<PAGE>
As filed with the Securities and Exchange Commission on April 28, 2000
Registration No. 333-65133
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
POST-EFFECTIVE AMENDMENT NO. 1
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 the effective date of this amendment 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>
PROSPECTUS
AVERY COMMUNICATIONS, INC.
9,326,994 Shares of Common Stock
This prospectus relates to the 9,326,994 shares of our common stock being
offered by certain of our securityholders. Of such shares, 4,572,523 shares are
currently outstanding and 4,754,471 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 approximately $5,430,248 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 April 24, 2000, the closing bid price for our common stock
was $1.65625 and the closing asked price for our common stock was $1.875.
----------------
An investment in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 4.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
----------------
The date of this prospectus is , 2000
<PAGE>
[This page has been intentionally left blank.]
2
<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 September 1999, we
acquired 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.
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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.
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.
A key element of our business strategy is to acquire customer management
software companies and other telecommunications services providers. The
success of our acquisition program will depend on our ability to overcome
substantial obstacles, such as 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.
We have no present commitments, understandings or plans to acquire other
software companies or telecommunications service providers.
We may be required to repurchase up to 1,550,000 shares of our common stock at
$2.50 per share between August and October 2000 from the former principal
stockholders of Primal.
We have made no arrangements to borrow or otherwise raise the $3,875,000
that may be required to meet our obligation to these stockholders. Based upon
our present financial condition and results of operations, it would be
extremely difficult, if not impossible, to borrow such amount from commercial
lenders. Consequently, the financing costs that we would likely incur to
obtain such financing, if available at all, would be substantial relative to
the amount borrowed. Our failure to repurchase these shares as agreed would be
a material default under our agreement with these stockholders. Although we
presently have no other agreements where such failure would also be a default,
we may have such agreements at the time such payment becomes due.
We will need substantial additional financing to fund future acquisitions.
We will need substantial additional financing to fund our planned
acquisition program and to market our new products and services aggressively.
If we are not able to obtain financing, or obtain financing on terms that we
consider acceptable, our acquisition program would be materially adversely
affected.
Our business at HBS Billing Services is largely dependent on two customers
that accounted for approximately 72% of our call records processed in 1999. In
addition, Primal's business is largely dependent on two customers that
accounted for approximately 59% of Primal's software license and service
revenue during the three-month period ended December 31, 1999. The loss of any
one of these customers would materially and adversely affect our results of
operations.
One of the HBS Billing Services customers accounted for 46% of our call
records processed and the other accounted for 26% of our call records
processed between January 1, and December 31, 1999.
One of the Primal customers accounted for 38% of Primal's license and
service revenue and the other accounted for 21% of this revenue for the three-
month period ended December 31, 1999.
We face substantial competition in the billing clearinghouse industry, and
many of our competitors are larger and have more resources than we have. We
may not be able to compete successfully with existing or future competitors.
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,
4
<PAGE>
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.
HBS Billing Services is a billing clearinghouse. Therefore, its business is
dependent both on the local exchange carriers' continuing to accept its call
records, and continuing to do so on reasonable terms, and its customers'
continuing to need its 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.
Substantially all of our outstanding common stock is freely tradable and may
be sold into the market at any time, and another approximately 4.8 million
shares not yet issued will be freely tradable immediately upon issuance. This
could cause the market price of our common stock to drop significantly, even
if our business is doing well.
The approximately 4.8 million shares that are not yet issued but which will
be freely tradable immediately upon issuance represent an increase in our
presently outstanding common stock of approximately 54%. The market price of
our common stock could drop significantly if the holders all our freely
tradable shares sell them or are perceived by the market as intending to sell
them.
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, which substantially increases the risk of loss to persons owning
our common stock.
Because of the limited trading market for our common stock, and because of
the possible price volatility, you may not be able to sell your shares of
common stock when you desire to do so. The inability to sell your shares in a
rapidly declining market may substantially increase your risk of loss because
of such illiquidity and because the price for our common stock may suffer
greater declines because of its price volatility.
We are not required to meet or maintain any listing standards for our common
stock to be traded on the OTC Bulletin Board.
The OTC Bulletin Board is separate and distinct from The Nasdaq Stock
Market. Although the OTCBB is a regulated quotation service operated by The
Nasdaq Stock Market that displays real-time quotes, last sale prices, and
volume information in over-the-counter equity securities like our common
stock, we are not required to meet or maintain any qualitative or quantitative
standards for our common stock to be traded on the OTCBB. Our common stock
does not presently meet the minimum listing standards for listing on The
Nasdaq Stock Market or any national securities exchange.
5
<PAGE>
We are required to pay substantial preferential dividends to holders of our
preferred stock.
Holders of our preferred stock are entitled to preferential quarterly
dividends before any common stock dividends are declared or paid. The amount of
these dividends is presently approximately $287,000 annually. 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.
6
<PAGE>
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical fact, included in this
prospectus are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or
"believe." We believe that the expectations reflected in such forward-looking
statements are accurate. However, we cannot assure you that such expectations
will occur. Our actual future performance could differ materially from such
statements. Factors that could cause or contribute to such differences include,
but are not limited to:
. the uncertainties and/or potential delays associated with respect to
integrating Primal following the Primal acquisition;
. our ability to acquire additional complementary customer management
software/services providers on terms favorable to us;
. the passage of legislation or court decisions adversely affecting the
telecommunications industry;
. our ability to repay our outstanding indebtedness;
7
<PAGE>
. competition in the telecommunications industry; and
. the advent of new technology.
You should not unduly rely on these forward-looking statements, which speak
only as of the date of this prospectus. Except as required by law, we are not
obligated to release publicly any revisions to these forward-looking statements
to reflect events or circumstances occurring after the date of this prospectus
or to reflect the occurrence of unanticipated events. Important factors that
could cause our actual results to differ materially from our expectations are
discussed under "Risk Factors" and elsewhere in this prospectus.
8
<PAGE>
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 approximately
$5,430,248 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 for the selling securityholders named below under the caption
"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. Subject
to the limitations on the use of this prospectus described below, the "selling
securityholders" also includes persons who receive shares as a gift from a
selling securityholder, commonly known as donees, and persons who receive
shares from a selling securityholder as collateral to secure a loan, commonly
known as 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 by this prospectus 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 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.
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<PAGE>
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.
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 may actually be sold by any selling
securityholder or that may be owned by any selling securityholder upon
completion of this offering.
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 April 20, 2000).
<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
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(2)......... 100,000 100,000
Cornerhouse Limited
Partnership(3).............. 30,000 83,419 113,419
Curiel, Giulio............... 9,000 9,000
Danilan Investments Inc.(4).. 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
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Common Stock Underlying
-------------------------- Total
Convertible Common Shares to
Name Warrants Securities Stock be Sold
- ---- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Dunn, Edward L................. 101,852 101,852
Dunn, Philip S................. 18,518 18,518
Eastern Virginia SBIC(5)....... 126,000 280,000 245,000 651,000
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 1,295,938 1,645,938
Gaines, John Joseph............ 3,333 5,024 8,357
Goldsmith, Bret................ 1,000 1,000
Gorum, Renee................... 2,500 2,500
Goss, Dianne................... 2,500 2,500
Greenbaum, John................ 75,000 75,000
Griffith, H. Tom Trustee UTA... 10,542 10,542
Harrison, Edward J. III........ 45,286 4,501 49,787
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 3,333 806 124,423
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
Kownatzki, Vickie.............. 1,000 1,000
Lindauer, Alan................. 75,000 75,000
Lowy, John..................... 50,000 50,000
Manolita S.A.(6)............... 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 12,500
Mews, Inc.(7).................. 67,799 67,799
Mitchell United Financial
Services...................... 1,875 1,875
Montgomery, Thomas............. 90,000 90,000
Muensler, Katherine............ 2,500 2,500
Nielsen, Mark J................ 925,000 925,000
Orb, John A.................... 42,168 42,168
Orbitrex Venture Funding,
Inc.(8)....................... 50,000 50,000
Pearlman, Leonard.............. 16,000 16,000
Peipers, David................. 10,000 27,818 37,818
Phipps, Norman................. 55,000 55,000
Ramirez, M.F................... 1,875 1,875
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Common Stock Underlying
------------------------- Total
Convertible Common Shares to
Name Warrants Securities Stock be Sold
- ---- ----------- ---------------------- ---------
<S> <C> <C> <C> <C>
Sabina International S.A.(9)..... 42,500 14,507 57,007
Safra Bank....................... 33,333 33,333
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(10)........... 34,000 34,000
Stern, Russell T., Jr............ 153,036 90,000 118,116 361,152
Stern, William................... 10,000 5,790 15,790
Swift, Bryan M................... 42,168 42,168
Swift, John S., III.............. 18,480 23,688 42,168
Swift, Stewart G................. 49,000 35,336 84,336
Teman, Wade...................... 5,000 5,000
Terivian Enterprises, Inc.(11)... 266,666 266,666
Thurston Group, Inc.(12)......... 910,000 90,417 1,000,417
Valle, Beatrice.................. 1,500 1,500
Waveland, LLC(13)................ 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(14)...................... 133,333 133,333
Ybarra, Thresa................... 1,000 1,000
Young, James A................... 64,815 64,815
Zavala, Hector................... 5,000 5,000
----------- ----------- --------- ---------
2,800,472 1,953,999 4,572,523 9,326,994
=========== =========== ========= =========
</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) The ultimate beneficial owner of these shares is Signor Mazzorlari.
