400,451 14,004 709,579
Financing fees in connection with
issuance of warrants - - - - 421,175
Interest paid through issuance of
common stock in connection with
exercise of warrants - - 226,191 2,261 20,357
Common shares received into treasury
in connection with the disposition
of Telco and related companies - - - - -
Issuance of preferred stock (Series
A, B and C) in connection with
conversion of notes payable 1,616,667 16,167 - - 1,600,500
Issuance of Units (Units include
common stock and HBS Series
preferred stock) 1,630,000 16,300 1,086,664 10,867 1,296,770
Issuance of common stock in
connection with acquisition
of Hold - - 362,963 3,630 458,767
Net loss
-------------- -------------- --------------- --------------- --------------
BALANCE AT DECEMBER 31, 1996 3,246,667 32,467 6,350,769 63,507 6,731,159
</TABLE>
The accompanying notes are an integral part of these financial statements
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996 and 1997 and Six Months Ended June 30, 1998 (unaudited)
CONTINUED
TREASURY STOCK ACCUMULATED
SHARES AMOUNT DEFICIT DEFICIT
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 - $ - $ (1,982,389)$ (575,633)
Issuance of common stock for cash - - - 10,000
Issuance of common stock for
consulting services - - - 840,000
Issuance of common stock for cash
in connection with exercise
of warrants - - - 723,583
Financing fees in connection with
issuance of warrants - - - 421,175
Interest paid through issuance of
common stock in connection with
exercise of warrants - - - 22,618
Common shares received into treasury
in connection with the disposition
of Telco and related companies 550,000 (496,537) - (496,537)
Issuance of preferred stock (Series
A, B and C) in connection with
conversion of notes payable - - - 1,616,667
Issuance of Units (Units include
common stock and HBS Series
preferred stock) - - - 1,323,937
Issuance of common stock in
connection with acquisition
of Hold - - - 462,397
Net loss (3,052,770) (3,052,770)
-------------- -------------- --------------- ---------------
BALANCE AT DECEMBER 31, 1996 550,000 (496,537) (5,035,159) 1,295,437
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996 and 1997 and Six Months Ended June 30, 1998 (unaudited)
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Issuance of Units (Units include
common stock and Series D
preferred stock) 1,500,000 15,000 999,997 10,000 1,263,217
Issuance of Units (Units include
common stock and HBS Series
preferred stock) 250,000 2,500 166,666 1,667 245,833
Issuance of shares for cash
in connection with warrants exercised - - 257,261 2,573 248,623
Issuance of shares in connection with
settlement of accounts payable - - 73,380 734 171,343
Partial redemption of HBS 1996
series (640,000) (6,400) - - (633,600)
Payment of preferred stock
dividend - - - - (132,929)
Issuance of HBS escrow
shares (Note B) - - 470,000 4,700 (4,700)
Financing fees in connection with
issuance of warrants - - - - 1,117,585
Interest paid through issuance
of common stock - - 156,154 1,562 154,592
Issuance of shares relating to HBS
acquisition 166,666 1,667 513,133
Issuance of preferred stock
for extinguishment of debt 210,000 2,100 - - 207,900
Net Loss - - - - -
-------------- -------------- --------------- --------------- --------------
BALANCE AT DECEMBEER 31, 1997 4,566,667 45,667 8,640,893 86,410 9,882,156
</TABLE>
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996 and 1997 and Six Months Ended June 30, 1998 (unaudited)
CONTINUED
TREASURY STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Issuance of Units (Units include
common stock and Series D
preferred stock) - - - 1,288,217
Issuance of Units (Units include
common stock and HBS Series
preferred stock) - - - 250,000
Issuance of shares for cash
in connection with warrants exercised - - - 251,196
Issuance of shares in connection with
settlement of accounts payable - - - 172,077
Partial redemption of HBS 1996
series - - - (640,000)
Payment of preferred stock
dividend - - - (132,929)
Issuance of HBS escrow
shares (Note B) - - - -
Financing fees in connection with
issuance of warrants - - - 1,117,585
Interest paid through issuance
of common stock - - - 156,154
Issuance of shares relating to HBS
acquisition 514,800
Issuance of preferred stock
for extinguishment of debt - - - 210,000
Net Loss - - (1,480,205) (1,480,205)
-------------- -------------- --------------- ---------------
BALANCE AT DECEMBEER 31, 1997 550,000 (496,537) (6,515,364) 3,002,332
</TABLE>
The accompanying notes are an integral part of these financial statements
F-8
<PAGE>
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996 and 1997 and Six Months Ended June 30, 1998 (unaudited)
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Issuance of shares for cash
in connection with warrants (unaudited) - - 66,429 663 33,979
Issuance of HBS escrow shares (unaudited) - - 499,998 5,000 (5,000)
Redemption of HBS 1997 Series (unaudited) (640,000) (6,400) - - (633,600)
Partial redemption of HBS 1996
series (unaudited) (600,000) (6,000) 100,000 1,000 (395,000)
Partial redemption of series B (unaudited) (85,000) (850) 85,000 850 -
Partial redemption of series C (unaudited) (200,000) (2,000) - - (118,000)
Issuance of common stock in exchange
for debt (unaudited) - - 12,000 120 29,880
Common shares received into treasury in
connection with sale of Bordercomm
and related company (unaudited) - - - - -
Financing fees in connection with
issuance of warrants (unaudited) - - - - 91,000
Payment of preferred stock dividend (unaudited) - - - - (445,876)
Net income (unaudited) - - - - -
============== ============== =============== =============== ==============
BALANCE AT JUNE 30, 1998 3,041,667 $ 30,417 9,404,320 $ 94,043 $ 8,439,539
============== ============== =============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996 and 1997 and Six Months Ended June 30, 1998 (unaudited)
CONTINUED
TREASURY STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Issuance of shares for cash
in connection with warrants (unaudited) - - - 34,642
Issuance of HBS escrow shares (unaudited) - - - -
Redemption of HBS 1997 Series (unaudited) - - - (640,000)
Partial redemption of HBS 1996
series (unaudited) - - - (400,000)
Partial redemption of series B (unaudited) - - - -
Partial redemption of series C (unaudited) - - - (120,000)
Issuance of common stock in exchange
for debt (unaudited) - - - 30,000
Common shares received into treasury in
connection with sale of Bordercomm
and related company (unaudited) 419,000 (900,000) - (900,000)
Financing fees in connection with
issuance of warrants (unaudited) - - - 91,000
Payment of preferred stock dividend (unaudited) - - - (445,876)
Net income (unaudited) - - 631,314 631,314
============== ============== =============== ===============
BALANCE AT JUNE 30, 1998 969,000 $ (1,396,537) $ (5,884,050) $ 1,283,412
============== ============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-9
<PAGE>
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996 and 1997 and Six Months Ended
June 30, 1997 and 1998 (unaudited)
Years ended December 31, Six Months Ended June 30,
1996 1997 1997 1998
----------- ------------ ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ (3,052,770) $ (1,480,205)$ (1,291,756) $ 631,314
Adjustments to reconcile net income (loss) to net cash used
by operating activities from continuing operations:
Earnings from discontinued operations (excluding intercompany
charges/revenue) (519,213) (112,348) - -
Loss on sale of Bordercomm - - - 51,301
Bad debt expense - 50,000 - -
Amortization of loan discounts - 99,913 78,018 27,005
Depreciation and amortization 56,048 408,434 231,855 214,231
Financing fees in connection with issuance of warrants 1,095,739 870,492 667,401 91,000
Common stock issued for consulting services 840,000 - 132,077 -
Common stock issued to settle interest payable 22,618 156,154 - -
Common stock issued under bonus agreement - 244,000 - -
Change in assets and liabilities, net of effects of assets and liabilities
acquired and disposed of:
(Increase) decrease in:
Trade accounts receivable (1,016,799) 436,986 848,151 (73,850)
Advance payment receivables (2,412,262) (9,790,084) (4,389,268) (3,036,729)
Other receivables (227,731) 13,216 277,731 214,515
Other current liabilities 518,816 200,000 - 50,500
Trade accounts payable and accrued liabilities 1,241,230 5,428,323 475,188 (973,035)
Deposits and other payables 3,082,725 2,001,522 1,559,303 1,238,304
Other assets (133,501) (743,465) (547,988) (277,469)
----------- ------------ ----------- ------------
Net cash used by operating activities (505,100) (2,217,062) (1,959,288) (1,842,913)
----------- ------------ ----------- ------------
Net cash used in discontinued operations (408,951) (1,414,219) (53,840) -
----------- ------------ ----------- ------------
Net cash used in operating activities (914,051) (3,631,281) (2,013,128) (1,842,913)
----------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (74,492) (298,295) (160,655) (395,242)
Cash received in connection with sale of Bordercomm - - - 1,600,000
Purchases of billing contracts - (47,000) - (45,600)
Cash paid in connection with acquisition of HBS and Bordercomm (1,431,284) - - -
----------- ------------ ----------- ------------
Net cash used by investing activities (1,505,776) (345,295) (160,655) 1,159,158
----------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,157,000 6,147,859 2,835,325 1,948,629
Principle payments on notes payable (967,167) (3,027,273) (2,144,141) (582,525)
Payment of preferred stock dividends - (132,929) (132,929) (445,876)
Redemption of preferred stock - (640,000) (400,000) (1,160,000)
Issuance of shares of common and preferred stock for cash 2,057,520 1,789,413 1,539,060 34,642
----------- ------------ ----------- ------------
Net cash provided by financing activities 3,247,353 4,137,070 1,697,315 (205,130)
----------- ------------ ----------- ------------
Increase in cash 827,526 160,494 (476,468) (888,885)
Cash at beginning of year - 827,526 827,526 988,020
----------- ------------ ----------- ------------
Cash at end of year $ 827,526 $ 988,020 $ 351,058 $ 99,135
=========== ============ =========== ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 183,829 $ 683,291 $ 231,700 $ 251,236
=========== ============ =========== ============
SCHEDULE OF NON-CASH FINANCING AND INVESTING TRANSACTIONS:
Disposition of Telco, American and Commnet $ 496,537 $ - $ 496,537 $ -
=========== ============ =========== ============
Conversion of debt to preferred stock $ 1,616,667 $ 210,000 $ - $ -
=========== ============ =========== ============
Notes payable issued in connection with acquisition and assumption
of assets and liabilities $ 1,175,926 $ - $ - $ -
=========== ============ =========== ============
Financing fees in connection with issuance of warrants $ 421,175 $ 1,117,585 $ 873,139 $ 91,000
=========== ============ =========== ============
Issuance of common stock in connection with acquisition of HBS
assumption of assets and liabilities $ 462,397 $ 270,800 $ - $ -
=========== ============ =========== ============
Fees paid through issuance of common stock $ 840,000 $ - $ 132,077 $ -
=========== ============ =========== ============
Payment of interest through issuance of common stock $ - $ 156,154 $ - $ -
=========== ============ =========== ============
Payment of accounts payable through issuance of common stock $ - $ 172,077 $ 40,000 $ -
=========== ============ =========== ============
Payment of debt through issuance of common stock $ - $ - $ - $ 30,000
=========== ============ =========== ============
Receipt of treasury stock in connection with sale of Bordercomm $ - $ - $ - $ 900,000
=========== ============ =========== ============
Acquisition of customer service department $ - $ 125,000 $ 125,000 $ -
=========== ============ =========== ============
Loss on disposal of discontinued operations $ - $ 142,181 $ - $ -
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-10
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Business Activity
- -----------------
Avery Communications, Inc. ("Avery") is the parent company of four wholly-owned
subsidiaries; Avery Communications, Inc. a Texas corporation, Alternate
Telephone Communications, Inc. ("ATC"), Bordercomm, Inc. ("Bordercomm") and Hold
Billing Services, LTD ("HBS"). Avery Communications, Inc. and its subsidiaries
are collectively referred to as the "Company". Each subsidiary's operations are
related to the telecommunications industry, providing such services as data
management, long distance reselling, supplying and maintaining
telecommunications equipment and billing and collection services. The
significant portion of the Company's revenues are generated through sales and
installation of communications equipment (and related maintenance contracts),
and providing billing and collection services. Billing and collection services
are performed by Local Exchange Carriers ("LEC's") pursuant to long-term
contracts with these entities. The Company presently operates under billing
contracts with all seven of the regional bell operating companies and GTE. The
contracts give the Company the capability of providing billing services in 49
states and the District of Columbia. Effective January 1, 1998, Avery disposed
of two of its previously owned subsidiaries, ATC and Bordercomm.
