<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 June 30, 2000
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 August 8, 2000
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
-------------- ----------------------------
Common Stock, $.01 par value 8,753,886
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Balance Sheets at June 30, 2000 (Unaudited) 1
and December 31, 1999
Consolidated Statements of Operations For the Periods 2
Ended June 30, 2000 and 1999 (Unaudited)
Consolidated Statements of Cash Flows For the Periods 3
Ended June 30, 2000 and 1999 (Unaudited)
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
PART II OTHER INFORMATION
Item 5. Other Information 13
<PAGE>
ITEM 1. AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------- -------------
June 30, December 31,
ASSETS 2000 1999
--------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,839,386 $ 5,744,069
Trade accounts and notes receivable, net of allowance for doubtful accounts of
$224,901 and $188,901 at June 30, 2000 and December 31, 1999, respectively 713,507 813,589
Other receivables 176,699 681,526
Deferred tax asset 374,086 374,086
Advanced payment receivables 2,079,037 6,810,249
Other 108,146 27,527
Net current assets of discontinued operations - 285,029
--------------- -------------
Total current assets 18,290,861 14,736,075
--------------- -------------
Property and equipment:
Furniture and fixtures 1,457,212 1,398,618
Accumulated depreciation and amortization (636,091) (506,535)
--------------- -------------
Total equipment, net 821,121 892,083
--------------- -------------
Other assets:
Goodwill, net 2,888,320 3,022,748
Net long-term assets of discontinued operations 4,543,757 4,443,827
Deposits 1,495,258 185,514
Other 452,493 488,204
--------------- -------------
Total other assets 9,379,828 8,140,293
--------------- -------------
Total assets $ 28,491,810 $ 23,768,451
=============== =============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current notes payable $ 12,489 $ 8,750
Trade accounts payable 4,243,126 4,369,562
Accrued liabilities 3,797,011 2,496,849
Income taxes payable 702,895 255,673
Holdback reserves 14,109,687 10,985,989
Net current liabilities of discontinued operations 398,463 -
--------------- -------------
Total current liabilities 23,263,671 18,116,823
--------------- -------------
Long-term liabilities: 329,335 325,195
--------------- -------------
Stockholders' equity:
Preferred stock (20,000,000 shares authorized): (See Note 4)
Series A; $0.01 par value, 800,000 shares authorized, 400,000 shares issued and
outstanding at June 30, 2000 and December 31, 1999
(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 June 30, 2000 and December 31, 1999
(liquidation preference of $390,000) 3,900 3,900
Series C; $0.01 par value, 340,000 shares authorized, 40,000 and 70,000 shares
issued and outstanding at June 30, 2000 and December 31, 1999, respectively
(liquidation preference of $40,000 and $70,000 at June 30, 2000 and
December 31, 1999, respectively) 400 700
Series D; $0.01 par value, 1,500,000 authorized, issued and outstanding
at June 30, 2000 and December 31, 1999
(liquidation preference of $1,500,000) 15,000 15,000
Series E; $0.01 par value, 350,000 authorized, issued and outstanding
at June 30, 2000 and December 31, 1999
(liquidation preference of $350,000) 3,500 3,500
Series F; $0.01 par value, 8,000,000 shares authorized, 3,890,373 shares issued and
outstanding at June 30, 2000 and December 31, 1999
(liquidation preference of $38,904) 38,904 38,904
Common stock, $0.01 par value, 20,000,000 shares authorized,
9,969,102 and 9,803,949 shares issued at June 30, 2000 and
December 31, 1999, respectively 99,691 98,039
Additional paid-in capital 12,262,226 12,306,164
Accumulated deficit (5,492,016) (5,161,775)
Treasury stock, 1,215,216 and 1,176,916 shares at June 30, 2000 and
December 31, 1999, respectively, at cost (2,036,801) (1,981,999)
--------------- -------------
Total stockholders' equity 4,898,804 5,326,433
--------------- -------------
Total liabilities and stockholders' equity $ 28,491,810 $ 23,768,451
=============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------- -------------------------------
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C>
Revenues $ 8,867,854 $ 5,343,894 $ 17,777,419 $ 9,728,253
Cost of revenues 6,344,788 3,906,149 12,851,939 7,112,797
--------------- -------------- -------------- --------------
Gross profit 2,523,066 1,437,745 4,925,480 2,615,456
