<PAGE>
As filed with the Securities and Exchange Commission on August 19, 1999
Registration No. 333-65133
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
TO
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 Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number
----------------
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].
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 August 19, 1999
PROSPECTUS
AVERY COMMUNICATIONS, INC.
9,868,591 Shares of Common Stock
This prospectus relates to the 9,868,591 shares of our common stock being
offered by certain of our securityholders. Of such shares, 5,122,952 shares are
currently outstanding and 4,745,639 shares are reserved for issuance upon
exercise of options and warrants that we have granted to these securityholders
or upon conversion of convertible securities held by these securityholders. We
will not receive any proceeds from the sale of the shares by these selling
securityholders. We may, however, receive up to $3,491,040 in the event all the
options and warrants held by the selling securityholders are exercised.
Our common stock is traded on the OTC Bulletin Board under the trading
symbol "ATEX." On August 18, 1999, the closing bid price for our common stock
was $1.00 and the closing asked price for our common stock was $1.0625.
----------------
An investment in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 4.
----------------
The information contained in this prospectus is not complete and may be
changed. The selling securityholders may not sell any shares of the common
stock until our registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell these
securities in any state where the offer or sale is not permitted.
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 , 1999
<PAGE>
ANNUAL REPORTS AND OTHER AVAILABLE INFORMATION
Stockholders Will Receive an Annual Report
We will voluntarily send an annual report to our stockholders. Our annual
reports will include our audited financial statements. Our first annual report
will be for the year ending December 31, 1999, and will be mailed to our
stockholders during the first half of 2000.
Where You Can Find Out More About Us
We are not yet required to file any reports with the Securities and Exchange
Commission. After the registration statement containing this prospectus becomes
effective, however, we will be required to file annual, quarterly and current
reports with the SEC. In addition, our complete registration statement with all
exhibits is filed with the SEC.
You may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding us
and other issuers that file electronically with the SEC. The address of the
SEC's Internet site is http://www.sec.gov.
Please note that our registration statement, of which this prospectus is
only a part, contains additional information about us. In addition, our
registration statement includes numerous exhibits containing information about
us. Copies of our complete registration statement may be obtained from the SEC
by following the procedures described above.
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
The discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. A number of important factors could cause our
actual results for 1999 and beyond to differ materially from those expressed in
any forward-looking statements made by us in this prospectus. 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."
Investors should carefully consider the information set forth under "Risk
Factors" on page 4.
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<PAGE>
AVERY
We are a telecommunications service company providing billing and collection
services for inter-exchange carriers and long-distance resellers. We provide
local exchange carrier billing services for approximately 29 long-distance
resellers and enhanced service providers and have the capability to bill and
collect through approximately 1,300 telephone companies, including the seven
regional Bell operating companies, GTE and Sprint.
We have recently taken steps to expand our business. In March 1999 we
entered into an agreement to acquire 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 in the telecommunications industry, primarily
utilizing decision support software and Internet technologies. This company
also owns a customer care and billing system used in the telecommunications
industry. For more information about this transaction, see "Recent
Transactions."
Our principal executive offices are located at 190 South LaSalle Street,
Suite 1710, Chicago, Illinois 60603, and our telephone number at that address
is (312) 419-0077.
3
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RISK FACTORS
Prospective purchasers of our common stock should consider carefully the
factors set forth below, as well as other information contained in this
prospectus, before making a decision to invest in our common stock.
We have incurred significant historical operating losses and have never had
earnings.
Since 1995, we have incurred operating losses. During the period January 1,
1995, through June 30, 1999, we have incurred a cumulative net loss of
$7,678,698, of which $1,323,478, $1,480,205 and $1,329,473 are attributable to
the years ended December 31, 1998 and 1997, and the six months ended June 30,
1999, respectively. There can be no assurance that we will be profitable in the
future. Our continued failure to operate profitably may materially and
adversely affect the value of our common stock.
Our losses to date have been funded by loans and equity sales. If we
continue to lose money we will likely need additional financing.
Our ability to acquire other software companies and telecommunications services
providers faces substantial obstacles. Our failure to overcome any of these
obstacles may materially and adversely affect our planned growth.
We are actively engaged in an acquisition program, focusing primarily on the
acquisition of customer management software companies and other
telecommunications services providers. One or more of such acquisitions could
result in a substantial change in our operations and financial condition. The
success of our acquisition program will depend, among other things, on the
availability of acquisition candidates, our 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. We have
limited resources and we can offer no assurance that we will succeed in
consummating any additional acquisitions or that we will be able to integrate
and manage any acquisitions successfully.
In March 1999 we entered into an agreement to acquire a privately held
software development company that designs, develops and supports an integrated
suite of client/server and browser-based software solutions focusing on
customer application and retention in the telecommunications and energy
industries. See "Recent Transactions." We have no other present commitments,
understandings or plans to acquire other customer management software companies
or telecommunications service providers.
We will need substantial financing to continue our present business and to fund
our planned growth. There is no assurance that we will be able to obtain such
financing.
We and our competitors in the long-distance billing clearinghouse business
offer an additional service of factoring customers' receivables. We anticipate
we will need to raise additional capital over the next 12 months to continue
providing appropriate factoring services to our customers and to attract new
customers.
We will also need substantial additional financing to fund our planned
growth through additional acquisitions. We have not received any commitments
for any such financing, and we cannot assure you that we will be able to obtain
such financing or that such financing will be adequate to fund our plans. If we
are not able to obtain financing on terms that we determine are economical, we
may not be able to achieve our planned growth.
In addition, we have incurred significant historical operating losses. If we
continue to lose money it is not likely that we will generate sufficient cash
flow to fund our future working capital requirements and growth. We therefore
likely 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 us, or, if available, that the terms of such financing will be
acceptable to us. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." If we issue additional equity or debt
financing that is convertible into our equity securities, such financing may be
dilutive to the holders of our common stock. If we borrow money, the lenders
4
<PAGE>
will have a higher priority claim on our assets than will the holders of our
common stock. In addition, future investors or lenders may require concessions
that could include, among others, liquidation or dividend preferences,
restrictions on future dividends, pledges of assets or sinking funds.
We have limited management resources to manage future growth.
Our strategy of continued growth and expansion will place additional demands
on our management and other resources and will require additional working
capital, information systems, operational and other financial resources. If we
fail to manage future growth effectively it may have a material adverse effect
on our financial condition and results of operations.
We have incurred substantial financing and debt service costs historically, and
those costs may increase in the future.
One of the reasons that we have not operated profitably in the past is
because we have incurred substantial costs in servicing our indebtedness. We
also paid substantial fees to obtain additional financing. As of June 30, 1999,
Avery's current portion of notes payable was $166,667 and Avery's aggregate
long-term portion of notes payable was $321,055. During the calendar years
ended December 31, 1998 and 1997, Avery incurred $627,736 and $412,145,
respectively, in interest expense and incurred $113,785 and $902,350,
respectively, in financing fees. We may need to incur additional debt in
attempting to accomplish our growth objectives through additional acquisitions.
We therefore could incur substantial financing fees and substantially increased
debt-service costs.
We face substantial competition in the billing clearinghouse industry, and many
of our competitors are larger and have more resources than we have.
The local exchange carrier billing clearinghouse industry is a competitive
industry. Our major competitors in the local exchange carrier billing
clearinghouse industry are Billing Concepts Corp. and OAN Services, Inc., a
wholly owned subsidiary of nTeleCom Holdings, Inc. Competition among the local
exchange carrier billing clearinghouses is based on the quality of information
reporting, collection history, the speed of collections, the ability to factor
a long-distance reseller's accounts, and the price of services. Our competitors
have greater name recognition and have, or have access to, substantially
greater financial and personnel resources than those available to us. We may
not be able to compete successfully with existing or future competitors. See
"Business--HBS."
We are a billing clearinghouse. Therefore, our business is dependent both on
the local exchange carriers' continuing to accept our call records, and
continuing to do so on reasonable terms, and our customers' continuing to need
our billing services.
The success of our business to date has been largely attributable to our
having contracts with the regional Bell operating companies, Sprint, GTE and
other local exchange carriers. This permits us to bill for telecommunications
services provided by our customers throughout the United States. If the local
exchange carriers were not to renew our existing contracts, or were to
terminate our contracts, our ability to bill for our customers on a nation-wide
basis could be adversely affected. While we have not received any notice of any
local exchange carriers' intention to refuse renewal or to terminate, the
current regulatory environment has raised the visibility of third-party billing
in the local exchange carriers.
If the local exchange carriers were to increase the costs payable by our
customers for including our customers' charges on the local exchange carrier
bills, it could make our customers' operations less profitable or not
profitable. This could result in our customers seeking alternative billing
arrangements. Our customers could enter into billing arrangements with
companies, other than the local exchange carriers, that would bill their
customers directly, or, in some instances, our customers could begin billing
directly for their services without the use of any third party. It is also
possible that some of our customers could determine that it would be
financially beneficial to them to install a direct billing system.
5
<PAGE>
The occurrence of any one or more of these events could adversely affect our
business, financial condition and results of operations.
Our business is dependent on local providers accepting us as a customer.
As regulation of the local telephone industry evolves, greater numbers of
local providers are likely to enter the industry. Our business is dependent
upon these local providers accepting us as a customer. There can be no
assurance that we will be able to contract with additional local providers as
the industry expansion occurs.
We may not have sufficient resources to acquire new technology and introduce
new services.
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. We believe that our future success depends on our 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 we 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.
Our financial results may be adversely affected by increased operating
expenses.
Our personnel and facilities expenses may increase materially if we continue
to grow through new acquisitions. Increases in our overhead and operating
expenses may materially adversely affect our financial condition and results of
operations.
We are dependent on our senior management and skilled personnel.
We depend, and will continue to depend, upon the services of Patrick J.
Haynes, III, Chairman of the Board, Mark J. Nielsen, President and Chief
Executive Officer, Scot M. McCormick, Chief Financial Officer and Harold D.
Box, the Vice President of Operations and Marketing of our billing subsidiary.
The loss of the services of any of such persons, or our inability to attract
additional management personnel in the future, could have a material adverse
effect on our business, financial condition and results of operations. We have
employment agreements with Messrs. Haynes, Nielsen and Box. See "Management--
Employment Agreements."
The marketability of our common stock may be adversely affected by the SEC's
penny stock rules.
Our common stock may be defined as a "penny stock" and subject to the penny
stock rules of the SEC. The penny stock rules generally impose additional sales
practice and disclosure requirements upon broker-dealers who sell our common
stock 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 SEC. Consequently, the penny stock rules
may adversely affect the ability of broker-dealers to make a market in or trade
our common stock or may affect your ability to resell those shares in the
public markets.
There is only a limited trading market for our common stock.
Our common stock is traded on the OTC Bulletin Board, a regulated quotation
service operated by The Nasdaq Stock Market, Inc. that displays real-time
quotes, last-sale prices, and volume information in over-the-counter equity
securities. The OTCBB is separate and distinct from The Nasdaq Stock Market.
Most
6
<PAGE>
importantly, we are not required to meet any listing standards for our common
stock to be traded on the OTCBB. On January 4, 1999, the SEC approved the OTCBB
eligibility rule. If we do not become subject to the SEC's periodic reporting
requirements prior to September 1999, our common stock will no longer be
eligible for trading on the OTCBB. Our common stock trades only sporadically
and has experienced in the past, and is expected to experience in the future,
significant price and volume volatility, increasing the risk of ownership to
investors.
The market price of our common stock may be adversely affected by future sales
of the common stock by the selling securityholders.
Sales of a significant number of shares of our common stock into the open
market may have a depressive effect on the market for and trading price of the
common stock, but we cannot predict the likely timing or extent of any such
sales or the long- or short-term market effect of any sales. When our
registration statement becomes effective, substantially all the outstanding
shares of common stock and substantially all shares of common stock reserved
for issuance will be freely tradable.
We have never paid any dividends, and do not anticipate doing so in the near
future.
We have never declared or paid any cash dividends on our common stock. For
the foreseeable future, we expect to retain any earnings to finance the
operation and expansion of our business. In addition, we anticipate 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."
We are required to pay substantial dividends to holders of our preferred stock.
This may adversely affect our financial condition and the rights of holders of
our common stock.
Our obligations to the holders of our preferred stock may limit our ability
to pay dividends on our common stock and to have sufficient funds for future
growth and acquisitions. Holders of our preferred stock are entitled to
preferential quarterly dividends before any common stock dividends are declared
or paid. Upon our liquidation, dissolution or winding-up, holders of our
preferred stock are each entitled to receive a liquidation distribution, plus
any accumulated dividends to date before the holders of common stock receive
any distributions. See "Description of Capital Stock--Senior Preferred Stock"
and "--Junior Preferred Stock."
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock by the
selling securityholders. We may, however, receive up to $3,491,040 in the event
all the options and warrants held by the selling securityholders are exercised.
PLAN OF DISTRIBUTION
We are registering the shares of our common stock described in this
prospectus on behalf of the selling securityholders named below. See "Selling
Securityholders." We are registering the common stock to satisfy our
obligations under agreements with some of the selling securityholders to
register their common stock so that their shares will be freely tradable and to
provide our affiliates with freely tradable shares of our common stock. The
"selling securityholders" also includes donees and pledgees selling shares
received from a named selling securityholder after the date of this prospectus.
All costs, expenses and fees in connection with the registration of the shares
offered hereby will be borne by us. Brokerage commissions and similar selling
expenses, if any, attributable to the sale of the shares will be borne by the
selling securityholders. Sales of the shares may be made by selling
securityholders from time to time in one or more types of transactions, which
may include block transactions, in the over-the-counter market, in negotiated
transactions, through put or call
7
<PAGE>
options transactions relating to the shares, through short sales of the shares,
or a combination of such methods of sale, at market prices prevailing at the
time of sale, or at negotiated prices. Such transactions may or may not involve
brokers or dealers. The selling securityholders have advised us that they have
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their securities, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of the shares by the selling securityholders.
The selling securityholders may sell their shares directly to purchasers or
to or through broker-dealers, which may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the selling securityholders or the purchasers of the shares
for whom such broker-dealers may act as agents or to whom they sell as
principal, or both. Such compensation as to a particular broker-dealer might be
in excess of customary commissions.
The selling securityholders may enter into hedging transactions with broker-
dealers and the broker-dealers may engage in short sales of the common stock in
the course of hedging the positions they assume with such selling
securityholder, including in connection with distributions of the common stock
by such broker-dealers. The selling securityholders may enter into option or
other transactions with broker-dealers that involve the delivery of their
shares to the broker-dealers, who may then resell or otherwise transfer such
shares. The selling securityholders may also loan or pledge their shares to a
broker-dealer and the broker-dealer may sell the shares so loaned or, upon a
default, may sell or otherwise transfer the pledged shares.
The selling securityholders and any broker-dealers that act in connection
with the sale of their shares might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
such broker-dealers and any profit on the resale of the shares sold by them
while acting as principals might be deemed to be underwriting discounts or
commissions under the Securities Act. We have agreed to indemnify some of the
selling securityholders for liabilities they incur for selling their shares
using this prospectus, including liabilities arising under the Securities Act.
The selling securityholders may agree to indemnify any agent, dealer or broker-
dealer that participates in transactions involving sales of their shares
against certain liabilities, including liabilities arising under the Securities
Act.
Because selling securityholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling securityholders
will be subject to the prospectus delivery requirements of the Securities Act.
We have informed the selling securityholders that the anti-manipulative rules
under the Securities Exchange Act, including Regulation M, may apply to their
sales in the market.
Selling securityholders also may resell all or a portion of their common
stock in open market transactions in reliance upon the SEC's Rule 144, provided
they meet the criteria and conform to the requirements of such Rule.
Upon our being notified by a selling securityholder that any material
arrangement has been entered into with a broker-dealer for the sale of such
selling securityholder's shares of common stock through a block trade, special
offering, exchange distribution or secondary distribution or a purchase by a
broker or dealer, we will, if required, file a supplement or an amendment to
this prospectus disclosing the name of each such selling securityholder and of
the participating broker-dealer(s), the number of shares involved, the price at
which such shares were sold, the commissions paid or discounts or concessions
allowed to such broker-dealer(s), where applicable, that such broker-dealer(s)
did not conduct any investigation to verify the information set out in this
prospectus, and the other facts material to the transaction. In addition, upon
our being notified by a selling securityholder that a donee or pledgee intends
to sell more than 500 shares, we will file a supplement to this prospectus.
Sales of a substantial number of shares of the common stock in the public
market by the selling securityholders or even the potential of such sales could
adversely affect the market price for our common stock, which could have a
direct impact on the value of the shares being offered by the selling
securityholder.
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<PAGE>
SELLING SECURITYHOLDERS
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 securityholder. Since the selling securityholders 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 securityholder 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 securityholders named below (based on the number of shares of
common stock, warrants and convertible securities held on August 19, 1999).