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of Avery
and all of its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Statement of Cash Flows
- -----------------------
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
Property and Equipment
- ----------------------
Furniture and fixtures are depreciated straight-line over the estimated useful
lives of the related assets ranging from 5 to 10 years. Depreciation from
continuing operations for the years ended December 31, 1996 and 1997, was
$23,319 and $66,077 respectively.
Maintenance and repairs are charged to operations when incurred. Betterments and
renewals are capitalized.
Debt Issuance Costs
- -------------------
Financial advisory, accounting, legal and other expenses associated with debt
are amortized by the straight-line method over the terms of the loans.
Additional financing costs are recorded for warrants issued as payment for
financing services and in connection with the loans and/or extending these
loans, and is amortized by the straight-line method over the term or extension
period of the loans. Additional financing fees resulting from the decrease in
the exercise price of certain warrants are expensed in the period in which the
decrease in exercise price is granted.
F-11
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES - Continued
Goodwill
- --------
Goodwill is the difference between the purchase price paid and liabilities
assumed over the estimated fair market value of assets acquired from HBS.
Goodwill acquired in connection with the acquisition of HBS amounted to
$3,101,923 and is being amortized using the straight-line method over 15 years.
Additional goodwill resulted from the difference between the purchase price paid
over the estimated fair market value of assets acquired in connection with the
purchase of HBS's customer service department and the earn-out shares from
escrow as provided for in the purchase agreement between Avery and former
partners of HBS. Goodwill from the purchase of the customer service department
amounted to $85,000, and is being amortized over five years. Goodwill from the
earnout agreement amounted to $270,800 and is being amortized over five years.
Amortization expense for the years ended December 31, 1996 and 1997 was $34,466
and $206,796, respectively. On an on-going basis, management reviews
recoverability, the valuation and amortization of goodwill. As a part of this
review, the Company considers the undiscounted projected future cash flow in
evaluating the goodwill. If the undiscounted future cash flow is less than the
stated value, goodwill would be written down to fair value.
Purchased Contracts
- -------------------
The direct costs of acquiring billing and collection contracts with LEC's are
capitalized and amortized straight-line over the contract life, generally three
to five years.
Revenue and Cost Recognition on Contracts, Billing Services, and Advance Funding
- --------------------------------------------------------------------------------
Programs
- --------
Billing Services - The Company recognizes billing services revenue when its
customers' records are accepted by HBS for billing and collection. Bills are
generated by the LEC's and the collected funds are remitted to the Company,
which in turn remits these funds, net of fees and reserves, to its billing
customers. The Company records trade accounts receivable and service revenue for
fees charged for its billing services. When the customers receivables are
collected by the Company from the LEC's, the Company's trade receivables are
reduced by the amount corresponding to the Company's processing fees and the
remaining funds are recorded as amounts due to customers, included in Deposits
and Other Payables in the accompanying balance sheets. The Company is reimbursed
by its customers for all direct costs associated with the billing of
transactions. The Company also retains a reserve from its customers' settlement
proceeds, calculated to cover accounts that the LEC's are unable to collect.
Advance Funding Programs - The Company offers participation in advance funding
to qualifying customers through its advance payment program. Under the terms of
the agreements, the Company purchases the customer's accounts receivable for an
amount equal to the face amount of the billing records submitted to the LEC by
the Company less various items including costs and expenses on previously billed
records, financing fees, LEC charges, rejects and other similar items. The
Company advances 50% to 75% of the purchased amount. The purchased accounts
receivable are recorded at the gross amount (as Advance Payment Receivables).
The amount due to the customer (included in Deposits and Other Payables) is
recorded as the purchased accounts receivable less amounts advanced, adjusted
for various other reserve items. Financing charges are assessed until the
Company recoups its initial payment.
F-12
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES - Continued
Stock Based Compensation
- ------------------------
The Company measures compensation cost for its stock based compensation plans
under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees". The difference, if any, between the
fair value of the stock on the date of grant over the amount received for the
stock is accrued over the related vesting period. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123") requires companies electing to continue to use APB 25 to account for its
stock-based compensation plan to make pro forma disclosures of net income and
earnings per share as if SFAS 123 had been applied (See Note K).
Loss Per Common Share
- ---------------------
Loss per common share is computed by dividing the net loss increased by
preferred stock dividends of $44,003 and $431,756 for the years ended December
31, 1996 and 1997, respectively, by the weighted average number of shares of
common stock outstanding during the respective periods. The effect of the
preferred stock dividend on the loss per common share was $0.01 and $0.05 per
weighted average common share outstanding for the years ended December 31, 1996
and 1997, respectively. The effect of outstanding warrants and options on the
computation of net loss per share would be anti-dilutive and, therefore, is not
included in the computation of weighted average shares for the years ended
December 31, 1996 and 1997.
Use of Estimates and Assumptions
- --------------------------------
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
Adoption of New Accounting Standards
- ------------------------------------
The Company adopted SFAS No. 128 "Earnings Per Share" ("SFAS No. 128") effective
December 15, 1997. This statement requires the replacement of primary earnings
per share with basic earnings per share and fully diluted earnings per share
with diluted earnings per share. Management of the Company does not believe that
the adoption of this statement had a material impact on the earnings per share
computation. Prior year amounts have been restated to conform with the new
standard.
NOTE B - ACQUISITIONS AND DISPOSITIONS
A wholly-owned subsidiary of the Company acquired the general partnership
interest and 100% of the limited partnership interests of HBS effective in
November, 1996, for a note payable of $1,175,926, cash of $1,296,302, the
issuance of 362,963 common shares at $1.28 per share ($462,963), and cash paid
for acquisition costs of $134,991, resulting in a total purchase price of
$3,070,182.
F-13
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE B - ACQUISITIONS AND DISPOSITIONS - Continued
In connection with the acquisition, the Company had 470,000 common shares which
were being held in escrow. On May 15, 1997, 100,000 shares were issued in
accordance with the terms of the purchase agreement. The balance of shares to be
issued, 370,000 will be issued in three equal amounts in 1998, 1999 and 2000
subject to HBS achieving future earnings projections. 185,000 of the 370,000
shares were issued in 1998 and were reflected as additional paid in capital and
goodwill effective December 31, 1997.
A summary of the fair value of assets acquired and liabilities assumed is as
follows:
Receivables $ 1,553,221
Other assets 288,189
Property and equipment 111,979
Goodwill 3,101,923
Accounts payable (412,632)
Other payables (547,401)
Notes payable (1,025,097)
--------------
3,070,182
Additional goodwill in connection with
shares issued for earn-out 270,800
--------------
$ 3,340,982
==============
The consolidated financial statements include the operations of HBS from the
date of acquisition. The acquisitions have been accounted for under the purchase
method of accounting.