Operating expenses 1,522,586 1,227,732 2,925,782 2,667,420
Advance funding program income 39,700 126,377 190,124 301,593
Advance funding program costs (36,874) (47,500) (94,482) (145,126)
--------------- -------------- -------------- --------------
Operating income 1,003,306 288,890 2,095,340 104,503
--------------- -------------- -------------- --------------
Other income (expense):
Interest expense (14,722) (197,997) (35,776) (340,429)
Financing fees and debt issuance costs -- (41,736) -- (321,736)
Other, net 116,258 120,875 171,662 226,142
--------------- -------------- -------------- --------------
Total other income (expense) 101,536 (118,858) 135,886 (436,023)
--------------- -------------- -------------- --------------
Income (loss) from continuing operations before
provision for income taxes 1,104,842 170,032 2,231,226 (331,520)
Income tax expense (232,293) - (762,571) -
--------------- -------------- -------------- --------------
Income (loss) from continuing operations 872,549 170,032 1,468,655 (331,520)
Loss from discontinued operations, net of income
tax benefit of $667,716 and $750,367 for the
three and six months ended June 30, 2000,
respectively (509,135) - (1,798,894) -
--------------- -------------- -------------- --------------
Net income (loss) $ 363,414 $ 170,032 $ (330,239) $ (331,520)
=============== ============== ============== ==============
Per share data:
Basic net income (loss) per share:
Continuing operations $ 0.09 $ 0.01 $ 0.15 $ (0.05)
Discontinued operations (0.06) 0.00 (0.21) 0.00
--------------- -------------- -------------- --------------
Net income (loss) $ 0.03 $ 0.01 $ (0.06) $ (0.05)
=============== ============== ============== ==============
Diluted net income (loss) per share:
Continuing operations $ 0.06 $ 0.01 $ 0.10 $ (0.05)
Discontinued operations (0.03) 0.00 (0.12) 0.00
--------------- -------------- -------------- --------------
Net income (loss) $ 0.03 $ 0.01 $ (0.02) $ (0.05)
=============== ============== ============== ==============
Weighted average number of common shares:
Basic common shares 8,750,771 8,653,699 8,719,013 8,659,555
=============== ============== ============== ==============
Diluted common shares 13,862,089 9,008,589 15,430,563 8,659,555
=============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------
Six Months Ended
June 30,
------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (330,239) $ (331,520)
Loss from discontined operations 1,798,894 -
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities from continuing operations:
Bad debt expense 36,000 147,506
Depreciation and amortization 293,686 259,557
Change in operating assets and liabilities:
Holdback reserves 3,123,698 887,893
Trade accounts and notes receivable 64,082 (750,230)
Advance payment receivables 4,731,212 5,909,265
Other current assets 424,208 49,999
Trade accounts payable and accrued liabilities 1,173,726 676,573
Income taxes payable 447,222 -
Other assets (1,299,597) 1,709,230
----------------- -----------------
Net cash provided by operating activities 10,462,892 8,558,273
Net cash used in operating activities of discontinued operations (1,215,332) -
----------------- -----------------
Net cash provided by operations 9,247,560 8,558,273
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (58,594) (115,348)
Capitalized cost in connection with Primal acquisition - (1,162,981)
Cash paid for treasury stock (54,802) (35,634)
----------------- -----------------
Net cash used in investing activities (113,396) (1,313,963)
----------------- -----------------
Cash flows from financing activities:
Proceeds from notes payable - 160,000
Principal payments on notes payable 3,739 (5,731,468)
Payment of preferred stock dividends (176,700) (252,900)
Issuance of shares of common and preferred stock for cash 134,114 -
----------------- -----------------
Net cash used in financing activities (38,847) (5,824,368)
----------------- -----------------
Increase in cash 9,095,317 1,419,942
Cash at beginning of period 5,744,069 1,086,473
----------------- -----------------
Cash at end of period $ 14,839,386 $ 2,506,415
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Avery Communications,
Inc. ("Avery") and subsidiaries ("Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions per Item 310(b) of Regulation SB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 2000 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
Certain reclassifications have been made to conform to current
classifications.
