<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------
FORM 8-K/A
CURRENT REPORT
Pursuant To Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported) September 30, 1999
------------------
AVERY COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 000-27095 12-2227079
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
190 South LaSalle Street,
Suite 1710
Chicago, IL 60603
- --------------------------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 419-0077
--------------------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisitions and Dispositions of Assets
Item 2 is amended to read in its entirety as follows: In March 1999, Avery
entered into a merger agreement with Primal Systems, Inc. and the principal
shareholders of Primal. Primal is a privately held software development
corporation that designs, develops and supports an integrated suite of
client/server and browser-based software solutions focusing on customer
acquisition and retention, as well as customer care and billing, in the
telecommunications and Internet industries primarily utilizing decision support
software and Internet technologies.
Following the close of business on September 30, 1999, the transaction was
closed and Primal merged into a wholly owned subsidiary of Avery. The name of
the surviving corporation was changed to Primal Solutions, Inc.
At the time of the merger, Avery issued 3,945,175 shares of Avery's
convertible preferred stock in exchange for all of the issued and outstanding
shares of Primal. Of this amount, 2,000,000 shares will be held in escrow to
satisfy the indemnification obligations of the principal shareholders of Primal
under the merger agreement. Any shares not returned to Avery under these
indemnification provisions will be released to Primal's shareholders based upon
the consolidated operating performance of Primal and Primal's wholly owned
subsidiary, Primal Billing Solutions, from August 1, 1999, through July 31,
2000.
The Primal shareholders may also receive up to a maximum 4,000,000
additional shares of Avery convertible preferred stock as additional
consideration for the merger based on the consolidated operating performance of
Primal and Primal Billing Solutions from August 1, 1999, through July 31, 2000.
The shares of convertible preferred stock issued and issuable by Avery are
convertible into Avery common stock on a one-for-one basis.
The consolidated operating performance of Primal and Primal Billing
Solutions will be based upon the consolidated revenues and actual operating
losses of Primal and Primal Billing Solutions during the period from August 1,
1999, through July 31, 2000. To receive the minimum additional shares under the
merger agreement, Primal and Primal Billing Solutions must have consolidated
revenues during this period of at least $6,660,000. To receive the maximum
number of shares under the merger agreement, Primal and Primal Billing Solutions
must have consolidated revenues during this period of at least $15,540,000.
There are eight revenue and operating loss thresholds between the minimum and
maximum thresholds that provide for the release of a pro rata number of shares
between the minimum and maximum amounts. The number of shares are subject to
reduction in each case if the actual consolidated operating loss of Primal and
Primal Billing Solutions for such period exceeds the consolidated operating loss
specified in the merger agreement for the applicable consolidated revenue
amount.
In addition, the principal shareholders of Primal will have the right
during September and October 2000 to require Avery to repurchase up to 1,550,000
shares of Avery common stock issued upon the conversion of the Avery preferred
stock received in the merger for the purchase price of $2.50 per share if Primal
and Primal Billing Solutions have consolidated gross revenues of at least
$8,325,000 and their consolidated operating loss does not exceed $1,082,000
during the period beginning August 1, 1999, and ending July 31, 2000. Assuming
that Mark J. Nielsen is still employed by Avery on August 15, 2000, the number
of shares required to be repurchased will be reduced by the total number of
shares received by Mr. Nielsen in the Primal merger, which would reduce the
repurchase obligation to a minimum of 890,126 shares and a maximum of 1,229,107
shares.
At the time of the merger, Avery entered into employment agreements with
the principals of Primal and entered into an agreement to register the
underlying shares of Avery common stock into which the Avery convertible
preferred stock is convertible.
2
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial statements of business acquired.
Report of Independent Auditors
Balance Sheets as of December 31, 1997, 1998 and September 30, 1999.
Statements of Operations for the years ended December 31, 1997 and 1998 and
for the nine months ended September 30, 1998 and 1999
Statements of Capital Deficiency for the years ended December 31, 1997 and
1998 and nine months ended September 30, 1999
Statements of Cash Flows for the years ended December 31, 1997 and 1998 and
for the nine months ended September 30, 1998 and 1999
Notes to Financial Statements
3
<PAGE>
Primal Systems, Inc.
Financial Statements for the Years
Ended December 31, 1997 and 1998,
and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Primal Systems, Inc.
We have audited the balance sheets of Primal Systems, Inc. (the Company) as of
December 31, 1997 and 1998, and the related statements of operations, capital
deficiency 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997 and 1998,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
November 17, 1999
Costa Mesa, California
<PAGE>
PRIMAL SYSTEMS, INC.
BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,040 $ 28,375 $ 401,081
Accounts and notes receivable, net of allowance
for doubtful accounts of $4,308 (1997), $6,261 (1998),
and $71,609 (1999) 104,508 177,414 2,423,756
Prepaid expenses and other current assets 13,344 35,029 188,822
---------- -------- ----------
Total current assets 158,892 240,818 3,013,659
PROPERTY AND EQUIPMENT, net (Note 2) 53,079 42,149 1,310,851
OTHER ASSETS 1,206 1,553 41,800
---------- -------- ----------
$ 213,177 $284,520 $4,366,310
========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PRIMAL SYSTEMS, INC.
BALANCE SHEETS (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
------------------------
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND CAPITAL DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 24,721 $ 178,279 $ 165,475
Accrued liabilities 35,491 43,614 205,514
Accrued salaries and benefits 75,397 54,217 346,952
Deferred revenue -- -- 2,264,610
Stockholder settlement liability (Note 4) -- 33,000 6,000
Current portion of Corsair loan payable (Note 9) -- -- 119,775
Current portion of capital lease obligations (Note 3) 9,506 11,866 37,047
--------- --------- ----------
Total current liabilities 145,115 320,976 3,145,373
CAPITAL LEASE OBLIGATIONS, less current
portion (Note 3) 15,402 3,633 76,613
LOAN PAYABLE TO AVERY (Notes 5 and 9) -- 100,000 --
LOANS PAYABLE TO OFFICERS, net of discount
(Note 6) 144,514 165,146 115,145
LOAN PAYABLE TO CORSAIR (Note 9) -- -- 2,001,397
--------- --------- ----------
Total liabilities 305,031 589,755 5,338,528
COMMITMENTS (Notes 3 and 4)
CAPITAL DEFICIENCY:
Common stock, no par value, 50,000,000 shares authorized,
1,636,000, 8,956,003,and 10,998,696 shares issued and
outstanding as of December 31, 1997, 1998 and
September 30, 1999, respectively 8,000 61,098 76,899
Accumulated deficit (99,854) (366,333) (1,049,117)
--------- --------- ----------
Net capital deficiency (91,854) (305,235) (972,218)
--------- --------- ----------
$ 213,177 $ 284,520 $4,366,310
========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PRIMAL SYSTEMS, INC
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
December 31, September 30,
-------------------------------- -----------------------------
1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Software systems revenue $1,114,102 $1,458,924 $1,018,900 $1,143,034
Service revenue 5,448,364
-------------- ---------- ---------- ----------
Total revenue 1,114,102 1,458,924 1,018,900 6,591,398
COST OF REVENUES 644,102 782,509 603,661 2,305,266
-------------- ---------- ---------- ----------
GROSS PROFIT 470,000 676,415 415,239 4,286,132
OPERATING EXPENSES:
Sales and marketing 36,802 33,089 24,816 448,633
Depreciation and amortization 8,942 14,257 10,693 232,512
Salaries and employee benefits 266,408 696,092 301,558 3,266,388
General and administrative 237,421 167,552 97,410 523,174
Research and development -- -- -- 235,735
-------------- ---------- ---------- ----------
Total costs and expenses 549,573 910,990 434,477 4,706,442
-------------- ---------- ---------- ----------
LOSS FROM OPERATIONS (79,573) (234,575) (19,238) (420,310)
INTEREST AND OTHER
EXPENSE 11,790 31,104 23,328 261,674
-------------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (91,363) (265,679) (42,566) (681,984)
INCOME TAXES (Note 7) 800 800 600 800
-------------- ---------- ---------- ----------
NET LOSS $ (92,163) $ (266,479) $ (43,166) $ (682,784)
============== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PRIMAL SYSTEMS, INC.