Effective in January 1996, the Company disposed of Telco Group, Inc.("Telco"),
American Networks, Inc. ("American") and Commnet Services, Inc. ("Commnet") in
exchange for 550,000 shares of the Company`s common stock, recorded as treasury
stock, valued at $496,537. Assets and liabilities disposed of are as follows :
Current assets $ 625,376
Equipment in service, future service
equipment and other property and
equipment, net 924,923
Other assets 20,263
Current liabilities (1,021,154)
Long-term liabilities (95,599)
Other 42,728
==============
$ 496,537
==============
Unaudited pro forma financial information for the year ended December 31, 1996
as though the acquisition and disposition had occurred on January 1, 1996 is as
follows:
1996
=============
Revenues $ 5,811,000
=============
Net Loss $ 3,152,000
=============
Net Loss Per Common Share $ 0.68
=============
F-14
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE B - ACQUISITIONS AND DISPOSITIONS - Continued
Effective in January 1998, the Company disposed of Alternate Telephone
Communications, Inc. and Bordercomm, Inc. and its subsidiaries in exchange for
419,000 shares of the Company's common stock, valued at $900,000, cash of
$1,600,000 and a receivable for $185,000 from a third party. Revenues for the
subsidiaries disposed of for the year ended December 31, 1997 amounted to
$3,942,797. Assets and liabilities disposed of are as follows:
Current Assets $ 2,302,665
Equipment in service and furniture and equipment 226,363
Microwave concessions and other assets 1,819,394
Inter-company receivable 1,321,627
Current liabilities (2,955,895)
Long-term liabilities (162,853)
------------------
$ 2,551,301
==================
NOTE C - SHORT-TERM DEBT OBLIGATIONS
HBS has a $7,500,000 revolving note payable - line of credit with a capital
corporation. Interest is payable monthly at the prime rate plus 1.5% (10% at
December 31, 1997) and the principal is due March 25, 2000. The note is secured
by substantially all the assets of HBS. The line of credit agreement contains
certain covenants that require HBS to maintain a certain financial ratio related
to debt servicing and to limit capital expenditures and additional indebtedness.
At November 30, 1997, HBS was in violation of one of these covenants, that is,
exceeding the capital expenditure limitations. HBS obtained a waiver from the
capital corporation for this violation. The balance outstanding at December 31,
1997 was $5,013,859 leaving an unused balance of $2,486,141.
HBS had a revolving line of credit with a bank. Interest was payable monthly at
the prime rate plus 1.5% (9.75% at December 31, 1996). This line was settled in
March 1997 through proceeds from the above described line of credit.
The balance outstanding under the former line of credit at December 31, 1996 was
$566,000.
<TABLE>
<CAPTION>
NOTE D - NOTES PAYABLE
Notes payable at December 31, 1996 and 1997 are as follows:
December 31, December 31,
1996 1997
------------------ ------------------
<S> <C> <C>
Note payable to third parties bearing interest at 12% per annum, payable
quarterly; principal and any unpaid interest originally due September
30, 1996, now due on demand. $ 246,666 $ 36,667
Note payable to third parties ($634,370) and related parties ($540,926)
bearing interest at 10% per annum; principal due May 15, 1997. 1,175,296 -
Note payable to related party bearing interest at 10% per annum; principal due
May 6, 1997, secured by HBS advance payment receivables.
500,000 -
Note payable to related party bearing interest at 10% per annum; principal due
December 23, 2001, secured by HBS advance payment
receivables. 350,000 -
F-15
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE D - NOTES PAYABLE - Continued
December 31, December 31,
1996 1997
------------------ ------------------
Note payable to related party bearing interest at 12% per annum; principal due
December 10, 2002; convertible to common stock at a price of $1.25 per share
at any time, unsecured. Principal at December 31, 1997 is $350,000 adjusted
for a discount for warrants issued in connection with the note based on
imputed interest rate of
20%. - 308,644
Note payable to related party bearing interest at 10% per annum,
principal due March 2, 1998, unsecured. - 300,000
Note payable to related party bearing interest at 10% per annum, principal due
quarterly beginning May, 1998 with the final payment due in May, 2000,
secured by a second lien on the assets of HBS. Principal at December 31, 1997
is $1,000,000 adjusted for a discount for warrants issued in connection with
the note based on imputed
interest rate of 20%. - 894,175
Note payable to a third party bearing interest at 2% over prime per annum
(10.25% at December 31, 1996); principal due August 20, 1997,
secured by all HBS equipment. 136,701 -
Note payable on demand to a third party bearing interest at 16% per
annum, unsecured. 639,526 49,250
Note payable to a related party bearing interest at 14% per annum, payable
quarterly; principal and any unpaid interest due April 1,
1998, secured by second lien on HBS advance payment receivables. 250,000 250,000
Note payable to a related party bearing interest at 14% per annum; principal and
interest due September 30, 1997, secured by second lien
on HBS advance payment receivables. 100,000 -
------------------ ------------------
3,398,189 1,838,736
Less current maturities 3,048,189 921,190
------------------ ------------------
Long-term portion $ 350,000 $ 917,546
================== ==================
</TABLE>
Principal amounts due on long-term debt at December 31, 1997 are as follows:
1998 $ 955,917
1999 570,000
2000 320,000
2001 70,000
2002 70,000
----------------
$ 1,985,917
Loan discounts (147,181)
----------------
Total $ 1,838,736
================
F-16
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE D - NOTES PAYABLE - Continued
Pursuant to $1,050,000 notes payables (1995) to various third parties, the note
holders had the right at any time within 5 years after the issuance of the notes
to purchase an aggregate of 350,000 shares of common stock at $0.10 per share.
In addition, as the due date was extended from January 31, 1996 to July 31,
1996, the note holders exercised their right to purchase an additional 125,000
shares of common stock at $0.10 per share. The difference between the fair
market value and the exercise price of the warrants at the point of issuance
amounting to $569,375 was being amortized as financing fees by the straight-line
method over the term of the notes. As the notes all matured in 1996, the
$569,375 was all amortized as financing fees in 1996. During 1996, the balance
of the note due of $850,000 was converted to Series B preferred stock.
In 1995, the Company executed an agreement with a financial underwriter to
obtain an $800,000 convertible bridge loan bearing 10% interest with three-year
bridge warrants to purchase up to 406,000 shares of the Company at a price equal
to $0.875 per share, which approximated the fair market value at the date of
issuance. The bridge loan was secured by assets of the Company. During 1995, the
Company exercised its option to renew the bridge loan for an additional year and
in accordance with the exercise was granted additional three-year warrants to
purchase an additional 210,000 shares at $0.875 per share. As incentive to
extend the note, an additional 196,000 three-year warrants were also issued. The
210,000 warrants issued in 1995 in connection with the extension of the note
were issued at $131,950 below fair market value calculated as of the date of
issuance. This fee was being amortized straight-line over the extension period
of the note. The unamortized portion was written off upon conversion of the
note. Subsequent to December 31, 1995, all warrant exercise prices were adjusted
to $0.60 per share. This decrease in warrant exercise price on the 812,000
warrants totaling $223,300 has been recorded as a financing fee during 1996.
During 1996, the balance of the bridge loan due of $700,000 was converted into
Series A preferred stock.
During 1996, 180,000 warrants with an option price of $3.00 per share issued in
connection with the $340,000 notes payable to various third parties was reduced
to $1.50 per share. The difference between the fair market value at the date the
price was reduced and the $1.50 per share, amounting to $13,500, has been
recorded as a financing fee.
NOTE E - STOCKHOLDERS' EQUITY
The Company had four and seven series of preferred stock outstanding as of
December 31, 1996 and 1997, respectively.
The preferred stock Series HBS is cumulative and has a conditional mandatory
redemption feature. Beginning in 1998 and continuing from year to year
thereafter, once audited stockholders' equity increases by $7,000,000, as
compared to the December 31, 1996 stockholders' equity balance of $1,295,437,
the Company will redeem the outstanding HBS on or before the September 30 first
following that audited balance sheet date. The HBS Series has a liquidation
preference of $1.00 per share together with all unpaid dividends.
The preferred stock Series' A, B, C, E and HBS Exchange series contain identical
conditional mandatory redemption features and liquidation preferences as the HBS
Series, and also include a conversion feature. This feature provides for the
preferred stockholder to convert their shares into common shares at the stated
conversion price, as defined in the certificate of designation. Under certain
conditions, as specified in the certificate of designation, the preferred stock
is subject to automatic conversion into common stock.
The preferred stock Series D contains the identical conditional mandatory
redemption feature as the HBS series plus other mandatory redemption provisions
which are enacted based upon the sale of HBS or Bordercomm.
Dividends are payable when, as and if declared by the Board of Directors at an
annual rate of $0.10 per share (Series HBS, A, D and HBS Exchange) and $0.12 per
share (Series B, C and E) all payable quarterly.
F-17
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE F - INCOME TAXES
A reconciliation of the expected federal income tax benefit based on the U.S.
Corporate income tax rate of 34% to actual benefit for 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Expected income tax benefit $ 1,037,942 $ 503,270
Meals and entertainment 5,856 8,280
Foreign income 16,014 12,262
Other 23 (23,129)
Valuation allowance (1,059,835) (500,683)
=============== ===============
$ - $ -
=============== ===============
</TABLE>
Deferred tax assets and liabilities as of December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Current deferred tax asset $ - $ 51,871
Current deferred tax liability - (51,871)
Valuation allowance for current deferred tax asset - -
=============== ===============
Net current deferred tax asset $ - $ -
=============== ===============
Non-current deferred tax asset $ 1,599,334 $ 2,105,157
Non-current deferred tax liability (31,480) (36,620)
Valuation allowance for non-current deferred tax asset (1,567,854) (2,068,537)
=============== ===============
Net non-current deferred tax asset $ - $ -
=============== ===============
</TABLE>
The current deferred tax asset and liability result primarily from differences
in contingency and valuation reserves for financial and federal income tax
reporting purposes. The non-current deferred tax asset results from differences
in amortization of goodwill and the non-compete agreement for financial and
federal income tax reporting purposes and the deferred tax benefit of net
operating losses. The non-current deferred tax liability results from
differences in depreciation of fixed assets for financial reporting purposes and
federal income tax purposes. The net non-current deferred tax asset has a 100%
valuation allowance due to the uncertainty of generating future taxable income.
The Company has net operating loss carryforwards for federal income tax purposes
of approximately $4,800,000, that begin expiring in the year 2008. The
utilization of the net operating loss is subject to limitations in accordance
with ss.382 of the Internal Revenue Code
NOTE G - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company`s billing services activities are with customers throughout the
United States. Financial instruments, which potentially expose the Company to
significant credit loss include trade accounts receivable, advance payment
receivables, and cash.