Common Stock Underlying
<TABLE>
<CAPTION>
Common Stock Underlying
-------------------------- Total
Convertible Common Shares to
Name Warrants Securities Stock be Sold
- ---- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Aguilar, Betty................. 10,000 10,000
Aikman, Robert Edwin........... 8,000 30,000 38,000
Bank One of Texas(1)........... 1,036,664 1,036,664
Bard, Ralph M. III............. 7,154 7,154
Bellgate Nominees LTD AW11..... 133,333 133,333
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
Cornerhouse Limited
Partnership................... 30,000 83,419 113,419
Curiel, Giulio................. 9,000 9,000
Danilan Investments Inc........ 133,333 133,333
Davis, Carol................... 25,000 6,143 31,143
Deloitte & Touche.............. 50,000 50,000
Der Uto Bank................... 40,037 40,037
Dickson, Katharine B........... 6,965 6,965
Dunn, Edward L................. 101,852 101,852
Dunn, Philip S................. 18,518 18,518
Eastern Virginia SBIC(2)....... 91,000 280,000 245,000 616,000
El Camino Real................. 1,875 1,875
Fay, Margaret H., Trustee,
Margaret H. Fay Living Trust.. 8,000 8,000
Felberbaum, Roger.............. 20,000 20,000
Fisher, Mark................... 40,000 9,829 49,829
Franklin Capital Corporation... 350,000 1,383,338 1,733,338
Gaines, John Joseph............ 3,333 5,024 8,357
Goldsmith, Bret................ 1,000 1,000
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Common Stock Underlying Total
--------------------------- Shares
Convertible Common to be
Name Warrants Securities Stock Sold
- ---- ------------ ------------- ------- -------
<S> <C> <C> <C> <C>
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
Handelsfinaz--CCF Bank........... 33,333 33,333
Harrison, Edward J. III.......... 45,286 16,256 61,542
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
Keene, Tom....................... 1,000 1,000
Keil, Bryant L................... 42,168 42,168
Keisel, Christina................ 500 500
Koch, Sidney..................... 3,333 3,333
Kownatzki, Vickie................ 1,000 1,000
Lake, Walter J. Sr............... 15,000 15,000
Lindauer, Alan................... 75,000 75,000
Lowy, John....................... 50,000 4,000 54,000
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 52,168 60,168
Mechler, David W................. 12,500 101,852 114,352
Mendelsohn, Alfred............... 50,000 50,000
Mews, Inc........................ 67,799 67,799
Mitchell United Financial
Services........................ 1,875 1,875
MJ Capital Partners L.P. ........ 17,500 17,500
Muensler, Katherine.............. 2,500 2,500
Musicant, David.................. 9,523 9,523
Nielsen, Mark J.................. 925,000 925,000
Orb, John A...................... 42,168 42,168
Pearlman, Leonard................ 16,000 3,868 19,868
Peipers, David................... 10,000 27,818 37,818
Phipps, Norman................... 55,000 55,000
Ramirez, M.F..................... 1,875 1,875
Sabina International S.A......... 42,500 90,632 133,132
Safra Bank....................... 33,333 33,333
Saidel, Larry.................... 12,000 12,000
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Common Stock Underlying
------------------------- Total
Convertible Common Shares to
Name Warrants Securities Stock be Sold
- ---- ----------- ---------------------- ---------
<S> <C> <C> <C> <C>
Salizar, Luz..................... 3,000 3,000
Schneider, Henry N............... 16,256 16,256
Schneider, Lawrence I............ 16,256 16,256
Schneider, Henry, Amy , Scot..... 100,000 100,000
Smith Barney Custodian for the
IRA of John J. Gaines III....... 8,436 8,436
Smith Barney Custodian for the
IRA of
John Leonard Huff............... 3,333 3,333
Stanley Associates............... 34,000 8,221 42,221
Stern, Russel T., Jr............. 153,036 90,000 103,116 346,152
Stern, William................... 10,000 5,790 15,790
Swift, Bryan M................... 42,168 42,168
Swift, John S. III............... 18,480 23,688 42,168
Swift, Stewart G................. 49,000 35,336 84,336
Teman, Wade...................... 20,000 20,000
Teirvian Enterprises, Inc........ 266,666 266,666
Thurston Group, Inc.(3).......... 910,000 219,417 1,129,417
Valle, Beatrice.................. 1,500 1,500
Waveland, LLC (4)................ 465,286 101,000 566,286
Weaver, Deborah.................. 5,000 5,000
Webb, Joseph W................... 64,815 64,815
Welsh, Mary E.................... 625 625
Yael AG fur Finanz und Handel.... 133,333 133,333
Ybarra, Thresa................... 1,000 1,000
Young, James A................... 64,815 64,815
Zavala, Hector................... 5,000 5,000
----------- ----------- --------- ---------
2,787,640 1,957,999 5,122,952 9,868,591
=========== =========== ========= =========
</TABLE>
- --------
(1) All of these shares are held in escrow for the benefit of the former owners
of HBS. Mr. Haynes holds an irrevocable proxy for these shares.
(2) Now known as Waterside Capital Corporation.
(3) The ultimate beneficial owners of these shares are Patrick J. Haynes, III
and Russell T. Stern, Jr.
(4) The ultimate beneficial owner of these shares is Patrick J. Haynes, III.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The common stock is quoted and traded on a limited and sporadic basis on the
OTC Bulletin Board operated by the NASDAQ Stock Market, Inc. 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.
The following table sets forth the high and low closing bid and asked prices
for our common stock 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
------- ------ ------ -------
Year Ended December 31, 1997
<S> <C> <C> <C> <C>
First Quarter.................................... 1.9375 1.375 2.25 1.75
Second Quarter................................... 2.25 1.25 2.75 1.625
Third Quarter.................................... 2 0.875 2.25 1
Fourth Quarter................................... 2.5625 1 2.75 1.25
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C>
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
Fourth Quarter................................... 2.3125 1.1875 2.75 1.3125
<CAPTION>
Year Ending December 31, 1999
<S> <C> <C> <C> <C>
First Quarter.................................... 2 1.3125 2.1875 1.50
Second Quarter................................... 1.75 1.4375 2 1.53125
</TABLE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. For
the foreseeable future, we expect to retain any earnings to finance the
operation and expansion of our business. In addition to the terms of our
outstanding preferred stock, 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."
12
<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 Avery, the Notes thereto and the other financial
information included elsewhere in this Report.
Selected Financial Information Line Item Explanations
Avery's revenues are primarily derived from the provision of billing
clearinghouse services to direct dial long distance carriers. Revenues are also
derived from billing enhanced services for companies that offer non-regulated
telecommunications equipment and services. HBS's revenues are derived from 29
long distance resellers and enhanced services providers throughout the country.
Local exchange carrier billing fees charged by Avery 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 Avery to
local telephone companies for billing and collection. Processing fees also
include any charges assessed to Avery 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 Avery 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. Avery 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 Avery's financing certain customers' accounts receivable. Typically,
50% to 75% of the amount receivable from the local exchange carrier is advanced
to the customer upon acceptance of its call records. When the local exchange
carrier remits payment of the receivable, Avery is repaid the advance and
receives a financing fee which generates the "Advance funding program income."
Avery 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" lines represent the results of
operations for the respective periods for BorderComm, Inc. and Alternate
Telephone and Communications, Inc., two wholly owned subsidiaries which were
divested effective January 1, 1998.
13
<PAGE>
Results of Operations for the Twelve Months Ended December 31, 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 Avery's
audited 1998 and 1997 financial statements.
Statement of Operations Data:
<TABLE>
<CAPTION>
December 31,
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Operating revenues........................................... $11,643 $19,634
Cost of revenues............................................. 8,592 13,044
------- -------
Gross profit................................................. 3,051 6,590
Operation expenses (excluding DD&A).......................... 3,105 3,264
Charge in connection with terminated customers............... -- 4,271
Advance funding program income............................... (832) (1,418)
Advance funding program expense.............................. 567 481
Depreciation and amortization expense (DD&A)................. 408 579
------- -------
Operating income............................................. (197) (587)
Other income (expense), net.................................. (1,305) (737)
Discontinued operations...................................... 22 --
------- -------
Net income (loss)............................................ $(1,480) $(1,324)
======= =======
</TABLE>
Operating Revenues
Revenues for calendar 1998 increased $7,991,000 or 68.6% compared to
calendar 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. The number of direct dial long
distance call records processed increased 94% from 57.1 million in calendar
1997 to 110.8 million for 1998. Enhanced billing services records processed
increased 44% from 1.6 million to 2.3 million, respectively, for the same
periods.
Cost of Revenues
Gross profit margin of 33.6% was achieved during calendar 1998, versus 26.2%
for calendar 1997. The increase in gross profit margin was principally higher
margins produced by higher risk customers, which have been terminated, offset
by a higher level of quantity discounts granted as mature customers advanced up
the quantity discount price list. Management currently believes that its gross
profit margin could decrease in subsequent periods as larger volume customers
are added and as current customers continue to mature and advance up the
quantity discount price list. However, the potential gross profit margin
decrease will be fueled by large increases in volume which will tend to offset
the effects of higher quantity discounts.
Operating Expenses
Consolidated operating expense (excluding depreciation and amortization
expense) increased $159,000 from $3,105,000 in 1997 to $3,264,000 in 1998
primarily due to higher corporate office costs.
Charge in Connection with Terminated Customers
Run-off costs associated with terminated customers totaled $4,271,000. This
amount results primarily from charge backs and bad debt costs charged by the
local exchange carriers to Avery which Avery will not be able to recover from
its customers and to a lesser extent other costs associated with the terminated
customers. Charge backs from local exchange carriers can continue for 6 to 9
months after Avery has ceased to process a
14
<PAGE>
customer's records and bad debt costs can continue for up to 18 months. In the
normal course of business, both Avery and the local exchange carriers maintain
reserves to offset these charges. However, due to questionable marketing
programs utilized by these customers, charge backs and bad debt costs for these
customers are estimated to be significantly in excess of normal reserves and
any amounts receivable from the local exchange carriers. The charge includes
Avery's estimate of all future charge backs and bad debt and other costs
related to the terminated customers. Avery has instituted a series of controls
to significantly limit exposure to this type of event in the future. The
controls include a system for offsite management to view a wide variety of
customer data over the Internet.
Advance Funding Program Income and Expense
Advance funding program income was $1,418,000 in 1998 compared with $832,000
in 1997. The period-to-period increase was primarily the result of financing a
higher level of customer receivables under Avery's advance funding program (see
"Advance Funding Program and Receivable Financing Facility" below).
Advance funding program expense was $481,000 in 1998, compared with $567,000
in 1997. In addition to declining in gross dollars between 1997 and 1998,
advance funding expense as a percentage of advance funding income dropped
between the two years, as well. This decrease was primarily attributable to
Avery financing more customer receivables with internally generated funds
rather than with funds borrowed through Avery's revolving credit facility.
Depreciation and Amortization
Depreciation and amortization expense was $579,000 in 1998 compared with
$408,000 in 1997. The increase is due to the effects of capital expenditures in
late 1997 and early 1998 partially offset by local exchange carrier contracts
becoming fully amortized in 1997.
Operating Income (Loss) from Continuing Operations
Operating losses for 1998 and 1997 were $587,000 and $197,000, respectively.
The year-to-year increase results from significant operating expense leverage
being more than offset by costs associated with terminated customers.
Other Income (Expense), Net
Other income (expense), net decreased to $737,000 of net expense in 1998
from $1,305,000 of net expense in 1997. These amounts consist of interest
expense and financing costs. Interest expense for 1998 was $628,000 versus
$412,000 for 1997. The increase is primarily attributable to additional
interest expense resulting from the increase in the line of credit. Financing
costs were $114,000 in 1998 and $902,000 in 1997. Financing costs primarily
consist of expenses recorded in conjunction with issuing warrants attached to
debt and amortization of debt discount. The 1997 expense was warrant related,
while the 1998 expense was attributable to amortization of debt discount and
writing off debt discount upon repayment of loans.
Income Taxes
An income tax benefit has not been recorded for the years ended December 31,
1998 and 1997 since future profitability is not assured.
15
<PAGE>
Results of Operations for the Six Months Ended June 30, 1999 and 1998
The following table sets forth selected income statement lines in thousands
of actual dollars. The Statement of Operations Data is derived from Avery's
unaudited financial statements for the six month periods ended June 30, 1999
and 1998.
Statement of Operations Data:
<TABLE>
<CAPTION>
June 30,
1998 1999
------ ------
(in
thousands)
<S> <C> <C>
Operating revenues............................................. $9,599 $9,728
Cost of revenues............................................... 7,079 7,113
------ ------
Gross profit................................................... 2,520 2,615
Operating expenses (excluding DD&A)............................ 1,662 2,232
Advance funding program income................................. (688) (302)
Advance funding program expense................................ 240 45
Depreciation and amortization (DD&A)........................... 245 433
------ ------
Operating income (loss)........................................ 1,061 207
Other income (expense), net.................................... (325) (536)
------ ------
Net income (loss).............................................. $ 736 $ (329)
====== ======
</TABLE>
Operating Revenues
Revenues for the six months ended June 30, 1999 increased by $129,000, or
1.3%, as compared to the six months ended June 30,1998. The increase is
directly attributable to higher volumes of call records processed in the first
half of 1999 versus the first half of 1998. Toll records processed in the first
six months of 1999 increased 41.6 million records, or 86.8%, to 89.5 million
from 47.9 million for the six months ended June 30, 1998. This significant
volume increase did not produce a proportional increase in revenues due to an
offsetting reduction in the revenue per record. Avery has eliminated its
questionable customers (which had high revenues per record) and only customers
with solid, industry-proven marketing programs remain. However, these larger
customers receive quantity discounts generating lower revenue per record.
Cost of Revenues
Gross profit margin of 26.9% was achieved in the six months ended June 30,
1999, versus 26.3% for the same period in 1998. The improvement resulted from
the decrease in local exchange carrier billing costs, offset by an increase in
customer service costs as a percentage of sales. Management currently believes
that its gross profit margin could decrease in subsequent periods as larger
volume customers are added and as current customers continue to mature and
advance up the quantity discount price list. However, the potential gross
profit margin decrease will be fueled by large increases in volume which will
tend to offset the effects of higher quantity discounts.
Operating Expenses
Operating expenses for the six months ending June 30, 1999 increased by
$570,000, or 42.8%, over the comparable period ending June 30, 1998. The
increase is due to non-recurring costs of $415,000 associated with a warrant
repurchase and SEC registration, additional salaries and associated costs in
the corporate office and to a lesser extent compensation and other costs at
HBS.
16
<PAGE>
Advance Funding Program Income and Expense
Advance funding program income declined by $386,000, or 56.1%, for the six
month period ended June 30, 1999 as compared to the same period the prior year.
This decline was primarily the result of financing a lower level of customer
receivables stemming from the reduced customer base.
Advance funding program expense declined by $195,000, or 81.3%, for the six
month period ended June 30, 1999 as compared to the same period the prior year.
This decrease is primarily attributed to lower levels of customer receivables
being funded and a higher use of internally generated funds as opposed to funds
borrowed through Avery's revolving credit facility.
Depreciation and Amortization
Depreciation and amortization expense was $433,000 in the first six months
of 1999 compared with $245,000 in the same period in 1998. The increase is due
to the capital expenditures in the last three quarters of 1998 and the first
half of 1999.
Income (Loss) from Operations
Operating income declined from $1,061,000 for the six months ended June 30,
1998 to a loss of $206,000 for the six months ending June 30, 1999. This
$854,000 decline is due primarily to $415,000 of non-recurring costs, higher
corporate costs, and lower levels of advance funding offset by improved gross
margins in the billing department of HBS.
Other Income (Expense), Net
Net other expense increased by $211,000 in the six months ended June 30,
1999 as compared to the six month period ended June 30, 1998. This increase is
primarily related to financing cost associated with the purchase of warrants
from a related party. There was no such activity in the first half of 1998.
Income Taxes
An income tax benefit has not been recorded for the first half of 1999 since
future profitability is not assured. No income tax provision has been recorded
for the first six months of 1998 since the taxable income is offset by a net
operating loss carryforward.
Liquidity
Avery's cash balance increased to $2,506,000 at June 30, 1999 from $99,000
at June 30, 1998. Large fluctuations in daily cash balances are normal due to
the large amount of customer receivables that Avery collects on behalf of its
customers. Avery's working capital position at June 30, 1999 was a negative
$6,900,000 compared to a $2,800,000 deficit as of June 30, 1998. Hold back
reserves of $10,000,000 and $8,000,000 as of June 30, 1999 and 1998,
respectively, were classified as current liabilities. These reserves represent
cash withheld from customers to satisfy future obligations on behalf of
customers. The obligations consist of local exchange carrier billing fees, bad
debts and sales and excise taxes. As HBS bills for its customers, these
obligations are continually incurred and paid. As volume increases, the amount
of the obligations on the balance sheet on average will increase. While proper
accounting treatment dictates classifying these amounts as current liabilities,
a significant permanent payment of these liabilities will not be required
unless Avery experiences a significant permanent decline in volume. Management
expects these reserves to increase in step with higher volume in the future.
Net cash provided by operating activities, excluding discontinued operations,
was $8,300,000 for the first half of 1999 versus a use of cash of $2,000,000
for the first half of 1998. The 1999 figure stems from reduced advance payment
receivables produced by shrinking the customer base as discussed above and an
increase in deposits and other payables resulting from timing and the 86.8%
increase in volume between years. The 1998 figure resulted primarily from
working capital requirements due to increased volume offset by net income plus
non-cash expenses of $1,100,000.
17
<PAGE>
Avery's cash balance increased to $1,086,000 at December 31, 1998, from
$988,000 at December 31, 1997. Large fluctuations in daily cash balances are
normal due to the large amount of customer receivables that Avery collects on
behalf of its customers. Avery's working capital position at December 31, 1998
was a negative $6,800,000 compared to a $2,600,000 deficit as of December 31,
1997. Hold back reserves of $9,900,000 and $6,900,000 million as of December
31, 1998 and 1997, respectively, were classified as current liabilities. These
reserves represent cash withheld from customers to satisfy future obligations
on behalf of the customer. The obligations consist of local exchange carrier
billing fees, bad debts and sales and excise taxes. As HBS bills for its
customers, these obligations are continually incurred and paid. As volume
increases, the amount of these obligations on the balance sheet on average will
increase. While proper accounting treatment dictates classifying these amounts
as current liabilities, they will not require a significant permanent paydown
unless Avery experiences a significant permanent decline in volume. Management
expects these reserves to increase in step with higher volume in the future.
Net cash provided by operating activities, excluding discontinued operations,
was $2,700,000 for calendar 1998 versus a $2,200,000 use of cash for 1997. The
1998 figure resulted primarily from non-cash expenses of $5,700,000, including
$4,400,000 of bad debt expense. 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.