STATEMENTS OF CAPITAL DEFICIENCY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Common stock Accumulated capital
-----------------------
Shares Amount deficit deficiency
<S> <C> <C> <C> <C>
BALANCE, January 1, 1997 1,636,000 $ 8,000 $ (7,691) $ 309
Net loss -- -- (92,163) (92,163)
---------- ------- ----------- ---------
BALANCE, December 31, 1997 1,636,000 8,000 (99,854) (91,854)
Common stock issued to officers
and consultants for services 7,320,003 53,098 -- 53,098
Net loss -- -- (266,479) (266,479)
---------- ------- ----------- ---------
BALANCE, December 31, 1998 8,956,003 61,098 (366,333) (305,235)
Unaudited:
Exercise of stock options 2,042,693 15,801 -- 15,801
Net loss -- -- (682,784) (682,784)
---------- ------- ----------- ---------
BALANCE, September 30, 1999 (Unaudited) 10,998,696 $76,899 $(1,049,117) $(972,218)
========== ======= =========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PRIMAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
December 31, September 30,
-------------------------- ----------------------------
1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (92,163) $ (266,479) $ (43,166) $ (682,784)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,942 14,257 10,693 232,512
Common stock issued for services -- 53,098 -- --
Amortization of loan payable discount 5,306 15,070 11,303 5,300
Changes in operating assets and liabilities,
net of the effects of business acquisition:
Accounts receivable (104,508) (72,906) (83,988) 185,087
Prepaid expenses and other current assets (13,344) (21,685) (700) (155,385)
Other assets 353 (347) -- 76,613
Accounts payable and accrued expenses 122,143 173,501 90,398 408,795
Deferred revenue -- -- -- 1,095,644
--------- ---------- --------- ----------
Net cash provided by (used in)
operating activities (73,271) (105,491) (15,460) 1,165,782
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (58,882) (3,327) (2,543) (559,611)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings on long-term obligations 184,367 100,000 -- --
Payments on long-term obligations (14,027) (3,847) (12,768) (249,266)
Exercise of employee stock options -- -- -- 15,801
--------- ---------- --------- ----------
Net cash provided by (used in) financing
activities 170,340 96,153 (12,768) (233,465)
--------- ---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 38,187 (12,665) (30,771) 372,706
CASH AND CASH EQUIVALENTS,
beginning of period 2,853 41,040 41,040 28,375
--------- ---------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PRIMAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
December 31, September 30,
----------------------- ---------------------------
1997 1998 1998 1999
(unaudited)
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS,
end of period $ 41,040 $ 28,375 $ 10,269 $ 401,081
========= ========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION -
Cash paid during the period for:
Interest $ 15,252 $ 30,412 $ 22,809 $ 105,050
========= ========= ========= ==========
Income taxes $ 800 $ 800 $ 600 $ 800
========= ========= ========= ==========
NONCASH ITEMS:
Acquisition of property through capital lease $ 46,605 $ - $ - $ -
========= ========= ========= ==========
Corsair Acquisition:
Assets acquired $ - $ - $ - $4,581,889
========= ========= ========= ==========
Liabilities assumed $ - $ - $ - $2,343,647
========= ========= ========= ==========
Issuance of Loan payable to Corsair $ - $ - $ - $2,238,242
========= ========= ========= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PRIMAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations - Primal Systems, Inc. (Primal or
the Company) was incorporated on June 28, 1996, to provide computer
software programming, customization, program maintenance and product
marketing for a variety of software languages and platforms. Subsequent
to the Corsair acquisition (Note 9), Primal also designs, develops, and
supports an integrated suite of client/server and browser-based software
solutions focusing on customer acquisition and retention in the
telecommunications industry, primarily utilizing decision support
software and internet technologies.
Unaudited Information - The information set forth in these financial
statements as of September 30, 1999 and for the nine months ended
September 30, 1998 and September 30, 1999 is unaudited and reflects all
adjustments, consisting only of normal recurring adjustments, that, in
the opinion of management, are necessary to present fairly the financial
position and results of operations of the Company for the period.
Results of operations for the interim periods are not necessarily
indicative of the results of operations for the full fiscal year.
Stock Split - On January 5, 1999, the Company effected a 818 for 1 stock
split and increased the number of authorized shares to 50,000,000. All
share, per share, and conversion amounts relating to common stock and
stock options included in the accompanying financial statements and
footnotes have been restated to reflect this stock split for all periods
presented.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are provided on the straight-line method
over the following estimated useful lives:
Computer and office equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Shorter of the estimated useful
life or life of the lease
Long-Lived Assets - The Company accounts for the impairment and
disposition of long-lived assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets to be held are
reviewed for events or changes in circumstances which indicate that
their carrying value may not be recoverable. There was no impairment of
the value of such assets for the years ended December 31, 1998 or 1997.
Software Licenses, Services and Post-Contract Customer Support -
Revenues from sales of software licenses, which generally do not contain
multiple elements, are recognized upon shipment of the related product
if the requirements of SOP 97-2, as amended, are met. If the
requirements of SOP 97-2, including evidence of an arrangement, client
acceptance, a fixed or determinable fee, collectibility or
<PAGE>
PRIMAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
vendor-specific objective evidence about the value of an element are not
met at the date of shipment, revenue recognition is deferred until such
items are known or resolved. Revenue from service and post-contract
customer support is deferred and recognized ratably over the term of the
contract.
Software Programming and Customization Services - Revenues are
recognized as services are performed under the agreements.