At December 31, 1997, three customers comprised approximately 30% of trade
receivables and six customers accounted for approximately 79% of advanced
payment receivables. At December 31, 1996, one customer comprised approximately
22% of trade accounts receivable, and five customers accounted for approximately
89% of advance payment receivables. The significant majority of these
receivables were collected after December 31, 1997 and 1996, respectively.
F-18
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE G - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS - Continued
Credit risk with respect to trade accounts receivable generated through billing
services is limited as the Company collects its fees through receipt of all its
customers' cash directly from LEC's. The credit risk with respect to purchase of
accounts receivable is reduced as the Company only advances 50% to 75% of the
gross accounts receivable purchased. Management evaluates accounts receivable
balances on an on-going basis and provides allowances as necessary for amounts
estimated to become uncollectible. In case of complete non-performance of
accounts receivable, the maximum exposure to the Company is the recorded amount
shown on the balance sheet.
The Company is at risk to the extent that cash held in banks exceeds the Federal
Deposit Corporation insured amounts. Cash in excess of these limits amounted to
approximately $700,000 at December 31, 1997. The Company minimizes this risk by
placing its cash with high credit quality financial institutions.
NOTE H - COMMITMENTS
The Company has entered into various non-cancelable operating leases relating to
equipment and office space. Future minimum payments on leases having remaining
terms more than one year as of December 31, 1997 are as follows:
Year ending December 31,
1998 $ 111,917
1999 109,614
2000 108,462
2001 108,462
2002 108,462
=============
Total future minimum rentals $ 546,917
=============
Rent expense for the years ended December 31, 1996 and 1997 amounted to $139,228
and $92,231, respectively.
The Company is obligated to pay minimum usage charges over the lifetime of most
LEC billing contracts. Each contract has a minimum usage amount which relates to
the Company's customers' sales volume to be processed through the LEC. The
remaining minimum usage for significant contracts at December 31, 1997 is as
follows:
Amount Expires
----------------- ----------------------
Contract 1 $ 8,885,000 June 22, 2001
Contract 2 2,220,000 August 31, 1998
Others 972,000 Throughout 1998
-----------------
$ 12,077,000
=================
The Company files consolidated sales and excise tax returns on behalf of its
customers for the various municipal, state and Federal jurisdictions in which
its customers do business. The Company relies on monthly tax reports it receives
from the LEC's in reporting and remitting such taxes. The Company's customers
are contractually obligated to reimburse the Company for any disputes with
taxing authorities that may arise from filing the sales and excise tax returns
on behalf of their customers. The Company is contingently liable for any such
disputes or assessments if its customers are unable or unwilling to honor the
contract provisions. There were no such disputes at December 31, 1997.
In connection with the acquisition of HBS, the Company entered into a contingent
earnout agreement with the previous partners of HBS under which 666,664 shares
are issuable based on HBS achieving certain pre tax income levels (as defined).
During 1997, 185,000 shares were issued pursuant to the contingent earnout
agreement and are reflected as an addition to goodwill and an increase in
shareholder equity.
F-19
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE I - RELATED PARTY TRANSACTIONS AND OTHER EVENTS
In addition to acquiring its Telco, American and Commnet operating subsidiaries
from its largest shareholder during 1994, the Company`s then largest shareholder
contributed equipment as additional paid-in capital. Some of the equipment was
used in the Company`s operations and some was held for future use in
telecommunications systems. The equipment was valued based upon the lower of the
shareholder's historical cost basis or fair market and amounted to $276,546.
Management determined that Telco, American and Commnet were not compatible with
the long term strategic direction of the Company. Accordingly, effective January
1, 1996, the Company disposed of Telco, American and Commnet (including certain
equipment in service, all future service equipment, and assets under capital
leases) by selling them to the previous owners (the Chairman of the Company
prior to the disposition of Telco, and the Chief Executive Officer). As
consideration, the Company received back into treasury a total of 550,000 of its
common shares from its previous Chairman. The disposition was recorded at the
book value of the companies disposed of which was $496,537.
Effective November 1, 1994, Global Capital Resources entered into a consulting
and financing agreement with the Company. Global Capital Resources was the agent
on certain notes payable transactions (the $800,000 and $1,050,000 notes
payable). Subsequent to December 31, 1995 the agreement was canceled in part
through the issuance of 325,000 shares recorded at a fair value of $650,000
which was expensed in 1996. The Chairman of Avery is also a shareholder in
Global Capital Resources. In addition, during 1996, the Company incurred other
consulting fees to Global Capital Resources totaling $307,600. The amount
accrued for these fees at December 31, 1996 totaled $282,600.
During the year ended December 31, 1996, the Company received a $500,000 loan
from an entity in which the Company's Chairman is a manager of the general
partner.
During 1996, two employees of the Company (who previously owned HBS) loaned the
Company $250,000 and $100,000, respectively. These same employees also signed a
promissory note with the Company for $540,926 which is included in the
$1,175,296 notes payable amount (due May 15, 1997).
During 1997, the Company granted an option to purchase 300,000 shares of its
common stock at $1.00 per share to an entity in which the Company's Chairman is
a partner. Another entity, in which the Company's Chairman is a partner, loaned
the company $240,000, which was subsequently repaid.
In May 1997, the Company entered into an agreement with The Franklin Holding
Corporation (Delaware) ("Franklin"). The transaction provided the Company with
financing to obtain $1,500,000 through the issuance of 7.5 Units (each unit
consists of 133,333 common shares and 200,000 preferred shares) and $1,000,000
through the issuance of a three year note payable. The preferred stock is
convertible to common stock. In accordance with the terms of the agreement,
three Franklin representatives were elected to the board of directors of the
Company.
In December 1997, the Company entered into a five-year note payable with a
company for which its president is also a member of the board. The note bears
interest at 12%, is convertible to common stock and contains warrants for
175,000 shares of common stock at $1.50 exercise price.
During 1997, an employee loaned the company $300,000 at 10%. The amount has
subsequently been repaid.
F-20
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments", requires
disclosure about the fair value of all financial assets and liabilities for
which it is practicable to estimate. Cash, trade accounts receivable, advance
payment receivables, accounts payable, accrued liabilities and deposits and
other liabilities are carried at amounts that reasonably approximate their fair
values.
The carrying amount and fair value of notes payable are as follows at December
31, 1997:
Carrying Fair
Amount Value
------ -----
Fixed rate debt $1,838,736 $1,985,917
The fair values of the Company's fixed rate debt have been estimated based upon
relative changes in the Company's borrowing rates since origination of the fixed
rate debt.
NOTE K - STOCK OPTIONS AND WARRANTS
Pursuant to various note agreements and in accordance with agreements for key
employees, the Company has issued certain stock options and warrants. The
options are all considered compensatory.
Following is a summary of warrant and option activity:
<TABLE>
<CAPTION>
Compensatory Warrant/Option Price
------------------------------
Options Warrants Total Per Share Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1995 217,500 2,221,000 2,438,500 $ .10-$3.00 $ 2,835,490
Reduction in option prices - - - (1,039,540)
Granted 150,000 654,000 804,000 $ 1.50 1,506,000
Canceled (150,000) (310,001) (460,001) $ 1.50-$3.00 (920,502)
Exercised - (1,626,643) (1,626,643) $ .10-$3.00 (746,180)
------------------------------------------- ----------------
Outstanding at December 31, 1996 217,500 938,356 1,155,856 $ .10-$3.00 1,635,268
Reduction in option prices - - - (267,600)
Granted 425,000 1,611,828 2,036,828 $ .50-$2.00 2,918,904
Canceled - (59,000) (59,000) $ 1.50 (88,500)
Exercised - (257,261) (257,261) $ .10-$1.02 (251,126)
=========================== =============== ================
Outstanding at December 31, 1997 642,500 2,233,923 2,876,423 $ .10-$3.00 $ 3,946,946
=========================== =============== ================
</TABLE>
The outstanding stock options and warrants expire from August 1998 through 2003.
The following summarizes information about compensatory options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------- ------------------------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable Price
--------------- ----------- ---------------- -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$.50 to $3.00 642,500 3.8 Years $1.28 642,500 $1.28
</TABLE>
F-21
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE K - STOCK OPTIONS AND WARRANTS - Continued
Compensation cost was recognized for one of the options granted in 1997 as the
exercise price was below the fair market value at the grant date. The remaining
options granted in 1997 have exercise prices which approximate fair value and
accordingly, no compensation cost has been recognized for those compensatory
stock options in the consolidated financial statements. Had compensation cost
for the Company's stock options been determined consistent with FASB statement
No. 123, the Company's net loss and loss per share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------
1996 1997
--------------------- -----------------
<S> <C> <C>
Net loss As reported $3,052,770 $1,480,205
Pro forma $3,052,770 $1,765,812
Loss per common share As reported $ 0.73 $ 0.24
Pro forma $ 0.73 $ 0.28
</TABLE>
The estimate for the fair value of each option grant is on the date of grant
using the Black-Scholes method option-pricing model. The following assumptions
were used for grants in 1997; dividend yield of 0%, expected volatility of 130%,
and an estimated risk free interest rate of 6.0%.
The model is based on historical stock prices and volatility which, due to the
low volume of transactions, may not be representative of future price variances.
NOTE L - 401(k) PLAN
The Company has a 401(k) Plan ("Plan") which covers substantially all of the
Company's employees. Employees can contribute up to $9,500 for 1996 and 1997.
The Company matches contributions to the Plan at $0.25 per dollar up to 3% of
the employees' compensation and may make additional discretionary contributions.
During the years ended December 31, 1996 and 1997, the Company contributed
$1,020 and $4,413 to the Plan, respectively.
NOTE M - INTERIM FINANCIAL STATEMENTS AT JUNE 30, 1998 (unaudited)
Stockholders' Equity (Deficit)
- ------------------------------
The Company completed the redemption of its HBS 1996 and 1997 Series Preferred
stock during the six months ended June 30, 1998. The HBS 1997 Series Preferred
was redeemed for $1 per share for a total cash payment of $640,000. The HBS 1996
Series Preferred was redeemed for $1 per share for a total cash payment of
$400,000 and a conversion into common stock at the rate of two shares of
preferred for one share of common for the remaining 200,000 shares of HBS 1996
Series Preferred.