(3) The ultimate beneficial owner of these shares is David Peipers.
(4) The ultimate beneficial owner of these shares is Paul Downs.
(5) Now known as Waterside Capital Corporation.
(6) The ultimate beneficial owner of these shares is C. H. DeChang.
(7) The ultimate beneficial owner of these shares is Russell T. Stern, Jr.
(8) The ultimate beneficial owner of these shares is Alfred Mendelsohn, who was
previously listed as a selling securityholder.
(9) The ultimate beneficial owner of these shares is Jean-Luc Jourdan.
(10) The ultimate beneficial owner of these shares is Stanley Schulman.
(11) The ultimate beneficial owner of these shares is Hardy Erler.
(12) The ultimate beneficial owners of these shares are Patrick J. Haynes, III
and Russell T. Stern, Jr.
(13) The ultimate beneficial owner of these shares is Patrick J. Haynes, III.
(14) The ultimate beneficial owner of these shares is Beatrice Gyssler.
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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 Asked
-------------- ---------------
High Low High Low
------- ------ ------- -------
Year Ended December 31, 1998
<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 Ended 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
Third Quarter................................... 1.4375 0.25 1.53125 0.8125
Fourth Quarter.................................. 1.9375 0.75 2 0.9375
<CAPTION>
Year Ending December 31, 2000
<S> <C> <C> <C> <C>
First Quarter................................... 4.875 1.75 5 1.875
</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. We also presently have outstanding
preferred stock that presently requires us to accrue dividends in the amount of
approximately $71,500 every quarter. The holders of our outstanding preferred
stock are entitled to receive all accrued dividends before we can pay any
dividends on our common stock. 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.
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<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 and related notes and the other financial information included
elsewhere in this prospectus.
Primal Acquisition
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 Primal
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. Therefore, the following information includes Primal's operating results
for the three months ended December 31, 1999.
Recent Events
HBS Billing Services Conversion to Corporation
HBS Billing Services was converted from a Texas limited partnership to a
corporation named HBS Billing Services Company effective February 15, 2000. In
connection with the conversion, Avery-HBS, Inc., the legal entity which owned
the 1% general partnership interest of HBS Billing Services, became the owner
of 100% of the stock of HBS Billing Services Company. Avery-HBS intends to
reincorporate in Delaware and to change its name to Thurston Communications
Corporation. HBS Billing Services Company will then become a wholly owned
subsidiary of Thurston Communications Corporation, which in turn will be a
wholly owned subsidiary of Avery. These changes were and are being made in
anticipation of the spin-off of Thurston Communications discussed below.
Thurston Communications Spin-Off
On February 29, 2000, our board of directors approved the spin-off of
Thurston Communications. Thurston Communications is a holding company and its
only operating subsidiary is HBS Billing Services. Essentially, the spin-off of
Thurston Communications is a spin-off of HBS Billing Services. The spin-off
will be accomplished through a distribution of one share of Thurston
Communications for each share of Avery held by stockholders as of the record
date for the spin-off. The board of directors approved the spin-off primarily
due to the fact that it appears that investors will be better able to
understand the Primal and HBS Billing Services businesses in separate entities
rather than being combined into one entity. The exercise and conversion prices
of our stock warrants, options and convertible securities will all be adjusted
to reflect the spin-off. The valuation of the Thurston Communications stock to
be distributed will be determined through an appraisal of the HBS Billing
Services business. For accounting purposes, the spin-off will be recorded at
book value since HBS Billing Services is an ongoing business. The spin-off will
be a taxable transaction for federal income tax purposes. The financial
information contained in this document presents HBS Billing Services as a
discontinued operation due to the spin-off. Accordingly, the amounts in the
statement of operations through the provision for income taxes are Primal's
plus expenses of Avery not associated with the discontinued operations segment.
Selected Financial Information Line Item Explanations
Avery's continuing revenues are primarily derived from Primal's sale of
software licenses and related services to telecommunications and Internet
carriers. Primal's revenues are derived from 28 customers located throughout
the world. Software license fees charged by Primal include one time and
recurring license charges,
14
<PAGE>
and license upgrade charges for its customer care and billing, intelligent
mediation, and customer relationship management products. Software license fees
are volume sensitive and generally are based on the number of subscribers, call
records, or number of users. Primal also generates revenue from providing
services relating to its software products. These services include maintenance
fees, installation services, training, and custom software development.
Revenues from sales of software licenses, which generally do not contain
multiple elements, are recognized upon shipment of the related product if the
requirements of the American Institute of Certified Public Accountants
Statement of Position 97-2, as amended, are met. If the requirements of SOP 97-
2, including evidence of an arrangement, client acceptance, a fixed or
determinable fee, collectibility or vendor-specific objective evidence about
the value of an element are not met at the date of shipment, revenue
recognition is deferred until such items are known or resolved. Revenue from
post-contract customer support is deferred and recognized ratably over the term
of the contract. Revenues from services are recognized as the services are
performed under the agreements.
Primal believes that future license revenues will be generated from three
sources: license fees from new customers; license fees for new products to
existing customers; and growth in the subscriber base, call record volume
and/or number of software users of its existing customers, which will lead to
increased revenue from these volume-based licenses.
Cost of revenues includes hardware costs and software license fees paid to
third-parties under equipment resale and technology license arrangements, as
well as all costs associated with the customer service organization, including
staffing expenses, travel, communications costs, and other support costs
related with installing, training, providing help desk services, and
customization for Primal's software products.
Operating expenses are comprised of sales and marketing costs, research and
development, and general and administrative costs. Sales and marketing costs
include salaries and benefits, commissions, trade shows, advertising and
promotional and presentation materials. Research and development costs consist
of salaries and benefits and other support costs. 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.
Depreciation and amortization expenses are incurred with respect to certain
assets, including computer hardware, software, office equipment, furniture,
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 HBS Billing Services, a wholly-owned
subsidiary which is being spun-off. See "Thurston Communications Spin Off"
discussed above.
15
<PAGE>
Results of Operations for the Twelve Months Ended December 31, 1999 and 1998
The following table sets forth selected income statement lines in actual
dollars. The Statement of Operations Data are derived from Avery's calendar
1999 and 1998 audited financial statements.
Statement of Operations Data:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Operating revenues.................................... $4,547,703 $ --
Cost of revenues...................................... 1,069,108 --
---------- -----------
Gross profit.......................................... 3,478,595 --
Operation expenses (excluding DD&A)................... 2,863,613 804,581
Depreciation and amortization expense (DD&A).......... 192,642 --
---------- -----------
Operating income...................................... 422,340 (804,581)
Other income (expense), net........................... (366,276) (511,741)
Provision for income taxes............................ (137,651) --
Discontinued operations Income (Loss)................. 2,758,651 (7,156)
---------- -----------
Net income (loss)................................... $2,677,064 $(1,323,478)
========== ===========
</TABLE>
Operating Revenues
Total Avery revenue for the twelve months ended December 31, 1999 which is
Primal's revenue for the three months ended December 31, 1999 was $4,547,703.
License revenue for the three months ended December 31, 1999 was $1,639,314, or
36% of total revenue. License revenue includes sales of new licenses and
upgrades to existing customer licenses. Service revenue for the three months
ended December 31, 1999 was $2,908,389, or 64% of total revenue. Service
revenue includes revenue from maintenance contracts, installation services,
training services, and custom software development contracts. International
customers accounted for 59% of total revenue versus 41% from domestic
customers.
Cost of Revenues
Total Avery cost of revenue for the twelve months ended December 31, 1999
which is Primal's cost of revenues for the three months ended December 31, 1999
was $1,069,108, or 24% of total revenues. Cost of revenues consists primarily
of hardware costs and license fees paid to third parties under equipment resale
and technology license arrangements which were not significant during the
period, as well as all costs associated with the customer service organization,
which include staffing expenses, travel, communications costs, and other
support costs related with installing, training, providing help desk services,
and doing customization for Primal's software products. Customer service
organization costs were $1,018,602 for the three months ended December 31,
1999.
Operating Expenses
Consolidated operating expenses (excluding depreciation and amortization
expense) increased $2,059,032 from $804,581 in 1998 to $2,863,613 in 1999
primarily due to including Primal operating expenses of $1,594,597 for the
three months ended December 31, 1999. Primal's operating expenses include
charges for sales and marketing, research and development, and general and
administrative expenses. Operating expenses related to Avery increased $464,435
from $804,581 in 1998 to $1,269,016 in 1999, primarily as a result of increased
salaries at Avery and travel related to the Primal acquisition.
16
<PAGE>
Depreciation and Amortization
Depreciation and amortization expense was $192,642 in 1999, and $0 in 1998.
The increase is due to the addition of Primal's depreciation and amortization
expense for the three months ended December 31, 1999.
