<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Or
[_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-27095
-------------
AVERY COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 12-2227079
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
190 SOUTH LASALLE STREET, 60603
SUITE 1710
CHICAGO, ILLINOIS
(Address and principal executive offices) (Zip code)
(312) 419-0077
(Registrant's telephone number, including area code)
The number of shares outstanding of each of the issuer's classes of common
equity, as of November 9, 1999
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
-------------- ----------------------------
Common Stock, $.01 par value 9,803,949
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Interim Condensed Consolidated Financial Statements 1
(Unaudited)
Condensed Consolidated Balance Sheets - September 30, 1
1999 and December 31, 1998
Condensed Consolidated Statements of Operations - For 2
the Three and Nine Months Ended September 30, 1999
and 1998
Condensed Consolidated Statements of Cash Flows - For 3
the Nine Months Ended September 30, 1999 and 1998
Notes to Interim Condensed Consolidated Financial 4
Statements
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II OTHER INFORMATION 13
Item 1 Legal Proceedings 13
<PAGE>
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
--------------- --------------
September 30, December 31,
ASSETS 1999 1998
--------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,199 $ 1,086
Trade accounts receivable 935 1,091
Advance payment receivables, net of allowance for doubtful accounts
of $189 at September 30, 1999 6,192 11,893
Other receivables, net of allowance for doubtful accounts
of $235 at September 30, 1999 and December 31, 1998 231 487
Other 143 12
------------- -------------
Total current assets 9,700 14,569
------------- -------------
Property and equipment:
Furniture, fixtures and equipment 1,392 1,224
Accumulated depreciation and amortization (442) (249)
------------- -------------
Total equipment, net 950 975
------------- -------------
Other assets:
Goodwill, net 2,786 2,994
Capitalized acquisition costs 267 --
Purchased contracts, net 98 35
Deposits 532 1,570
Other 436 595
------------- -------------
Total other assets 4,119 5,194
------------- -------------
Total assets $ 14,769 $ 20,738
============= =============
--------------- --------------
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1999 1998
--------------- --------------
Current liabilities:
Line of credit $ 8 $ 5,767
Current portion of notes payable (including $250 to related parties
at September 30, 1999) 257 7
Trade accounts payable (including $17 to related parties at
December 31, 1998) 4,471 3,890
Accrued liabilities 2,813 2,066
Deposits and other payables 8,425 9,852
------------- -------------
Total current liabilities 15,974 21,582
------------- -------------
Long-term liabilities:
Long-term portion of notes payable (including $323 and $317 to
related parties at September 30, 1999 and December 31, 1998, respectively) 323 317
------------- -------------
Stockholders' deficit:
Preferred stock (20,000,000 shares authorized): (See Note 4) 28 28
Common stock, $0.01 par value, 20,000,000 shares authorized,
9,803,949 shares issued and outstanding at September 30, 1999 and
December 31, 1998 98 98
Additional paid-in capital 8,165 8,418
Accumulated deficit (7,837) (7,839)
Treasury stock, 1,176,916 and 1,130,250 shares at September 30, 1999 and
December 31, 1998, respectively, at cost (1,982) (1,866)
------------- -------------
Total stockholders' deficit (1,528) (1,161)
------------- -------------
Total liabilities and stockholders' deficit $ 14,769 $ 20,738
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues 6,608 4,654 16,336 14,253
Cost of revenues 5,045 2,111 12,158 9,190
--------- --------- --------- ---------
Gross profit 1,563 2,543 4,178 5,063
Operating expenses 1,296 894 3,960 2,801
Charge in connection with terminated customers - 4,150 - 4,150
Advance funding program income (151) (361) (452) (1,049)
Advance funding program costs 48 204 193 524
--------- --------- --------- ---------
Operating income (loss) 370 (2,344) 477 (1,363)
Other income (expense):
Interest expense (78) (209) (254) (464)
Financing fees and debt issuance costs - (23) (322) (114)
Other, net 39 89 101 189
--------- --------- --------- ---------
Total other expense (39) (143) (475) (389)
--------- --------- --------- ---------
Net income (loss) 331 (2,487) 2 (1,752)
========= ========= ========= =========