85,000 shares of the Company's Series B Preferred were converted to the
Company's common shares at one common share for each preferred share. The
Company also reached agreement with a group of Series C Preferred stockholders
to redeem their 200,000 shares for a cash settlement of $120,000 plus other
costs.
Related Party Transactions and Other Events
- -------------------------------------------
The Company granted an option in May 1998 to purchase 100,000 shares of its
common stock at $2.69 per share to the directors of the Company.
F-22
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1997 and June 30, 1997 and 1998 (unaudited)
NOTE M - INTERIM FINANCIAL STATEMENTS AT JUNE 30, 1998 (unaudited) - Continued
Stock Options and Warrants
- --------------------------
Following is a summary of warrant and options activity during the six months
ending June 30, 1998:
<TABLE>
<CAPTION>
Warrant/Option Price
Compensatory -----------------------------------
Options Warrants Total Per Share Total
--------------- ------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31,
1997 642,500 2,233,923 2,876,423 $ .10 - $3.00 $ 3,946,946
Granted - 140,000 140,000 $1.50 - $2.69 328,752
Exercised - (66,429) (66,429) $ .10 - $1.50 (34,644)
=============== ============= ================ ==================
Outstanding at June 30, 1998 642,500 2,307,494 2,949,994 $ 4,241,054
=============== ============= ================ ==================
</TABLE>
During July 1998 the Company entered into an employment agreement with its
chairman and issued an option to purchase 420,000 shares of common stock at a
price of $3.00 per share. The terms of the employment agreement require the
Company to pay an annual salary of $200,000 for five years.
The Company granted another warrant to a director during July 1998 for 25,000
shares at $3.00 per share.
In July, 1998, The Company and HBS were named in a complaint for
injuncted relief filed by the Federal Trade Commission ("FTC") against Veterans
of America Association (VOAA). The suit alleged that VOAA caused unauthorized
charges to appear on end-users bills. HBS has allready voluntarily paid out
twice the revenue it took from this account and has offered cooperation in this
investigation. Management believes that this suit will not materially impact the
Company's future operations or financial condition.
A class action suit was brought against HBS alleging unauthorized
switching of their long distance telephone service by Discount Telecom, Inc. HBS
denies liability and intends to defend the suit vigorously. Management believes
that this suit will not materially impact the Company's operations or financial
condition.
F-23
<PAGE>
<TABLE>
<CAPTION>
AVERY COMMUNICATIONS, INC.
EXHIBIT 1
STATEMENT REGARDING COMPUTATION OF PER SHARE DATA
Years ended December 31, Six months ended June 30,
------------------------------------------------------------
1996 1997 1997 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ (3,716,983) $ (1,501,768) $ (1,534,999) $ 631,314
Gain from discontinued operations 664,213 163,744 243,243 -
Net estimated loss on disposal (142,181) - -
------------------------------------------------------------
Net income (loss) (3,052,770) (1,480,205) (1,291,756) 631,314
------------------------------------------------------------
Preferred stock dividends (44,003) (431,756) (196,089) (153,453)
------------------------------------------------------------
$ (3,096,773) $ (1,911,961) $ (1,487,845) $ 477,861
============================================================
PER SHARE DATA BASIC AND DILUTED:
Basic income (loss) per share
Continuing operations $ (0.89) $ (0.24) $ (0.24) $ 0.05
Discontinued operations
Earnings from operations 0.16 0.02 0.03 -
Estimated loss on disposal - (0.02) - -
------------------------------------------------------------
Net income (loss) $ (0.73) $ (0.24) $ (0.21) $ 0.05
============================================================
Diluted income (loss) per share
Continuing operations $ (0.89) $ (0.24) $ (0.24) $ 0.04
Discontinued operations
Earnings from operations 0.16 0.02 0.03 -
Estimated loss on disposal - (0.02) - -
------------------------------------------------------------
Net income (loss) $ (0.73) $ (0.24) $ (0.21) $ 0.04
============================================================
SHARES USED IN THE CALCULATION OF PER SHARE AMOUNTS:
Basic common shares 4,264,002 7,818,338 7,182,508 9,258,852
Dilutive impact of stock options
and convertible securities - - - 5,005,661
------------------------------------------------------------
Diluted common shares 4,264,002 7,818,338 7,182,508 14,264,513
============================================================
</TABLE>
F-24
<PAGE>
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
HOLD BILLING SERVICES, LTD.
DECEMBER 31, 1997 AND 1996
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Partners of
HOLD Billing Services, Ltd.
We have audited the accompanying balance sheets of HOLD Billing Services, Ltd.
as of December 31, 1997 and 1996 and the related statements of operations,
partners' capital, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly, in
all material respects, the financial position of HOLD Billing Services, Ltd. as
of December 31, 1997 and 1996 and the results of its operations and cash flows
for the years then ended in conformity with generally accepted accounting
principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
February 6, 1998
F-25
<PAGE>
<TABLE>
<CAPTION>
HOLD BILLING SERVICES, LTD.
Balance Sheets
December 31, 1997 and 1996
ASSETS
CURRENT ASSETS 1997 1996
----------------- ---------------
<S> <C> <C>
Cash $ 958,951 $ 1,261,825
Advance payment receivables 13,545,346 3,755,262
Trade accounts receivable 790,061 1,227,047
Due from affiliate - 224,796
Other receivable 214,515 2,935
----------------- ---------------
Total current assets 15,508,873 6,471,865
----------------- ---------------
PROPERTY AND EQUIPMENT
Computer equipment and software 388,301 128,984
Furniture and fixtures 125,068 46,090
Accumulated depreciation and amortization (77,766) (17,548)
----------------- ---------------
435,603 157,526
----------------- ---------------
OTHER ASSETS
Goodwill, net 3,216,455 3,067,451
Purchased contracts, net 104,838 193,400
Deferred costs, net 129,812 -
Other 581,873 118,766
----------------- ---------------
Total other assets 4,032,978 3,379,617
----------------- ---------------
TOTAL ASSETS $ 19,977,454 $ 10,009,008
================= ===============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Line of credit $ 5,013,859 $ 566,000
Current portion of notes payable (including $299,250 and
$350,000 to related parties in 1997 and 1996) 299,250 1,126,226
Trade accounts payable 5,781,251 1,309,589
Accrued liabilities 926,190 206,987
Parent note payable - 380,000
Deposits and other payables 5,477,647 3,476,125
----------------- ---------------
Total current liabilities 17,498,197 7,064,927
----------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTES C, D, G, AND H)
PARTNERS' CAPITAL 2,479,257 2,944,081
----------------- ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 19,977,454 $ 10,009,008
================= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-26
<PAGE>
<TABLE>
<CAPTION>
HOLD BILLING SERVICES, LTD.
Statements of Operations
Years ended December 31, 1997 and 1996
1997 1996
--------------- ---------------
<S> <C> <C>
Operating revenues $ 11,643,263 $ 2,431,144
Cost of revenues (8,592,217) (1,620,175)
--------------- ---------------
Gross profit 3,051,046 810,969
Selling, general and administrative expenses (1,981,743) (892,053)
Advance funding program income 832,248 90,042
Advance funding program expense (566,859) (65,726)
Depreciation and amortization expense (478,464) (116,206)
--------------- ---------------
Income (loss) from operations 856,228 (172,974)
--------------- ---------------
Other income (expense)
Interest expense (69,814) (52,657)
Interest income 9,046 -
--------------- ---------------
Total other income (expense) (60,768) (52,657)
--------------- ---------------
Net income (loss) $ 795,460 $ (225,631)
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-27
<PAGE>
<TABLE>
HOLD BILLING SERVICES, LTD.
Statement of Partners' Capital
Years ended December 31, 1997 and 1996
Capital
------------------------------- Avery
General Limited Communications
Partner Partners Inc. and HBS, Inc. Total
--------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 2,236 $ 221,378 $ - $ 223,614
Distributions (1,558) (154,267) - (155,825)
Sale and acquisition of the general
and limited partners' interest 317 31,424 3,070,182 3,101,923
Net loss (995) (98,535) (126,101) (225,631)
--------------- ------------ -------------- -----------------
BALANCE AT DECEMBER 31, 1996 - - 2,944,081 2,944,081
Distributions - - (1,531,084) (1,531,084)
Earn-out of Avery stock by former partners - - 270,800 270,800
Net Income - - 795,460 795,460
--------------- ------------ -------------- -----------------
BALANCE AT DECEMBER 31, 1997 $ - $ - $ 2,479,257 $ 2,479,257
=============== ============ ============== =================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-28
<PAGE>
<TABLE>
<CAPTION>
HOLD BILLING SERVICES, LTD.
Statements of Cash Flows
Years ended December 31, 1997 and 1996
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
--------------- ---------------
<S> <C> <C>
Net income (loss) $ 795,460 $ (225,631)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 60,218 17,547
Amorization 418,246 98,659
Change in assets and liabilities
Trade accounts receivable 436,986 (904,271)
Advance payment receivables (9,790,084) (2,929,197)
Due from affiliate and other receivable 13,216 (65,979)
Other assets (647,807) 16,455
Trade accounts payable 4,471,662 846,667
Accrued liabilities 719,203 87,566
Deposits and other payables 2,001,522 3,172,863
--------------- ---------------
Net cash provided (used) by operating activities (1,521,378) 114,679
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and software (323,295) (174,021)
Purchase of contracts (68,000) -
--------------- ---------------
Net cash used in investing activities (391,295) (174,021)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit 4,447,859 26,000
Proceeds from notes payable - 1,863,675
Principal payments on notes payable (926,976) (892,698)
Distribution to parent (1,531,084) -
Proceeds from parent note payable - 380,000
Repayment of parent note payable (380,000) -
Distributions to partners - (155,825)
--------------- ---------------
Net cash provided by financing activities 1,609,799 1,221,152
--------------- ---------------
Increase (decrease) in cash (302,874) 1,161,810
Cash at beginning of year 1,261,825 100,015
--------------- ---------------
Cash at end of year $ 958,951 $ 1,261,825
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-29
<PAGE>
<TABLE>
<CAPTION>
HOLD BILLING SERVICES, LTD.