Operating Income (Loss) from Continuing Operations
Operating income for 1999 was $422,340, as compared to an operating loss of
$804,581 for 1998. Operating income for 1999 includes Primal's operating income
of $1,691,356 for the three months ended December 31, 1999. Operating loss
related to Avery was $(1,269,016) for 1999 and $(804,581) for 1998. The
increase in operating deficit was primarily due to an increase in salaries at
Avery and travel related to the Primal acquisition.
Other Income (Expense), Net
Other income (expense), net decreased to $366,276 of net expense in 1999
from $511,741 of net expense in 1998. These amounts consist of interest expense
and other income (expense). Interest expense for 1999 was $372,625, as compared
to $511,741 in 1998. The decrease is primarily attributable to repayment of a
$1,000,000 loan in July of 1998 offset by $67,265 of interest relating to
Primal notes for the three months ended December 31, 1999.
Income Taxes
An income tax provision of $137,651 was recorded for the year ended December
31, 1999. The significant difference between the tax provision for calendar
1999 and $19,062, the income from continuing operations at the statutory tax
rate, is due to permanent and temporary book vs. tax differences. These
differences consist of non-deductible meals and entertainment, amortization,
allowance for bad debt and accrued vacations.
Income (Loss) from Discontinued Operations
Income from discontinued operations was $2,758,651 in 1999, including
applicable income tax benefit of $118,413 for the year ended December 31, 1999.
Loss from operations was $7,156 in 1998. The increase in income from
discontinued operations was primarily due to a $4.3 million loss in connection
with terminated customers recorded in 1998 which did not recur in 1999 and an
increase in Hold Billing Services' sales of $4.1 million from $19.6 million in
1998 to $23.7 million in 1999.
Liquidity
Avery's cash balance increased to $1,777,015 at December 31, 1999, from
$867,198 at December 31, 1998, primarily due to cash collected from Primal
customers in the fourth quarter of 1999. Avery's working capital position at
December 31, 1999 was a negative $3.4 million compared to a negative $7.0
million as of December 31, 1998. The improvement is primarily due to a $4.0
million decrease in current liabilities in discontinued operations resulting
from a significant increase in operating volumes. Net cash provided by
operating activities, excluding discontinued operations, was $700,000 for
calendar 1999, as compared to cash used by operating activities of $(1,303,000)
for 1998. The increase was primarily due to net income generated by Primal
during the three months ended December 31, 1999.
Avery generated proceeds from the sale of common and preferred stock of $0
during 1999 and $200,000 during 1998. Avery also paid dividends of and redeemed
preferred stock in amounts totaling $468,000 during 1999 and $1,900,000 during
1998.
Capital expenditures amounted to $316,000 during 1999 and $0 during 1998.
Expenditures for 1999 relate primarily to the purchase of computer equipment
and software and to a lesser extent furniture and fixtures.
17
<PAGE>
Acquisition costs in 1999 totaled $357,000. These costs are comprised of
professional fees relating to the Primal acquisition.
Avery's operating cash requirements consist principally of working capital
requirements, software development costs, sales and marketing costs, scheduled
payments of principal on its outstanding indebtedness and capital expenditures.
As part of the proposed spin-off of Thurston Communications, Thurston
Communications will provide Avery with $2.5 million in cash. In addition, Avery
has another firm commitment for $2.0 million and is in the process of raising
additional capital for a total in the $8.0 to $10.0 million range.
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 Update
During 1999 we undertook initiatives to ensure that our systems were Year
2000 compliant. As of the date of this filing, we have not experienced any
disruption of our operations due to Year 2000 issues. The cost of Year 2000
modifications have not been significant and no additional Year 2000 costs are
anticipated.
Obligations Under Employment Agreements
Avery has employment agreements with its management requiring Avery to pay
specified amounts as annual base salaries and certain bonuses. Current
aggregate minimum annual cash compensation under the agreements is $543,000,
which will be funded from working capital. 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.
In connection with the Primal acquisition, three principal Primal
shareholders entered into employment agreements with Primal as the surviving
corporation in the merger. Avery estimates that the minimum annual cash
compensation under these agreements will be approximately $539,000, which will
be funded from working capital.
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<PAGE>
BUSINESS
General
Avery is a telecommunications service company which, through its operating
subsidiaries, HBS Billing Services Company and Primal Solutions, Inc., is
engaged in providing billing and collection services for inter-exchange
carriers and long-distance resellers and in providing customer care systems,
mediation systems and customer relationship management decision support systems
to telecommunications carriers.
HBS Billing Services Company
General
HBS Billing Services Company is a third-party billing clearinghouse for the
telecommunications industry. HBS Billing Services' customers consist primarily
of direct dial long distance telephone companies. HBS Billing Services
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 Billing Services processes transaction records
and collects the related end-user charges from these telephone companies for
its customers.
HBS Billing Services' customers use HBS Billing Services as a billing
clearinghouse for processing records generated by their end-users. Although
such carriers can bill end-users directly, HBS Billing Services provides these
carriers with a cost-effective means of billing and collecting residential and
small commercial accounts.
HBS Billing Services 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 Billing Services 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 Billing Services 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 Billing Services' customers' sales
volume to be processed through the local exchange carrier. The remaining
minimum usage for significant contracts at December 31, 1999, totaled $6.1
million through 2003. As a frame of reference, customers' sales processed by
HBS Billing Services relating to all contracts in January, 2000 were
approximately $35.6 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 Billing Services has met all such volume commitments in the past
and anticipates exceeding the minimum usage volumes with all of these vendors.
HBS Billing Services 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, although this business was
significantly reduced in 1999.
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
19
<PAGE>
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 Billing Services, entered
into these billing and collection agreements and became aggregators of
telephone call records of third-tier long distance companies, thereby becoming
"third-party clearinghouses." Today, HBS Billing Services provides billing
clearinghouse services to approximately 29 customers in the telecommunications
industry.
Third-party clearinghouses such as HBS Billing Services 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 Billing Services performs billing clearinghouse services
under billing and collection agreements with local telephone companies. HBS
Billing Services 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 Billing Services
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 Billing Services' 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 Billing Services, 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 Billing Services then submits the
relevant billable telephone call records and other transactions to the
appropriate local telephone company for billing and collection. HBS Billing
Services 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 Billing Services 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 Billing Services is, on average, approximately 50 days.
HBS Billing Services accrues for end-user customer service refunds, holdback
reserves and certain adjustments charged to HBS Billing Services by the local
telephone companies. HBS Billing Services 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 Billing Services
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 Billing Services and there are
insufficient funds being held to cover future refunds and adjustments, HBS
Billing Services' only recourse is through legal action.
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<PAGE>
HBS Billing Services 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 for its customers. HBS Billing
Services currently submits state and local tax returns for its customers in
over 500 taxing jurisdictions.
HBS Billing Services 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 Billing Services' customer service
call center. HBS Billing Services' customer service telephone number is
included in the local telephone company bill to the end-user, and HBS Billing
Services' customer service representatives are authorized to resolve end-user
disputes regarding such transactions.
HBS Billing Services' 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 Billing Services by local telephone companies
for billing and collection services are also included in revenues and are
passed through to the customer.
Operations
HBS Billing Services' billing clearinghouse services are highly automated
through HBS Billing Services' proprietary computer software. The staff required
to provide HBS Billing Services' billing clearinghouse and information
management services is largely administrative and the number of employees is
not directly volume sensitive. All of HBS Billing Services' customers submit
their records to HBS Billing Services using electronic transmission protocols
directly into HBS Billing Services' electronic bulletin board or over the
Internet. These records are automatically accessed by HBS Billing Services'
proprietary software, processed, and submitted to the local telephone
companies. Upon completion of the billing process, HBS Billing Services
provides reports relating to billable records and returns any unbillable
records to its customers electronically through the bulletin board or through
the Internet.
HBS Billing Services 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 Billing Services.
HBS Billing Services' 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 Billing Services 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 Billing Services'
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 Billing Services 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 Billing Services 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.
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<PAGE>
. 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.
. Information Providers: Companies that provide various forms of
information or voice mail services to subscribers.
Other customers include suppliers of various forms of telecommunications
equipment, Internet services and paging companies.
HBS Billing Services has two material customers which represented 46% and
26%, respectively, of total call records processed in calendar 1999.
Competition
HBS Billing Services 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 Billing Services, and have, or have access
to, substantially greater financial and personnel resources than those
available to HBS Billing Services.
As a large user of local exchange carrier billing services, HBS Billing
Services enjoys favorable rates and passes the benefits of its buying power on
to its customers. We believe that HBS Billing Services 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.
Insurance
Avery does not maintain errors and omissions insurance for the business
conducted by HBS Billing Services.
Employees
At December 31, 1999, HBS Billing Services had 44 full-time employees,
including two executive officers, two sales and marketing personnel, eight
technical and operations personnel, eight accounting, administrative and
support personnel, and 24 customer service representatives and related support
personnel. HBS Billing Services' employees are not represented by a union. HBS
Billing Services believes that its employee relations are good.
22
<PAGE>
Primal Solutions, Inc. and its subsidiary, Primal Billing Solutions
Primal is a 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.
Wireless Billing Solutions, doing business as 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 (Orange).
Primal combines 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 Informix.
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 Connect CCB, and the
Access IM software products. Connect 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. Connect currently supports paging, cellular, ISP and long-
distance direct billing. Connect's modular design currently supports customers
ranging from start-ups to nationwide carriers with over 5 million customers.