Software Development Costs - Costs incurred in the research and
development of new software products and enhancements to existing
software products are expensed as incurred until technological
feasibility has been established. After technological feasibility is
established, any additional costs are capitalized in accordance with
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed. Because the Company believes that its
current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no
software development costs have been capitalized as of December 31, 1997
and 1998.
401(k) Plan - The Company has a contributory 401(k) plan which covers
substantially all employees. The Company makes no contributions to the
plan.
Income Taxes - Income taxes are recorded in accordance with SFAS No.
109, Accounting for Income Taxes. This statement requires the
recognition of deferred tax assets and liabilities to reflect the future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Measurement of the deferred items
is based on enacted tax laws. In the event the future consequences of
differences between financial reporting bases and tax bases of the
Company's assets and liabilities result in a deferred tax asset, SFAS
No. 109 requires an evaluation of the probability of being able to
realize the future benefits indicated by such assets. A valuation
allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees.
Concentration of Credit Risk - The Company sells its products primarily
to large commercial companies. Credit is extended based on an evaluation
of the Customer's financial condition, and collateral is generally not
required. The Company also evaluates its credit customers for potential
credit losses.
Fair Value of Financial Instruments - The recorded amounts of financial
assets and liabilities at December 31, 1997 and 1998, approximate fair
value, based on the Company's incremental borrowing rate or due to the
relatively short period of time between origination of the instruments
and their expected realization.
<PAGE>
PRIMAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. There was no difference between the net
loss and the comprehensive net loss for the years ended December 31, 1997
and 1998.
In June 1998, the FASB, issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the Company is required to
adopt effective in its fiscal year 2000. SFAS No. 133 will require the
Company to record all derivatives on the balance sheet at fair value. The
Company does not currently engage in hedging activities but will continue
to evaluate the effects of adopting SFAS No. 133. The Company will adopt
SFAS No. 133 in its fiscal Year 2000.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
Computers and office equipment $ 50,534 $ 53,141 $ 1,207,488
Furniture and fixtures 11,206 11,573 341,445
16,789
Leasehold improvements ----------- ---------- ------------
61,740 64,714 1,565,722
Less accumulated depreciation and amortization (8,661) (22,565) (254,871)
----------- ---------- ------------
Property and equipment, net $ 53,079 $ 42,149 $ 1,310,851
=========== ========== ============
</TABLE>
Amortization of equipment purchased under capitalized lease obligations
is included in depreciation expense. Maintenance and repairs are charged
to expense as incurred. Renewals and improvements of a major nature are
capitalized. Included in property and equipment is $46,605 of equipment
under capital leases at both December 31, 1997 and 1998, and $196,656 at
September 30, 1999. Accumulated depreciation related to equipment under
capital leases amounted to $8,661, $22,513, and $55,506 at December 31,
1997, 1998, and September 30, 1999, respectively.
<PAGE>
PRIMAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
3. LEASE COMMITMENTS
The Company leases office space and certain equipment under various
noncancelable operating and capital leases. Future minimum lease
payments required under the operating and capital leases at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
leases leases
<S> <C> <C>
Year ending December 31:
1999 $ 86,998 $ 14,170
2000 4,438 3,722
2001 3,699 --
---------- ---------
Total minimum lease payments $ 95,135 17,892
==========
Less amount representing interest (2,393)
---------
Present value of minimum lease payments 15,499
Less current portion at December 31, 1998 (11,866)
---------
Long-term obligation at December 31, 1998 $ 3,633
=========
</TABLE>
4. STOCKHOLDER SETTLEMENT AGREEMENT
The Company entered into a settlement agreement on December 2, 1998,
with three stockholders, whereby they will receive $14,000 each to be
paid in installments through September 1999. At December 31, 1998,
$27,000 was included in accounts payable and accrued liabilities related
to this agreement. The three stockholders can receive additional
payments if annualized sales during the four-month period ending October
1999 exceed certain amounts, as defined. The additional payments are as
follows:
If annualized sales, as defined, are between $1,000,000 and
$1,300,000, payment will be $2,000.
If annualized sales, as defined, are between $1,300,000 and
$1,600,000, payment will be $6,000.
If annualized sales, as defined, are greater than $1,600,000, payment
will be $12,000.
At December 31, 1998, the Company has accrued $6,000 related to the
above additional payments as required under the settlement agreement in
the accompanying financial statements.