In March of 1997, Avery obtained a $7,500,000 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 Avery'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 $10,000,000. The amounts borrowed by
Avery under its credit facility to finance the advance funding program were
$35,000, $5,800,000 and $5,000,000 at June 30, 1999 and December 31, 1998 and
1997, respectively. At June 30, 1999, December 31, 1998 and December 31, 1997,
the amounts available under Avery's credit facility were $6,200,000, $4,300,000
and $2,500,000, respectively. As of December 31, 1998, there was $3,500,000 of
collateral in excess of the $10,000,000 credit line maximum. If the credit
facility were increased to cover the excess collateral, total availability
under the facility would have been $7,800,000.
Avery generated proceeds from the sale of common and preferred stock of
$200,000 and $1,800,000 during 1998 and 1997, respectively. Avery also paid
dividends of and redeemed preferred stock in amounts totaling $1,900,000 and
$800,000 during 1998 and 1997, respectively.
Capital expenditures amounted to $700,000 during 1998 and $300,000 during
1997. Expenditures for both periods relate primarily to the purchase of
computer equipment and software and to a lesser extent furniture and fixtures.
Management believes that Avery 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.
Acquisition costs in the first six months of 1999 totaled $300,000. These
costs are comprised of professional fees relating to the Primal acquisition and
the Primal Billing Solutions transaction.
Avery received $1,600,000 during 1998 in connection with the sale of
BorderComm.
Avery'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.
Avery 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 Avery's advance funding program. Avery offers
18
<PAGE>
participation in this program to qualifying customers through its Advance
Payment Agreement. Under the terms of this agreement, Avery 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 Avery for billing
and collection, less certain deductions. The purchase price is remitted by
Avery 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%. Avery 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 Avery's revolving line of
credit facility. The amount borrowed by Avery under this credit facility to
finance the advance funding program was $35,000 at June 30, 1999, $5,800,000 at
December 31, 1998, and $5,000,000 at December 31, 1997.
Service fees charged to customers by Avery 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 Avery recoups the
full amount of the initial payment from local telephone companies. The rate
charged to the customer by Avery is higher than the interest rate charged to
Avery, 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 Avery. 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 Avery.
As part of the advance payment agreement, Avery 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 Avery's
first lien security interest in such assets. Under the terms of the credit
facility agreement, Avery is obligated to repay amounts borrowed whether or not
the purchased accounts receivable are actually collected.
New Accounting Standards
Management of Avery does not anticipate the adoption of any new standards
recently issued by the Financial Accounting Standards Board will have a
material impact on Avery's financial position or results of operations.
Year 2000 Contingency
The Year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date-sensitive information for
the Year 2000 and beyond. Unless modified prior to December 31, 1999, such
systems may not properly recognize such information and could generate
erroneous data or cause a system to fail to operate properly.
The operation of Avery's business is highly dependent on its computer
software programs and operating systems. These programs and systems are used in
several key areas of Avery's business, including information management
services, third-party billing clearinghouse services (including the advance
funding program), direct billing services and financial reporting, as well as
in various administrative functions. In providing information management,
third-party billing clearinghouse and direct billing services, Avery processes
telephone call records which are date sensitive.
Avery is in the process of evaluating its programs and systems to identify
potential Year 2000 readiness problems, as well as manual processes, external
interfaces with customers and services supplied by vendors to coordinate Year
2000 compliance and conversion. Avery's software was developed internally and
management
19
<PAGE>
believes that it is Year 2000 compliant, which means that it will be able to
interpret dates beyond the year 1999. Avery plans to test its hardware during
1999 to determine whether it is Year 2000 compliant. In the event that these
systems are not Year 2000 compliant, Avery will make appropriate upgrades or
replacements. Avery believes that, with its existing software and any necessary
hardware modifications, the Year 2000 problem will not pose a significant
operational problem for Avery's information systems.
However, because Avery's business relies on processing date-sensitive
telephone call records supplied by third parties, it is possible that non-
compliant third-party computer systems may not be able to provide accurate data
for processing through Avery's computer systems. Avery's business, financial
condition and results of operations could be materially adversely affected by
the Year 2000 problem if it or unrelated parties fail to successfully address
this issue. Management of Avery currently anticipates that the total expenses
and capital expenditures associated with its Year 2000 readiness project,
including personnel and other costs associated with modifying or replacing its
programs and systems will not exceed $300,000, most of which will be
capitalized. As of December 1998, Avery has incurred approximately $50,000 in
costs related to its Year 2000 readiness.
Avery also plans to identify any non-information technology systems that may
be vulnerable to the Year 2000 issue during 1999. Such systems include utility
switches and meters, thermostats and alarms. Once the evaluation of these
systems is complete, Avery will make necessary modifications or adjustments to
achieve Year 2000 readiness. Management believes that the costs related to Year
2000 compliance for its non-information systems will not have a material
adverse effect on its operations or financial condition.
The cost of Year 2000 readiness and the expected completion dates are the
best estimates of Avery management and are believed to be reasonably accurate.
In the event Avery's plan to address the Year 2000 problem is not successfully
or timely implemented, Avery may need to devote more resources to the process
and additional costs may be incurred, which could have a material adverse
effect on Avery's financial condition and results of operations. Problems
encountered by Avery's vendors, customers and other third parties also may have
a material adverse effect on Avery's financial condition and results of
operations. Following the Year 2000 date change, in the event Avery determines
that its programs and systems are not Year 2000 compliant, Avery will be unable
to process date-sensitive telephone call records and thus be unable to provide
most of its revenue-producing services, which will have a material adverse
effect on Avery's financial condition and results of operations. Avery will
also likely experience considerable delays in compiling information required
for financial reporting and performing various administrative functions.
Avery is currently developing a contingency plan for implementation in the
event its programs and systems are not Year 2000 ready prior to December 31,
1999.
Obligations Under Employment Agreements
Avery has employment agreements with its management requiring Avery to pay
specified amounts as annual base salaries and certain bonuses. Additional
bonuses are at the sole discretion of Avery's Board of Directors. Avery is also
required to maintain a profit sharing plan for the benefit of its employees.
See "Management--Executive Compensation" and "--Employment Agreements."
20
<PAGE>
BUSINESS
General
Avery is a telecommunications service company which, through its operating
subsidiary Hold Billing Services, is engaged in billing and collection services
for inter-exchange carriers and long-distance resellers.
Recent Transactions
The Corsair Transaction. In February 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(TM)
billing system and its switch mediation product, Intelligent Message Router, to
Wireless Billing Systems, a wholly owned subsidiary of Primal Systems, Inc.
that conducts its business using the name Primal Billing Solutions. As
consideration for Primal Billing Solutions entering into the Corsair
transaction, Corsair paid $1,000,000 cash to PBS. Corsair also agreed to loan
Primal Billing Solutions the difference between the assets and liabilities
acquired by Primal Billing Solutions, plus $200,000.00 cash. The terms of the
note are 10% annual interest, five year amortization, and payment in full
required in May 2001. In addition, Corsair agreed to allow Primal Billing
Solutions to retain any cash collected from certain accounts receivable
totaling $1.3 million up to a maximum of $1.0 million. Neither the amount
collected nor the $1.3 million will be included in the note described above.
Under the terms of the Corsair acquisition agreement, Avery guaranteed the
obligations of Primal Billing Solutions. The Corsair transaction was entered
into in contemplation of Avery's acquisition of Primal, discussed below.
The Primal Acquisition. In March 1999, Avery entered into a merger agreement
with Primal and 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 in the telecommunications industry,
primarily utilizing decision support software and Internet technologies. As
part of this merger, Avery will acquire the billing system and switch mediation
assets acquired by Primal Billing Solutions in the Corsair transaction. For
more information regarding the business of Primal and its software products,
see "Business--Primal Systems and Primal Billing Solutions."
At the time of the merger, Avery will issue up to 4,000,000 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 be released to Primal's shareholders based upon the operating
performance of Primal from August 1, 1999 through July 31, 2000. Upon the
meeting of certain operating performance thresholds by Primal during this
period, the Primal shareholders may receive up to a maximum 4,000,000
additional shares of Avery convertible preferred stock as additional
consideration for the merger. The shares of convertible proposed stock issued
by Avery will be convertible into Avery common stock on a one-for-one basis. In
addition, upon Primal's satisfaction of certain operating performance levels
during this period, 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 Avery
preferred stock received in the merger for the purchase price of $2.50 per
share.
At the time of the merger, Avery will also enter into employment agreements
with the principals of Primal and will enter into an agreement to register the
underlying shares of Avery common stock to which the Avery convertible
preferred stock is convertible.
Mark J. Nielsen, Avery's President and Chief Executive Officer, is the
Chairman of the Board and a principal shareholder of Primal. You should read
the section entitled "Certain Transactions" for a description of Mr. Nielsen's
interests in the Primal transaction.
Primal financial statements have not been included in this registration
statement as management believes that the acquisition of Primal does not meet
the requirements for inclusion. The relevant requirement is that the
21
<PAGE>
consideration paid for Primal must not exceed 50% of Avery's consolidated
assets as of Avery's most recently completed fiscal year, December 31, 1998
(total assets at December 31, 1998 of $20,737,840 X 50% = $10,368,920). As
noted above, the maximum total consideration in the Primal transaction is
8,000,000 shares of Avery's convertible preferred stock, 6,000,000 shares of
which is contingent upon Primal's meeting certain operating performance
thresholds in the twelve-month period beginning August 1, 1999. Based upon the
current market price of Avery's common stock ($1.00 at August 16, 1999), the
total value of the consideration in the Primal transaction would only be
$8,000,000, which is $2,368,920 less than 50% of Avery's total assets at
December 31, 1998.
Hold Billing Services
General
Hold Billing Services, commonly known as 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
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, 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 local exchange
carrier billing contracts. Each contract has a minimum usage amount which
relates to HBS's customers' sales volume to be processed through the local
exchange carrier. The remaining minimum usage for significant contracts at
December 31, 1998 totals $7.3 million through 2003. As a frame of reference,
customers' sales processed by HBS relating to all contracts in April 1999 were
approximately $19.1 million. A portion of this amount applies to the minimum
usage requirements. 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.
HBS also provides 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 AT&T 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 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, MCI and
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 of
third-tier long distance companies,
22
<PAGE>
thereby becoming "third-party clearinghouses." Today, HBS provides billing
clearinghouse services to approximately 29 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 companies collect payments from end-users, they remit them to the
third-party clearinghouses who, in turn, remit payments to their customers.
Billing Clearinghouse Services
In general, HBS performs billing clearinghouse services under billing and
collection agreements with 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 for other
telecommunication services, such as Internet access, paging services, and voice
mail 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 its 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 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 its customers. HBS currently submits
state and local tax returns on behalf of its customers in over 500 taxing
jurisdictions.
HBS provides end-user customer service for billed telephone records. This
service allows end-users to make inquiries regarding transactions for which
they were billed directly to HBS's customer service call center. 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.
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<PAGE>
HBS's operating revenues consist of a processing fee that is assessed to
customers either as a fee charged for each telephone call record or other
transaction processed, and 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 submitted call records within seven
business days of the customer's submission of records to HBS. 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. 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. All 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 ready to be 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.
Customers
HBS provides billing and information management services to the following
categories of telecommunications services providers:
. Inter-exchange 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.
. Switchless Resellers: Marketing organizations, affinity groups, and
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.
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. 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.
HBS has two material customers which represented 31% and 27%, respectively,
of total records processed in the first quarter of 1999.
Competition
HBS operates in a highly competitive segment of the telecommunications
industry. Competition among the clearinghouses is based on the quality of
information reporting, program flexibility, collection history, the speed of
collections, the price of services and availability of an advanced funding
program. Except for Billing Concepts Corp., all other third-party
clearinghouses are either privately held or are part of a larger parent
company. Management believes, based on publicly available independent industry
research reports, that Billing Concepts 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.
As a large user of local exchange carrier billing services, HBS enjoys
favorable rates and passes the benefits of its buying power on to its
customers. Management believes that HBS enjoys a good reputation within the
industry for the timeliness and accuracy of its collections and disbursements
to customers.
Several significant challenges 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.
Since most customers in the billing clearinghouse industry are under
contracts with a minimum term of at least one year, penetration of the existing
market will be difficult. 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 funds to the customer whose traffic is being billed.
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,
significant opportunities exist 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:
Expand existing customer base. HBS intends to market its services to
providers of other telecommunications services and products. These 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.
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 and the continuing deregulation of the
telecommunications industry.
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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 functions. HBS's services are
currently utilized by approximately 29 customers, and management believes that
HBS will maintain and expand its position of respect in the industry.
Insurance
Avery does not maintain errors and omissions insurance for the business
conducted by HBS.
Employees
At March 31, 1999, HBS had 55 full-time employees, including two executive
officers, three sales and marketing personnel, ten technical and operations
personnel, eight accounting, administrative and support personnel, and 32
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.
Avery's Business Strategy
The business strategy of Avery is as follows.
Acquire complementary customer management software/services providers. Avery
will continue to evaluate opportunities to acquire telecommunications services
software providers which are complementary to and augment its existing
operations.
Acquire decision support software. Management is evaluating opportunities in
software designed to mine data from various operational support systems,
including billing. This software, known as decision support software, has many
and varied applications. It is particularly useful in enterprises which
generate huge volumes of data, such as utilities, telecommunications, insurance
companies and consumer products concerns. One of the uses of the software is to
determine patterns in data which are then used to guide decisions concerning
the data, hence the term decision support software. Initially this effort will
be focused on the telecommunications and Internet industries for customer
acquisition and retention, as well as other business intelligence. The
applications will address needs in the fraud management, operations and
marketing areas. Expansion to other industries is planned for the future.
Expand offerings to serve Internet billing and customer care. Avery has
efforts underway to move into electronic customer care and billing with a
product set that will interface with multiple billing systems. The product set
is expected to include Internet-based bill processing and payment, Internet-
based point-of-sale for activations of new customers, and Internet self-service
customer care.
Employees
As of the date of this prospectus, Avery had 59 full-time employees. None of
the employees of Avery 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. HBS's monthly rent is approximately $9,039.
HBS's lease expires December 31, 2002.
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DESCRIPTION OF THE PRIMAL COMPANIES
Primal is a private software company that provides intelligent, client-
server and web-enabled applications in a real-time environment to
telecommunications and Internet carriers to manage their customer
relationships. Primal's software products allow users to organize and analyze
customer and usage data from multiple operational systems, such as billing, in
order to reduce customer turnover, or churn, spend marketing dollars more
effectively, and predict customer and business opportunities. Primal's Internet
and e-commerce software products provide carriers with Internet customer care
and service and billing capabilities.
Primal Billing Solutions was formed in early 1999 to acquire the assets in
the Corsair transaction. Primal Billing Solutions provides a convergent billing
and customer care system to wireless carriers and integrated communications
service providers worldwide, including such companies as British Telecom,
MetroCall, and Hutchison Telecom.
As a result of the Corsair transaction, Primal can now combine the direct
billing capability of Primal Billing Solutions with Primal's decision support
and Internet technologies, resulting in an enterprise-wide business
intelligence offering for telecommunications carriers and Internet service
providers, commonly referred to as ISPs.
Direct billing vendors are finding tremendous pressure building from
customers demanding customization of existing software that is ill-suited to
the carrier customer's core billing software. The result is a frustrated
customer base, delayed delivery schedules, and a loss of control by the billing
vendor of its product development plan with ever-increasing maintenance and
research and development costs.
The Primal Outfront(TM) software operating with the carrier customer's core
platform billing system can significantly reduce the maintenance demands and
research and development on the carrier customer's core billing system, while
simultaneously providing the carrier customer with greater responsiveness to
competitive changes and direct control over its critical management information
system needs. Outfront is an integrated suite of Internet-enabled intelligent
decision support software applications that includes customer profiling,
predictive modeling, and analysis and reporting tailored for the specific
requirements of the telecommunications industry. Unlike traditional business
intelligence applications, which rely on one-way data flow, Outfront features a
closed-loop model that can "take action" against business data automatically
gathered from other sources and measure its effectiveness. The application
draws information from traditional business and operational systems, such as
customer care and billing, and uses this data to generate real business
intelligence about a carrier's customers and prospects. Outfront can also
interface directly with an existing data warehouse or data mart. This permits
organization and analysis of previously gathered data without additional costs
of re-entering existing data.
Turnkey and custom configurations are available for both Windows NT and
UNIX. All major relational and decision support-specific databases can be
supported, including Oracle, Sybase and Microsoft SQL.
The Outfront product suite may be utilized for reducing customer churn,
increasing marketing campaign effectiveness, blocking subscription fraud, or
addressing various other major operational challenges facing telecommunications
carriers and ISPs.
"Wizards" are utilized in the Outfront product suite to provide "plain
English" interfaces to the powerful analytical, segmentation and modeling
capabilities of the product. This allows non-technical users in the carrier's
marketing, finance and executive departments to gain real-time information and
perform ad-hoc analyses without putting additional demands on scarce internal
management information systems resources. Even more importantly, however, the
information and analysis can automatically perform actions within various
operational systems, such as prompting calls to customers or placing automatic
messages or credits on a subscriber's next invoice. Most existing decision
support or data mining software products merely provide hard-copy reports that
must be reviewed and acted upon by the carrier customer's personnel before an
end result can be achieved.
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<PAGE>
The Primal Billing Solutions product lines include the Communications
Resource ManagerTM, commonly known as CRM, and the Intelligent Message Router,
commonly known as IMR, software products. CRM is a complete back office system
for carriers and resellers that includes direct billing, customer service,
accounts receivable and financial reporting, distribution channel management,
inventory and collections. CRM currently supports paging, cellular, ISP and
long-distance direct billing. CRM's modular design currently supports customers
ranging from start-ups to nationwide carriers with over 5 million customers.
IMR is a switch mediation product that connects to a multitude of different
switch types. IMR collects all call traffic off a switch and routes it to
various other systems, including the billing system, either in switch format or
after reformatting the records. The same call records can be copied and routed
to multiple systems. The IMR is available in both a DOS and UNIX version.