Access IM is a switch mediation product that connects to a multitude of
different switch types. Access IM 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.
Employees
At December 31, 1999, Primal and Primal Billing Solutions had 86 full-time
employees, including 3 executive officers, 9 sales and marketing personnel, 51
technical and operations personnel, 14 accounting, administrative and support
personnel, and 9 customer service representatives and related support
personnel. Neither Primal nor Primal Billing Solutions employees are
represented by a union. Primal and Primal Billing Solutions believe that their
employee relations are good.
Recent Developments
Spin-Off of Thurston Communications Corporation
In March 2000, Avery announced its plans to spin-off Thurston Communications
Corporation, a wholly owned subsidiary of Avery and the parent holding company
of HBS Billing Services to Avery's stockholders. Effectively, the spin-off of
Thurston Communications is a spin-off of HBS Billing Services. Avery
anticipates effecting the spin-off by the close of the third quarter of 2000.
Following the spin-off, Avery intends to change its name to Primal and intends
to focus its business on the communications and Internet industries. See
"Management's Discussion and Analysis or Plan of Operation--Recent Events--
Thurston Communications Spin-Off" for additional information.
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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 51 Director and Chairman of the Board
Mark J. Nielsen 41 Director, President and Chief Executive Officer
Scot M. McCormick 46 Director, Vice President, Chief Financial Officer and Secretary
Norman M. Phipps 40 Director
J. Alan Lindauer 60 Director
Stephen L. Brown 61 Director and Vice Chairman of the Board
Spencer L. Brown 34 Director
Robert T. Isham, Jr. 47 Director
</TABLE>
Directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualify.
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 Industry Director--Mobile Communications for
Cincinnati Bell Information Systems and Director of Sales and Marketing for
Cellular Business Systems, Inc. serving the billing and customer care needs of
the telecommunications industry on a service bureau basis. Mr. Nielsen has
delivered a letter to Avery's Board of Directors advising Avery and the Board
that the letter should be considered as his notice of termination of his
employment agreement, effective May 5, 2000.
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.
25
<PAGE>
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).
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 and an
advisor to Copley Fund, Inc., a mutual fund. Spencer L. Brown is Mr. Brown's
son.
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.
Stephen L. Brown is Mr. Brown's father.
Robert T. Isham, Jr. originally served as a director of Avery 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.
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.
William L. Salway was appointed President of Primal in January 2000. Mr.
Salway has extensive experience in software development and telecommunications.
He began consulting for Primal in January, 1999 and was named Vice President
and General Manager in February of that same year. Prior to his involvement
with Primal, Mr. Salway was President and Chief Operating Officer of Garg Data
International in Newport Beach, California, a privately held information
technology company engaged in consulting services and the development and
delivery of financial and insurance services software products. Mr. Salway was
Vice President of Sales and Marketing and, subsequently, President of CAIR
Systems, a venture capital backed provider of property and casualty insurance
software from 1989 through 1996. From 1965 through 1989, Mr. Salway was
employed in a variety of positions of increasing responsibility in software and
telecommunications with both large-scale companies, such as RCA, Citicorp and
United Technologies, as well as with small cap and venture capital backed
start-ups. He is a graduate of Rutgers University.
26
<PAGE>
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. Each non-employee director also receives an annual stipend of
$10,000 and an annual grant of options to purchase 10,000 shares of common
stock at an exercise price determined by the board at the time of the grant.
The non-employee directors of Avery also receive $1,000 for each meeting
attended, plus reimbursement of travel expenses.
Executive Compensation
The following table summarizes certain information relating to the
compensation paid or accrued by Avery for services rendered during the years
ended December 31, 1999 and 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 years ended December 31, 1999 and 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, 1999 $200,000 $100,000 $36,804 100,000
III(/1/)............... 1998 $100,000 $ -- $30,000 420,000
Chairman of the Board
Mark J. 1999 $200,000 $117,500 $14,400 --
Nielsen(/2/)(/3/)...... 1998 $ 16,667 $ -- $ -- 925,000
President and Chief
Executive Officer
Scot M. McCormick(/3/).. 1999 $130,000 $ 50,000 $12,912 150,000
Vice President, Chief 1998 $122,667 $ 35,000 $ -- 75,000
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 for health, life, disability and medical insurance.
(/2/)Mr. Nielsen became the Chief Executive Officer of Avery on December 1,
1998.
(/3/)"Other Annual Compensation" includes premiums for health, life, disability
and medical insurance.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Indvidual Grants
- -------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise or Base Expiration
Name Granted in Fiscal Year Price ($/Sh) Date
- ---- ---------- -------------- ---------------- ----------
<S> <C> <C> <C> <C>
Patrick J. Haynes, III... 100,000 8.0% $1.63 11/18/09
Scot M. McCormick........ 150,000 11.9% $1.63 11/18/04
</TABLE>
27
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End(#) FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
- ---- --------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Patrick J.
Haynes,
III........ -- -- 380,000/140,000 $ 37,500/$0
Mark J.
Neilsen.... -- -- 925,000/0 $ 0/$0
Scot M.
McCormick.. -- -- 125,000/100,000 $ 56,250/$37,500
</TABLE>
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. Mr. Nielsen waived until
March 31, 2000 his right to be elected Chairman of the Board. The employment
agreement had an original term of one year and automatically renews 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. Mr. Nielsen has delivered a letter to Avery's Board of Directors
advising Avery and the Board that the letter should be considered as his notice
of termination of his employment agreement, effective May 5, 2000.
Effective January 1, 2000, Scot M. McCormick entered into an employment
agreement with Avery. Under his employment agreement, Mr. McCormick will serve
as Vice President, Chief Financial Officer and Secretary, subject to the Board
of Directors power to elect and remove officers of Avery. The employment
agreement expires December 31, 2000, and will automatically be renewed for
additional terms unless either party notifies the other prior to November 1 of
a given year that they do not wish to renew the agreement. Mr. McCormick's
initial base salary is $143,000 annually. In addition, Mr. McCormick is
entitled to annual incentive compensation in an amount equal to 40% of his
annual salary if certain performance goals established by the Board of
Directors are met or exceeded. Mr. McCormick is entitled 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. McCormick for comparable coverage, and to receive such
other bonuses as the Board may determine in its sole discretion.
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
28
<PAGE>
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 the employment agreement. Mr. Box is entitled to receive an annual
salary of $100,000, subject to standard payroll deductions, and is entitled to
receive the 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
with such defense.
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 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
29
<PAGE>
. 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 for 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.
Bylaws
The 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.
SEC Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
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 SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
30
<PAGE>
CERTAIN TRANSACTIONS
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. Of the total $621,736 used to repurchase the warrants,
$300,000 was classified as compensation paid to Mr. Haynes. None of this amount
was classified as compensation paid to Mr. Isham. Waveland, Thurston Group and
Thurston Interests are affiliates of Mr. Haynes. Thurston Group and Thurston
Interests are also affiliates of Mr. Isham.
Mark J. Nielsen, Avery's President and Chief Executive Officer, was also the
Chairman of Primal Systems and owned approximately 16.04% of the Primal Systems
common equity on a fully diluted basis at the time the agreement to acquire
Primal Systems was entered and on October 1, 1999, the date the acquisition was
completed. Mr. Nielsen received 320,893 shares of Avery's convertible preferred
stock in the merger. If the maximum number of shares that could be issued under
the earn-out provisions of the merger agreement were issued, Mr. Nielsen could
receive up to an additional 953,608 shares of Avery's convertible preferred
stock. Each share of Avery's convertible preferred stock issued in the merger
is immediately convertible into shares of Avery's common stock on a one-for-one
basis.
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 was 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
was 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. As noted
above, Avery completed its acquisition of Primal Systems after the close of
business on September 30, 1999.
31
<PAGE>
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
The table following sets forth information regarding the beneficial
ownership of common stock for each person who is known by Avery to be the
beneficial owner of more than five percent of Avery's voting securities, for
each director and named executive officer of Avery, and 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.
All information is as of April 20, 2000. As of such date, 8,745,651 shares
of common stock were outstanding, which excludes 1,215,216 held by Avery as
treasury shares. 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 through the
exercise of any option, warrant or right, through the conversion of any
security, through the power to revoke a trust, discretionary account, or
similar arrangement, or through the automatic termination of a trust,
discretionary account or similar arrangement.
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percent of Class
- ------------------------ ---------------- ----------------
<S> <C> <C>
Franklin Capital
Corporation(/1/)....... 1,645,938 18.1%
Waterside Capital
Corporation(/2/)....... 686,000 7.5%
Thurston Group,
Inc.(/3/).............. 1,085,917(/4/) 11.2%
Waveland, LLC(/3/)...... 566,286(/5/) 6.1%
John Faltys(/6/)........ 593,008 6.4%
Patrick J. Haynes,
III(/3/)............... 2,688,877(/5/)(/8/) 26.6%
Mark J. Nielsen(/9/).... 1,260,893 12.6%
Scot M. McCormick....... 245,000 2.7%
Norman M. Phipps........ 75,000 0.9%
J. Alan Lindauer(/2/)... 803,700(/10/) 8.6%
Stephen L. Brown(/1/)... 1,770,938(/11/) 19.2%
Spencer L. Brown(/1/)... 1,742,188(/11/) 19.0%
Robert T. Isham, Jr. ... 182,355 2.0%
All executive officers
and directors as a
group.................. 8,768,951(/7/)(/8/)(/10/)(/11/) 65.9%
</TABLE>
- --------
(1) The business address for this person is 450 Park Avenue, 10th Floor, New
York, NY 10022.