NOTE 2. EARNINGS (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing the net loss,
increased by the preferred stock dividends of $70,900 and 71,800 for the three
month periods ending June 30, 2000 and 1999 and $142,400 and $143,600 for the
six-month periods ending June 30, 2000 and 1999 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 $0.02 per weighted average common share outstanding for the six-months
ended June 30, 2000 and 1999. Diluted net income (loss) per share includes the
effect of all dilutive options and warrants and instruments convertible into
common stock. The effect of outstanding warrants and options on the computation
of net income (loss) per share for the six-months ended June 30, 1999 would be
antidilutive and, therefore, are not included in the computation of diluted
weighted average shares. The effect of outstanding warrants, options and
convertible securities on the computation of net income (loss) per share for the
three and six month periods ending June 30, 2000 were dilutive and are included
in the computation of diluted weighted average shares.
4
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 4. DISCONTINUED OPERATIONS
On July 30, 2000, the Board of Directors of Avery approved the spin-off of
Primal Solutions, Inc. ("PSI"). The decision revised its plan announced
February 29, 2000 to spin-off Hold Billing Services Company ("HBS") its local
exchange carrier billing clearing house business. The decision to spin-off PSI
instead of HBS is motivated primarily by the expectations that Avery
shareholders will pay less in taxes under a spin-off of PSI than would have been
the case with a spin-off of HBS. Accordingly prior filed financial statements
reflect HBS as discontinued operations.
In March 1999, Avery entered into a merger agreement with Primal and
certain shareholders of Primal. Pursuant to this agreement, Primal was purchased
effective as of October 1, 1999. Primal is a software development company that
designs, develops and supports an integrated suite of client/server and
browser-based software solutions focusing on customer acquisition and retention
in the communications industry, primarily utilizing decision support software
and Internet technologies. As part of this merger, Avery also acquired Wireless
Billing Solutions, Primal's subsidiary, which sells and supports convergent
billing, customer care and mediation system software products. The transaction
was accounted for using the purchase method of accounting with revenues and
expenses of Primal being included in Avery's operations from the acquisition
date.
Under the terms of the spin-off agreement with PSI, each common shareholder
of the Company on the record date of the spin-off will receive one share of
Primal common stock for each share of the Company's common stock held on that
date. In addition, owners of shares of Avery's series A, B, C, D or E
convertible preferred stock will receive Primal common stock, in the amount of
the preferred stock's common stock equivalents, for each share of Avery
preferred stock held on the record date of the spin-off. The spin-off will be
recorded at book value for accounting purposes since PSI is an ongoing business.
The board of directors approved the spin-off primarily due to the fact that
it appears that investors will be better able to understand and value the PSI
and HBS businesses in separate entities rather than being combined into one
entity. The exercise and conversion price of outstanding stock warrants, options
and convertible securities will be adjusted to reflect the spin-off. The
valuation of the PSI stock to be distributed will be determined through an
appraisal of the PSI business. The spin-off will be a taxable transaction for
federal income tax purposes. As part of the transaction, the original PSI
owners, have agreed to recieve 15% and 32% of Avery and PSI, respectively, on
fully diluted basis. In addition, the former PSI shareholders have agreed to
waive their right for Avery to repurchase $3.9 million of their Avery stock and
Avery has agreed to provide $4.0 million in working capital to PSI.
The financial information contained in this document presents PSI
as a discontinued operation due to the spin-off. Accordingly, the amounts in the
statements of operations through the provision for income taxes are HBS's plus
expenses of Avery.