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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 Avery.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Patrick J.
Haynes,
III 50 Director and Chairman of the Board
Mark J.
Nielsen 40 Director, President and Chief Executive Officer
Scot M.
McCormick 46 Director, Vice President, Chief Financial Officer and Secretary
Norman M.
Phipps 39 Director
J. Alan
Lindauer 60 Director
Stephen L.
Brown 61 Director and Vice Chairman of the Board
Spencer L.
Brown 33 Director
Robert T.
Isham,
Jr. 47 Director
</TABLE>
Patrick J. Haynes, III has served as a director and Chairman of the Board of
Avery since November 1995. Mr. Haynes was elected President and Chief Executive
Officer of Avery in July 1998, and served in such capacity until December 1,
1998. In 1992, Mr. Haynes founded and became President of American
Communications Services, Inc., 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. American Communications 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.
Mark J. Nielsen has served as President and Chief Executive Officer of Avery
since December 1, 1998, and was elected as a director on December 15, 1998.
From February 1998 until joining Avery, Mr. Nielsen served as the Chairman of
Primal Systems, Inc., a private company engaged in providing software
consulting and decision support systems to the telecommunications industry.
From 1988 to 1997, Mr. Nielsen was President and Chief Executive Officer; and
Chairman until 1998, of Subscriber Computing, Inc., a private company providing
billing and customer care solutions to the telecommunications industry
worldwide. During his tenure at Subscriber Computing, he completed a $15
million private placement, acquired another software company, and positioned
the company for its ultimate sale to Corsair Communications, Inc. in 1998.
Previously, Mr. Nielsen was associated with Cincinnati Bell Information Systems
and Cellular Business Systems, Inc. in executive marketing positions serving
the billing and customer care needs of the telecommunications industry on a
service bureau basis.
Scot M. McCormick has served as Vice President, Chief Financial Officer and
Assistant Secretary of Avery 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 Avery, Mr. McCormick was a consultant to Avery 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 Avery since November 1995. Mr.
Phipps is a director of LogiMetrics, Inc., a company primarily involved in the
manufacture of infrastructure equipment for the wireless broadband
telecommunications market. Mr. Phipps has served as the President and Chief
Operating Officer of LogiMetrics since April 1997, and also as interim Chief
Financial Officer since March 1998. From May 1996 to April 1997, Mr. Phipps
served as Chairman of the Board and Acting President of LogiMetrics. Mr. Phipps
has served as a principal of two private investment firms, Phipps, Teman &
Company, L.L.C. (from January 1994 to December 1997) and CP Capital Partners
(from January 1991 to December 1993).
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<PAGE>
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 Bank of
Virginia since 1986 and serves as chair of its Loan Committee, Norfolk
Division, and a member of the Executive, Trust, Marketing, Compensation, and
Mergers & Acquisition Committees. Mr. Lindauer served as 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 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 Capital since
November 1995, Secretary of Franklin Capital since October 1994 and was Vice
President of Franklin Capital from August 1994 to November 1995. From September
1993 to July 1994 Mr. Brown was an attorney with the firm of Wilson, Elser,
Moskowitz, Edelman & Dicker, and from September 1991 to September 1993 he was
an attorney with the firm of Weil, Gotshal & Manges LLP. Mr. Brown is the son
of Mr. Stephen L. Brown, the Chairman and Chief Executive Officer of Franklin.
Robert T. Isham, Jr. has served as a director of Avery 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 Avery. Executive officers of
Avery 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 local exchange carrier 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 to 1994 and a founding partner of HBS. Mr. Box holds a Bachelor's
Degree in Business Administration from North Texas State University.
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 non-employee directors of Avery also receive $1,000 for each
meeting attended, plus reimbursement of travel expenses.
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<PAGE>
Executive Compensation
The following table summarizes certain information relating to the
compensation paid or accrued by Avery for services rendered during the year
ended December 31, 1998, to each person serving as its Chief Executive Officer
and each of Avery's other most highly paid executive officers whose total
annual salary and bonus for the year ended December 31, 1998, exceeded
$100,000.
Summary Executive Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------------
Long-Term
Name and Principal Fiscal Salary Other Annual Compensation
Position Year ($) Bonus ($) Compensation ($) Awards/Options (#)
- ------------------ ------ -------- --------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Patrick J. Haynes, 1998 $100,000 $ -- $30,000 420,000
III(/1/)...............
Chairman of the Board
Mark J. Nielsen(/2/).... 1998 $ 16,667 $ -- $ -- 925,000
President and Chief
Executive Officer
Scot M. McCormick....... 1998 $122,667 $35,000 $ -- --
Vice President, Chief
Financial Officer
and Secretary
</TABLE>
- --------
(/1/) Mr. Haynes served as the Chief Executive Officer of Avery through November
30, 1998. "Other Annual Compensation" represents monthly automobile
allowance and premiums on health and major medical insurance.
(/2/) Mr. Nielsen became the Chief Executive Officer of Avery on December 1,
1998.
Employment Agreements
Effective July 1, 1998, Mr. Haynes entered into an employment agreement with
Avery. Under his 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 Avery. The employment agreement expires
June 30, 2003. Mr. Haynes' initial base salary is $200,000 annually. In
addition, Mr. Haynes is entitled to receive bonuses based on performance goals
as established by the Board, to receive stock options, to participate in
applicable incentive plans established by Avery, to participate in Avery's
hospitalization and major medical plans, or, at his option, to be reimbursed
for amounts paid by Mr. Haynes for comparable coverage, and 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 December 1, 1998, Mark J. Nielsen entered into an employment and
noncompetition agreement with Avery. Under his employment agreement, Mr.
Nielsen will serve as President and Chief Executive Officer, and will be
elected Chairman of the Board by December 1, 1999, subject to the Board of
Directors power to elect and remove officers of Avery. The employment agreement
expires December 1, 1999, and will automatically be renewed for additional
terms unless either party notifies the other prior to October of a given year
that they do not wish to renew the agreement. Mr. Nielsen's initial base salary
is $200,000 annually. In addition, Mr. Nielsen is entitled to receive an
aggregate bonus of $100,000 during the first year of his employment ending on
December 1, 1999, to participate in applicable incentive plans established by
Avery, to participate in Avery's hospitalization and major medical plans, or,
at his option, to be reimbursed for amounts paid by Mr. Nielsen for comparable
coverage, and to receive such other bonuses as the Board may determine in its
sole discretion. Mr. Nielsen also received a ten-year stock option to purchase
925,000 shares of Avery's common stock at $2.00 per share.
31
<PAGE>
Effective November 1, 1996, Harold D. Box entered into an employment and
noncompetition agreement with HBS. Under his employment agreement, Mr. Box will
serve as Vice President of Operations and Marketing of HBS, subject to the
general partner's power to elect and remove officers of HBS. The 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. Mr. Box
is entitled to receive an annual salary of $100,000, subject to standard
payroll deductions, and is entitled to receive the same benefits as HBS
provides to other employees at comparable salaries and responsibilities to
those of Mr. Box. In addition, Mr. Box is entitled to participate in HBS's
profit sharing plan, 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 exceed certain specified targets for the respective preceding year,
and to receive such other bonuses as the Board may determine in its sole
discretion.
The employment agreements with Mr. Nielsen and Mr. Box contain certain
covenants by such employees not to compete with the business of Avery. A state
court may determine not to enforce, or only partially enforce, these covenants.
Limitation of Liability and Indemnification
Section 145 of the Delaware General Corporation Law
Section 145(a) provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
Section 145(c) provides that to the extent that a present or former
director, officer, employee or agent of a corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred
to in subsections (a) and (b) of Section 145, or in defense of any claim, issue
or matter therein, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
therewith.
Section 145(d) provides that any indemnification under subsections (a) and
(b) of Section 145, unless ordered by a court, shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent
is proper in the
32
<PAGE>
circumstances because he has met the applicable standard of conduct set forth
in subsections (a) and (b) of Section 145. Such determination shall be made,
with respect to a person who is a director or officer at the time of such
determination:
. by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or
. by a committee of such directors designated by majority vote of such
directors, even though less than a quorum, or
. if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or
. by the stockholders.
Section 145(e) provides that expenses, including attorneys' fees, incurred
by an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or 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 Avery provides that a director of Avery
shall not be liable to Avery or its stockholders for monetary damages for
breach of fiduciary duty as a director, unless the breach involves
. a breach of the director's duty of loyalty to Avery or its stockholders,
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. liability for unlawful dividend payments or stock purchases or
redemptions, or
. a transaction from which the director derived an improper personal
benefit.
The Certificate of Incorporation of Avery provides that Avery shall
indemnify all persons whom it may indemnify to the fullest extent permitted by
law.
Amended and Restated Bylaws
The Amended and Restated Bylaws of Avery generally make mandatory the
provisions of Section 145 of the Delaware General Corporation Law discussed
above, including the advancement of expenses reasonably incurred in defending a
claim prior to its final resolution, and provide that Avery's directors and
officers will at all times be indemnified to the maximum extent permitted by
law.
Indemnification Agreements
Avery has entered into indemnification agreements with each of its directors
and executive officers. These agreements provide the directors and executive
officers of Avery with indemnification to the maximum extent permitted by law.
These agreements also include provisions requiring advancement of expenses,
establishing procedures and standards for resolving claims, and providing for
indemnification following a change of control of Avery.
D&O Insurance
Avery 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 Avery,
including liabilities arising under the Securities Act.
33
<PAGE>
CERTAIN TRANSACTIONS
On December 23, 1996, Thurston Bridge Fund L.P. loaned $500,000 to Avery.
The 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 loan was secured by the equity interests in all
of Avery's subsidiaries and the accounts that HBS purchases from its customers.
The loan was paid in full with proceeds from the FINOVA financing.
Patrick J. Haynes, III and Robert T. Isham, Jr. own a portion of the general
and limited partnership interests of Thurston Bridge Fund.
On December 23, 1996, Waterside Capital Corporation (then named Eastern
Virginia Small Business Investment Corporation) loaned $350,000 to Avery. The
loan bore an interest rate of 10%. Waterside Capital also received a seven-year
warrant to purchase 245,000 shares of common stock at an exercise price of
$1.50 per share. The loan was guaranteed by HBS and secured by the accounts
that HBS purchases from its customers. The loan was paid in full with proceeds
from the FINOVA financing.
On January 14, 1997, Thurston Bridge Fund loaned $240,000 to HBS. The loan
was guaranteed by Avery 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 in full with proceeds from the FINOVA
financing in March 1997. In conjunction with the extension of this loan to
March 1997, 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, Avery negotiated a financing which was not consummated. A
condition of the financing was that a portion of the collateral securing
existing loans be released. Thurston Bridge Fund received warrants to purchase
118,400 shares of common stock in consideration for the release of a portion of
this collateral. Waterside Capital received a warrant to purchase 56,000 shares
of common stock in consideration for the release of a portion of this
collateral.
On June 25, 1997, J. Alan Lindauer was elected to Avery's Board of
Directors. Mr. Lindauer is the President and a director of Waterside Capital.
On July 2, 1997, the exercise price of the Waterside Capital warrant to
purchase 245,000 shares of common stock was reduced to $1.02 per share and the
warrant was fully exercised.
On May 30, 1997, Avery and Franklin Capital Corporation (then named The
Franklin Holding Corporation (Delaware)) entered into an agreement whereby
Franklin Capital made an investment of $2,500,000 in Avery. 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. As
additional consideration for this loan, Avery issued to Franklin Capital
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. As a condition to Franklin Capital's making the investment,
Messrs. Stephen L. Brown, Spencer L. Brown and John Greenbaum were appointed to
Avery's six person Board of Directors. Franklin Capital was also entitled to a
management fee equal to $150,000 per year if the Series E preferred stock is
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 Capital 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 the 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 Capital's investment in Avery.
34
<PAGE>
In December 1998, Avery's Board of Directors authorized Avery to repurchase
any or all of its outstanding warrants for a price of $1.00 per underlying
share. In December 1998, Avery repurchased warrants held by Waveland, LLC to
purchase 100,000 shares of common stock at an exercise price of $1.50 per
share. On January 5, 1999, Avery repurchased warrants held by the Thurston
Group to purchase 300,000 shares of common stock at an exercise price of $1.00
per share and warrants to purchase 200,000 shares of common stock at $1.50 per
share. On March 31, 1998, Avery repurchased warrants held by the Thurston Group
to purchase 80,000 shares of common stock at an exercise price of $1.50 per
share. On April 16, 1999, Avery repurchased warrants held by Thurston
Interests, LLC to purchase 41,746 shares of common stock at an exercise price
of $1.50 per share. Waveland, Thurston Group and Thurston Interests are
affiliates of Mr. Haynes. Thurston Group and Thurston Interests are also
affiliates of Mr. Isham.
Avery has entered into a merger agreement pursuant to which it may acquire
Primal Systems. See "Business--Recent Transactions." Mark J. Nielsen, Avery's
President and Chief Executive Officer, is the Chairman of Primal Systems and
owns approximately 16.04% of the Primal Systems common equity on a fully
diluted basis. If, however, employees of Primal Systems do not exercise their
existing Primal Systems stock options prior to the proposed merger, and Avery
does not grant replacement options to those employees, Mr. Nielsen's interest
in the transaction could be as high as 20.26%. This means that Mr. Nielsen
could receive between 320,800 and 405,200 shares of Avery's convertible
preferred stock that will be issued in the proposed merger. If the maximum
number of shares that could be issued pursuant to the earn-out provisions of
the merger agreement were issued, Mr. Nielsen could receive an additional
320,800 to 1,215,600 shares of Avery's convertible preferred stock. Mr. Nielsen
therefore could receive a minimum of 320,800 shares and a maximum of 1,620,800
shares of Avery's convertible preferred stock to be issued in the proposed
merger. Each share of Avery's convertible preferred stock to be issued in the
proposed merger will initially be immediately convertible into shares of
Avery's common stock on a one-for-one basis. Assuming Avery's proposed
acquisition of Primal Systems were to be completed, Mr. Nielsen's beneficial
ownership of Avery's common stock could increase from 8.6% to a minimum of
11.2% or a maximum of 20.6%. See "Stock Ownership of Directors, Executive
Officers and Principal Holders."
In contemplation of entering into an agreement for the acquisition of Primal
Systems, Avery made a $100,000 working capital loan to Primal Systems on
December 15, 1998. The loan is secured by a first lien on the accounts
receivable of Primal Systems. On January 25, 1999, the working capital loan was
increased to $180,000. This loan has been replaced with the loan described in
the following paragraph.
In contemplation of the Corsair transaction, on February 3, 1999, Avery
agreed to loan Primal Systems up to $1,000,000 on a revolving credit basis in
replacement of the then-outstanding $180,000 loan described above. This loan is
secured by a pledge of all the stock of Primal Billing Solutions, the wholly
owned subsidiary of Primal Systems that acquired the Corsair assets, and by a
security interest in all of the accounts receivable and general intangibles,
including all intellectual property of Primal Systems. In addition,
representatives of Avery will constitute a majority of the members of the board
of directors of Primal Billing Solutions. As of July 19, 1999, there were no
funds loaned to Primal Solutions under this revolving credit facility.
35
<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 Avery to be the
beneficial owner of more than five percent of Avery's voting securities, (ii)
for each director and named executive officer of Avery, and (iii) all directors
and executive officers of Avery as a group. Unless otherwise indicated in the
footnotes, each person named below has sole voting and investment power over
the shares indicated.
<TABLE>
<CAPTION>
Name of Beneficial
Owner(/1/) Number of Shares Percent of Class
- ------------------ ---------------- ----------------
<S> <C> <C> <C>
Franklin Capital
Corporation(/2/)....... 1,733,338 17.0%
Waterside Capital
Corporation(/3/)....... 616,000 6.0%
Thurston Group,
Inc.(/4/).............. 1,129,417 10.5%
Waveland, LLC(/4/)...... 566,286 5.5%
Bank One, Texas,
N.A.(/5/).............. 1,036,664(/6/) 10.5%
Patrick J. Haynes,
III(/4/)............... 2,732,377(/7/) 24.4%
Mark J. Nielsen(/8/).... 925,000 8.6%
Scot M. McCormick....... 95,000 1.0%
Norman M. Phipps........ 55,000 0.6%
J. Alan Lindauer(/3/)... 691,000(/9/) 6.7%
Stephen L. Brown(/2/)... 1,833,338(/10/) 17.8%
Spencer L. Brown(/2/)... 1,808,338(/10/) 17.6%
Robert T. Isham, Jr..... 158,161 1.6%
All executive officers
and directors as a
group.................. 8,298,214(/4/)(/6/)(/7/)(/9/)(/10/) 60.4%
</TABLE>
- --------
(1) All information is as of August 19, 1999. As of such date, 9,836,529 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. The ultimate beneficial owners of these shares are
Patrick J. Haynes, III and Russell T. Stern, Jr.
(5) The business address for this person is 8111 Preston Road, 2nd Floor,
Dallas, TX 75225.
(6) All of these shares are held in escrow for the benefit of the former owners
of HBS. These shares are the subject of the earn-out agreements described
under "Management--Employment Agreements." Mr. Haynes holds an irrevocable
proxy for these shares.
(7) Includes 1,036,664 shares of common stock beneficially owned by Bank One,
Texas, N.A, for which Mr. Haynes holds an irrevocable proxy.
(8) The business address of this person is 190 South LaSalle Street, Suite
1710, Chicago, Illinois 60603. If Avery completes its acquisition of Primal
Systems, Mr. Nielsen's beneficial ownership could increase to a minimum of
11.2% or a maximum of 20.6%. See "Certain Transactions."