(2) The business address for this person is 300 East Main Street, Suite 1380,
Norfolk, VA 23510.
(3) The business address for this person is 190 South LaSalle Street, Suite
1710, Chicago, IL 60603.
(4) The ultimate beneficial owners of these shares is Patrick J. Haynes, III.
(5) The ultimate beneficial owner of these shares is Patrick J. Haynes, III.
(6) The business address for this person is 18881 Von Karman, Suite 400,
Irvine, California 92612.
(7) Includes 1,085,917 shares beneficially owned by Thurston Group, Inc.
(8) Includes 1,085,917 shares beneficially owned by Thurston Group, Inc.,
426,286 shares beneficially owned by Waveland, LLC, and 1,036,664 shares of
common stock beneficially owned by Bank One, Texas, N.A, for which
Mr. Haynes holds an irrevocable proxy.
(9) The business address of this person is 18881 Von Karman, Suite 400, Irvine,
California 92612.
(10) Includes 651,000 shares beneficially owned by Waterside Capital
Corporation, of which Mr. Lindauer is the President.
(11) Includes 1,645,938 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.
32
<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. As of April 20, 2000, 8,745,651 shares of
common stock were outstanding, which excludes 1,215,216 shares held by Avery as
treasury shares. As of such date, there were approximately 345 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, 350,000 shares of series e convertible
preferred stock and 3,890,373 shares of series f participating 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. 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 for
dividends, subject to the dividend and liquidation rights of Avery's
outstanding preferred stock and any other series of preferred stock that may be
issued in the future 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.
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, 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, the
series d senior preferred stock may be, 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
aggregate proceeds from such offering exceeding $7 million, the series d senior
preferred stock, will be automatically, 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. Avery's
stockholders' equity on December 31, 1996, was $1,295,437. Accordingly, the
series d preferred stock
33
<PAGE>
must be redeemed in the year following the December 31 on which Avery's
stockholders' equity is $8,295,437 or more. At December 31, 1999, Avery's
stockholders' equity was $5,326,430.
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.
Junior Preferred Stock
The board of directors has designated five 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, series e junior convertible redeemable
preferred stock and series f junior participating convertible preferred stock.
For convenience, the series a, series b, series c, series e and series f 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, 350,000
shares of the series e and 8,000,000 of the series f.
The holders of the junior preferred stock other than the series f 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 other than the series f 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 series d senior preferred stock and any other senior
preferred stock which may be designated in the future. Holders of series f are
entitled to receive a liquidation distribution of $.01 per share.
At the option of the holders of the junior preferred stock, 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, series e and series f may be converted
into common stock at a rate equal to one share of common stock per share. 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 aggregate proceeds from such offering
exceeding $7 million, the series of junior preferred stock other than the
series f will be automatically converted into common stock at the ratios set
forth above.
If the audited balance sheet of Avery at the end 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
other than the series f is to be redeemed at its liquidation value plus any
unpaid accumulated dividends to that date. Avery's stockholders' equity on
December 31, 1996, was $1,295,437. Accordingly, the junior preferred stock
other than the series f must be redeemed in the year following the December 31
on which Avery's stockholders' equity is $8,295,437 or more. At December 31,
1999, Avery's stockholders' equity was $5,326,430.
The shares of the junior preferred stock other than the series f do not have
any voting rights, except as otherwise required by law. The series f votes as a
single class with the common stock on an "as if converted basis, " which is
presently one vote for each share outstanding.
Future Issuances of Preferred Stock
Avery has no present intention to issue any additional shares of preferred
stock.
34
<PAGE>
LEGAL PROCEEDINGS
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.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports, proxy
statements and other information 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.
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, 1999 and 1998, and are included in this prospectus in reliance
upon such reports given upon the authority of such firms as experts in
accounting and auditing.
35
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
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, 1999 and 1998............... F-2
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998.......................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1999 and 1998....................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998.......................................................... F-5
Notes to Consolidated Financial Statements.............................. F-6
</TABLE>
36
<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, 1999 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 did not audit the financial statements of
Primal Solutions, Inc., a consolidated subsidiary, which statements reflect
total assets of $9,674,468 as of December 31, 1999, and total revenue of
$4,547,703 for the three months ended December 31, 1999. These statements were
audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for Primal Solutions,
Inc. is based solely on the report of the other auditors.
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, based on our report and the report of other auditors, 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, 1999 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.
March 15, 2000
Dallas, Texas
F-1
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,777,015 $ 867,198
Trade accounts and notes receivable, net of
allowance for doubtful accounts of $102,580 at
December 31, 1999.................................. 993,406 --
Other............................................... 368,588 444
----------- ----------
Total current assets................................ 3,139,009 867,642
----------- ----------
Property and equipment, net.......................... 1,608,845 --
----------- ----------
Other assets:
Goodwill, net....................................... 4,563,584 --
Net long-term assets of discontinued operations..... 4,588,549 6,068,972
Other............................................... 61,552 100,000
----------- ----------
Total other assets.................................. 9,213,685 6,168,972
----------- ----------
Total assets........................................ $13,961,539 $7,036,614
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable (including $88,333
to related parties at December 31, 1999)........... $ 473,252 $ --
Current portion of capital lease obligations........ 89,577 --
Trade accounts payable.............................. 371,121 125,308
Accrued liabilities................................. 860,473 79,631
Income taxes payable................................ 137,651 --
Deferred revenue.................................... 1,023,605 --
Net current liabilities of discontinued operations.. 3,564,078 7,676,837
----------- ----------
Total current liabilities........................... 6,519,757 7,881,776
----------- ----------
Long-term liabilities:
Capital lease obligations........................... 62,049 --
Long-term portion of notes payables (including
$407,436 and $316,916 to related parties at
December 31, 1999 and 1998, respectively).......... 2,053,303 316,916
----------- ----------
Total long-term liabilities......................... 2,115,352 316,916
----------- ----------
Commitments and contingencies (Note 5)
Stockholders' equity (deficit):
Preferred stock (20,000,000 authorized):
Series A; $0.01 par value, 800,000 shares
authorized, 400,000 shares issued and outstanding
at December 31, 1999 and 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 December 31, 1999 and 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
December 31, 1999 and 1998 (liquidation preference
of $70,000)........................................ 700 700
Series D; $0.01 par value, 1,500,000 authorized,
issued and outstanding at December 31, 1999 and
1998 (liquidation preference of $1,500,000)........ 15,000 15,000
Series E; $0.01 par value, 350,000 authorized,
issued and outstanding at December 31, 1999 and
1998 (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 December 31, 1999 (liquidation preference of
$38,904)........................................... 38,904 --
Common stock, $0.01 par value, 20,000,000 shares
authorized, 9,803,949 shares issued at December 31,
1999 and 1998, respectively........................ 98,040 98,040
Additional paid-in capital.......................... 12,306,163 8,417,991
Accumulated deficit................................. (5,161,778) (7,838,842)
Treasury stock, 1,176,916 and 1,130,250 shares at
December 31, 1999 and 1998, respectively, at cost.. (1,981,999) (1,866,367)
----------- ----------
Total stockholders' equity (deficit)................ 5,326,430 (1,162,078)
----------- ----------
Total liabilities and stockholders' equity
(deficit).......................................... $13,961,539 $7,036,614
=========== ==========
</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
December 31,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Total revenues:
Systems revenues.................................... $1,639,314 $ --
Service revenues.................................... 2,908,389 --
---------- -----------
Total revenues.................................... 4,547,703 --
Cost of revenues...................................... 1,069,108 --
---------- -----------
Gross profit...................................... 3,478,595 --
Operating expenses.................................... 3,056,255 804,581
---------- -----------
Operating income (loss)........................... 422,340 (804,581)
Other income (expense):
Interest expense.................................... (372,625) (511,741)
Other, net.......................................... 6,349 --
---------- -----------
Total other expense, net.......................... (366,276) (511,741)
---------- -----------
Income (loss) from continuing operations before
provision for income taxes........................... 56,064 (1,316,322)
Provision for income taxes............................ (137,651) --
---------- -----------
Loss from continuing operations....................... (81,587) (1,316,322)
Income (loss) from discontinued operations (including
applicable income tax benefit of $118,413 for the
year ended December 31, 1999)........................ 2,758,651 (7,156)
---------- -----------
Net income (loss)................................. $2,677,064 $(1,323,478)
========== ===========
Per share data
Basic net income (loss) per share:
Continuing operations................................. $ (0.04) $ (0.19)
Discontinued operations............................... 0.32 --
---------- -----------
Net income (loss)..................................... $ 0.28 $ (0.19)
========== ===========
Diluted net income (loss) per share:
Continuing operations................................. $ (0.04) $ (0.19)
Discontinued operations............................... 0.32 --
---------- -----------
Net income (loss)..................................... $ 0.28 $ (0.19)
========== ===========
Weighted average number of common shares:
Basic common shares................................. 8,643,526 8,541,575