Statements of Cash Flows - Continued
Years ended December 31, 1997 and 1996
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 400,539 $ 52,657
================== ===============
SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Sale and purchase of partnership interests $ - $ 3,070,182
================== ===============
Earn-out of Avery's shares by former partners $ 270,800 $ -
================== ===============
Note payable issued in connection with acquisition of
customer service department $ 100,000 $ -
================== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-30
<PAGE>
HOLD BILLING SERVICES, LTD.
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Business Activity
- -----------------
HOLD Billing Services, Ltd. ("Billing" or the "Partnership") is a Texas Limited
Partnership. The Partnership is a wholly owned subsidiary of Avery
Communications Inc. ("Avery"). Avery owns 99% of Billing directly and the
additional 1% through its wholly owned subsidiary HBS, Inc.
Billing was organized on August 1, 1994 for the purpose of providing billing and
collection clearinghouse services to its telecommunications customers. Billing
and collection services are performed by Local Exchange Carriers ("LEC's") which
Billing administers pursuant to long-term contracts. On August 1, 1994, Billing
purchased four contracts from an affiliated company Home Owners Long Distance,
Inc. ("HOLD") for $112,500. The purchase price approximated the fair market
value of the contracts at time of purchase. Concurrently with the purchase,
Billing and HOLD executed a three year billing services agreement whereby
Billing became the primary billing contractor for HOLD.
Effective November, 1996 Avery acquired the partnership interests of the general
(HOLD Billing and Collections, L.C., "Hold B&C") and limited partners of
Billing. Billing has applied push down accounting in recording the sale of the
partnership interest. Accordingly, these financial statements include the effect
of recording the purchase price paid, and the resulting increase in goodwill and
equity (see Note B). Additionally, these financial statements include the effect
of the subsequent earn-out of shares of Avery by the former partners which also
resulted in an increase to goodwill and equity.
Effective February, 1997, Billing acquired the customer service department of
HOLD for the purpose of providing customer service support to its
telecommunications customers.
Billing currently operates under billing contracts with all seven of the
regional bell operating companies, GTE and Sprint operating telephone companies.
The contracts give Billing the capability of billing in 49 states and the
District of Columbia.
Billing is reimbursed by its customers for all direct costs associated with the
billing of transactions. Billing also retains a reserve from its customers'
settlement proceeds, calculated to cover accounts that the LEC's are unable to
collect. Billing charges a billing fee for each record processed, an inquiry fee
for each end user inquiry and a finance fee to customers who participate in the
Company's Advance Payment Program.
Revenue Recognition
- -------------------
The Partnership recognizes billing services revenue when its customers' records
are accepted for billing and collection. Bills are generated by the LEC's and
the collected funds are remitted to the Partnership, which in turn remits these
funds, net of fees and reserves, to its billing customers. The Partnership
records trade accounts receivable and service revenue for fees charged for its
billing services. When the customers' receivables are collected by the
Partnership from the LEC's, the Partnership's trade receivables are reduced by
the amount corresponding to the Partnership's processing fees and the remaining
funds are recorded as amounts due to customers, included in Deposits and Other
Payables in the accompanying balance sheets. The Partnership is reimbursed by
its customers for all direct costs associated with the billing of transactions.
The Partnership also retains a reserve from its customers' settlement proceeds,
calculated to cover accounts that the LEC's are unable to collect.
F-31
<PAGE>
HOLD BILLING SERVICES, LTD.
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES - Continued
LEC Receivables and Customer Payables
- -------------------------------------
Billing acts as a billing agent for its customers receivables and does not
acquire these receivables. Therefore such receivables are not reflected on the
Partnership's balance sheet. For the same reason, offsetting unsettled payables
to its customers are not reflected on the Partnership's balance sheet.
Advance Payment Receivables
- ---------------------------
Under its Advance Payment Program, Billing offers to purchase qualifying
customers' receivables to accelerate their collection time which would otherwise
range from 45 to 60 days. Receivables are purchased as follows:
An advance is made to the customer shortly after records are submitted to a LEC.
Typically the advance is 50 - 75% of the value of the records purchased and is
made within seven days of when Billing submits the records to a LEC. Upon
purchase, the gross value (face amount) of the receivable is recorded on the
balance sheet as a "advance payment receivable" and the portion not advanced is
recorded as a component of deposits and other payables.
When a LEC remits funds to Billing to settle the advance payment receivable,
Billing remits the balance due to the customer net of direct billing costs.
Property, Equipment and Software
- --------------------------------
Property, equipment and purchased software are stated at cost. Depreciation is
provided for on a straight line basis over the assets estimated five to seven
year useful life. Internally developed software is expensed as incurred.
Maintenance and repairs are charged to expense as incurred. Betterments and
renewals are capitalized. Depreciation expense for the years ended December 31,
1997 and 1996 was $60,218 and $17,547, respectively.
Goodwill
- --------
Goodwill resulted from the difference between the purchase price paid and
liabilities assumed by Avery over the estimated fair market value of assets of
Billing. Goodwill in connection with the sale amounted to $3,101,923, and is
being amortized using the straight-line method over 15 years. Additional
goodwill resulted from the difference between the purchase price paid by the
Partnership over the estimated fair market value of assets acquired in
connection with the purchase of HOLD's customer service department and the
earn-out of shares from escrow as provided in the purchase agreement between
Avery and the Partnership. Goodwill from the purchase of the Customer service
department amounted to $85,000, and is being amortized over 5 years. Goodwill
from the earn-out agreement amounted to $270,800 and is also being amortized
over 5 years. Total amortization expense for 1997 and 1996 amounted to $206,796
and $34,466, respectively. On an on-going basis, management reviews
recoverability, the valuation and amortization of goodwill. As a part of this
review, the Company considers the undiscounted projected future net earnings in
evaluating the goodwill. If the undiscounted future net earnings is less than
the stated value, goodwill would be written down to fair value.
Purchased Contracts
- -------------------
The direct costs of acquiring billing and collection contracts with LEC's are
capitalized and amortized straight-line over the contract life, generally three
to five years.
F-32
<PAGE>
HOLD BILLING SERVICES, LTD.
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES - Continued
Income Taxes
- ------------
Billing qualifies as a limited partnership and as such, Federal income taxes
accrue to the partners rather than to the Partnership. In addition, the
Partnership is not subject to state income or franchise taxes. Accordingly, no
provision or liability for income taxes is included in the financial statements.
Deposits and Other Payables
- ---------------------------
Deposits and other payables represent deposits billed to customers, for
uncollectible end user accounts and LEC billing fees which have not yet been
remitted to the LEC or settled with customers.
Statement of Cash Flows
- -----------------------
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred and consist principally of newspaper,
customer publication, customer referral and trade show costs. Advertising
expense in 1997 and 1996 was approximately $262,000 and $73,000, respectively.
Use of Estimates and Assumptions
- --------------------------------
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with the current
year presentation.
NOTE B - SALE OF PARTNERSHIP INTEREST
Avery acquired the general partner and 100% of the limited partnership interests
of Hold Billing Services, Ltd. effective in November, 1996, for a note payable
of $1,175,926, cash of $1,296,302, the issuance of 362,963 common shares valued
at $1.28 per share ($462,963), and cash paid for acquisition costs of $134,991,
resulting in a total purchase price of $3,070,182.
In connection with the acquisition, Avery also has 470,000 common shares which
are being held in escrow. 100,000 shares were issued on May 15, 1997 after all
representations and warranties made by the sellers at acquisition date were met.
The balance of 370,000 shares, will be issued in three equal amounts in 1998,
1999 and 2000 subject to the Partnership achieving future earnings projections.
F-33
<PAGE>
HOLD BILLING SERVICES, LTD.
Notes to Financial Statements
December 31, 1997 and 1996
NOTE B - SALE OF PARTNERSHIP INTEREST - Continued
A summary of the fair value of assets acquired and liabilities assumed is as
follows:
Receivables $ 1,553,221
Other assets 288,189
Property and equipment 111,979
Goodwill 3,101,923
Accounts payable (412,632)
Other payables (547,401)
Notes payable (1,025,097)
------------
$ 3,070,182
============
The purchase price was adjusted for the release of shares under the earn-out
agreement with the sellers. The adjustment, based on the value of stock
released, was $270,800 and increased goodwill.
NOTE C - SHORT-TERM DEBT OBLIGATIONS
The Partnership has a revolving note payable - line of credit with a capital
corporation with a maximum facility of $7,500,000 subject to borrowing
limitations based on collateral. Subsequent to December 31, 1997, the maximum
facility was increased to $10,000,000. Interest is payable monthly at the prime
rate plus 1.5% (10% at December 31, 1997) and the principal is due March 25,
2000. The note is secured by substantially all the assets of the Partnership.
The line of credit agreement contains certain covenants which require the
Partnership to maintain certain financial ratios related to debt servicing and
to limit capital expenditures and additional indebtedness. The Partnership was
in non-compliance with one of these covenants, that is, exceeding the capital
expenditure limitations at November 30, 1997. The Partnership obtained a waiver
from the capital corporation.
The Partnership had a revolving line of credit with a bank. Interest was payable
monthly at the prime rate plus 1.5% (9.75% at December 31, 1996). The line was
settled in March, 1997 through proceeds from the above line of credit.
NOTE D - NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable at December 31, 1997 and 1996 are as follows:
1997 1996
------------ ------------
<S> <C> <C>
Installment note payable to an affiliated company, due in monthly installments
of $5,713, including interest at 10% per annum,
maturing June 1998; not secured $ 49,250 $ -
Note payable to a third party bearing interest at 2% over prime per annum
(10.25% at December 31, 1997 and 1996); principle due August 20, 1997,
secured by all Hold equipment, settled in March, 1997 through proceeds
from line of credit. - 136,701
Note payable to a third party bearing interest at 16% per
annum; principle due December 1, 1997, not secured. - 639,525
F-34
<PAGE>
HOLD BILLING SERVICES, LTD.