(9) Includes all the shares beneficially owned by Waterside Capital
Corporation, 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.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Avery'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 August 19,
1999, Avery had 9,836,529 shares of common stock issued and outstanding held by
approximately 365 record holders. In addition, Avery has issued and outstanding
400,000 shares of Series A Convertible Preferred Stock, 390,000 shares of
Series B Convertible Preferred Stock, 70,000 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 Avery 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--Directors and Executive 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 Avery'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 Avery 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--
We have never paid any dividends . . ." 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 Series D 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 Avery, holders of the Series D 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
Series D senior preferred stock and any other senior preferred stock which may
be designated in the future. Avery is obligated to offer to repurchase the
Series D senior preferred stock in the event Avery makes a disposition of HBS.
At the option of the holders of the Series D senior preferred stock or upon the
vote or written consent of the holders of at least two-thirds of the
outstanding shares of the Series D or upon the closing of a firm commitment
underwritten public offering registered under the Securities Act at a price of
$5.00 or more per share and the aggregate proceeds from such offering exceeds
$7 million, the Series D 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 Avery at the ending of any fiscal year ending on or after
December 31, 1997, indicates that the stockholders' equity of Avery is $7
million or more greater than the stockholders' equity as indicated on Avery's
audited balance sheet on December 31, 1996, the Series D senior preferred stock
must be redeemed at its liquidation value plus any unpaid accumulated dividends
to that date. The shares of Series D 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, except as otherwise
required by law.
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<PAGE>
Junior Preferred Stock
The Board of Directors has designated four other series of preferred stock
that remain outstanding: Series A Junior Convertible Redeemable Preferred
Stock, Series B Junior Convertible Redeemable Preferred Stock, Series C Junior
Convertible Redeemable Preferred Stock and the Series E Junior Convertible
Redeemable Preferred Stock. For convenience, the Series A, Series B, Series C
and Series E will sometimes be referred to collectively as junior preferred
stock. The Board of Directors has designated 800,000 shares of preferred stock
to be Series A, 1,050,000 shares of Series B, 340,000 shares of Series C and
350,000 shares of the Series E. The holders of the junior preferred stock are
entitled to preferential dividends to the common stock but subordinate to the
Series D senior preferred stock and any other senior preferred stock that may
be designated in the future. Holders of the Series A are entitled to quarterly
dividends payable at the rate of $0.025 per share. Holders of the Series B,
Series C and Series E are entitled to quarterly dividends payable at the rate
of $.03 per share. Upon liquidation, dissolution or winding-up of Avery,
holders of the junior preferred stock are entitled to receive a liquidation
distribution of $1.00 per share, 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
Junior Preferred Stock, or upon the vote or written consent of the holders of
at least two-thirds of the outstanding shares of the respective series, or upon
the closing of a firm commitment underwritten public offering registered under
the Securities Act at a price of $5.00 or more per share and the aggregate
proceeds from such offering exceeds $7 million, the Series A and the Series C
may be converted into common stock at a rate equal to .4 share of common stock
per share and the Series B and Series E may be converted into common stock at a
rate equal to one share of common stock per share. If the audited balance sheet
of Avery at the ending of any fiscal year ending on or after December 31, 1997
indicates that the stockholders' equity of Avery is $7 million or more greater
than the stockholders' equity as indicated on Avery's audited balance sheet on
December 31, 1996, the junior preferred stock is to be redeemed at its
liquidation value plus any unpaid accumulated dividends to that date. The
shares of the 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 Avery
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, former President of HBS. The
suit alleged that VOAA had caused unauthorized charges to appear on end-users'
bills based on deceptive marketing programs and seeks relief against HBS, Avery
and Mr. 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 Mr. 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 Mr. 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.
From time to time Avery 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, Avery is not aware of any current or pending litigation or
proceedings that would have a material adverse effect on Avery's business,
results of operations or financial condition.
38
<PAGE>
CHANGES IN ACCOUNTANTS
On June 11, 1999, PricewaterhouseCoopers LLP was dismissed as Avery's
auditors, and King Griffin & Adamson P.C. was engaged on June 11, 1999, to
audit the financial statements of Avery for fiscal year ended December 31,
1998. Avery's Board of Directors unanimously resolved to reappoint King Griffin
& Adamson P.C. as Avery's independent accountants for the fiscal year ended
December 31, 1998. King Griffin & Adamson P.C. had served as Avery's
independent accountants since 1995 and was dismissed on February 10, 1999.
PricewaterhouseCoopers LLP was engaged on February 10, 1999.
PricewaterhouseCoopers LLP has not issued any reports on Avery's financial
statements.
Through the date of their dismissal, June 11, 1999, there were no
disagreements with PricewaterhouseCoopers LLP, whether or not resolved, on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
Avery has requested that PricewaterhouseCoopers LLP furnish a letter
addressed to the SEC stating whether or not it agrees with the above statements
in the immediately preceding two paragraphs. A copy of such letter is attached
as Exhibit 16.1 to this Form SB-2.
EXPERTS
The audited financial statements of Avery included in this prospectus, to
the extent and for the periods indicated in their report, have been prepared by
King Griffin & Adamson P.C., independent accountants, for the years ended
December 31, 1997 and 1998, and are included herein in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
39
<PAGE>
AVERY COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants........................ F-1
Financial Statements:
Consolidated Balance Sheets at December 31, 1997, 1998 and March 31,
1999 (unaudited)....................................................... F-2
Consolidated Statements of Operations for the years ended December 31,
1997 and 1998 and the three months ended March 31, 1998 (unaudited) and
1999 (unaudited)....................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997 and 1998 and the three months ended March 31,
1998 (unaudited) and 1999 (unaudited).................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the three months ended March 31, 1998 (unaudited) and
1999 (unaudited)....................................................... F-5
Notes to Consolidated Financial Statements.............................. F-6
</TABLE>
<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, 1997 and 1998 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, 1997 and 1998 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.
July 16, 1999
Dallas, Texas
F-1
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 988,020 $ 1,086,473 $ 2,506,415
Trade accounts receivable................ 790,061 1,090,672 1,840,902
Advance payment receivables.............. 13,545,346 11,893,146 5,983,881
Other receivables, net of allowance for
doubtful accounts of $50,000, $235,000
and $235,000 (unaudited) at December 31,
1997, 1998 and June 30, 1999,
respectively............................ 214,515 486,596 325,416
Net current assets of discontinued
operations.............................. 668,395 -- --
Other.................................... 51,665 11,981 123,162
----------- ----------- -----------
Total current assets..................... 16,258,002 14,568,868 10,779,776
----------- ----------- -----------
Property and equipment:
Furniture, fixtures and equipment........ 541,376 1,224,430 1,339,778
Accumulated depreciation and
amortization............................ (95,092) (249,217) (381,656)
----------- ----------- -----------
Total equipment, net..................... 446,284 975,213 958,122
----------- ----------- -----------
Other assets:
Goodwill, net............................ 3,216,455 2,993,539 2,846,418
Purchased contracts, net................. 104,838 35,092 59,235
Capitalized acquisition costs............ -- -- 278,078
Net long-term assets of discontinued
operations.............................. 1,882,906 -- --
Deposits................................. 547,969 1,570,278 840,219
Other.................................... 277,451 594,850 455,899
----------- ----------- -----------
Total other assets....................... 6,029,619 5,193,759 4,479,849
----------- ----------- -----------
Total assets............................. $22,733,905 $20,737,840 $16,217,747
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Line of credit........................... $ 5,013,859 $ 5,766,832 $ 35,364
Current portion of notes payable
(including $773,544 to related parties
at December 31, 1997 and $160,000 at
June 30, 1999).......................... 859,461 6,667 166,667
Trade accounts payable (including
$82,430, $16,578 and $0 (unaudited) to
related parties at December 31, 1997,
1998 and June 30, 1999, respectively)... 4,691,095 3,891,070 3,943,858
Accrued liabilities...................... 1,131,459 2,066,035 2,643,087
Deposits and other payables.............. 6,856,424 9,852,399 10,887,801
Other.................................... 200,000 -- --
----------- ----------- -----------
Total current liabilities................ 18,752,298 21,583,003 17,676,777
----------- ----------- -----------
Long-term liabilities:
Long-term portion of notes payables
(including $979,275, $316,915 and
$321,055 (unaudited) to related parties
at December 31, 1997, 1998 and June 30,
1999, respectively)..................... 979,275 316,915 321,055
----------- ----------- -----------
Commitments and contingencies (Notes 8, 9
and 14)
Stockholders' equity (deficit):
Preferred stock (20,000,000 authorized):
HBS Series; cumulative, $0.01 par value,
5,000,000 shares authorized, 600,000
shares issued and outstanding at
December 31, 1997 (liquidation
preference of $600,000)................. 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, 400,000 and 400,000
(unaudited) shares issued and
outstanding at December 31, 1997, 1998
and June 30, 1999, respectively
(liquidation preference of $700,000,
$400,000 and $400,000 at December 31,
1997, 1998 and June 30, 1999,
respectively)........................... 7,000 4,000 4,000
Series B; $0.01 par value, 1,050,000
shares authorized, 500,000, 390,000 and
390,000 shares issued and outstanding at
December 31, 1997, 1998 and June 30,
1999, respectively (liquidation
preference of 500,000, 390,000 and
390,000 at December 31, 1997, 1998 and
June 30, 1999, respectively)............ 5,000 3,900 3,900
Series C; $0.01 par value, 340,000 shares
authorized, 276,667, 70,000 and 70,000
shares issued and outstanding at
December 31, 1997, 1998 and June 30,
1999, respectively (liquidation
preference of 276,667, 70,000 and 70,000
at December 31, 1997, 1998 and June 30,
1999, respectively)..................... 2,767 700 700
Series D; $0.01 par value, 1,500,000
authorized, issued and outstanding at
December 31, 1997, 1998 and June 30,
1999 (liquidation preference of
$1,500,000)............................. 15,000 15,000 15,000
Series E; $0.01 par value, 350,000
authorized, issued and outstanding at
December 31, 1997, 1998 and June 30,
1999 (liquidation preference of
$350,000)............................... 3,500 3,500 3,500
Common stock, $0.01 par value, 20,000,000
shares authorized, 8,640,893, 9,803,949
and 9,803,949 shares issued and
outstanding at December 31, 1997, 1998
and June 30, 1999, respectively......... 86,410 98,040 98,040
Additional paid-in capital............... 9,882,156 8,417,991 8,165,091
Accumulated deficit...................... (6,515,364) (7,838,842) (8,168,315)
Treasury stock, 550,000,1,130,250 and
1,150,250 shares at December 31, 1997,
1998 and June 30, 1999, respectively, at
cost.................................... (496,537) (1,866,367) (1,902,001)
----------- ----------- -----------
Total stockholders' equity (deficit).... 3,002,332 (1,162,078) (1,780,085)
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)....................... $22,733,905 $20,737,840 $16,217,747
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Six Months ended
December 31, June 30,
------------------------ -----------------------
1997 1998 1998 1999
----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues.................... $11,643,263 $19,633,576 $ 9,598,898 $9,728,254
Cost of revenues............ 8,592,217 13,043,784 7,079,099 7,112,800
----------- ----------- ----------- ----------
Gross profit............ 3,051,046 6,589,792 2,519,799 2,615,454
Operating expenses.......... 3,512,754 3,842,001 1,906,525 2,665,374
Charge in connection with
terminated customers....... -- 4,271,394 -- --
Advance funding program
income..................... (832,248) (1,417,528) (688,311) (301,593)
Advance funding program
costs...................... 566,859 480,817 240,494 45,526
----------- ----------- ----------- ----------
Operating income
(loss)................. (196,319) (586,892) 1,061,091 206,147
Other income (expense):
Interest expense.......... (412,145) (627,736) (236,687) (240,428)
Financing fees and debt
issuance costs........... (902,350) (113,785) (91,000) (321,736)
Other, net................ 9,046 4,935 2,291 26,544
----------- ----------- ----------- ----------
Total other expense..... (1,305,449) (736,586) (325,396) (535,620)
----------- ----------- ----------- ----------
Net loss from continuing
operations................. (1,501,768) (1,323,478) 735,695 (329,473)
Discontinued operations:
Net earnings from
discontinued operations,
net of income taxes of
$0....................... 163,744 -- -- --
Net loss on disposal, net
of income taxes of $0.... (142,181) -- -- --
----------- ----------- ----------- ----------
Net income (loss)....... $(1,480,205) $(1,323,478) $ 735,695 $ (329,473)
=========== =========== =========== ==========
Per share data
Basic loss per share:
Continuing operations..... $ (0.28) $ (0.19) $ .06 $ (.05)
Discontinued operations:
Earnings from
operations............. 0.02 -- -- --
Estimated loss on
disposal............... (0.02) -- -- --
----------- ----------- ----------- ----------
Net loss.................... $ (0.28) $ (0.19) $ .06 $ (.05)
=========== =========== =========== ==========
Diluted loss per share:
Continuing operations..... $ (0.28) $ (0.19) $ .05 $ (.05)
Discontinued operations
Earnings from
operations............. 0.02 -- -- --
Estimated loss on
disposal............... (0.02) -- -- --
----------- ----------- ----------- ----------
Net loss.................... $ (0.28) $ (0.19) $ .05 $ (.05)
=========== =========== =========== ==========
Weighted average number of
common shares:
Basic common shares....... 7,268,338 8,541,575 9,258,044 9,803,949
=========== =========== =========== ==========
Diluted common shares..... 7,268,338 8,541,575 10,613,065 9,803,949
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Treasury Stock
------------------ ----------------- Paid-in --------------------- Accumulated
Shares Amount Shares Amount Capital Shares Amount Deficit Total
--------- ------- --------- ------- ---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 3,246,667 $32,467 6,350,769 $63,507 $6,731,159 550,000 $ (496,537) $(5,035,159) $ 1,295,437
Issuance of Units
(Units include common
stock and Series D
preferred stock)....... 1,500,000 15,000 999,997 10,000 1,263,217 1,288,217
Issuance of Units
(Units include common
stock and HBS Series
preferred stock)....... 250,000 2,500 166,666 1,667 245,833 250,000
Issuance of shares for
cash in connection with
warrants exercised..... 257,261 2,573 248,623 251,196
Issuance of shares in
connection with
settlements of accounts
payable................ 73,380 734 171,343 172,077
Partial redemption of
HBS 1996 series........ (640,000) (6,400) (633,600) (640,000)
Payment of preferred
stock dividend......... (132,929) (132,929)
Issuance of HBS escrow
shares--earn out ...... 470,000 4,700 (4,700)
Financing fees in
connection with
issuance of warrants... 1,117,585 1,117,585
Interest paid through
issuance of common
stock.................. 156,154 1,562 154,592 156,154
Issuance and/or release
of HBS escrow shares... 166,666 1,667 513,133 514,800
Issuance of preferred
stock for
extinguishment of
debt................... 210,000 2,100 207,900 210,000
Net loss............... (1,480,205) (1,480,205)
--------- ------- --------- ------- ---------- --------- ----------- ----------- -----------
Balance at December 31,
1997................... 4,566,667 45,667 8,640,893 86,410 9,882,156 550,000 (496,537) (6,515,364) 3,002,332
Issuance of shares for
cash in connection with
exercise of warrants... -- -- 198,705 1,986 224,820 -- -- -- 226,806
Issuance of shares in
connection with
exercise of cashless
warrants............... -- -- 196,502 1,965 (1,965) -- -- -- --
Accounts payable paid
through issuance of
common shares.......... -- -- 43,184 432 58,946 -- -- -- 59,378
Issuance of HBS escrow
shares--employment
agreements............. -- -- 499,998 5,000 (5,000) -- -- -- --
Redemption of HBS
Exchange Series........ (640,000) (6,400) -- -- (633,600) -- -- -- (640,000)
Partial redemption of
HBS Series............. (400,000) (4,000) -- -- (396,000) -- -- -- (400,000)
Partial conversion of
HBS Series............. (200,000) (2,000) 100,000 1,000 1,000 -- -- -- --
Partial redemption of
Series A............... (300,000) (3,000) -- -- (297,000) -- -- -- (300,000)
Partial conversion of
Series B............... (110,000) (1,100) 110,000 1,100 -- -- -- -- --
Partial redemption of
Series C............... (200,000) (2,000) -- -- (118,000) -- -- -- (120,000)
Partial conversion of
Series C............... (6,667) (67) 2,667 27 40 -- -- -- --
Issuance of common
stock in exchange for
debt................... -- -- 12,000 120 29,880 -- -- -- 30,000
Common shares received
into treasury in
connection with sale of
Bordercom and related
company................ -- -- -- -- -- 419,000 (900,000) -- (900,000)
Purchase of common
shares for the
treasury............... -- -- -- -- -- 161,250 (469,830) -- (469,830)
Issuance of
compensatory stock
warrants............... -- -- -- -- 118,590 -- -- -- 118,590
Payment of preferred
stock dividend......... -- -- -- -- (445,876) -- -- -- (445,876)
Net loss............... -- -- -- -- -- -- -- (1,323,478) (1,323,478)
--------- ------- --------- ------- ---------- --------- ----------- ----------- -----------
Balance at December 31,
1998................... 2,710,000 27,100 9,803,949 98,040 8,417,991 1,130,250 (1,866,367) $(7,838,842) (1,162,078)
Purchase of common
shares for the treasury
(unaudited)............ -- -- -- -- -- 20,000 (35,634) -- (35,634)
Payment of preferred
stock dividend
(unaudited)............ -- -- -- -- (252,900) -- -- -- (252,900)
Net loss (unaudited)... -- -- -- -- -- -- -- (329,473) (329,473)
--------- ------- --------- ------- ---------- --------- ----------- ----------- -----------
Balance at June 30,
1999 (unaudited)....... 2,710,000 $27,100 9,803,949 $98,040 $8,165,091 1,150,250 $(1,902,001) $(8,168,315) $(1,780,085)
========= ======= ========= ======= ========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Six Months ended June
December 31, 30,
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss).................. $(1,480,205) $(1,323,478) 735,696 (329,473)
Adjustments to reconcile net
(loss) to net cash used by
operating activities from
continuing operations:
Earnings from discontinued
operations (excluding
intercompany
charges/revenue)........... (112,348) -- -- --
Bad debt expense............ 50,000 185,000 -- --
Charge in connection with
terminated customers....... -- 4,271,394 -- --
Amortization of loan
discounts.................. 99,913 30,166 27,005 164,140
Write-off unamortized loan
discounts.................. -- 83,930 -- --
Write-off debt issuance
costs...................... -- 90,203 -- --
Depreciation and
amortization............... 408,434 578,575 245,137 432,905
Compensation in connection
with issuance of
warrants................... 870,492 118,590 91,000 --
Common stock issued to
settle interest payable.... 156,154 -- -- --
Common stock issued under
bonus agreement............ 244,000 316,700 -- --
Change in assets and
liabilities, net of effects
of assets and liabilities
acquired and disposed of:
(Increase) decrease in:
Trade accounts
receivable................ 436,986 (300,611) (73,850) (750,230)
Advance payment
receivables............... (9,790,084) 1,652,200 (3,036,729) 5,909,265
Other receivables.......... 13,216 (272,081) 146,928 161,180
Other current
liabilities............... 200,000 (200,000) 5,000 --
Trade accounts payable and
accrued liabilities....... 4,049,550 (122,774) (1,099,564) 701,040
Deposits and other
payables.................. 3,380,295 (1,460,416) 1,350,230 1,280,901
Other assets............... (743,465) (973,915) (409,650) 757,828
----------- ----------- ---------- ----------
Net cash provided (used)
by operating activities.. (2,217,062) 2,673,483 (2,018,797) 8,327,556
----------- ----------- ---------- ----------
Net cash provided (used)
in discontinued
operations............... (1,414,219) -- 1,651,301 --
----------- ----------- ---------- ----------
Net cash provided (used)
in operating activities.. (3,631,281) 2,673,483 (367,496) 8,327,556
----------- ----------- ---------- ----------
Cash flows from investing
activities:
Purchase of property and
equipment.................. (298,295) (683,054) (310,242) (115,348)
Purchases of billing
contracts.................. (47,000) (48,100) (45,600) (177,487)
Acquisition costs........... -- -- -- (278,078)
Cash paid for treasury
stock...................... -- (469,830) -- (35,634)
Cash received in connection
with sale of Bordercomm.... - 1,651,301 - -
----------- ----------- ---------- ----------
Net cash provided (used)
by investing activities.. (345,295) 450,317 (355,842) (606,547)
----------- ----------- ---------- ----------
Cash flows from financing
activities:
Issuance of notes
receivable................. -- (500,000) -- --
Proceeds from notes
payable.................... 6,147,859 752,973 1,988,212 --
Principal payments on notes
payable.................... (3,027,273) (1,599,250) (582,525) (5,731,468)
Payment of preferred stock
dividends.................. (132,929) (445,876) (445,876) (569,599)
Redemption of preferred
stock for cash............. (640,000) (1,460,000) (1,160,000) --
Issuance of shares of common
and preferred stock for
cash....................... 1,789,413 226,806 34,642 --
----------- ----------- ---------- ----------
Net cash provided (used)
by financing activities.. 4,137,070 (3,025,347) (165,547) (6,301,067)
----------- ----------- ---------- ----------
Increase (decrease) in cash.. 160,494 98,453 (888,885) 1,419,942
Cash at beginning of period.. 827,526 988,020 988,020 1,086,473
----------- ----------- ---------- ----------
Cash at end of period........ $ 988,020 $ 1,086,473 $ 99,135 $2,506,415
=========== =========== ========== ==========
Supplemental disclosures:
Interest paid............... $ 683,291 $ 650,399 $ 251,235 $ 240,026
=========== =========== ========== ==========
Schedule of non-cash
financing and investing
transactions:
Conversion of debt to
preferred to stock......... $ 210,000 $ -- $ -- $ --
=========== =========== ========== ==========
Financing fees in connection
with issuance of warrants.. $ 1,117,585 $ 118,590 $ -- $ --
=========== =========== ========== ==========
Discount on notes........... $ 247,092 $ -- $ -- $ --
=========== =========== ========== ==========
Issuance of common stock in
connection with acquisition
of HBS assumption of assets
and liabilities............ $ 270,800 $ -- $ -- $ --
=========== =========== ========== ==========
Fees paid through issuance
of common stock............ $ 132,077 $ -- $ -- $ --
=========== =========== ========== ==========
Payment of interest through
issuance of common stock... $ 156,154 $ -- $ -- $ --
=========== =========== ========== ==========
Payment of accounts payable
through issuance of common
stock...................... $ 172,077 $ 59,378 $ -- $ --
=========== =========== ========== ==========
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 $ -- $ -- $ --
=========== =========== ========== ==========
Loss on disposal of
discontinued operations.... $ 142,181 $ 51,301 $ $ --
=========== =========== ========== ==========
Deemed preferred dividend in
connection with below
market conversion feature.. $ 96,600 $ -- $ -- $ --
=========== =========== ========== ==========
</TABLE>
The accompanying financial statements are an integral part of these
consolidated financial statements.