========== ===========
Diluted common shares............................... 8,643,526 8,541,575
========== ===========
</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,
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.............. -- -- -- -- -- 46,666 (115,632) -- (115,632)
Payment of preferred
stock dividend........ -- -- -- -- (468,300) -- -- -- (468,300)
Purchase of Primal
Systems,
Inc. ................. 3,890,373 38,904 -- -- 3,365,172 -- -- -- 3,404,076
Release of HBS escrow
shares-employment
agreements............ -- -- -- -- 991,300 -- -- -- 991,300
Net income............. -- -- -- -- -- -- -- 2,677,064 2,677,064
--------- ------- --------- ------- ----------- --------- ----------- ----------- ----------
Balance at December 31,
1999.................. 6,600,373 $66,004 9,803,949 $98,040 $12,306,163 1,176,916 $(1,981,999) $(5,161,778) $5,326,430
========= ======= ========= ======= =========== ========= =========== =========== ==========
</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 December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (income) loss................................... $ 2,677,064 $(1,323,478)
Earnings from discontinued operations............... (2,758,651) 7,156
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
from continuing operations:
Bad debt expense.................................. 102,580 --
Amortization of loan discounts.................... 8,280 30,166
Write-off unamortized loan discounts.............. -- 83,930
Write-off debt issuance costs..................... -- 90,203
Depreciation and amortization..................... 192,642 23,532
Compensation in connection with issuance of
warrants......................................... -- 118,590
Common stock issued to settle debt................ -- 30,000
Change in assets and liabilities, net of effects of
assets and liabilities acquired and disposed of:
Trade accounts receivable......................... 952,010 --
Deferred revenue.................................. (1,241,004) --
Other current assets.............................. 190,679 (444)
Other current liabilities......................... -- (200,000)
Trade accounts payable and accrued liabilities.... 302,714 (203,900)
Income tax payable................................ 137,651 --
Other assets...................................... 136,107 41,667
----------- -----------
Net cash provided by (used in) continuing
operations..................................... 700,072 (1,302,578)
Net cash provided by discontinued operations.... 1,117,617 5,389,607
----------- -----------
Net cash provided by operating activities....... 1,817,689 4,087,029
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment................ (316,479) --
Capitalized costs in connection with Primal
acquisition...................................... (356,845) --
Cash paid for treasury stock...................... (115,632) (469,830)
Cash acquired from Primal acquisition............. 401,081 --
Issuance of notes receivable...................... -- (100,000)
----------- -----------
Net cash (used in) investing activities......... (387,875) (569,830)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable....................... 37,963 --
Principal payments on notes payable............... (89,660) (1,000,000)
Payment of preferred stock dividends.............. (468,300) (445,876)
Redemption of preferred stock for cash............ -- (1,460,000)
Issuance of shares of common and preferred stock
for cash......................................... -- 226,806
----------- -----------
Net cash (used in) financing activities......... (519,997) (2,679,070)
----------- -----------
Increase in cash.................................... 909,817 838,129
Cash at beginning of year........................... 867,198 29,069
----------- -----------
Cash at end of year................................. $ 1,777,015 $ 867,198
=========== ===========
Supplemental disclosures:
Interest paid..................................... $ 98,444 $ 127,770
=========== ===========
Schedule of non-cash financing and investing
transactions:
Preferred stock issued in acquisition of Primal... $ 3,404,076 $ --
=========== ===========
Net liabilities assumed in acquisition of Primal.. $ 971,874 $ --
=========== ===========
Release of HBS escrow shares-employment and earn-
out-agreements................................... $ 991,300 $ --
=========== ===========
Financing fees in connection with issuance of
warrants......................................... $ -- $ 118,590
=========== ===========
Payment of accounts payable through issuance of
common stock..................................... $ -- $ 59,378
=========== ===========
Payment of debt through issuance of common stock.. $ -- $ 30,000
=========== ===========
Receipt of treasury stock in connection with sale
of Bordercomm.................................... $ -- $ 900,000
=========== ===========
Loss on disposal of discontinued operations....... $ -- $ 51,301
=========== ===========
</TABLE>
The accompanying notes 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 five wholly-
owned subsidiaries, Avery Communications, Inc. a Texas corporation, Hold
Billing Services, Ltd. ("HBS"), Primal Solutions, Inc. ("PSI") and Wireless
Billing Solutions, doing business as Primal Billing Solutions ("Primal Billing
Solutions") . Avery Communications, Inc. and its subsidiaries are collectively
referred to as the "Company."
Avery acquired PSI effective October 1, 1999. The consolidated results of
operations of this acquisition (accounted for as a purchase) are included in
these consolidated financial statements from October 1, 1999. Through this
entity and its subsidiary, the Company 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.
Effective February 29, 2000, the board of directors approved the spin-off
of HBS. The operations of this entity have been reflected as discontinued
operations for all periods presented in these consolidated financial statements
(See Note 3). This entity provides billing and collection services to local
exchange carriers ("LEC's") pursuant to long-term contracts. 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
Property and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Computer and office
equipment.............. 5 years
Furniture and fixtures.. 7 years
Leasehold improvements.. Shorter of the estimated useful life or life of the lease
</TABLE>
Depreciation from continuing operations for the year ended December 31,
1999 was $23,431. Maintenance and repairs are charged to operations when
incurred. Betterments and renewals are capitalized.
F-6
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived
assets in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of. In accordance with SFAS No. 121, long-lived assets
are reviewed for events or changes in circumstances which indicate that their
carrying value may not be recoverable. There was no impairment of the value of
such assets for the years ended December 31, 1999.
Software Development Costs
Costs incurred in the research and development of new software products
and enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological
feasibility is established, any additional costs are capitalized in accordance
with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed. Because the Company believes that its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility, no software development costs have
been capitalized as of December 31, 1999. Total research and development costs
expensed during the year ended December 31, 1999 totaled $543,525.
Goodwill
Goodwill is the difference between the purchase price paid and
liabilities assumed over the estimated fair market value of assets acquired
from PSI. Goodwill recorded in connection with the acquisition of PSI amounted
to $4,732,795 and is being amortized using the straight-line method over 7
years.
Amortization expense for the year ended December 31, 1999 was $169,211.
On a periodic basis, management reviews intangible assets for possible
impairment based on several criteria, including but not limited to, sales
trends, undiscounted operating cash flows and other operating factors.
Revenue Recognition
Continuing Operations:
Software Licenses, Services and Post-Contract Customer Support
Revenues from sales of software licenses, which generally do not contain
multiple elements, are recognized upon shipment of the related product if
the requirements of AICPA Statement of Position 97-2, as amended, are met.
If the requirements of AICPA Statement of Position 97-2, including evidence
of an arrangement, client acceptance, a fixed or determinable fee,
collectibility or vendor-specific objective evidence about the value of an
element are not met at the date of shipment, revenue recognition is
deferred until such items are known or resolved. Revenues from service and
post-contract customer support is deferred and recognized ratably over the
term of the contract.
Software Programming and Customization Services
Revenues are recognized as services are performed under the agreements.
Discontinued Operations:
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 collections. Bills
are generated by 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.
F-7
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The obligations consist of local exchange carrier billing fee, 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.
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 expensed 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 10).
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing the net income
(loss), (decreased) increased by preferred stock dividends of $287,200 and
$338,582 for the years ended December 31, 1999 and 1998, 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 net
income (loss) per common share was $0.03 and $0.04 per weighted average common
share outstanding for the years ended December 31, 1999 and 1998,
respectively. Diluted earnings per share includes the effect of all dilutive
options and warrants and instruments convertible into common stock. During the
years ended December 31, 1999 and 1998, the effect of outstanding warrants and
options on the computation of net income (loss) per share would be anti-
dilutive and, therefore, is not included in the computation of weighted
average shares.
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.
Concentration of Credit Risk
The Company sells its products primarily to large commercial companies.
Credit is extended based on an evaluation of the Customer's financial
condition, and collateral is generally not required. The Company also
evaluates its credit customers for potential credit losses. From time to time,
the Company may hold cash with financial institutions in excess of FDIC
insurance limits. The Company deposits its cash with high credit quality
financial institutions.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
1999 presentation.
Fair Value of Financial Instruments
The recorded amounts of financial assets and liabilities at December 31,
1999 and 1998, approximate fair value, based on the Company's incremental
borrowing rate or due to the relatively short period of time between
origination of the instruments and their expected realization.
F-8
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Adoption of New Accounting Standards
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 a statement of operations is
presented. The Company had no transactions during the years ended December 31,
1999 and 1998 that would be included as comprehensive income.
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. After excluding the
discontinued operations segment, the Company currently has only one operating
segment.
The FASB has issued SFAS No. 132, Employers' Disclosures about Pensions
and Other Post-retirement Benefits, an amendment of FASB Statements No. 87, 88,
and 106. This Statement revises employers' disclosures about pension and other
post-retirement benefit plans and standardizes the disclosure requirements for
pensions and other postretirement benefits. The Company adopted the statement
effective January 1, 1998. The Company typically does not offer the types of
benefit programs that fall under the guidelines of SFAS No. 132.