Net income (loss) attributable to common
stockholders after preferred dividends 259 (2,563) (213) (2,018)
========= ========= ========= =========
Per share data:
Net income (loss) per share - basic 0.03 (0.29) (0.02) (0.24)
Net income (loss) per share - diluted 0.03 (0.29) (0.02) (0.24)
Weighted average number of common shares:
Basic common shares 8,653,699 8,711,544 8,657,582 8,468,027
Diluted common shares 8,795,095 8,711,544 8,657,582 8,468,027
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
---------------------
Nine Months Ended
September 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2 $(1,751)
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Charge in connection with terminated customers - 4,150
Amortization of loan discounts 6 30
Write-off loan costs - 90
Write-off unamortized loan discounts - 84
Depreciation and amortization 398 378
Financing fees in connection with issuance of warrants - 119
Change in assets and liabilities, net of effects of assets and liabilities disposed of:
Trade accounts receivable 155 (157)
Advance payment receivables 5,513 (961)
Other receivables 256 204
Trade accounts payable and accrued liabilities 1,327 (614)
Deposits and other payables (1,238) (3,381)
Other assets 1,045 (396)
------- -------
Net cash provided (used) by operating activities 7,464 (2,205)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (168) (638)
Cash received in connection with sale of Bordercomm - 1,651
Purchases of billing contracts (60) (48)
Acquisition costs (267) -
Cash paid for treasury stock (115) -
------- -------
Net cash provided (used) by investing activities (610) 965
------- -------
Cash flows from financing activities:
Issue notes receivable (80) -
Proceeds from notes payable 510 3,658
Principal payments on notes payable (5,918) (1,599)
Payment of preferred stock dividends (253) (446)
Redemption of preferred stock for cash - (1,460)
Issuance of shares of common and preferred stock for cash - 227
------- -------
Net cash provided (used) by financing activities (5,741) 380
------- -------
Increase (decrease) in cash 1,113 (860)
Cash at beginning of period 1,086 988
------- -------
Cash at end of period $ 2,199 $ 128
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by Avery Communications, Inc. ("ACI"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company's management, the accompanying interim condensed
consolidated financial statements reflect all adjustments that are necessary for
a fair presentation of the Company's financial position, results of operations
and cash flows for such periods. All such adjustments are of a normal recurring
nature. It is recommended that these interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Report on Form SB-2
for the years ended December 31, 1998 and 1997. Results of operations for
interim periods are not necessarily indicative of results that may be expected
for any other interim periods or the full fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to conform to current
classifications.
NOTE 2. EARNINGS (LOSS) PER SHARE
Earnings per share for all periods have been restated to reflect the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which established standards for computing and presenting
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS No. 128 requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. Basic EPS were computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS differs from basic EPS due to the assumed conversions of potentially
dilutive convertible preferred stock, convertible debt and warrants that were
outstanding during the period. The following is a reconciliation of the
numerators and the denominators of the basic and diluted per-share computations
for net income (loss).
Income (loss) per share for the nine months ended September 30, 1999 and
1998 is computed by dividing the net income (loss) decreased (increased) by the
preferred stock dividends of $214,400 and $266,782, 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
income (loss) per common share was $0.02 and $0.03 per weighted average common
share outstanding for the nine months ended September 30, 1999 and 1998,
respectively. The effect of outstanding warrants and options on the computation
of net income (loss) per share for the nine months ended September 30, 1999 and
1998 and the three months ended September 30, 1998 would be antidilutive and,
therefore, is not included in the computation of weighted average shares for
that period.