5
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DISCONTINUED OPERATIONS--Continued
At June 30, 2000 and December 31, 1999, the net current liabilities and net
long-term assets of PSI were as follows:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Current assets
Cash ............................................................ $ 156,481 $1,710,996
Trade accounts receivable ...................................... 1,808,870 993,406
Income tax receivable............................................ 750,367 -0-
Other current assets ........................................... 473,493 366,088
----------- ----------
Total current assets ........................................ 3,189,211 3,070,490
----------- ----------
Current liabilities
Current portion of capital lease obligations ................... 204,364 89,577
Current portion of notes payable ............................... 299,540 473,252
Trade accounts payable ......................................... 266,679 346,932
Accrued liabilities ............................................ 930,793 714,444
Current taxes payable .......................................... -- 137,651
Deferred revenue ............................................... 1,886,298 1,023,605
----------- ----------
Total current liabilities ................................... 3,587,674 2,785,461
----------- ----------
Net current assets (liabilities) of discontinued operations ........... $ (398,463) $ 285,029
=========== ==========
<CAPTION>
2000 1999
----------- ----------
Property and equipment
Computer equipment and software ................................ $ 2,286,237 $1,524,626
Furniture and fixtures ......................................... 110,814 107,650
Accumulated depreciation and amortization ...................... (227,435) (23,431)
----------- ----------
2,169,616 1,608,845
----------- ----------
Other assets
Goodwill, net .................................................. 4,224,034 4,413,559
Capital lease obligations ...................................... (241,284) (62,046)
Notes payable .................................................. (1,669,984) (1,728,108)
Acquisition costs .............................................. -- 150,025
Other .......................................................... 61,375 61,552
----------- ----------
Total other assets .......................................... 2,374,141 2,834,982
----------- ----------
Net long-term assets of discontinued operations ....................... $ 4,543,757 $4,443,827
=========== ==========
</TABLE>
6
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. DISCONTINUED OPERATIONS--Continued
The operating results of PSI for the three and six-months ended June 30,
2000 is as follows:
<TABLE>
<S> <C> <C>
Three-months Six-months
ended ended
June 30, 2000 June 30, 2000
------------- -------------
Operating revenues .......................... $ 2,094,314 $ 4,067,796
Cost of revenues ............................ (1,087,703) (2,036,257)
------------ ------------
Gross profit .................. 1,006,611 2,031,539
Selling, general and administrative expenses . (2,119,751) (4,505,863)
------------ ------------
Loss from operations ..................... (1,113,140) (2,474,324)
Other (Expenses) ............................. (63,711) (74,937)
------------ ------------
Loss before income tax provision ......... (1,176,851) (2,549,261)
Income tax benefit ....................... 667,716 750,367
------------ ------------
Net loss ................................. $ (509,135) $ (1,798,894)
============ ============
</TABLE>
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 three and six-months ended June 30,
2000 and 1999, respectively. It should be read in conjunction with the
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 10-KSB for the year ended December 31, 1999. 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 three and six month periods ended June 30, 2000 and 1999.
The results on the "Discontinued operations" lines represent the results of
operations for the respective periods for PSI, a wholly-owned subsidiary that is
being spun-off. Accordingly, prior filed financial statements reflect HBS as
discontinued operations. See Note 4 to Consolidated Financial Statements
discussed above. All discussions relating to revenue, cost of revenues,
operating expenses, etc. pertain only to continuing operations.
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 Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
------------------------ ------------------------
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Revenues $ 8,868 $ 5,344 $ 17,777 $ 9,728
Cost of revenues 6,345 3,906 12,852 7,113
-------- -------- -------- --------
Gross profit 2,523 1,438 4,925 2,615
Operating expenses, excluding DD&A 1,374 1,088 2,632 2,407
Advance funding program income 40 126 190 302
Advance funding program costs (37) (48) (94) (145)
Depreciation and amortization 149 140 294 260
-------- -------- -------- --------
Operating income 1,003 288 2,095 105
Other income (expense) 102 (118) 137 (437)
Income tax provision (232) - (763) -
-------- -------- -------- --------
Income (loss) from continuing operations 873 170 1,469 (332)
Discontinued operations loss (509) - (1,769) -
-------- -------- -------- --------
Net income (loss) $ 364 $ 170 $ (330) $ (332)
======== ======== ======== ========
</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"). To a lesser extent, 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 include processing and
customer service inquiry fees. Processing fees are assessed to customers either
as a fee charged for each telephone call record or other transaction processed
or as a percentage of the customer's revenue that is submitted by the Company to
local telephone companies for billing and collection. Processing fees also
include any charges assessed to the Company by local telephone companies for
billing and collection services that are passed through to the customer.