F-5
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General and Summary of Significant Accounting Principles
Business Activity
Avery Communications, Inc. ("Avery") is the parent company of two wholly-
owned subsidiaries, Avery Communications, Inc. a Texas corporation 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 long
distance reselling and billing and collection services. The significant portion
of the Company's revenues are generated through providing billing and
collection services. Local exchange carriers ("LEC's") pursuant to long-term
contracts with these entities perform billing and collection services. 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, Alternate Telephone and Communications, Inc. ("ATC") and
BorderComm, Inc. ("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 fixtures and equipment 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, 1997
and 1998, was $66,077 and $154,125, 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 the
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.
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 recorded 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
F-6
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 fourteen
years. Amortization expense for the years ended December 31, 1997 and 1998 was
$206,796 and $222,916, respectively. On an on-going basis, management reviews
recoverability, the valuation and amortization of goodwill. As 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 cost 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 revenues 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. These reserves represent cash withheld from customers to satisfy
future obligations on behalf of the customer. The obligations consist of local
exchange carrier billing fees, bad debts and sales and excise taxes. 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 also retains a reserve
from its customers' settlement proceeds, calculated to cover accounts that the
LEC's are unable to collect, LEC billing fees and sales taxes.
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 previous billing 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.
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 Standard 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 (loss) and earnings (loss) per share as if SFAS 123
had been applied (See Note 11).
Loss Per Common Share
Loss per common share is computed by dividing the net loss increased by
preferred stock dividends of $528,356 and $338,582 for the years ended December
31, 1997 and 1998, respectively, by the weighted
F-7
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
average number of shares of common stock outstanding during the respective
periods. Preferred stock dividends include deemed dividends of $96,600 for the
year ended December 31, 1997 (see Note 5). The effect of the preferred stock
dividend on the loss per common share was $0.07 and $0.04 per weighted average
common share outstanding for the years ended December 31, 1997 and 1998,
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,
1997 and 1998.
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 1998
presentation.
Adoption of New Accounting Standards
Effective December 15, 1997, the Company adopted SFAS No. 128 "Earnings Per
Share." This statement requires the replacement of primary earnings per share
with basic earnings per share and fully diluted earnings per share with diluted
earning per share. Management of the Company does not believe that the adoption
of this statement had a material impact on the earnings per share computations.
Prior year amounts have been restated to conform with the new standard.
Effective January 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income." This standard requires the presentation of comprehensive
income and its components for each year in which an income statement is
presented. The Company has no transactions in the current year that would be
included as comprehensive income. The Company's financial statements are
prepared in accordance with SFAS No. 130.
Effective January 1, 1998, the Company adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes the standard for the way business enterprises report information
about operating segments in annual and interim financial statements. The
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company currently has only
one operating segment. There is no additional disclosure required.
The FASB has issued SFAS No. 132 "Employers' Disclosures about Pensions and
Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and
106." This Statement revises employers' disclosures about pension and other
postretirement benefit plans and standardizes the disclosure requirements for
pensions and other postretirement benefits. This Statement is effective for
fiscal years beginning after December 15, 1997. The Company typically does not
offer the types of benefit programs that fall under the guidelines of Statement
of Financial Accounting Standards No. 132.
The FASB issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities", during the
second quarter of 1998. SFAS No. 133 becomes effective for the Company's fiscal
year 2000. The statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that
F-8
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. Management has not determined what
impact this standard, when adopted, will have on the Company's financial
statements.
2. Acquisitions and Dispositions
A wholly-owned subsidiary of the Company acquired the general partnership
interest and 100% of the limited partnership interest 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.
In connection with the acquisition, the Company held 470,000 common shares
in escrow. On May 15, 1997, 100,000 shares were issued in accordance with the
terms of the purchase agreement. The balance of 370,000 shares were to be
earned, in 1997, 1998 and 1999, subject to HBS achieving future earnings
projections. Shares earned in 1997 and 1998 were 185,000 and 0, respectively,
and were reflected as additional paid-in capital and goodwill effective in the
year earned.
A summary of the fair value of assets acquired and liabilities assumed is as
follows:
<TABLE>
<S> <C>
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
===========
</TABLE>
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 1998, the Company disposed of Alternate Telephone and
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:
<TABLE>
<S> <C>
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
===========
</TABLE>
F-9
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Short-term Debt Obligations
HBS has a $10,000,000 revolving note payable - line of credit with a capital
corporation. Interest is payable monthly at the prime rate plus 1.5% (9.25% at
December 31, 1998) 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. During 1998, HBS was in violation of three of these covenants,
including exceeding the capital expenditure limitation, exceeding the advance
funding limit, and notification of pending litigation. HBS has received waivers
from the capital corporation for these violations. 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 and 1998 was
$5,013,859 and $5,766,832 leaving an available balance of $2,486,141 and
$4,233,168 as of December 31, 1997 and 1998, respectively.
4. Notes Payable
Notes payable at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Notes 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................................... $ 36,667 $ 6,667
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 and 1998 is $350,000 adjusted for a
discount for warrants issued in connection with the
note based on imputed interest rate of 20%.......... 308,644 316,915
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 on demand to a third party bearing
interest at 16% per annum, unsecured................ 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 --
--------- --------
1,838,736 323,582
Less current maturities.............................. 859,461 6,667
--------- --------
Long term portion.................................... $ 979,275 $316,915
========= ========
</TABLE>
F-10
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principal amounts due on long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 6,667
2000........................................................... --
2001........................................................... --
2002........................................................... 350,000
2003........................................................... --
--------
Total........................................................ 356,667
Loan discounts................................................. (33,085)
--------
Total........................................................ $323,582
========
</TABLE>
5. Stockholders' Equity (Deficit)
The Company had seven and five series of preferred stock outstanding as of
December 31, 1997 and 1998, 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 $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 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. As of
December 31, 1998, all of the Series HBS has been redeemed.
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 a
stated conversion price as follows: Series A--$2.50 per share, Series B--$1.00
per share, Series C--$2.50 per share, Series D--$2.00 per share, and Series E--
$1.00 per share. The HBS Exchange Series was subject to automatic conversion at
$2.00 per share upon the date that the Company's ending stockholders' equity
equaled or exceeded $3,000,000. At December 31, 1997, the stockholders' equity
exceeded that amount, however, the Company redeemed such shares in the first
quarter of 1998 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. Series A, B, C, D and
E preferred stock is automatically convertible at the earlier of 1) a vote of
2/3 of the shares of the respective series outstanding, or 2) the closing of an
initial public offering of at least $5 per share and at least $7,000,000 in
aggregate proceeds.
The Company accounts for the issuance of preferred stock with below market
conversion features as deemed dividends to the extent that the fair value of
the common stock at the date of issuance of the preferred stock exceeds the
stated conversion price. During 1997, 400,000 and 100,000 HBS Exchange Series
preferred stock was issued on dates when the fair value of the Company's common
stock was $2.18 and $2.25, respectively. During 1997, the Company recognized
deemed dividends totaling $96,600. Such dividends have been considered in the
calculation of loss attributable to common shareholders, but have no effect on
the consolidated statements of changes in stockholders' equity.
Dividends are payable, 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-11
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
A reconciliation of the expected federal income tax benefit based on the
U.S. Corporate income tax rate of 34% for 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Expected income tax benefit.......................... $503,270 $449,983
Meals and entertainment.............................. 8,280 8,500
Effect of sale of subsidiaries....................... -- (144,365)
Stock option deduction for Federal tax purposes not
deductible for financial reporting purposes......... -- 269,373
Foreign income....................................... 12,262 --
Other................................................ (23,129) 49,138
Valuation allowance.................................. (500,683) (632,629)
-------- --------
$ -- $ --
======== ========
</TABLE>
Deferred tax assets and liabilities as of December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Current deferred tax asset...................... $ 51,871 $1,254,365
Current deferred tax liability.................. -- --
Valuation allowance for current deferred tax
asset.......................................... (51,871) (1,254,365)
----------- ----------
Net current deferred tax asset................ $ -- $ --
=========== ==========
Non-current deferred tax asset.................. $ 2,105,157 $1,541,380
Non-current deferred tax liability.............. (36,620) (42,708)
Valuation allowance for non-current deferred tax
asset.......................................... (2,068,537) (1,498,672)
----------- ----------
Net non-current deferred tax asset............ $ -- $ --
=========== ==========
</TABLE>
The current deferred tax assets and liability result primarily from
differences in contingency and valuation reserves for financial and federal
income tax reporting purposes. The non-current deferred tax assets 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 and prepaid amounts deducted for
federal income tax purposes deferred for financial reporting 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 $3,300,000, that begin expiring in the year 2008. The
utilization of the net operating loss is subject to limitations in accordance
with (S)382 of the Internal Revenue Code.
7. 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, 1998, 10 customers comprised approximately
82% of trade receivables and 5 customers accounted for approximately 83% of
advanced payment receivables. The significant majority of these receivables
were collected after December 31, 1998.
F-12
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit risk with respect to trade accounts receivable generated through
billing services is limited since 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 and $50,000 at December 31, 1997 and 1998,
respectively. The Company minimizes this risk by placing its cash with high
credit quality financial institutions.
8. Commitments and Contingencies
The Company has entered into various non-cancelable operating leases related
to equipment and office space. Future minimum payments on leases having
remaining terms of more than one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1999........................................................ $109,614
2000........................................................ 108,462
2001........................................................ 108,462
2002........................................................ 108,462
2003........................................................ --
--------
Total future minimum rentals.............................. $435,000
========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 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 Company does not expect to incur any losses with respect to these
minimum usage requirements. The remaining minimum usage for significant
contracts at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Amount Expires
---------- -------
<S> <C> <C>
Contract 1...................................... $5,850,000 June 22, 2001
Contract 2...................................... 346,000 January 1, 2001
Others.......................................... 1,156,000 Throughout 2003
----------
$7,352,000
==========
</TABLE>
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
F-13
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
such disputes or assessments if its customers are unable or unwilling to honor
the contract provisions. There were no such disputes at December 31, 1998. The
Company is also contingently liable for chargebacks from the LEC's, to the
extent such charge backs exceed the Company's reserves for such charge backs.
This contingent liability is increased when the Company discontinues business
with a particular customer. See Note 12.
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 and 1998, 166,666 and 0 shares, respectively
were issued pursuant to the contingent earnout agreement and are reflected as
compensation and an increase in shareholder equity.
The Company is party to a legal proceeding filed in July 1998. HBS was named
in a complaint for injunctive relief filed by the Federal Trade Commission
("FTC") against Veterans of America Association ("VOAA"). The suit alleges that
VOAA has caused unauthorized charges to appear on end users' bills based on
deceptive marketing programs and seeks relief against HBS and others. Several
months prior to the filing of the suit, HBS terminated its contract with VOAA
based on suspicion of the same activities 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 and Avery 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
and Avery 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.
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.
9. Related Party Transactions and Other Events
During 1996, two employees of the Company (who previously owned HBS) loaned
the Company $250,000 and $100,000, respectively. At December 31, 1998 these
amounts had been repaid. These same employees also signed a promissory note in
1996 with the Company for $540,926 which was paid in 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 five-year $350,000 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.
F-14
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1997, an employee loaned the Company $300,000 at 10%. The amount was
subsequently repaid.
In May 1998, the Company granted an option to purchase 100,000 shares of
its common stock at $2.69 per share (fair value at the date of grant) to the
directors of the Company.
During July 1998, the Company repaid a $1,000,000 loan to an entity of
which its chairperson is a partner.
Also during July 1998, the Company entered into an employment agreement
with its chairperson and issued an option to purchase 420,000 shares of common
stock at a price of $3.00 per share (fair value at the date of grant). 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.
During December 1998, the Company entered into an employment agreement with
its new president and issued an option to purchase 925,000 shares of common
stock at a price of $2.00 per share (which was more than fair value at the
date of grant). One-half of the option vested at the date of the grant, with
the balance vesting during the first six months of 1999. The terms of the
employment agreement require the Company to pay an annual salary of $200,000.
During December 1998, the Company advanced $400,000 to an employee at 9%
interest and advanced $100,000 to a company at 10% for which its president is
a major stockholder.
In December 1998, Avery's Board of Directors authorized Avery to repurchase
any or all of its outstanding warrants for a price of $1.00 per underlying
share. In December 1998, Avery repurchased warrants held by an entity
controlled by its chairperson to purchase 100,000 shares of common stock at an
exercise price of $1.50 per share. The $100,000 amount was recorded as
compensation in 1998.
10. Fair Value of Financial Instruments
SFAS No. 107, ("Disclosure About Fair Value of Financial Instruments"),
requires disclosures 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, 1998.
<TABLE>
<CAPTION>
Carrying Fair
Amount Amount
-------- --------
<S> <C> <C>
Fixed rate debt.......................................... $323,582 $354,719
</TABLE>
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.
F-15
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. 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 considered compensatory.