4
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income (loss) 2
Preferred stock dividend (215)
------
Net income (loss) available to common stockholders (213) 8,657,582 (0.02)
=====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants
Convertible Preferred Stock
Convertible Debt
---------
DILUTED EPS
Net income (loss) available to common stockholders
including assumed conversions (213) 8,657,582 (0.02)
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income (loss) (1,752)
Preferred stock dividend (266)
------
Net income (loss) available to common stockholders (2,018) 8,468,027 (0.24)
=====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants
Convertible Preferred Stock
Convertible Debt
---------
DILUTED EPS
Net income (loss) available to common stockholders
including assumed conversions (2,018) 8,468,027 (0.24)
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ----------
<S> <C> <C> <C>
BASIC EPS
Net income (loss) 331
Preferred stock dividend (72)
------
Net income (loss) available to common stockholders 259 8,653,699 0.03
=====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants 141,396
Convertible Preferred Stock
Convertible Debt
---------
DILUTED EPS
Net income (loss) available to common stockholders
including assumed conversions 259 8,795,095 0.03
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income (loss) (2,487)
Preferred stock dividend (76)
------
Net income (loss) available to common stockholders (2,563) 8,711,544 (0.29)
=====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants
Convertible Preferred Stock
Convertible Debt
---------
DILUTED EPS
Net income (loss) available to common stockholders
including assumed conversions (2,563) 8,711,544 (0.29)
====== ========= =====
</TABLE>
5
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes it
is unlikely that the final outcome of any of the claims or proceedings to which
the Company is a party will have a material adverse effect on the Company's
financial position or results of operations; however, due to the inherent
uncertainty of litigation, there can be no assurance that the resolution of any
particular claim or proceeding would not have a material adverse effect on the
Company's results of operations for the fiscal period in which such resolution
occurred.
In February 1999, Corsair Communications, Inc. ("Corsair") 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. Under the terms of the Corsair
acquisition agreement, Avery guaranteed the obligations of Wireless, which are
a note to Corsair for $2.2 million and monthly office space rental payments of
$38,000. The Corsair note bears interest at the annual rate of 10% is due May
26, 2001 and has a five year amortization schedule which generates monthly
payments of $48,000. The office space rental payments relate to office space
sublet by Wireless from Corsair.
NOTE 4. PREFERRED STOCK
The details of preferred stock as of the periods indicated were as
follows:
<TABLE>
<CAPTION> (In Whole Dollars)
September 30, December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Preferred stock (20,000,000 shares authorized):
Series A; $0.01 par value, 800,000 shares authorized, 400,000 shares
issued and outstanding at September 30, 1999 and December 31, 1998,
(liquidation preference of $400,000) 4,000 4,000
Series B; $0.01 par value, 1,050,000 shares authorized, 390,000 shares
issued and outstanding at September 30, 1999 and December 31, 1998
(liquidation preference of $390,000) 3,900 3,900
Series C; $0.01 par value, 340,000 shares authorized, 70,000 shares
issued and outstanding at September 30, 1999 and December 31, 1998
(liquidation preference of $70,000) 700 700
Series D; $0.01 par value, 1,500,000 authorized, issued and outstanding at
September 30, 1999 and December 31, 1998
(liquidation preference of $1,500,000) 15,000 15,000
Series E; $0.01 par value, 350,000 authorized, issued and outstanding at
September 30, 1999 and December 31, 1998
(liquidation preference of $350,000) 3,500 3,500
--------- ---------
Total Preferred 27,100 27,100
========= =========
</TABLE>
NOTE 5. RELATED PARTY TRANSACTIONS
During the nine months ended September 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.
NOTE 6. CHARGE IN CONNECTION WITH TERMINATED CUSTOMERS
In the third and fourth quarters of calendar 1998, the Company recorded
charges in connection with terminated customers totaling $4,271,000. Of this
amount, $4,150,000 was recorded in the third quarter of 1998. At December 31,
1998 the remaining reserve was $2.8 million. The reserve balance at September
30, 1999 was $1.4 million.
6
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. SUBSEQUENT EVENTS
The Primal Acquisition
In March 1999, Avery entered into a merger agreement with Primal Systems,
Inc (Primal) and certain shareholders of Primal. Avery exercised its option to
consummate the merger effective after the close of business on September 30,
1999. 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.
At the time of the merger, Avery issued 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.