Customer service inquiry fees are assessed as a fee charged for each billing
inquiry made by end users.
Total revenues for the quarter ended June 30, 2000 were $8.9 million, an
increase of 65.9% from the comparable prior year quarter. During the first six
months of 2000, total revenues increased 82.7% to $17.8 million from $9.7
million during the comparable period of 1999. LEC billing services revenues
increased 72.4% to $6.9 million in the second quarter of 2000, from $4.0 million
in the second quarter of 1999. For the first six months of 2000, LEC billing
services increased 94.6% to $13.7 million, from $7.0 million in the first six
months of 1999. The LEC billing services revenue increases are attributable
primarily to an increase in the number of telephone call
9
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In Thousands) (In Thousands)
Direct dial long distance 88,909 52,077 177,924 89,465
Enhanced billing 171 153 337 413
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 increased from 26.9% to 28.5% from the prior year
quarter ended June 30, 1999 to the current year quarter, respectively. The gross
profit margin also increased from 26.9% to 27.8% from the prior year to date
period to the current period ended June 30, 2000. The slight increase in gross
profit is primarily due to higher margins in the customer service department as
compared to 1999. For the six months ended June 30, 2000 the customer service
department contributed $93,000 to gross profit as opposed to the same period in
1999 which generated a loss of $142,000.
Operating Expense
Operating expenses are comprised of all selling, marketing and
administrative costs incurred in direct support of the business operations of
the Company. Operating expenses for the second quarter of 2000 and 1999 were
$1.4 million and $1.1 million, representing 15.5% and 20.4% of revenues,
respectively. Operating expenses for the first six months of 2000 increased to
$2.6 million, or 14.8% of revenues, from $2.4 million, or 24.7% of revenues, in
the comparable period of 1999. The higher operating expenses were primarily due
to professional and director fees, and insurance costs somewhat offset by
reduced personnel costs.
10
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization
Depreciation and amortization expense for the second quarter were $149,000
in 2000, and $140,000 in 1999. Depreciation and amortization expense for the
six months ended June, were $294,000 in 2000, and $260,000 in 1999. Both
increases were due to the addition of equipment at HBS.
Advance Funding Program Income and Costs
Management has made significant policy changes in regards to the advance
funding program. In an effort to reduce the inherent risk involved in advancing
customer receivables, HBS encouraged and participated in placing current
customers with significant financing needs with third party financing companies.
HBS plans to assist future customers in a similar manner. Although internal
advance funding is still available, it's scope has been reduced to mainly start
up companies and those requiring reduced funding as a percent of gross billable
revenue with the LEC. As a result, advance funding program income decreased
68.3% to $40,000 for the second quarter of 2000 from $126,000 for the second
quarter of 1999. Advance funding program income for the first six months of 2000
decreased 37.1% to $190,000 from $302,000 in the first six months of 1999.
Advance funding program costs decreased 22.9% to $37,000 for the second
quarter of 2000 from $48,000 for the second quarter of 1999. Advance funding
program costs for the first six months of 2000 decreased 35.2% to $94,000 from
$145,000 in the comparable period of 1999. The decreases noted result from the
Company's policy decision discussed above.
Operating Income from Continuing Operations
Operating income from continuing operations in the second quarter of 2000
was $1,003,000, or 11.3% of revenues, compared to $288,000 or 5.4% of revenues,
in the second quarter of 1999. Operating income from continuing operations in
the first six months of 2000 increased to $2,095,000 or 11.8% of revenues, from
$105,000 or 1.1% of revenues, in the first six months of 1999.
Other Income (Expense), Net
Other income (expense) net in the second quarter increased to $102,000 of
net income in 2000 from $118,000 of net expense in 1999. The increase is
primarily attributable to lower interest associated with reduced levels of debt
and the charge for warrant buy backs that occurred in 1999 but not in 2000.
Other income (expense) net for the six month period ending 2000 increased to
$137,000 of net income from $437,000 of net expense in 1999. The increase was
due to the reduction of interest expense due to lower levels of debt and the
elimination of warrant buy back cost occurring in 1999 but not in 2000.