<PAGE>
PRIMAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
5. LOAN PAYABLE TO AVERY
At December 31, 1998, the Company had a note payable for $100,000 to Avery
Communications, Inc. (Avery) (Note 9). The note payable is collateralized by
substantially all the Company's assets and bears interest at 10%. Seven
quarterly interest-only payments of $2,500 commencing March 15, 1999 through
December 15, 2000, are required under the note with all remaining principal
and unpaid interest due and payable on December 15, 2000. If the Company is
unable to pay the balance in full by the due date, the outstanding balance
will bear interest at 14% until paid in full.
6. LOANS PAYABLE TO OFFICERS
Certain officers of the Company have advanced funds to the Company to provide
working capital as needed. The notes payable aggregate to $144,514 and
$165,146 at December 31, 1997 and 1998, respectively, and are net of
discounts of $27,189 and $12,119 at December 31, 1997 and 1998, respectively.
The notes bear interest at a interest rate of 6% per annum (effective rate at
10%). The principal and interest is payable over eight equal quarterly
installments with payments due January 10, 2000 through January 10, 2002.
Maturities of the loans payable to officers as of December 31 are as follows:
2000 $ 66,474
2001 88,632
2002 22,159
Less discount (12,119)
---------
$ 165,146
=========
7. INCOME TAXES
At December 31, 1997 and 1998, the provision for income taxes is comprised of
current state taxes of $800.
The major reconciling items between computed "expected" tax benefits are
state taxes, net of federal income tax benefit, and the change in the
valuation allowance.
<PAGE>
PRIMAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
The tax effects of temporary differences used in determining the Company's
deferred tax assets and liabilities at December 31, 1998, are presented
below:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 48,802 $ 128,653
Other - 39,495
Bad debt allowance - 2,744
Accrued vacation - 6,032
Total deferred tax assets 48,802 176,924
Less valuation allowance (48,802) (176,924)
-------- ---------
Net deferred tax asset/liability $ - $ -
======== =========
</TABLE>
The valuation allowance was increased by $48,802 during 1997 and $128,122
during 1998.
As of December 31, 1998, the Company has a net operating loss (NOL)
carryforward for federal tax purposes of $291,300, which will expire in the
years 2011 through 2013, and an NOL carryforward for California purposes of
$301,975, which will expire in 2004.
Pursuant to Section 382 of the Internal Revenue Code, use of the Company's
net operating loss carryforwards may be limited if the Company experiences a
cumulative change in ownership of greater than 50% in any three-year period.
Ownership changes could impact the Company's ability to utilize net operating
losses and credit carryforwards remaining at the ownership change date. The
limitation will be determined by the fair market value of common stock
outstanding prior to the ownership change, multiplied by the applicable
federal rate.
8. STOCK OPTION PLAN
On December 2, 1998, the Company adopted a stock option plan (the Plan)
pursuant to which the Company's Board of Directors may grant stock options to
officers and key employees. The Plan authorizes grants of options to purchase
up to 2,999,606 shares of authorized but unissued common stock. Stock options
are granted with an exercise price equal to the stock's fair market value at
the date of grant. For participants who own shares representing more than 10%
of the voting shares of the Company, stock options are granted with an
exercise price equal to 110% of the stocks' fair market value at the date of
grant. Stock options have a contractual life of 10 years. Shares vest on a
pro rata basis and become fully exercisable from 18 to 60 months from the
date of grant.
<PAGE>
PRIMAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
At December 31, 1998, there were 644,413 shares available for grant under the
Plan. The per share fair value of stock options granted during 1998 was not
significant on the date of grant using the Black-Scholes option-pricing
model, with risk-free interest rates ranging from 4.45% to 4.52% and expected
lives of one to five years and no volatility or dividends during the expected
term.
The Company applies APB No. 25 for its Plan and, accordingly, no compensation
cost has been recognized for its stock options in the financial statements
for those options where the fair market value approximates the exercise
price. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's pro
forma net loss would not have significantly differed from reported net loss.
<TABLE>
<CAPTION>
Weighted
Price of average
Options option exercise
outstanding grants price
<S> <C> <C> <C>
BALANCE, December 31, 1997 - $ - $ -
Granted 2,355,193 $0.0133-$0.0151 $ 0.0150
---------
BALANCE, December 31, 1998 2,355,193
=========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options:
<TABLE>
<CAPTION>
Weighted
average Weighted
Range of remaining average
exercise Options contractual exercise
prices outstanding life price
<S> <C> <C> <C>
$0.0133 312,500 9.91 $ 0.0133
$0.0151 2,042,693 9.91 $ 0.0151
---------
2,355,193 9.91 $ 0.0150
=========
</TABLE>
There were no options exercisable at December 31, 1998.