Following is a summary of warrant and option activity:
<TABLE>
<CAPTION>
Weighted
Average
Compensatory Exercise
Options Warrants Total Price Total
------------ --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at December
31, 1996............... 217,500 938,356 1,155,856 $1.41 $1,635,268
Reduction in option
prices................ -- -- -- (267,600)
Granted................ 425,000 1,611,828 2,036,828 $1.43 2,918,904
Canceled............... -- (59,000) (59,000) $1.50 (88,500)
Exercised.............. -- (257,261) (257,261) $ .98 (251,126)
--------- --------- --------- ----------
Outstanding at December
31, 1997............... 642,500 2,233,923 2,876,423 $1.37 3,946,946
Purchase of option..... (100,000) -- (100,000) $1.50 (150,000)
Granted................ 1,522,500 -- 1,522,500 $2.32 3,532,502
Exercised.............. (17,500) (567,871) (585,371) $1.76 (806,808)
--------- --------- --------- ----------
Outstanding at December
31, 1998............... 2,047,500 1,666,052 3,713,552 $6,522,640
========= ========= ========= ==========
</TABLE>
The outstanding stock options and warrants expire from August 1998 through
2008.
The following summarizes information about compensatory options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------
Range of Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Number Remaining Exercisable Number Exercisable
Prices Outstanding Contractual Life Price Exercisable Price
-------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$.50-
$3.00 2,047,500 7.7 years $2.05 1,305,000 $1.86
</TABLE>
The weighted average grant date fair values of compensatory exercise prices
equal to and below market price at the date of grant are as follows
<TABLE>
<CAPTION>
Equal to Below
-------- -----
<S> <C> <C>
1997...................................................... $ .75 $1.60
1998...................................................... $1.52 $1.37
</TABLE>
Compensation cost totaling $75,500 and $118,590 was recognized for one of
the options granted in 1997 and several options granted in 1998 as the
exercise price was below the fair value at the grant date. The considered fair
value of the Company's common stock on the date of each respective grant was
based upon the quoted NASD closing share price. The remaining options granted
in 1997 and 1998 have exercise prices which approximate fair value (which was
the quoted trading price at the date of grant) 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,
-------------------------
1997 1998
------------ ------------
<S> <C> <C> <C>
Net loss............................... As reported $ 1,480,205 $ 1,323,478
Pro forma $ 1,765,812 $ 2,880,877
Loss per common share.................. As reported $ 0.24 $ .19
Pro forma $ 0.28 $ .38
</TABLE>
F-16
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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%; 1998--dividend yield of
0%, expected volatility of 89%, 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.
12. Charge in Connection With Terminated Customers
During the year ended December 31, 1998, the Company recorded a charge of
$4,271,394 in connection with the termination of billing and collection
services for certain customers. This amount results primarily from charge backs
and bad debt costs charged by the LEC's to the Company which the Company will
not be able to recover from its customers and to a lesser extent other costs
associated with the terminated customers. Charge- backs from LEC's can continue
for 6 to 9 months after the Company has ceased to process a customer's records
and bad debt costs can continue for up to 18 months. In the normal course of
business, both the Company and LEC's maintain reserves to offset these charges.
However, due to questionable marketing programs utilized by these customers,
chargebacks and bad debt costs for these customers are estimated to be
significantly in excess of normal reserves and any amounts receivable from the
LEC's. The charge includes the Company's estimate of all future chargebacks and
bad debt and other costs related to the terminated customers, including a
$250,000 estimated settlement with the FTC as further described in Note 8.
13. 401(k) Plan
The Company has a 401(k) Plan ("Plan") which covers substantially all of the
Company's employees. Employees could contribute up to $9,500 for 1997 and
$10,000 for 1998. The Company matched contributions to the Plan at $0.25 per
dollar up to 3% of employees compensation for 1997 and at $0.50 per dollar up
to 8% of the employee's compensation for 1998. In addition, Avery may make
additional discretionary contributions. During the years ended December 31,
1997 and 1998, the Company contributed $4,413 and $16,680 to the Plan,
respectively.
14. Year 2000 Contingency
The Year 2000 problem refers to the limitations of the programming code in
certain existing software programs to recognize date-sensitive information for
the Year 2000 and beyond. Unless modified prior to December 31, 1999, such
systems may not properly recognize such information and could generate
erroneous data or cause a system to fail to operate properly.
The operation of the Company's business is highly dependent on its computer
software programs and operating systems. These programs and systems are used in
several key areas of the Company's business, including information management
services, third-party billing clearinghouse services (including the advance
funding program), direct billing services and financial reporting, as well as
in various administrative functions. In providing information management,
third-party billing clearinghouse and direct billing services, the Company
processes telephone call records which are date sensitive.
The Company is in the process of evaluating its programs and systems to
identify potential Year 2000 readiness problems, as well as manual processes,
external interfaces with customers and services supplied by vendors to
coordinate Year 2000 compliance and conversion. The Company's software was
developed internally and management believes that it is Year 2000 compliant,
which means that it will be able to interpret
F-17
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dates beyond the year 1999. The Company plans to test its hardware during 1999
to determine whether it is
Year 2000 compliant. In the event that these systems are not Year 2000
compliant, the Company will make appropriate upgrades or replacements. The
Company believes that, with its existing software and any necessary hardware
modifications, the Year 2000 problem will not pose a significant operational
problem for the Company's information systems.
However, because the Company's business relies on processing date sensitive
telephone call records supplied by third parties, it is possible that non-
compliant third-party computer systems may not be able to provide accurate data
for processing through the Company's computer systems. The Company's business,
financial condition and results of operations could be materially adversely
affected by the Year 2000 problem if it or unrelated parties fail to
successfully address this issue. The Company plans to obtain written assurance
of Year 2000 compliance from its customers during 1999. Management of the
Company currently anticipates that the total expenses and capital expenditures
associated with its Year 2000 readiness project, including personnel and other
costs associated with modifying or replacing its programs and systems will not
exceed $300,000, most of which will be capitalized. As of December 1998, the
Company has incurred approximately $50,000 in costs related to its Year 2000
readiness.
The Company also plans to identify any non-information technology systems
that may be vulnerable to the Year 2000 issue during 1999. Such systems include
utility switches and meters, thermostats and alarms. Once the evaluation of
these systems is complete, the Company will make necessary modifications or
adjustments to achieve Year 2000 readiness. Management believes that the costs
related to Year 2000 compliance for its non-information systems will not have a
material adverse effect on its operations or financial condition.
The cost of Year 2000 readiness and the expected completion dates are the
best estimates of the Company's management and are believed to be reasonably
accurate. In the event the Company's plan to address the Year 2000 problem is
not successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's
financial condition and results of operations. Following the Year 2000 date
change, in the event the Company determines that its programs and systems are
not Year 2000 compliant, the Company will be unable to process date-sensitive
telephone call records and thus be unable to provide most of its revenue-
producing services, which will have a material adverse effect on the Company's
financial condition and results of operations. The Company will also likely
experience considerable delays in compiling information required for financial
reporting and performing various administrative functions.
The Company is currently developing a contingency plan for implementation in
the event its programs and systems are not Year 2000 ready prior to December
31, 1999.
15. Subsequent Events
The Corsair Transaction
In February 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, ("Wireless"), a wholly
owned subsidiary of Primal Systems, Inc. As consideration for Wireless entering
into the Corsair transaction, Corsair paid $1,000,000 cash to Wireless. Corsair
also agreed to loan Wireless the difference between the assets and liabilities
acquired by Wireless, plus $200,000 cash. The terms of the Note are 10% annual
interest, five year amortization, and payment in full required in May 2001. In
addition, Corsair agreed to allow Wireless to retain
F-18
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
any cash collected from certain accounts receivable totaling $1.3 million up to
a maximum of $1.0 million. Neither the amount collected nor the $1.3 million
will be included in the Note described above. Under the terms of the Corsair
acquisition agreement, Avery guaranteed the obligations of Wireless. The
Corsair transaction was entered into in contemplation of Avery's acquisition of
Primal, discussed below.
The Primal Acquisition
In March 1999, Avery entered into a merger agreement with Primal and certain
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 in the telecommunications industry, primarily
utilizing decision support software and internet technologies. As part of this
merger, Avery will acquire the Wireless Billing Systems subsidiary which
acquired billing system assets in the Corsair transaction.
At the time of the merger, Avery will issue up to 4,000,000 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 be issued to Primal's shareholders based upon the operating
performance of Primal from August 1, 1999 through July 31, 2000. Upon the
meeting of certain operating performance thresholds by Primal during this
period, 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.
At the time of the merger, Avery will also enter into employment agreements
with the principals of Primal and will enter into an agreement to register the
underlying shares of Avery common stock to which the Avery convertible
preferred stock is convertible.
Mark J. Nielsen, Avery's President and Chief Executive Officer, is the
Chairman of the Board and a significant shareholder of Primal.
16. Unaudited Interim Financial Information
The unaudited interim financial information as of June 30, 1999 and for the
six months ended June 30, 1998 and 1999, has been prepared on the same basis as
the audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presenation of this interim information.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 1999.
Loss Per Common Share
Loss per share for the six months ended June 30, 1998 and 1999 is computed
by dividing the net loss increased by the preferred stock dividends of $160,500
and $143,600, 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 basic loss per common share was $0.01 and $0.01 per
weighted average common share outstanding for the six months ended June 30,
1998 and 1999, respectively. The effect of outstanding warrants and options on
the computation of net loss per share for the six months ended June 30, 1999
would be antidilutive and, therefore, is not included in the computation of
weighted average shares for that period.
F-19
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
During the six months ended June 30, 1999 the Company repurchased an
additional 621,746 warrants from entities controlled by its chairperson, for
$621,746. The warrant exercise prices ranged from $1.00 to $1.50 per share.
$321,746 was recorded as financing fees and debt issuance costs as the
underlying warrants were originally issued in connection with debt
transactions. The balance of $300,000 was recorded as compensation.
F-20
<PAGE>
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the securities offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Annual Reports and Other Available Information........................... 2
A Note About Forward-Looking Statements.................................. 2
Avery.................................................................... 3
Risk Factors............................................................. 4
Use of Proceeds.......................................................... 7
Plan of Distribution..................................................... 7
Selling Securityholders.................................................. 9
Price Range of Common Stock.............................................. 12
Dividend Policy.......................................................... 12
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 13
Business................................................................. 21
Description of the Primal Companies...................................... 27
Management............................................................... 29
Certain Transactions..................................................... 34
Stock Ownership of Directors, Executive Officers and Principal Holders... 36
Description of Capital Stock............................................. 37
Legal Proceedings........................................................ 38
Changes in Accountants................................................... 39
Experts.................................................................. 39
</TABLE>
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9,868,591 Shares
Avery Communications, Inc.
Common Stock
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[LOGO]
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- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Delaware General Corporation Law
Section 145(a) of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present or
former director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of Section 145, or in defense
of any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith.
Section 145(d) of the DGCL provides that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be
made by the corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of Section
145. Such determination shall be made, with respect to a person who is a
director or officer at the time of such determination, (1) by a majority vote
of the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) by a committee of such directors designated
by majority vote of such directors, even though less than a quorum, or (3) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined
II-1
<PAGE>
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 Avery, as amended, a copy of which is
filed as Exhibit 3.1 to the Registration Statement, provides that a director of
Avery shall not be liable to Avery 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 Avery 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 Avery 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 Avery, 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 Avery, 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 Avery, or is or
was serving at the request of Avery 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 Avery, 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 Avery, 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
Avery 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
Avery 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 Avery,
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.
<TABLE>
<S> <C>
SEC registration fee.............................................. $8,249
Blue Sky fees and expenses........................................
Accounting fees and expenses......................................
Printing and engraving expenses...................................
Legal fees and expenses...........................................
Registrar and transfer agent's fees...............................
Miscellaneous fees and expenses...................................
Total........................................................... $
</TABLE>
Item 26. Recent Sales of Unregistered Securities
On January 31, 1996, Avery 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 Avery'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 Avery should offer the following: (i) to the holders of Avery'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 Avery'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 Avery'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.
The Board of Directors of Avery accepted the PTC Recommendation, and
authorized the proposed recapitalization upon the terms hereinafter described
(the"Avery Recapitalization").
In July 1996, Avery 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 Avery's Series A Junior
Convertible Redeemable 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 Avery'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 Avery's Series C Junior Convertible
Redeemable 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 Avery'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
II-3
<PAGE>
850,000 shares of Avery's Series B Junior Convertible Redeemable 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
Avery's issuing 475,000 shares of Common Stock which are included in the
Secondary Shares and receiving gross proceeds of $47,500.
Each of the persons who acquired the securities described in the Avery
Recapitalization was an accredited investor who acquired such new securities
for investment. The transactions constituting the recapitalization of Avery
involved the exchange by Avery 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 Securities Act of 1933.
In November 1996, Avery acquired HBS. In connection with such acquisition,
Avery 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," as defined
in Rule 501 of Regulation D under the Securities Act, who acquired the shares
of Common Stock for investment. Avery issued such shares in a transaction not
involving a public offering in reliance upon the exemption set forth in Section
4(2) of the Securities Act.
In November 1996, Avery 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. At the time of such purchase,
each of the purchasers was also a beneficial owner of securities of Avery.
Avery issued the units in a transaction not involving a public offering in
reliance upon the exemption set forth in Section 4(2) of the Securities Act.
In March 1997, Avery 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.
Avery issued these shares in a transaction not involving a public offering in
reliance upon the exemptions set forth in Section 3(a)(9) and Section 4(2) of
the Securities Act.
In November 1997, Avery issued an aggregate of 156,154 shares of Common
Stock in payment of interest due on certain notes payable of Avery. The persons
who received such shares were accredited investors who acquired such shares for
investment. Avery 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.
This transaction also constituted an exchange of the Common Stock by Avery 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 Securities Act.
In November 1997, Avery issued an aggregate of 10,000 shares of Preferred
Stock in exchange for certain outstanding debt of Avery. The recipient of such
stock was an accredited investor who acquired such shares for investment. Avery
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 Avery 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 Securities Act.
Since January 1, 1996, Avery issued an aggregate of 2,000,881 shares of
Common Stock to approximately 20 persons upon exercise of outstanding warrants
previously issued by Avery to such persons. Each of the purchasers of such
shares upon exercise of such warrants was an accredited investor who acquired
such shares for investment. Avery 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 Securities 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. Each of such persons was also either a director of Avery or an
affiliate of a director of Avery. Avery issued such securities in transactions
not involving a public offering in reliance upon the exemption set forth in
Section 4(2) of the Securities Act.
II-4
<PAGE>
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
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<C> <S>
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., Harold
D. Box and David W. Mechler, Jr.
2.4 First Amendment to Partnership Interest Option Agreement dated as of
October 15, 1996, by and among Avery Communications, Inc., Avery
Acquisition Sub, Inc., Harold D. Box, and David W. Mechler, Jr.
2.5 Agreement and Plan of Merger, dated as of March 19, 1999, by and among
Avery Communications, Inc., ACI Telecommunications Financial Services
Corporation, Primal Systems, Inc., Mark J. Nielsen, John Faltys,
Joseph R. Simrell and David Haynes (the "Primal Merger Agreement")
2.6* Amendment No. 1 to the Primal Merger Agreement, dated as of March 19,
1999
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 for
$800,000 Bridge Loan Notes
4.4 Form of Warrant Exercise and Securities Exchange Agreement for
$1,050,000 Promissory Note
4.5 Form of Warrant Exercise and Securities Exchange Agreement for
$340,000 Promissory Notes
4.6 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
4.7 Registration Rights Agreement by and between Avery Communications,
Inc. and The Franklin Holding Corporation (Delaware) dated May 30,
1997
4.8 Registration Rights Agreement by and between Avery Communications,
Inc. and Roger Felberbaum dated December 5, 1996
4.9 Registration Rights Agreement by and between Avery Communications,
Inc. and Giulio Curiel dated December 31, 1996
4.10 Registration Rights Agreement by and between Avery Communications,
Inc. and Sabina International S.A. dated December 31, 1996
4.11 Form of Investor Warrant
4.12 Registration Rights Agreement by and between Avery Communications,
Inc. and Thomas A. Montgomery dated January 24, 1997
4.13 Registration Rights Agreement by and between Avery Communications,
Inc. and Thurston Bridge Fund, L.P. dated December 6, 1996
</TABLE>
- --------
* Filed with Amendment No. 2.
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
4.14 Registration Rights Agreement by and between Avery Communications,
Inc. and Eastern Virginia Small Business Investment Corporation dated
December 23, 1996
4.15 Securities Exchange Agreement for 1996 HBS Series
4.16 $350,000 Promissory Note payable to Eastern Virginia Small Business
Investment Corporation dated December 23, 1996
4.17 $50,000 Promissory Note to Global Capital Resources, Inc. dated
September 30, 1996
4.18 Loan and Security Agreement, by and between Hold Billing Services,
Ltd. and FINOVA Capital Corporation dated March 25, 1997
4.19 Schedule to Loan and Security Agreement, by and between Hold Billing
Services, Ltd. and FINOVA Capital Corporation dated March 25, 1997
4.20 Amendment to Loan and Security Agreement and Schedule to Loan and
Security Agreement, by and between Hold Billing Services, Ltd. and
FINOVA Capital Corporation dated February 1998
4.21 Second Amendment to Loan and Security Agreement and Schedule to Loan
and Security Agreement, by and between Hold Billing Services, Ltd. and
FINOVA Capital Corporation dated April 1998
4.22 $7,500,000 Secured Revolving Credit Note to FINOVA Capital Corporation
from Hold Billing Services dated March 25, 1997
5.1 Opinion of Winstead Sechrest & Minick P.C.
10.1 Employment Agreement by and between Avery Communications, Inc. and
Patrick J. Haynes, III dated July 1, 1998
10.2 Stock Warrant Certificate to Patrick J. Haynes, III dated July 1, 1998
10.3 Employment and Noncompetition Agreement by and between Hold Billing
Services, Ltd. and Harold D. Box dated November 15, 1996
10.4 Employment Agreement by and between Avery Communications, Inc. and
Mark J. Nielsen dated December 1, 1998
10.5 Avery Communications, Inc. Stock Option to Mark J. Nielsen dated
December 1, 1998
10.6 Investment Agreement by and between The Franklin Holding Corporation
(Delaware) and Avery Communications, Inc. dated May 30, 1997
10.7 Warrant to the Thurston Group, Inc. dated May 27, 1997
10.8 Avery Communications, Inc. Stock Purchase Warrant to Thurston Bridge
Fund, L.P. dated December 6, 1996
10.9 Avery Communications, Inc. Stock Purchase Warrant to Eastern Virginia
Small Business Investment Corporation dated December 23, 1996
10.10 Avery Communications, Inc. Stock Purchase Warrant to The Franklin
Holding Corporation (Delaware) dated May 30, 1997
10.11 Form of Billing Services Agreement
10.12 Form of Supplemental Advance Purchase Agreement
10.13 Form of Director and Officer Indemnification Agreement
11.1* Statement Regarding Computation of Earnings per Share
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
16.1 Letter from PricewaterhouseCoopers LLP on change in certifying
accountant
21.1 Subsidiaries of Registrant
23.1* Consent of King Griffin & Adamson P.C.