The transaction will be accounted for using the purchase method of
accounting with revenues and expenses of Primal being included in the Company's
operations from the acquisition date.
Mark J. Nielsen, Avery's President and Chief Executive Officer, is the
Chairman of the Board and a significant shareholder of Primal.
NOTE 8. UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial information as of September 30, 1999 and
for the nine months ended September 30, 1999 and 1998, 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 presentation of this interim
information. Operating results for the nine months ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999.
7
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
This Quarterly Report on Form 10-QSB contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions made
by and information currently available to the Company's management. When used in
this report, the words "anticipate," "believe," "estimate," "expect" and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or Company management, are intended to identify forward-
looking statements. Such statements reflect the current risks, uncertainties and
assumptions related to certain factors including, without limitations,
competitive factors, general economic conditions, customer relations,
relationships with vendors, the interest rate environment, governmental
regulation and supervision, seasonality, distribution networks, product
introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in other
filings made by the company with the Securities and Exchange Commission. Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
GENERAL
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the quarters and nine months ended
September 30, 1998 and 1999, respectively. It should be read in conjunction with
the Interim Condensed Consolidated Financial Statements of the Company, the
notes thereto and other financial information included elsewhere in this report,
and the Company's Annual Report on Form SB-2 for the year ended December 31,
1998. For purposes of the following discussion, references to year periods refer
to the Company's fiscal year ended December 31 and references to quarterly
periods refer to the Company's fiscal quarter ended September 30.
8
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain items in the Company's Condensed
Consolidated Statements of Income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Revenues 6,608 4,654 16,336 14,253
Cost of revenues 5,045 2,111 12,158 9,190
------ ------- ------- -------
Gross profit 1,563 2,543 4,178 5,063
Operating expenses 1,158 767 3,581 2,466
Charge in connection with terminated customers - 4,150 - 4,150
Advance funding program income (151) (361) (452) (1,049)
Advance funding program costs 48 204 193 524
Depreciation, depletion, and amortization 138 127 379 335
------ ------- ------- -------
Operating income (loss) 370 (2,344) 477 (1,363)
Other income (expense):
Interest expense (169) (209) (510) (464)
Financing fees and debt issuance costs - (23) (322) (114)
Other, net 130 89 357 189
------ ------- ------- -------
Total other expense (39) (143) (475) (389)
------ ------- ------- -------
Net income (loss) 331 (2,487) 2 (1,752)
====== ======= ======= =======
</TABLE>
Operating Revenues
The Company's revenues are derived primarily from the provision of billing
clearinghouse and information management services to direct dial long distance
carriers and operator services providers ("Local Exchange Carrier billing" or
"LEC billing"). Revenues are also derived from enhanced billing services
provided to companies that offer voice mail, paging and internet services or
other non-regulated telecommunications equipment and services. LEC billing fees
charged by the Company includes processing and customer service inquiry fees.
Processing fees are assessed to customers either as a fee charged for each
telephone call record or other transaction processed or as a percentage of the
customer's revenue that is submitted by the Company to local telephone companies
for billing and collection. Processing fees also include any charges assessed to
the Company by local telephone companies for billing and collection services
that are passed through to the customer. Customer service inquiry fees are
assessed to customers either as a fee charged for each record processed by the
Company or as a fee charged for each billing inquiry made by end users.
9
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total revenues for the quarter ended September 30, 1999 were $6.6 million,
an increase of 42.0% from the comparable prior year quarter. During the first
nine months of 1999, total revenues increased 14.6% to $16.3 million from $14.3
million during the comparable period of 1998. LEC billing services revenues
increased 67.7% to $5.1 million in the third quarter of 1999, from $3.0 million
in the third quarter of 1998. For the first nine months of 1999, LEC billing
services increased 28.6% to $12.1 million, from $9.4 million in the first nine
months of 1998. The LEC billing services revenue increases are attributable
primarily to an increase in the number of telephone call records processed and
billed on behalf of direct dial long distance customers. Revenues derived from
enhanced billing services customers decreased from the comparable prior year
periods due to the Company canceling billing contracts with most of its enhanced
services customers. Telephone call record volumes were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
------ ------- ------- ------
(In Thousands) (In Thousands)
Direct dial long distance
services 66,154 25,385 152,619 73,288
Enhanced billing services 173 740 586 1,518
Cost of Revenues
Cost of revenues includes billing and collection fees charged to the
Company by local telephone companies and related transmission costs, as well as
all costs associated with the customer service organization, including staffing
expenses and costs associated with telecommunications services. Billing and
collection fees charged by the local telephone companies include fees that are
assessed for each record submitted and for each bill rendered to its end-user
customers. The Company achieves discounted billing costs due to its aggregated
volumes and can pass these discounts on to its customers.