<PAGE>
PRIMAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
9. SUBSEQUENT EVENTS
On January 12, 1999, the maximum amount which could be drawn from Avery
pursuant to the agreement (Note 5) was increased to $180,000, and again
increased on February 4, 1999 to $1,000,000. The funds were drawn down as
needed. At November 17, 1999, the Company had no amounts outstanding under
the agreement. The amended agreement requires quarterly interest-only
payments due commencing March 15, 1999 through February 15, 2001, when the
entire unpaid principal balance and interest are due.
On February 4, 1999, Corsair Communications, Inc. and its wholly owned
subsidiary, Subscriber Computing, Inc., sold substantially all of the assets
relating to Subscriber's Communication Resource Manager billing system and
Intelligent Message Router to Wireless Billing Systems, a newly-formed and
wholly owned subsidiary of Primal Systems, Inc. As consideration for the
agreement, the Company paid Corsair $2,238,242 by issuing a note payable to
Corsair for all of the purchase price. The terms of the note are 10% annual
interest, five year amortization, and payment in full required in May 2001.
In March 1999, the Company and a wholly owned subsidiary of Avery entered
into a merger agreement. Pursuant to this agreement, Primal was purchased
effective after the close of business on September 30, 1999. Accordingly, the
accompanying financial statements do not include the effects of this
acquisition. At the time of the merger, Avery issued 3,945,175 shares of
Avery's convertible preferred stock in exchange for all of the issued and
outstanding shares of Primal. Of this amount, 2,000,000 shares were held in
escrow, to be issued to Primal's shareholders based upon the operating
performance of Primal, as defined. Upon the meeting of certain operating
performance thresholds by Primal, the Primal shareholders may receive up to a
maximum of 4,000,000 additional shares of Avery convertible preferred stock
as additional consideration for the merger. In addition, upon Primal's
satisfaction of certain operating performance levels during this period,
certain shareholders of Primal will have the right in September through
October 2000 to require Avery to repurchase up to 1,550,000 shares of Avery
common stock issued upon the conversion of Avery preferred stock received in
the merger for the purchase price of $2.50 per share.
* * * * * *
<PAGE>
(b) Pro Forma Financial Information.
The unaudited pro forma condensed balance sheet of Avery Communications, Inc.
("Avery" or the "Company") and Primal Systems, Inc. ("Primal") as of
September 30, 1999, reflects this acquisition as if it had occurred on
September 30, 1999 and includes the issuance of 3,945,175 shares of
convertible preferred stock to Primal shareholders. The 3,945,175 shares
include 2,000,000 shares which will be held in escrow and will be issued to
Primal shareholders based upon the operating performance of Primal and
Primal's wholly owned subsidiary, Primal Billing Solutions, from August 1,
1999 through July 31, 2000. Management has included these shares as
outstanding on the pro forma financial statements as it appears likely that
the July 31, 2000 operating performance thresholds will be met. The meeting
of operating performance thresholds by Primal and Primal Billing Solutions in
the future would result in the issuance of up to 4,000,000 additional shares
of Avery convertible preferred stock. This additional consideration would
result in incremental adjustments to goodwill and equity. The acquisition has
been accounted for using the purchase method of accounting. The purchase
price allocation is preliminary and subject to change pending receipt of
additional valuation information.
The unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 1998 and the nine months ended September 30, 1999
reflect the acquisition as if it had occurred on January 1, 1998.
The unaudited pro forma condensed consolidated balance sheet and statements
of operations should be read in conjunction with the separate historical
financial statements of the Company and Primal, and related notes appearing
elsewhere in this document. The pro forma financial information is not
necessarily indicative of the results that would have been reported had such
events actually occurred on the dates specified, nor is it necessarily
indicative of the future results of the combined entities.