The FASB issued SFAS 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 changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company does not currently engage in hedging activities, but will
continue to evaluate the effects of adopting the statement.
F-9
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions and Dispositions
The Alternate Telephone and BorderComm Disposition
Effective January 1, 1998, the Company disposed of ATC and Bordercomm 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. 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>
The Corsair Transaction
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 Primal Billing Solutions, a wholly owned
subsidiary of Primal Systems, Inc. Primal Systems, Inc. changed its name to
Primal Solutions, Inc. concurrent with its acquisition by Avery on October 1,
1999. As consideration for Primal Billing Solutions entering into the Corsair
transaction, Corsair paid $1,000,000 cash to Primal Billing Solutions. Corsair
also agreed to loan Primal Billing Solutions the difference between the assets
and liabilities acquired by Primal Billing Solutions, plus $200,000 cash. The
terms of the Note are 10% annual interest, five year amortization, and payment
in full required in May 2001. Avery guaranteed the obligations of Primal
Billing Solutions. The Corsair transaction was entered into in contemplation of
Avery's acquisition of Primal Systems, Inc. discussed below. Primal Billing
Solutions recorded the acquisition under the purchase method of accounting,
acquiring assets at fair value of $4,581,889 and assuming liabilities of
$2,343,647 in addition to the note payable to Corsair. There was no goodwill
recorded in connection with this transaction.
The Primal Acquisition
In March 1999, Avery entered into a merger agreement with Primal Systems,
Inc. and certain shareholders of Primal Systems, Inc. Pursuant to this
agreement, Primal Systems, Inc. was purchased effective after the close of
business on September 30, 1999. At the time of the merger, Avery issued
3,890,373 shares of Avery's convertible preferred stock in exchange for all of
the issued and outstanding shares of Primal Systems, Inc. Of this amount,
1,945,188 shares will be held in escrow, to be issued to Primal Systems, Inc.'s
shareholders based upon the operating performance of Primal Systems, Inc. from
August 1, 1999 through July 31, 2000. Upon the meeting of certain operating
performance thresholds by Primal Systems, Inc. during this period, the Primal
Systems, Inc. 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 Systems, Inc.'s satisfaction of certain
operating performance levels during this period, certain shareholders of Primal
Systems, Inc. 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 was accounted for using the purchase method of accounting
with revenues and expenses of Primal Systems, Inc. being included in the
Company's operations from the acquisition date. The stock issued in the merger
was valued at $3,404,076 using the closing price of Avery's common stock on the
acquisition date plus other acquisition costs of $356,845. The Company acquired
assets at fair value of $4,421,356 and assumed liabilities of $5,393,230. The
Company recorded goodwill of $4,732,795 in connection with this transaction
which includes the expenses incurred to consummate the transaction.
F-10
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mark J. Nielsen, the Company's President and Chief Executive Officer, was
the Chairman of the Board and a significant shareholder of Primal Systems, Inc.
at the time of its acquisition by the Company.
Unaudited pro forma financial information for the years ended December 31,
1999 and 1998 as though the Primal acquisition had occurred on January 1, 1998
is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues........................................ $11,139,101 $ 1,458,924
=========== ===========
Net loss........................................ $ (759,426) $(1,582,801)
=========== ===========
Net loss per share-continuing operations:
Basic......................................... $ (0.12) $ (0.22)
=========== ===========
Diluted....................................... $ (0.12) $ (0.22)
=========== ===========
</TABLE>
3. Discontinued Operations
On February 29, 2000, the board of directors of the Company approved the
spin-off of Thurston Communications Corporation ("TCC") (See Note 12). TCC is a
holding company and its wholly owned operating subsidiary is HBS. In essence
the spin-off of TCC, is a spin-off of HBS. Each shareholder of the Company on
the record date for the spin-off will receive one share of TCC for each share
of the Company owned on that date. The spin-off will be recorded at book value
for accounting purposes since HBS is an ongoing business. HBS was originally
acquired during 1996. Pursuant to certain contingent incremental issuances of
the Company's common stock in connection with HBS achieving required earnings
projections, the Company released 185,000 of its common stock in 1999 as
additional consideration for the HBS purchase. The shares were recorded at fair
value of $297,900. This amount is included within the total $991,300 addition
to paid-in capital in the statement of stockholders equity for the year ended
December 31, 1999.
At December 31, 1999 and 1998, the net current liabilities and net long-
term assets of HBS were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets
Cash................................................. $ 5,678,050 $ 219,275
Advance payment receivables.......................... 6,621,348 11,893,146
Trade accounts receivable............................ 1,002,490 1,090,672
Other receivables.................................... 681,526 486,152
Deferred tax assets.................................. 374,086 --
Other current assets................................. 25,027 11,981
----------- -----------
Total current assets............................... 14,382,527 13,701,226
----------- -----------
Current liabilities
Line of credit....................................... -- 5,766,832
Current portion of notes payable..................... 6,667 6,667
Trade accounts payable............................... 4,345,373 3,765,762
Current tax payable.................................. 255,673 --
Accrued liabilities.................................. 2,347,676 1,984,397
Accrued interest..................................... 5,227 2,007
Deposits and other payables.......................... 10,985,989 9,852,398
----------- -----------
Total current liabilities.......................... 17,946,605 21,378,063
----------- -----------
Net current liabilities of discontinued operations..... $ 3,564,078 $ 7,676,837
=========== ===========
</TABLE>
F-11
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Property and equipment
Computer equipment and software....................... 1,063,674 902,841
Furniture and fixtures................................ 334,944 321,589
Accumulated depreciation and amortization............. (506,535) (249,217)
---------- ----------
892,083 975,213
---------- ----------
Other assets
Goodwill, net......................................... 3,022,748 2,993,539
Purchased contracts, net.............................. 70,555 35,092
Deposits.............................................. 185,514 1,570,278
Other................................................. 417,649 494,850
---------- ----------
Total other assets.................................. 3,696,466 5,093,759
---------- ----------
Net long-term assets of discontinued operations......... $4,588,549 $6,068,972
========== ==========
</TABLE>
The operating results of HBS for the years ended December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Operating revenues................................. $ 23,702,748 $ 19,633,576
Cost of revenues................................... (17,385,337) (13,043,784)
------------ ------------
Gross profit................................... 6,317,411 6,589,792
Selling, general and administrative expenses....... (4,061,227) (2,932,615)
Charge in connection with terminated customers..... 226,219 (4,271,394)
Advance funding program income, net................ 341,294 691,174
------------ ------------
Income from operations........................... 2,823,697 76,957
Other income (expense)............................. (183,459) (84,113)
------------ ------------
Income (loss) before income tax provision........ 2,640,238 (7,156)
Income tax provision............................. 118,413 --
------------ ------------
Net income (loss)................................ $ 2,758,651 $ (7,156)
============ ============
</TABLE>
F-12
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1998, HBS recorded a charge of
$4,271,394. The charge relates primarily to cash received from LECs that has
been paid by HBS to terminated customers and must be refunded to the LECs.
Under its billing contracts with the LECs, HBS is obligated to pay these
refunds if it is unable to collect them from its customers. During the later
half of 1998, HBS paid an estimated $3,800,000 to terminated customers that
will have to be refunded to the LECs. Of this amount, $1,471,742 were actually
refunded to local exchange carriers in calendar 1998. Management does not
believe that these amounts can be collected from the four customers that
generated most of the charge since they are out of business with no material
surviving assets. The refunds resulted from customers placing inappropriate
charges on consumer's local telephone bills. The inappropriate charges stem
from unauthorized switching of long distance service from a consumer's
incumbent provider to our customer and placing unauthorized charges for
services such as voice mail, internet access and paging on consumer's local
telephone bills. Prior to incurring these refunds, HBS had processed billing
records for these customers for periods ranging from approximately 10 months to
two years. During these periods LEC refunds were within acceptable levels.
The $4,271,394 consists of cash refunds made in calendar 1998 of
$1,471,742 and estimated future refunds as of December 31, 1998 of $2,799,652
which is included in deposits and other payables in the balance sheet presented
above. HBS estimated the $2,799,652 by reviewing actual refunds for the
terminated customers in 1998 and 1999 and projecting future refunds based on
each customer's actual refund pattern. In addition to the $3,800,000 discussed
above, included in the $4,271,394 charge is a $250,000 payment made to the FTC
as further described in Note 5, legal fees and other charges. HBS has
instituted a series of controls to limit its exposure to this type of refund in
the future.
In 1999, HBS expended $1,663,221 in cash relating to the $4,271,394 dollar
loss. Management determined that the loss was overestimated by $226,219, and
accordingly, adjusted the reserve. At December 31, 1999, $910,212 of the
original $4,271,394 estimated loss remained in the deposits and other payables
section of the balance sheet presented above. This is the remaining amount
estimated for future cash expenditures expected to be charged by the LECs in
connection with the terminated customers.
F-13
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
At December 31, 1999, property and equipment consists of the following:
<TABLE>
<S> <C>
Computers and office equipment................................... $1,524,626
Furniture and fixtures........................................... 87,802
Leasehold improvements........................................... 19,848
----------
1,632,276
Less accumulated depreciation and amortization................... (23,431)
----------
Property and equipment, net...................................... $1,608,845
==========
</TABLE>
Amortization of equipment purchased under capitalized lease obligations is
included in depreciation expense. Included in property and equipment is
$209,782 of equipment under capital leases at December 31, 1999. Accumulated
amortization related to equipment under capital leases amounted to $13,111 at
December 31, 1999.