The gross profit margin decreased from 54.6% to 23.7% from the prior year
quarter ended September 1998 to the current year quarter, respectively. The
gross profit margin also decreased from 35.5% to 25.6% from the prior year to
date period to the current period ended September 30, 1999. Higher billing and
collection costs as a percentage of revenue contributed to the decrease in the
gross profit margin for both periods. Larger volume customers are being added
and current customers continue to mature and advance up the quantity discount
price list, which is also responsible for the decline in gross profit.
Charge in connection with Terminated Customers
During the period ending September 30, 1998, Avery recorded a charge of
$4.15 million. The charge relates primarily to cash received from local exchange
carriers that has been paid by HBS to terminated customers and must be refunded
to the local exchange carriers. Under its billing contracts with local exchange
carriers, HBS is obligated to pay these refunds if it is unable to
10
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
collect them from its customers. For the nine months ending September 30, 1999,
no such charges were incurred. As of September 30, 1999, the remaining reserve
relating to the charge was $1.4 million. Management feels this amount is
adequate to absorb future charges connected with terminated customers.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses are comprised of all
selling, marketing and administrative costs incurred in direct support of the
business operations of the Company. SG&A expenses for the third quarter of 1999
and 1998 were $1.2 million and $0.8 million, representing 17.5% and 16.4% of
revenues, respectively. SG&A expenses for the first nine months of 1999
increased to $3.6 million, or 21.9% of revenues, from $2.5 million, or 17.3% of
revenues, in the comparable period of 1998. The higher SG&A expenses were
primarily due to the growth of the management infrastructure and technical staff
to support the higher sales as well as increased costs associated with SEC
registration and a one-time compensation charge.
Advance Funding Program Income and Costs
Advance funding program income decreased 58.4% to $150,000 for the third
quarter of 1999 from $361,000 for the third quarter of 1998. Advance funding
program income for the first nine months of 1998 decreased 56.9% to $452,000
from $1,049,000 in the first nine months of 1998. The decrease was primarily the
result of financing fewer customer receivables under the Company's advance
funding program.
Advance funding program costs decreased 76.6% to $48,000 for the third
quarter of 1999 from $205,000 for the third quarter of 1998. Advance funding
program costs for the first nine months of 1999 decreased 63.2% to $193,000 from
$524,000 in the comparable period of 1998. In addition to declining from period
to period, advance funding program costs declined relative to advance funding
program income due to the use of internally generated funds for the financing of
substantially all purchased receivables during the first nine months of 1999.
Income from Operations
Income from operations in the third quarter of 1999 was $370,000, or 5.6%
of revenues, compared to loss from operations of $2,344,000 or -50.4% of
revenues, in the third quarter of 1998. Income from operations in the first nine
months of 1999 increased to $477,000 or 2.9% of revenues, from a loss of
$1,363,000 or -9.6% of revenues, in the first nine months of 1998. The increase
in income from operations is attributable to higher revenues and no terminated
customer charges offset by a decrease in gross profit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $2.2 million at September 30, 1999
from $1.1 million at December 31, 1998. Large fluctuations in daily cash
balances are normal due to the large amount of customer receivables that the
Company collects on behalf of its customers. The Company's working capital
position and current ratio decreased to a negative $6.3 million and 0.6:1 at
September 30, 1999, from a negative $7.0 million and 0.7:1 at December 31, 1997,
respectively. The decline in working capital is due in part to the use of cash
generated from
11
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
operations of $7.5 million to the net payment of notes of $5.9 million, $0.3
million payment of cash dividends on preferred stock, and the purchase of $0.2
million purchases of property and equipment. Net cash generated (used) by
operating activities was $7.5 million and $2.2 million in the first nine months
of 1999 and 1998, respectively, and reflected the increase in net income and the
decline in advanced payment receivables ($5.5 million), trade accounts payable
and accruals ($1.3 million), and other assets ($1.0 million) from the prior year
period.