Loss from Discontinued Operations
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MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Loss from discontinued operations was $1,177,000 for the quarter ending
2000 and $2,467,000 for the six months ending 2000 net of tax benefit of
$667,716 and $750,367 for the three and six-months ended June 30, 2000
respectively. The income tax provision reflects the change in direction as noted
in notes above. Revenues from discontinued operations was $4,068,000 for the
quarter ending 2000 and $2,094,000 for the six months ending 2000. There were no
discontinued operations for 1999 as PSI was not acquired until October 1, 1999.
PSI provides computer software programming, customization, program
maintenance and product marketing for a variety of software languages and
platforms. PSI also designs, develops and supports an integrated suit 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.
Income Taxes
An income tax provision of $558,000 was recorded for the quarter ending
June 30, 2000, none in 1999. An income tax provision of $1,088,000 was recorded
for the six month period ending June 30, 2000, none in 1999. The significant
difference between the tax provision for the periods ending June 30, 2000 and
1999 are directly related to the Company's loss situation in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Avery's cash balance increased to $14,839,000 at June 30, 2000, from
$5,744,000 at December 31, 1999, primarily due to timing of cash receipts for
LEC's and increased processing volume. Avery's working capital position at June
30, 2000 was a negative $6.0 million compared to a negative $3.4 million as of
December 31, 1999. The decrease in working capital is due to a $6,140,000
million increase in current liabilities, offset by a $3,555,000 increase in
current assets. The increase in current liabilities is primarily attributable to
a $3,124,000 increase in holdback reserves associated with increased volume,
$2,100,000 increase in accrued liabilities and income taxes and $1,066,000
increase in net liabilities associated with discontinued operations of PSI. The
increase in current assets is primarily attributable to a $9,096,000 increase in
cash offset by a $4,731,000 decrease in advanced payment receivables due to the
companies change in direction on financing receivables.
Net cash provided by operating activities, excluding discontinued
operations, was $10,463,000 for the six months ending June 30, 2000, compared to
$8,558,000 for the similar period in 1999. The increase was primarily due to an
increase in net income from continuing operations and increased by reductions in
holdback reserves and advance payment receivables, increases in accounts payable
and accrued liabilities offset by an increase in other assets consisting
primarily of deposits.
Avery generated proceeds from the sale of common and preferred stock of
$134,000 during 2000 and $0 during 1999. Avery also paid preferred dividends of
$177,000 during 2000 and $253,000 during 1999. Avery also paid off its line of
credit during 1999 for $5,731,000.
Acquisition costs in 1999 totaled $1,163,000. These costs are comprised of
professional fees relating to the Primal acquisition.
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 will be sufficient to fund capital
expenditures, advance funding requirements, working capital needs and debt
repayment requirements for the foreseeable future.
YEAR 2000 UPDATE
During 1999 Avery undertook initiatives to ensure that our systems were
Year 2000 compliant. As of the date of this filing, Avery has not experienced
any disruption of their operations due to Year 2000 issues. The cost of Year
2000 modifications have not been significant and no additional Year 2000 costs
are anticipated.
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OTHER INFORMATION
ITEM 5. Other Information
On July 30, 2000, the Board of Directors of Avery approved the spin-off of
Primal Solutions, Inc. ("PSI"). The decision revised its plan announced February
29, 2000 to spin-off Hold Billing Services Company ("HBS") its local exchange
carrier billing clearinghouse business. The decision to spin-off PSI instead of
HBS is motivated primarily by the expectations that Avery shareholders will pay
less in taxes under a spin-off of PSI than would have been the case with a
spin-off of HBS. Accordingly, the financial information contained in this
document presents PSI as a discontinued operation due to the spin-off and the
amounts in the statement of operations through the provision for income taxes
are HBS's plus expenses of Avery.
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<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Communication, Inc.
----------------------------------------
(Registrant)
Date_________________________ /s/Patrick J. Haynes III
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Patrick J. Haynes III
Chairman of the Board
Date_________________________ /s/ Scot McCormick
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/s/ Scot McCormick, Secretary
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