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 1999
<TABLE>
<CAPTION>
--------------------- --------------- ------------- ------------
Avery Primal Pro-Forma
Communications, Inc. Systems, Inc. Adjustments Pro-Forma
--------------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,199,089 $ 401,081 $ $ 2,600,170
Trade accounts receivable, net 935,230 2,041,509 2,976,739
Other receivables 230,711 382,247 (355,883) D 257,075
Advance payments receivables 6,192,092 - 6,192,092
Other current assets 143,868 188,822 332,690
-------------------- ------------- ----------- ------------
Total current assets 9,700,990 3,013,659 (355,883) 12,358,766
-------------------- ------------- ----------- ------------
Property, plant, equipment, capitalized software, net 949,856 1,310,851 2,260,707
Other assets 436,387 647 437,034
LEC contracts 97,897 - 97,897
Acquisition costs, net 266,874 - (16,033) D 250,841
Deposits 531,902 41,153 573,055
Goodwill, net 2,785,633 - 4,424,246 A 7,209,879
-------------------- ------------- ----------- ------------
Total assets $ 14,769,539 $ 4,366,310 $ 4,052,330 $ 23,188,179
==================== ============= =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of capital lease obligations $ - $ 37,047 $ $ 37,047
Trade accounts payable 4,471,705 165,474 (121,916) D 4,515,263
Line of credit 8,417 - 8,417
Note payable 256,667 119,775 (250,000) D 126,442
Accrued liabilities 2,812,859 558,467 3,371,326
Deferred income - 2,264,610 2,264,610
Holdback reserves 8,425,378 - 8,425,378
-------------------- ------------- ----------- ------------
Total current liabilities 15,975,026 3,145,373 (371,916) 18,748,483
-------------------- ------------- ----------- ------------
Long-term liabilities
Notes payable 323,125 2,116,542 2,439,667
Capital lease obligations, net of
current portion - 76,613 76,613
-------------------- ------------- ----------- ------------
Total long-term liabilities 323,125 2,193,155 - 2,516,280
-------------------- ------------- ----------- ------------
Stockholders' equity (deficit)
Preferred stock 27,100 - 27,100
Primal preferred series 39,452 B 39,452
Treasury stock (1,981,999) - (1,981,999)
Common stock 98,039 76,899 (76,899) C 98,039
Additional paid-in capital 8,165,091 11,577,667
3,412,576 B
Accumulated earnings (deficit) (7,836,843) (1,049,117) 1,049,117 C (7,836,843)
-------------------- ------------- ----------- ------------
Total stockholders' equity (deficit) (1,528,612) (972,218) 4,424,246 1,923,416
-------------------- ------------- ----------- ------------
Total liabilities and stockholder's
equity (deficit) $ 14,769,539 $ 4,366,310 $ 4,052,330 $ 23,188,179
==================== ============= =========== ============
</TABLE>
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDING SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
-------------------- ------------- ----------- -------------
Avery Primal Pro-Forma
Communications, Inc. Systems, Inc. Adjustments Pro-Forma
-------------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues $ 16,335,812 $ 6,591,398 $ $ 22,927,210
Cost of revenues 12,158,093 2,305,266 14,463,359
-------------------- ------------- ----------- -------------
Gross profit 4,177,719 4,286,132 8,463,851
Operating expenses 3,960,174 3,087,270 474,030 E 7,548,348
26,874 E
Product development - 1,799,438 1,799,438
Advance funding program income (452,273) - (452,273)
Advance funding program costs 192,772 - 192,772
-------------------- ------------- ----------- -------------
Income from operations 477,046 (600,576) (500,904) (624,434)
Interest expense (254,041) (105,050) 5,000 F (354,091)
Warrant buy back (321,736) - (321,736)
Other income 100,728 23,642 (5,000)F 119,370
-------------------- ------------- ----------- -------------
Income (loss) before income tax provision 1,997 (681,984) (500,904) (1,180,891)
Income tax provision - 800 800
-------------------- ------------- ----------- -------------
Net income (loss) $ 1,997 $ (682,784) $ (500,904) $ (1,181,691)
==================== ============= =========== =============
Loss attributable to common stock $ (212,403) $ (1,396,091)
==================== =============
Per share data
Basic loss per share $ (0.02) $ (0.16)
Diluted loss per share $ (0.02) $ (0.16)
Weighted average number of common shares:
Basic common shares 8,657,582 8,657,582
Diluted common shares 8,657,582 8,657,582
</TABLE>
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
--------------- ------------ ----------- --------------
Avery
Communications, Primal Pro-Forma
Inc. Systems,Inc. Adjustments Pro-Forma
--------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Total revenues $ 19,633,576 $ 1,458,924 $ $ 21,092,500
Cost of revenues 13,043,784 782,509 13,826,293
--------------- ------------ ----------- --------------
Gross profit 6,589,792 676,415 7,266,207
Operating expenses 3,842,196 910,990 35,832 E 5,421,058
632,040 E
Charge in connection with terminated customers 4,271,394 - 4,271,394
Advance funding program income (1,417,528) - (1,417,528)
Advance funding program costs 726,354 - 726,354
--------------- ------------ ----------- --------------
Income (loss) from operations (832,624) (234,575) (667,872) (1,735,071)
Other income (expense)
Interest expense (686,705) (31,461) (718,166)
Other income 309,441 357 309,798
Offering and Acquisition Costs (113,590) - (113,590)
--------------- ------------ ----------- --------------
Income (loss) before income tax provision (1,323,478) (265,679) (667,872) (2,257,029)
Income tax provision - 800 800
--------------- ------------ ----------- --------------
Net income (loss) $ (1,323,478) $ (266,479) $ (667,872) $ (2,257,829)
=============== ============ =========== ==============
Loss attributable to common stock $ (1,662,060) $ (2,596,411)
=============== ==============
Per Share Data
Basic loss per share $ (0.19) $ (0.30)
Diluted loss per share $ (0.19) $ (0.30)
Weighted average number of common shares:
Basic common shares 8,541,575 8,541,575
Diluted common shares 8,541,575 8,541,575
</TABLE>
<PAGE>
Notes to Pro Forma Financial Statements
1. Pro Forma Condensed Consolidated Balance Sheet
For purposes of determining the pro forma effect of the Primal acquisition,
the pro forma adjustments described below have been made on the unaudited
historical consolidated balance sheet of the Company and Primal. The Company,
in connection with the purchase of Primal Systems, Inc. (Primal), issued
3,945,175 shares of its Convertible Preferred Stock at the market price of
its common stock at September 30, 1999 of $0.875 per share.