Notes to Financial Statements
December 31, 1997 and 1996
NOTE D - NOTES PAYABLE - Continued
Note payable to a related party bearing interest at 14% per annum, payable
quarterly; principle and any unpaid interest due April 1998, secured by
second lien on
Hold advance payment receivables. 250,000 250,000
Note payable to a related party bearing interest at 14% per annum; principle and
interest due September 30, 1997,
secured by second lien on Hold advance payment receivables. - 100,000
------------- ------------
299,250 1,126,226
Less current maturities (299,250) (1,126,226)
------------- ------------
Long-term portion $ - $ -
============= ============
</TABLE>
NOTE E - RELATED PARTY TRANSACTIONS
The note payable to Parent at December 31, 1996 was repaid in 1997 through
offsets with amounts due from Parent. The Partnership has other amounts due
under notes payable to related parties (See Note D).
NOTE F - PARTNERS' CAPITAL
Prior to the acquisition by Avery in November, 1997, there was a general partner
and six limited partners who together with the general partner contributed
initial capital of $1,000 in the following respective percentages:
HOLD B&C (general partner) 1%
Limited partners 99%
In accordance with the Partnership Agreement, net profits and losses are
allocated in the same ratio as the initial capital contribution through the
acquisition date.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company has entered into various non-cancelable operating leases relating to
equipment and office space. Future minimum payments on leases having remaining
terms in excess of one year as of December 31, 1997 are as follows:
Year ending December 31,
1998 $ 111,917
1999 109,614
2000 108,462
2001 108,462
2002 108,462
------------
Total future minimum rentals $ 546,917
============
Rent expense for the years ended December 31, 1997 and 1996 amounted to $84,608
and $26,163, respectively.
F-35
<PAGE>
HOLD BILLING SERVICES, LTD.
Notes to Financial Statements
December 31, 1997 and 1996
NOTE G - COMMITMENTS AND CONTINGENCIES - Continued
The Partnership is obligated to pay minimum usage charges over the lifetime of
most LEC billing contracts. Each contract has a minimum usage amount. The
remaining minimum usage for significant contracts at December 31, 1997 is as
follows:
Amount Expires
-------- ---------
Contract 1 $ 8,885,000 June 22, 2001
Contract 2 2,220,000 August 31, 1998
Others 972,000 Throughout 1998
-----------
$ 12,077,000
===========
The Partnership files consolidated sales and excise tax returns on behalf of its
customers for the various municipal, state and Federal jurisdictions in which
its customers do business. The Partnership relies on monthly tax reports it
receives from the LEC's in reporting and remitting such taxes. While the
Partnership's customers are contractually obligated to reimburse Billing for any
disputes with taxing authorities that may arise from such filings, Billing is
contingently liable for any such disputes or assessments if its customers are
unable or unwilling to honor the contract provisions. There were no such
disputes at December 31, 1997.
NOTE H - CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Four customers accounted for approximately 48% of the Partnership's revenues in
1997. Three customers accounted for 90% of the Partnership's revenues in 1996
(including 44% from HOLD). At December 31, 1997, four customers represented 64%
of Billing's outstanding advance payment receivables. At December 31, 1996, one
customer represented 37% and five customers represented 89% of Billing's
outstanding advanced payment receivables. Credit risk with respect to trade
accounts receivable generated through billing services is limited as the Company
collects its fees through receipt of all its customers cash directly from LEC's.
The credit risk with respect to purchase of accounts receivable is reduced as
the Company only advances up to 75% of the gross accounts receivable purchased.
Management evaluates accounts receivable balances on an on-going basis and
provides allowances as necessary for amounts estimated to eventually become
uncollectible which at December 31, 1997 and 1996 were considered to be minimal.
In the event of complete non-performance of accounts receivable, the maximum
exposure to the Partnership is the recorded amount shown on the balance sheet.
The Partnership is at risk to the extent that cash held at banks exceeds the
Federal Deposit Insurance Corporation insured amounts. Cash in excess of these
limits amounted to approximately $700,000 at December 31, 1997. The Partnership
minimizes this risk by placing its cash with high credit quality financial
institutions.
NOTE I - 401(k) PLAN
Avery initiated a 401(k) Plan ("Plan") which covers substantially all of Avery's
and Billing's employees. Employees can contribute up to $9,500 for 1996 and
1997. Avery matches contributions to the Plan at $0.25 per dollar up to 3% of
employees compensation and may make additional discretionary contributions.
During 1997 and 1996, $4,413 and $1,020, respectively were contributed to the
Plan for the benefit of the Partnership's employees.
F-36
<PAGE>
II-13
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Delaware General Corporation Law
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present
or former director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of Section 145, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
Section 145(d) of the DGCL provides that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in subsections (a) and (b) of Section 145. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors designated by
majority vote of such directors, even though less than a quorum, or (3) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the corporation deems appropriate.
II-1
<PAGE>
Certificate of Incorporation
The Certificate of Incorporation of the Company, as amended, a copy of
which is filed as Exhibit 3.1 to the Registration Statement, provides that a
director of the Company shall not be liable to the Company or its 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 the Company or
its 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 the Company will indemnify all
persons whom it may indemnify to the fullest extent permitted by the DGCL.
Amended and Restated Bylaws
The Amended and Restated Bylaws of the Company, a copy of which is
filed as Exhibit 3.2 to the Registration Statement, provide that each person who
at any time is or was a director of the Company, 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 a director of
the Company, or is or was serving at the request of the Company 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 the Company,
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 best interests of the Company, 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
The Company has entered into Indemnification Agreements pursuant to
which it will indemnify certain of its directors and officers against judgments,
claims, damages, losses and expenses incurred as a result of the fact that any
director or officer, in his capacity as such, is made or threatened to be made a
party to any suit or proceeding. Such persons will be indemnified to the fullest
extent now or hereafter permitted by the DGCL. The Indemnification Agreements
also provide for the advancement of certain expenses to such directors and
officers in connection with any such suit or proceeding.
Insurance
The Company has a directors' and officers' liability insurance policy
to insure its directors and officers against losses resulting from wrongful acts
committed by them in their capacities as directors and officers of the Company,
including liabilities arising under the Securities Act.
II-2
<PAGE>
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, other than
the underwriting discount. All amounts are estimated except the Commission
registration fee.
SEC registration fee..................................... $ 8,249
Blue Sky fees and expenses............................... ________
Accounting fees and expenses............................. ________
Legal fees and expenses.................................. 2,500,000
---------
Printing and engraving expenses.......................... ________
Registrar and transfer agent's fees...................... ________
Miscellaneous fees and expenses.......................... ________
Total........................................... $
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In November 1995, the Company issued warrants to purchase 375,000
shares of Common Stock as additional consideration for a loan in the amount of
$1,050,000. The lenders were "accredited investors," as defined in Rule 501 of
Regulation D under the Securities Act of 1933, as amended (the "Act"), to
acquire the warrants for investment. The Company issued the warrants in a
transaction not involving a public offering in reliance upon the exemption set
forth in Section 4(2) of the Act.
In November 1996, the Company acquired HBS. In connection with such
acquisition, the Company issued an aggregate of 1,499,627 shares of Common Stock
to the former partners of HBS. Each of such persons was an accredited investor
who acquired the shares of Common Stock for investment. The Company issued the
warrants in a transaction not involving a public offering in reliance upon the
exemption set forth in Section 4(2) of the Act.
In November 1996, the Company sold units consisting of an aggregate of
1,880,000 shares of Preferred Stock and 1,253,330 shares of Common Stock to
finance the acquisition of HBS. Each of the purchasers of such units was an
accredited investor who acquired such units for investment. The Company issued
the units in a transaction not involving a public offering in reliance upon the
exemption set forth in Section 4(2) of the Act.
In March 1997, the Company issued an aggregate of 73,380 shares of
Common Stock in settlement of certain accounts payable. The recipients of these
shares of Common Stock were accredited investors who acquired such shares for
investment. The Company issued these shares in a transaction not involving a
public offering in reliance upon the exemption set forth in Section 4(2) of the
Act.
In November 1997, the Company issued an aggregate of 156,154 shares of
Common Stock in payment of interest due on certain notes payable of the Company.
The persons who received such shares were accredited investors who acquired such
shares for investment. The Company issued these shares in a transaction not
involving a public offering in reliance upon the exemption set forth in Section
4(2) of the Act.
In November 1997, the Company issued an aggregate of 10,000 shares of
Preferred Stock in exchange for certain outstanding debt of the Company. The
recipient of such stock was an accredited investor who acquired such shares for
investment. The Company issued such shares in a transaction not involving a
public offering in reliance upon the exemption set forth in Section 4(2) of the
Act. This transaction also constituted an exchange of the Preferred Stock by the
Company with its existing security holders exclusively where no commission or
other remuneration was paid or given directly or indirectly for soliciting such
exchange, and therefore constituted an exempt transaction under Section 3(a)(9)
of the Act.
Since January 1, 1996, the Company issued an aggregate of 2,000,881
shares of Common Stock upon exercise of outstanding warrants previously issued
by the Company. Each of the purchasers of such shares upon exercise of such
warrants was an accredited investor who acquired such shares for investment. The
Company issued such shares upon exercise of such warrants in transactions not
involving a public offering in reliance upon the exemption set forth in Section
4(2) of the Act.
The information set forth in the prospectus constituting a part of this
Registration Statement under the caption "Recapitalization of the Company" is
incorporated herein by reference. Each of the persons who acquired the
securities described therein was an accredited investor who acquired such new
securities for investment. The transactions constituting the recapitalization of
the Company involved the exchange by the Company with its existing security
holders exclusively where no commission or remuneration was paid or given
directly or indirectly for soliciting such exchange, and therefore constituted
an exempt transaction under Section 3(a)(9) of the Act.
The information set forth in the prospectus constituting a part of this
Registration Statement under the caption "Certain Transactions" is incorporated
herein by reference. Each of the persons who acquired the securities described
thereunder was an accredited investor who acquired such securities for
investment. The Company issued such securities in transactions not involving a
public offering in reliance upon the exemptions set forth in Section 4(2) of the
Act.