The Company has a $10.0 million revolving line of credit facility with a
lender primarily to draw upon to advance funds to its billing customers before
collection of the funds from the local telephone companies. This credit facility
terminates on March 25, 2000. Borrowings under the credit facility are limited
to a portion of the Company's eligible receivables. Substantially all of current
advances to billing customers are being funded from the Company's operating cash
flow. At September 30, 1999, the amount available under the Company's receivable
financing facility was $3.7 million. This availability varies from day to day
based on eligible receivables and cash collections.
The Company's operating cash requirements consist principally of working
capital requirements, requirements under its advance-funding program, scheduled
payments of preferred dividends and capital expenditures. The Company believes
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.
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is highly dependent on
its computer software programs and operating systems (collectively, "Programs
and Systems"). These Programs and Systems are used in several essential areas of
the Company's business, including LEC billing processing, information management
services, and financial reporting, as well as in various administrative
functions. The Company has been evaluating its Programs and Systems to identify
potential year 2000 compliance problems, as well as manual processes, external
interfaces with customers and services supplied by vendors to coordinate year
2000 compliance and conversion. 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 the
year 2000, such systems may not properly recognize such information and could
generate erroneous data or cause a system to fail to operate properly.
Based on current information, the Company expects to attain year 2000
compliance and institute appropriate testing of its modifications and
replacements in a timely fashion and in advance of the year 2000 date change. It
is anticipated that modification or replacement of the Company's Programs and
Systems will be performed in-house by Company personnel. The Company believes
that, with modifications to existing software and conversions to new software,
the year 2000 problem will not pose a significant operational problem for the
Company. However, because most computer systems are, by their very nature,
interdependent, it is possible that non-compliant third party computers may not
interface properly with the Company's computer
12
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
systems. The Company could be adversely affected by the year 2000 problem if it
or unrelated parties fail to successfully address this issue. Management of the
Company currently anticipates that the expenses and capital expenditures
associated with its year 2000 compliance project will not have a material effect
on its financial position or results of operations.
PART II-OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Federal Trade Commission v. HOLD Billing Services, Ltd., et al., Civil
Action No. SA-988-CA-0629-FB was settled in the U.S. District Court for the
Western District of Texas in San Antonio, Texas on October 8, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf, thereunto duly authorized.
Avery Communications, Inc.
----------------------------
(Registrant)
Date /s/ Mark J. Nielsen
--------------------------- ----------------------------------
Mark J. Nielsen, President
Date /s/ Scot McCormick
--------------------------- ----------------------------------
Scot McCormick, Secretary
13
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<PAGE>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,199,089
<SECURITIES> 0
<RECEIVABLES> 7,358,033
<ALLOWANCES> 423,900
<INVENTORY> 0
<CURRENT-ASSETS> 9,700,990
<PP&E> 1,392,346
<DEPRECIATION> 442,490
<TOTAL-ASSETS> 14,769,539
<CURRENT-LIABILITIES> 15,975,026
<BONDS> 0
27,100
0
<COMMON> 98,039
<OTHER-SE> (1,653,751)
<TOTAL-LIABILITY-AND-EQUITY> 14,769,539
<SALES> 16,335,812
<TOTAL-REVENUES> 16,335,812
<CGS> 12,158,093
<TOTAL-COSTS> 16,118,267
<OTHER-EXPENSES> 321,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254,041
<INCOME-PRETAX> 1,997
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,997
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<NET-INCOME> 1,997
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