<TABLE>
<CAPTION>
<S> <C>
(A) Goodwill, net
a. Excess of consideration given for the $4,424,246
acquisition of Primal over the net assets
acquired
(B) Primal Preferred Series
a. To record the par value of 3,945,175 shares $ 39,452
at $0.01 per share
b. To record the excess of amount provided over $3,412,576
the par value of the preferred stock issued
(C) Acquired Deficit
a. To eliminate Primal deficit acquired
i. Common Stock $ (76,899)
iii. Accumulated Deficit $1,049,117
(D) Eliminate Intercompany Items
a. i. Notes Payable - Current $ (250,000)
iv. Acquisition Costs $ (16,033)
v. Accounts Payable $ (121,916)
v. Other Assets $ (355,883)
</TABLE>
<PAGE>
2. Pro Forma Condensed Consolidated Statements of Operations
For purposes of determining the pro forma effect of the Primal acquisition,
the pro forma adjustments described below have been made on the unaudited
historical consolidated statements of operations of the Company and Primal
for the nine month period ended September 30, 1999, and to the audited
historical consolidated Statements of Operations of the Company and Primal
for the year ended December 31, 1998 as if the acquisition had occurred as of
January 1, 1998.
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, 1998 September 30, 1999
----------------------- ------------------------
<S> <C> <C>
(E) Amortization
Pro forma amortization of goodwill
is calculated using the
straight-line method over an
estimated useful life of 7 years
a. Increase in amortization of
goodwill due to additional
goodwill recorded in
connection with the
acquisition of Primal $632,040 $474,030
Pro forma amortization of costs
accumulated relating to the
acquisition of Primal using the
straight-line method over an
estimated useful life of 7 years
a. Increase in amortization of
acquisition costs due to
completion of the Primal
acquisition $ 35,832 $ 26,874
(F) Intercompany Eliminations
a. To eliminate interest expense
charged to Primal by Avery $ -0- $ 5,000
</TABLE>
24
<PAGE>
(c) Exhibits
2.1 Primal Merger Agreement (filed as Exhibit 2.5 to Avery's
Registration Statement on Form SB-2 (Registration No. 333-65133) and
incorporated by reference herein)
2.2 Amendment No. 1 to the Primal merger Agreement (filed as Exhibit 2.6
to Avery's Registration Statement on Form SB-2 (Registration No.
333-65133) and incorporated by reference herein)
2.3 Amendment No. 2 to the Primal Merger Agreement (filed as Exhibit 2.1
to Avery's Current Report on Form 8-K, dated September 27, 1999, and
incorporated by reference herein)
99.1* Press release announcing the closing of the Primal Systems, Inc.
merger
________________
* Previously filed.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AVERY COMMUNICATIONS, INC.
Date: December 13, 1999 By: /s/ Scot McCormick
------------------------------------------
Scot McCormick
Vice President and Chief Financial Officer
26
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description of Document Number
- ------ ----------------------- ------
2.1 Primal Merger Agreement (filed as Exhibit 2.5
to Avery's Registration Statement on Form SB-2
(Registration No. 333-65133) and incorporated
by reference herein)
2.2 Amendment No. 1 to the Primal Merger Agreement (filed
as Exhibit 2.6 to Avery's Registration Statement on Form
SB-2 (Registration No. 333-65133) and incorporated
by reference herein)
2.3 Amendment No.2 to the Primal Merger Agreement (filed as
Exhibit 2.1 to Avery's Current Report on Form 8-K, dated
September 27, 1999, and incorporated by reference herein)
99.1* Press release announcing the closing of the Primal Systems, Inc.
merger
________________________
* Previously filed.
27