II-3
<PAGE>
ITEM 27. EXHIBITS
EXHIBIT *
NUMBER DESCRIPTION OF DOCUMENT
2.1 Partnership Interest Purchase Agreement dated as of May 3, 1996, by and
among Avery Communications, Inc., Avery Acquisition Sub, Inc., Hold
Billing Services, Ltd., Hold Billing & Collection, L.C., Joseph W.
Webb, James A. Young, Edward L. Dunn, Philip S. Dunn, Harold D. Box,
and David W. Mechler, Jr.
2.2 First Amendment to Partnership Interest Purchase Agreement by and
between Avery Communications, Inc., Avery Acquisition Sub, Inc., HOLD
Billing Services, Ltd., HOLD Billing & Collection, L.C., Joseph W.
Webb, James A. Young, Edward L. Dunn, Philip S. Dunn, Harold D. Box and
David W. Mechler, Jr.
2.3 Partnership Interest Option Agreement dated as of May 3, 1996, by and
among Avery Communications, Inc., Avery Acquisition Sub, Inc., and
Harold D. Box and David W. Mechler, Jr.
2.4 First Amendment to Partnership Interest Option Agreement dated as of
October ___, 1996, by and among Avery Communications, Inc., Avery
Acquisition Sub, Inc., Harold D. Box, and David W. Mechler, Jr.
3.1 Certificate of Incorporation, as amended
3.2 Amended and Restated Bylaws
4.1 Specimen Common Stock Certificate
4.2 Form of Warrant Exchange and Exercise Agreement
4.3 Form of Warrant Exercise and Securities Exchange Agreement [$800,000
BRIDGE LOAN NOTES]
4.4 Form of Warrant Exercise and Securities Exchange Agreement [$1,050,000
PROMISSORY NOTE]
4.5 Form of Warrant Exercise and Securities Exchange Agreement [$340,000
PROMISSORY NOTES]
4.6 Form of Securities Exchange Agreement
4.7 Registration Rights Agreement by and among Avery Communications, Inc.
and Joseph W. Webb, James A. Young, Edward L. Dunn, Philip S. Dunn,
Harold D. Box, and David W. Mechler, Jr. dated November 15, 1996
4.8 Registration Rights Agreement by and between Avery Communications, Inc.
and The Franklin Holding Corporation (Delaware) dated _____________,
1997
4.9 Registration Rights Agreement by and between Avery Communications, Inc.
and The Franklin Holding Corporation (Delaware) dated May 30, 1997
4.10 Avery Communications, Inc. Stock Purchase Warrant to The Franklin
Holding Corporation (Delaware) dated May 30, 1997
4.11 Registration Rights Agreement by and between Avery Communications, Inc.
and Roger Felberbaum dated December 5, 1996
4.12 Registration Rights Agreement by and between Avery Communications, Inc.
and Giulio Curiel dated December 31, 1996
4.13 Registration Rights Agreement by and between Avery Communications, Inc.
and Sabina International S.A. dated December 31, 1996
4.14 Stock Purchase Warrant to Roger Felberbaum dated December 5, 1996
4.15 Stock Purchase Warrant to Giulio Curiel dated December 31, 1996
4.16 Stock Purchase Warrant to Sabina International S.A. dated December 31,
1996
II-4
<PAGE>
4.17 Stock Purchase Warrant to Thomas A. Montgomery dated January 24, 1997
4.18 Registration Rights Agreement by and between Avery Communications, Inc.
and Thomas A. Montgomery dated January 24, 1997
4.19 Registration Rights Agreement by and between Avery Communications, Inc.
and Thurston Bridge Fund, L.P. dated December 6, 1996
4.20 Registration Rights Agreement by and between Avery Communications, Inc.
and Eastern Virginia Small Business Investment Corporation dated
December 23, 1996
4.21 Securities Exchange Agreement dated ______________, 1997
4.22 Warrant to The Thurston Group, Inc. dated May 27, 1997
4.23 Avery Communications, Inc. Stock Purchase Warrant to Thurston Bridge
Fund, L.P. dated December 6, 1996
4.24 Avery Communications, Inc. Stock Purchase Warrant to Eastern Virginia
Small Business Investment Corporation dated December 23, 1996
5.1 Opinion of Winstead Sechrest & Minick P.C.
10.1 Employment Agreement by and between Avery Communications, Inc. and
Thomas M. Lyons dated December 6, 1995
10.2 Employment Agreement by and between Avery Communications, Inc. and
Patrick J. Haynes, III dated August 1, 1996
10.3 $50,000.00 Promissory Note to Global Capital Resources, Inc. dated
September 30, 1996
10.4 Security Agreement by and between Avery Communications, Inc. and Global
Capital Resources, Inc. dated September 30, 1996
10.5 $258,703.74 Promissory Note to David W. Mechler, Jr. dated November 15,
1996 --------------
10.6 $282,222.26 Promissory Note to Harold D. Box dated November 15, 1996
10.7 $47,037.04 Promissory Note to Philip S. Dunn dated November 15, 1996
10.8 $164,629.63 Promissory Note to James A. Young dated November 15, 1996
10.9 $164,629.63 Promissory Note to Joseph W. Webb dated November 15, 1996
10.10 $258,703.70 Promissory Note to Edward L. Dunn dated November 15, 1996
10.11 Employment and Noncompetition Agreement by and between Hold Billing
Services, Ltd. and David W. Mechler, Jr. dated November 15, 1996
10.12 Employment and Noncompetition Agreement by and between Hold Billing
Services, Ltd. and Harold D. Box dated November 15, 1996
10.13 Pledge Agreement by and between Avery Communications, Inc., d/b/a the
Company Communications, Inc. and Thurston Bridge Fund, L.P., dated
December 6, 1996
10.14 Pledge Agreement by and between Avery Acquisition Sub, Inc. and
Thurston Bridge Fund, L.P., dated December 6, 1996
10.15 Pledge Agreement by and between Avery Communications, Inc. and Thurston
Bridge Fund, L.P., dated December 6, 1996
10.16 $500,000 Promissory Note from Avery Communications, Inc., a Delaware
corporation, d/b/a the Company Communications, Inc. payable to Thurston
Bridge Fund, L.P., dated December 6, 1996
10.17 Security Agreement by and between Hold Billings Services, Ltd. and
Thurston Bridge Fund, L.P. dated December 6, 1996
10.18 Loan and Security Agreement by and among Hold Billing Services, Ltd.,
Avery Communications, Inc., and Eastern Virginia Small Business
Investment Corporation dated December 23, 1996
10.19 $350,000 Promissory Note payable to Eastern Virginia Small Business
Investment Corporation dated December 23, 1996
II-5
<PAGE>
10.20 Guaranty Agreement by and between Hold Billing Services, Ltd. and
Eastern Virginia Small Business Investment Corporation dated December
23, 1996
10.21 Guaranty Agreement by and between Avery Communications, Inc. and Neil
F. Gibson, Jr. dated January 24, 1997
10.22 Security Agreement by and between Hold Billings Services, Ltd. and Neil
F. Gibson, Jr. dated January 24, 1997
10.23 $250,000.00 Promissory Note from Hold Billing Services, Ltd. to Neil F.
Gibson, Jr. dated January 24, 1997
10.24 Loan and Security Agreement, by and between Hold Billing Services, Ltd.
and FINOVA Capital Corporation dated March 25, 1997
10.25 $7,500,000 Secured Revolving Credit Note to FINOVA Capital Corporation
from Hold Billing Services dated March 25, 1997
10.26 Investment Agreement by and between The Franklin Holding Corporation
(Delaware) and Avery Communications, Inc. dated May 30, 1997
10.27 $1,000,000 Promissory Note payable to The Franklin Holding Corporation
(Delaware) dated May 30, 1997
10.28 Security Agreement, made by Avery Communications, Inc. in favor of The
Franklin Holdings Corporation (Delaware) dated May 15, 1997
21.1 Subsidiaries of Company
23.1** Consent of King Griffin & Adamson
23.2 Consent of Winstead Sechrest & Minick P.C. (included in Exhibit 5.1)
24.1 Power of Attorney
* To be filed by amendment.
** Filed here with
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Chicago,
State of Illinois, on September 30, 1998.
AVERY COMMUNICATIONS, INC.
By: /S/ Scot M. McCormick
-----------------------------
Scot M. McCormick
Vice President
Each person whose signature appears below constitutes and appoints
Patrick J. Haynes, III and Scot M. McCormick 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/ Patrick J. Haynes, III
- ------------------------------ Director, Chairman of the Board, September 30, 1998
Patrick J. Haynes, III President, Chief Executive Officer
(Principal Executive Officer)
/S/ Scot M. McCormick
- ------------------------------ Director, Vice President, Chief September 30, 1998
Scot M. McCormick Financial Officer and Secretary
(Principal Accounting Officer)
/S/ Norman M. Phipps
- ------------------------------ Director September 30, 1998
Norman M. Phipps
/S/ J. Alan Lindauer
- ------------------------------ Director September 30, 1998
J. Alan Lindauer
/S/ Stephen L. Brown
- ------------------------------ Director September 30, 1998
Stephen L. Brown
/S/ Spencer L. Brown
- ------------------------------ Director September 30, 1998
Spencer L. Brown
Director September 30, 1998
/S/Robert T. Isham, Jr.
- ------------------------------
Robert T. Isham, Jr.
</TABLE>
II-7
<PAGE>
CONSENT FOR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in Form SB-2, Registration Statement under the Securities
Act of 1933, of Avery Communications, Inc. of our report dated June 19, 1998, on
the financial statements of Avery Communications, Inc. as of and for the years
ended December 31, 1996 and 1997 and of our report dated February 6, 1998, on
the financial statements of HOLD Billing Services, Ltd. as of and for the years
ended December 31, 1996 and 1997 , accompanying the financial statements
contained in Form SB-2, and to the use of our name and the statements with
respect to us as appearing under the heading "Experts" in Form SB-2.
/S/ KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
September 30, 1998
<PAGE>