23.2 Consent of Winstead Sechrest & Minick P.C. (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page of this Registration
Statement as originally filed)
24.2 Power of Attorney for Mark J. Nielsen
24.3 Power of Attorney for Robert T. Isham, Jr.
27.1 Financial Data Schedule for Twelve Months Ended December 31, 1998
27.2* Financial Data Schedule for Six Months Ended June 30, 1999
</TABLE>
- --------
* Filed with Amendment No. 2.
Item 28. Undertakings
Rule 415
Avery will:
(1) File, during any period in which it offers or sells securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Commission Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Avery pursuant to the foregoing provisions, or otherwise, Avery has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, Avery will, unless in the opinion of its
II-7
<PAGE>
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Rule 430A
Avery will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Avery under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-8
<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 August 19, 1999.
AVERY COMMUNICATIONS, INC.
By: /s/ Scot M. McCormick
-------------------------------
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
- --------------------------------- August 19,
Patrick J. Haynes, III 1999
/s/ Mark J. Nielsen* Director, President and Chief
- --------------------------------- Executive Officer (Principal August 19,
Mark J. Nielsen Executive Officer) 1999
/s/ Scot M. McCormick Director, Vice President, Chief
- --------------------------------- Financial Officer and Secretary August 19,
Scot M. McCormick (Principal Accounting Officer) 1999
/s/ Norman M. Phipps* Director
- --------------------------------- August 19,
Norman M. Phipps 1999
/s/ J. Alan Lindauer* Director
- --------------------------------- August 19,
J. Alan Lindauer 1999
/s/ Stephen L. Brown* Director
- --------------------------------- August 19,
Stephen L. Brown 1999
/s/ Robert T. Isham, Jr.* Director
- --------------------------------- August 19,
Robert T. Isham, Jr. 1999
*By: /s/ Scot M. McCormick
------------------------------ August 19,
Scot M. McCormick 1999
Attorney-in-Fact
</TABLE>
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Document Number
------- ----------------------- ------
<C> <S> <C>
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., Harold D. Box and David W.
Mechler, Jr.
2.4 First Amendment to Partnership Interest Option Agreement
dated as of October 15, 1996, by and among Avery
Communications, Inc., Avery Acquisition Sub, Inc., Harold D.
Box, and David W. Mechler, Jr.
2.5 Agreement and Plan of Merger, dated as of March 19, 1999, by
and among Avery Communications, Inc., ACI Telecommunications
Financial Services Corporation, Primal Systems, Inc., Mark J.
Nielsen, John Faltys, Joseph R. Simrell and David Haynes (the
"Primal Merger Agreement")
2.6* Amendment No. 1 to the Primal Merger Agreement, dated as of
March 19, 1999
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
for $800,000 Bridge Loan Notes
4.4 Form of Warrant Exercise and Securities Exchange Agreement
for $1,050,000 Promissory Note
4.5 Form of Warrant Exercise and Securities Exchange Agreement
for $340,000 Promissory Notes
4.6 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
4.7 Registration Rights Agreement by and between Avery
Communications, Inc. and The Franklin Holding Corporation
(Delaware) dated May 30, 1997
4.8 Registration Rights Agreement by and between Avery
Communications, Inc. and Roger Felberbaum dated December 5,
1996
4.9 Registration Rights Agreement by and between Avery
Communications, Inc. and Giulio Curiel dated December 31,
1996
4.10 Registration Rights Agreement by and between Avery
Communications, Inc. and Sabina International S.A. dated
December 31, 1996
4.11 Form of Investor Warrant
</TABLE>
- --------
* Filed with Amendment No. 2
II-10
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Document Number
------- ----------------------- ------
<C> <S> <C>
4.12 Registration Rights Agreement by and between Avery
Communications, Inc. and Thomas A. Montgomery dated January
24, 1997
4.13 Registration Rights Agreement by and between Avery
Communications, Inc. and Thurston Bridge Fund, L.P. dated
December 6, 1996
4.14 Registration Rights Agreement by and between Avery
Communications, Inc. and Eastern Virginia Small Business
Investment Corporation dated December 23, 1996
4.15 Securities Exchange Agreement for 1996 HBS Series
4.16 $350,000 Promissory Note payable to Eastern Virginia Small
Business Investment Corporation dated December 23, 1996
4.17 $50,000 Promissory Note to Global Capital Resources, Inc.
dated September 30, 1996
4.18 Loan and Security Agreement, by and between Hold Billing
Services, Ltd. and FINOVA Capital Corporation dated March 25,
1997
4.19 Schedule to Loan and Security Agreement, by and between Hold
Billing Services, Ltd. and FINOVA Capital Corporation dated
March 25, 1997
4.20 Amendment to Loan and Security Agreement and Schedule to Loan
and Security Agreement, by and between Hold Billing Services,
Ltd. and FINOVA Capital Corporation dated February 1998
4.21 Second Amendment to Loan and Security Agreement and Schedule
to Loan and Security Agreement, by and between Hold Billing
Services, Ltd. and FINOVA Capital Corporation dated April
1998
4.22 $7,500,000 Secured Revolving Credit Note to FINOVA Capital
Corporation from Hold Billing Services dated March 25, 1997
5.1 Opinion of Winstead Sechrest & Minick P.C.
10.1 Employment Agreement by and between Avery Communications,
Inc. and Patrick J. Haynes, III dated July 1, 1998
10.2 Stock Warrant Certificate to Patrick J. Haynes, III dated
July 1, 1998
10.3 Employment and Noncompetition Agreement by and between Hold
Billing Services, Ltd. and Harold D. Box dated November 15,
1996
10.4 Employment Agreement by and between Avery Communications,
Inc. and Mark J. Nielsen dated December 1, 1998
10.5 Avery Communications, Inc. Stock Option to Mark J. Nielsen
dated December 1, 1998
10.6 Investment Agreement by and between The Franklin Holding
Corporation (Delaware) and Avery Communications, Inc. dated
May 30, 1997
10.7 Warrant to the Thurston Group, Inc. dated May 27, 1997
10.8 Avery Communications, Inc. Stock Purchase Warrant to Thurston
Bridge Fund, L.P. dated December 6, 1996
10.9 Avery Communications, Inc. Stock Purchase Warrant to Eastern
Virginia Small Business Investment Corporation dated December
23, 1996
10.10 Avery Communications, Inc. Stock Purchase Warrant to The
Franklin Holding Corporation (Delaware) dated May 30, 1997
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Document Number
------- ----------------------- ------
<C> <S> <C>
10.11 Form of Billing Services Agreement
10.12 Form of Supplemental Advance Purchase Agreement
10.13 Form of Director and Officer Indemnification Agreement
11.1* Statement Regarding Computation of Earnings per Share
16.1 Letter from PricewaterhouseCoopers LLP on change in
certifying accountant
21.1 Subsidiaries of Registrant
23.1* Consent of King Griffin & Adamson P.C.
23.2 Consent of Winstead Sechrest & Minick P.C. (included in
Exhibit 5.1)
24.1 Power of Attorney (included on signature page of this
Registration Statement as originally filed)
24.2 Power of Attorney for Mark J. Nielsen
24.3 Power of Attorney for Robert T. Isham, Jr.
27.1 Financial Data Schedule for Twelve Months Ended December 31,
1998
27.2* Financial Data Schedule for Six Months Ended June 30, 1999
</TABLE>
- --------
* Filed with Amendment No. 2
II-12
<PAGE>
EXHIBIT 2.6
Amendment No. 1
to
Agreement and Plan of Merger
This is AMENDMENT NO. 1 (this "Amendment") to that certain Agreement and
Plan of Merger (the "Agreement") and is made as of March 19, 1999, by and among
Avery Communications, Inc., a Delaware corporation ("Avery"), ACI
Telecommunications Financial Services Corporation, a Delaware corporation and
wholly owned subsidiary of Avery ("Merger Sub"), Primal Systems, Inc., a
California corporation ("Primal"), Mark J. Nielsen, an individual resident in
San Juan Capistrano, California ("Nielsen"), John Faltys, an individual resident
in Orange, California ("Faltys"), Joseph R. Simrell, an individual resident in
Aliso Viejo, California ("Simrell"), and David Haynes, an individual resident in
Irvine, California ("Haynes," and, collectively with Nielsen, Faltys, and
Simrell, the "Stockholders"). All terms not defined herein are used with the
same meanings as defined in the Agreement.
Recitals
A. Pursuant to the Merger for which provision is made in the Agreement,
Primal will merge with and into Merger Sub and Merger Sub will survive as the
Surviving Corporation.
B. The term "Acquired Companies" is defined in Section 13 of the
Agreement to mean Primal and its Subsidiaries (other than WBS), collectively.
C. On the date hereof, Primal has no Subsidiaries other than WBS.
D. The parties hereto desire to supplement the provisions of Section 3.3
and Section 3.4 of the Agreement to make clear that it was and is the intention
of the parties to the Agreement that, in determining whether any Escrow Shares
or Additional Merger Consideration is due to the holders of the Primal Common
Stock pursuant to the terms of such Sections, only the unconsolidated revenues
and earnings or losses of the Surviving Corporation shall be used, and that no
revenues and earnings or losses of any Subsidiary of the Surviving Corporation
shall be used in the calculations under such Sections for any purpose
whatsoever.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto,
intending to be legally bound, agree as follows:
1. For all purposes of Section 3.3 and Section 3.4 of the Agreement, the
determination of whether the holders of Primal Common Stock at the Effective
Time shall be entitled to a release of any Escrow Shares or to receive any
Additional Merger Consideration, or both, shall be based solely upon the
unconsolidated revenues and earnings or losses of the Surviving Corporation,
which shall mean for all purposes, the unconsolidated revenues and earnings of
Primal, although Primal will technically, under applicable law, cease to exist
at the Effective Time and shall thereafter be the survived by the Surviving
Corporation. Under no circumstance whatsoever shall any revenues and
<PAGE>
earnings or losses of WBS or any other Subsidiary of Primal be included with the
revenues and earnings or losses of the Surviving Corporation in making any of
the calculations required by Section 3.3 or Section 3.4 of the Agreement.
2. For all the purposes of Section 3.3 and Section 3.4 of the Agreement,
the revenues and earnings or losses of WBS shall be excluded for all purposes.
3. For the purposes of Section 3.4 of the Agreement, the Closing Financial
Statements shall mean and refer to the unconsolidated financial statements of
the Surviving Corporation, which, in effect, would be the unconsolidated
financial statements of Primal were Primal to be the surviving corporation in
the Merger.
4. In preparing the Closing Financial Statements of the Surviving
Corporation for the purposes of Section 3.3 and Section 3.4 of the Agreement, no
revenues and earnings or losses of WBS or any other Subsidiary of the Surviving
Corporation shall be included therein for any purposes whatsoever, including,
without limitation, the determination of whether any Escrow Shares are released
or whether any Additional Merger Consideration is due to the holders of Primal
Common Stock.
5. Except as expressly modified hereby, each of the other terms and
provisions of the Agreement are hereby ratified and confirmed in all respects
and shall remain in full force and effect in accordance with their respective
terms.
6. This Agreement may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Agreement and all of which,
when taken together, will be deemed to constitute one and the same agreement.
[The remainder of this page has been left blank intentionally.
Signatures of the parties appear on the following page.]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
AVERY COMMUNICATIONS, INC.
By: /s/ Scot M. McCormick
-------------------------------------
Scot M. McCormick
Vice President
ACI TELECOMMUNICATIONS FINANCIAL
SERVICES CORPORATION
By: /s/ Scot M. McCormick
-------------------------------------
Scot M. McCormick
Vice President
PRIMAL SYSTEMS, INC.
By: /s/ John Faltys
-------------------------------------
John Faltys
President
S-1
<PAGE>
STOCKHOLDERS:
/s/ Mark J. Nielsen
------------------------------------
Mark J. Nielsen
/s/ John Faltys
------------------------------------
John Faltys
/s/ Joseph R. Simrell
------------------------------------
Joseph R. Simrell
/s/ David Haynes
------------------------------------
David Haynes
S-2
<PAGE>
EXHIBIT 11.1
Avery Communications, Inc.
Exhibit 1
Statement regarding computation of per share data
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
------------------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------------- ----------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net loss from continuing operations (1,323,478)
Preferred stock dividend (338,582)
----------------
Net loss from continuing operations available to
common stockholders (1,662,060) 8,541,575 -.19
Gain from discontinued operations - 8,541,575 -
Estimated loss on disposal - 8,541,575 -
----------------
Net loss available to common stockholders (1,662,060) 8,541,575 -.19
================ =========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants -
Convertible Preferred Stock -
Convertible Debt -
-----------------
DILUTED EPS
Net loss from continuing operations (1,323,478)
Preferred stock dividend (338,582)
----------------
Net loss from continuing operations available to
common stockholders (1,662,060) 8,541,575 -.19
Gain from discontinued operations - 8,541,575 -
Estimated loss on disposal - 8,541,575 -
----------------
Net loss available to common stockholders
including assumed conversions (1,662,060) 8,541,575 -.19
================ ================= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
------------------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------------- ------------------ ---------
<S> <C> <C> <C>
BASIC EPS
Net loss from continuing operations (1,501,768)
Preferred stock dividend (528,356)
----------------
Net loss from continuing operations available to
common stockholders (2,030,124) 7,268,338 (0.28)
Gain from discontinued operations 163,744 7,268,338 0.02
Estimated loss on disposal (142,181) 7,268,338 (0.02)
----------------
Net income available to common stockholders (2,008,561) 7,268,338 (0.28)
================ =========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants - -
Convertible Preferred Stock - -
Convertible Debt - -
------------------
DILUTED EPS
Net loss from continuing operations (1,501,768)
Preferred stock dividend (528,356)
----------------
Net loss from continuing operations available to
common stockholders (2,030,124) 7,268,338 (0.28)
Gain from discontinued operations 163,744 7,268,338 0.02
Estimated loss on disposal (142,181) 7,268,338 (0.02)
Net loss available to common stockholders
including assumed conversions (2,008,561) 7,268,338 (0.28)
================ ================= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ----------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income from continuing operations 735,695
Preferred stock dividend (160,500)
---------------
Net income from continuing operations available to
common stockholders 575,195 9,258,044 0.06
Loss on disposal - 9,258,044 0.00
---------------
Net Income available to common stockholder 575,195 9,258,044 0.06
===============
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants 1,355,021
Convertible Preferred Stock -
Convertible Debt -
-----------------
DILUTED EPS
Net income from continuing operations 735,695
Preferred stock dividend (160,500)
---------------
Net income from continuing operations available to
common stockholders 575,195 10,613,065 0.05
Loss on disposal - 10,613,065 0.00
---------------
Net Income available to common stockholder
including assumed conversions 575,195 10,613,065 0.05
=============== ================= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------------- ----------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net loss from continuing operations (329,473)
Preferred stock dividend (143,600)
----------------
Net loss from continuing operations available to
common stockholders (473,073) 9,803,949 (0.05)
Gain from discontinued operations _ 9,803,949 0.00
----------------
Net loss available to common stockholders (473,073) 9,803,949 (0.05)
================ =========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants - -
Convertible Preferred Stock - -
Convertible Debt - -
-----------------
DILUTED EPS
Net loss from continuing operations (329,473)
Preferred stock dividend (143,600)
----------------
Net loss from continuing operations available to
common stockholders (473,073) 9,803,949 (0.05)
Gain from discontinued operations - 9,803,949 0.00
----------------
Net loss available to common stockholders
including assumed conversions (473,073) 9,803,949 (0.05)
================ ================= =========
</TABLE>
<PAGE>
EXHIBIT 23.1
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 July 16, 1999,
on the financial statements of Avery Communications, Inc. as of and for the
years ended December 31, 1997 and 1998, 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.
_____________________________________
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
August 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> JUN-30-1998 JUN-30-1999
<CASH> 99,135 2,506,415
<SECURITIES> 0 0
<RECEIVABLES> 17,445,986 7,824,783
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 17,647,708 10,779,776
<PP&E> 851,618 1,339,778
<DEPRECIATION> 152,226 381,656
<TOTAL-ASSETS> 22,777,725 16,217,747
<CURRENT-LIABILITIES> 20,160,106 17,676,777
<BONDS> 0 0
30,417 27,100
0 0
<COMMON> 94,043 98,040
<OTHER-SE> 1,263,336 (1,905,225)
<TOTAL-LIABILITY-AND-EQUITY> 22,777,725 16,217,747
<SALES> 9,598,898 9,728,254
<TOTAL-REVENUES> 9,598,898 9,728,254
<CGS> 7,079,099 7,112,800
<TOTAL-COSTS> 8,535,516 9,495,563
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 327,687 562,164
<INCOME-PRETAX> 735,695 (329,473)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 735,695 (329,473)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 735,695 (329,473)
<EPS-BASIC> 0.06 (0.05)
<EPS-DILUTED> 0.05 (0.05)
</TABLE>