5. Commitments and Contingencies
Continuing Operations:
PSI leases office space and certain equipment under various noncancelable
operating and capital leases. Future minimum lease payments required under the
operating and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year ended December 31, leases leases
----------------------- --------- --------
<S> <C> <C>
2000..................................................... $466,419 $107,010
2001..................................................... 155,473 42,910
2002..................................................... -- 28,261
2003..................................................... -- --
2004..................................................... -- --
-------- --------
Total minimum lease payments............................. $621,892 178,181
========
Less amount representing interest........................ 26,555
--------
Present value of minimum lease payments.................. 151,626
Less current portion at December 31, 1999................ 89,577
--------
Long-term obligation at December 31, 1999................ $ 62,049
========
</TABLE>
Rent expense under such leases was $23,664 for the year ended December 31,
1999.
Discontinued operations:
HBS has entered into various non-cancelable operating leases relating to
equipment and office space. Future minimum payments on leases having remaining
terms in excess of one year as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
2000............................................................... $108,462
2001............................................................... 108,462
2002............................................................... 108,462
2003............................................................... --
2004............................................................... --
--------
Total minimum lease payments....................................... $325,386
========
</TABLE>
F-14
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the years ended December 31, 1999 and 1998 amounted to
$108,462 and $109,026, respectively.
HBS is obligated to pay minimum usage charges over the lifetime of most
LEC billing contracts. Each contract has a minimum usage amount which relates
to HBS' customers' sales volume to be processed through the LEC. HBS does not
expect to incur any losses with respect to these minimum usage requirements.
The remaining minimum usage for significant contracts at December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
Amount Expires
---------- ---------------
<S> <C> <C>
Contract 1........................................ $4,850,000 March 1, 2001
Contract 2........................................ 450,000 January 1, 2003
Others............................................ 757,000 Throughout 2003
----------
$6,057,000
==========
</TABLE>
HBS 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. HBS relies on monthly tax reports it receives from
the LEC's in reporting and remitting such taxes. HBS' customers are
contractually obligated to reimburse HBS for any disputes with taxing
authorities that may arise from filing the sales and excise tax returns on
behalf of their customers. HBS is contingently liable for any such disputes or
assessments if its customers are unable or unwilling to honor the contract
provisions. There were no such disputes at December 31, 1999. HBS is also
contingently liable for chargebacks from the LEC's, to the extent such charge
backs exceed HBS' reserves for such charge backs. This contingent liability is
increased when HBS discontinues business with a particular customer.
In connection with the acquisition of HBS, two of the previous partners of
HBS entered into contingent incentive compensation agreements with HBS under
which 666,664 shares are issuable based on HBS achieving certain pre-tax income
levels (as defined). During 1998 and 1999, 0 and 416,665 shares, respectively,
were released pursuant to these contingent incentive compensation agreements.
These shares are reflected as compensation and an increase in stockholders
equity in the accompanying financial statements. Furthermore, they are included
in the $991,300 addition to paid-in capital in the statement of stockholders
equity for the year ended December 31, 1999.
HBS was 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 alleged that VOAA
caused unauthorized charges to appear on end users' bills based on deceptive
marketing programs and sought 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
sought 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. In 1999, HBS
settled with the FTC in the amount of $250,000 and agreed to abide by the
standards set by the FTC.
From time to time, HBS 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, HBS is not aware of any current or pending litigation or
proceedings that would have a material adverse effect on HBS' business, results
of operations or financial condition.
F-15
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Notes Payable
Notes payable at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---------- --------
<S> <C> <C>
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, 1999 and 1998 is $350,000 adjusted for a discount
for warrants issued in connection with the note based
on imputed interest rate of 20%....................... $ 325,195 $316,916
Note payable to officers bearing interest at 10% per
annum effective rate, principal due September 30,
2001, net of discount................................. 170,575 --
Note payable to seller of Primal Billing Solutions
bearing interest at 10%, principal maturing
May, 2001............................................. 2,030,785 --
---------- --------
Sub total.............................................. 2,526,555 316,916
Less current maturities................................ 473,252 --
---------- --------
Long term portion...................................... $2,053,303 $316,916
========== ========
</TABLE>
Principal amounts due on long-term debt at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000............................................................. $ 473,252
2001............................................................. 1,728,108
2002............................................................. 350,000
2003............................................................. --
2004............................................................. --
----------
Total.......................................................... 2,551,360
Loan discounts................................................... (24,805)
----------
Total.......................................................... $2,526,555
==========
</TABLE>
7. Stockholders' Equity (Deficit)
The Company had six and five series of preferred stock outstanding as of
December 31, 1999 and 1998, respectively.
The preferred stock Series' A, B, C, D and E contain a conditional mandatory
redemption feature. Beginning in 1998 and continuing from year to year
thereafter, once audited stockholders' equity increased to $7,000,000, as
compared to the December 31, 1996 stockholders' equity balance of $1,295,437,
the Company would redeem the outstanding shares in each series on or before
the first September 30 following that audited balance sheet date. Each series
has a liquidation preference of $1.00 per share together with all unpaid
dividends. Each series also includes a conversion feature. This feature
provides for the preferred stockholder to convert their shares into common
stock at a stated conversion price as follows: Series A and C--$2.50 per
share, Series B and E--$1.00 per share, and Series D--$2.00 per share. The
preferred stock Series D contains additional mandatory redemption provisions
which are enacted based upon the sale of HBS. Series A, B, C, D and E
preferred stock are 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 preferred stock Series F is participating and convertible. The
participating feature entitles the holders to participate, on a "if converted"
basis, in any and all dividends paid with respect to the common stock. The
conversion feature associated with the Series F provides for the issuance of
one share of common stock for every share of preferred Series F issued.
Dividends are payable, as and if declared by the Board of Directors at an
annual rate of $0.10 per share (Series A and D) and $0.12 per share (Series B,
C and E), all payable quarterly.
F-16
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1999 1998
-------- -------
<S> <C> <C>
Federal
Current.................................................... $ 82,651 $ --
Deferred................................................... -- --
State....................................................... 55,000 --
-------- -------
$137,651 $ --
======== =======
</TABLE>
A reconciliation of the federal income tax provision (benefit) based on the
U.S. Corporate income tax rate of 34% for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Income tax provision (benefit) at statutory rate...... $ 19,062 $(447,550)
Meals and entertainment............................... 11,454 8,500
Effect of sale of subsidiaries........................ -- 144,365
Stock option deduction for Federal tax purposes not
deductible for financial reporting purposes.......... -- (269,373)
State tax net of federal benefit...................... 36,300 --
Change in net operating loss - no benefit received.... (322,438) --
Net operating loss utilized........................... (67,097) --
Non-deductible amortization........................... 56,223 --
Other................................................. 8,647 (68,571)
Valuation allowance................................... 395,500 632,629
-------- ---------
Income tax expense.................................. $137,651 $ --
======== =========
</TABLE>
Deferred taxes are provided for the temporary differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities. The temporary differences that give rise to the deferred tax
assets or liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
Deferred tax assets ----------- -----------
<S> <C> <C>
Accounts receivable.............................. $ 126,682 $ 86,880
Accrued expenses................................. 60,264 15,370
Capital losses in excess of capital gains........ 52,564 --
Compensatory stock options....................... 43,716 43,716
Net operating loss............................... 1,755,240 1,497,000
Other............................................ 664 664
Less: Valuation allowance........................ (2,039,130) (1,643,630)
----------- -----------
Net deferred tax asset......................... $ -- $ --
=========== ===========
Deferred tax assets and liabilities as of December 31, 1999 and 1998 are
as follows:
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current deferred tax asset....................... $ 186,946 $ 102,250
Valuation allowance for current deferred tax
asset........................................... (186,946) (102,250)
----------- -----------
Net current deferred tax asset................. $ -- $ --
=========== ===========
Non-current deferred tax asset................... $ 1,852,184 $ 1,541,380
Valuation allowance for non-current deferred tax
asset........................................... (1,852,184) (1,541,380)
----------- -----------
Net non-current deferred tax asset............. $ -- $ --
=========== ===========
</TABLE>
F-17
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The current and non-current deferred tax assets have a 100% valuation
allowance due to the uncertainty of generating future taxable income.
As of December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $4,700,000, 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.
9. Related Party Transactions and Other Events
In December 1997, the Company entered into a 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. The note
is outstanding as of December 31, 1999, and is included with net current
liabilities of discontinued operations.
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 HBS employee at
9% interest. This amount is included in net current liabilities of discontinued
operations. The Company advanced $100,000 to a company at 10% for which its
president is a major stockholder. The advance of $100,000 was repaid in 1999.
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. During 1999, an additional 621,736 warrants and options
with $1.50 exercise prices were repurchased from entities controlled by the
Company's chairperson for a price of $1.00 per underlying share. The entire
amount of $621,736 has been included as an expense in income from discontinued
operations.
At the close of business on September 30, 1999, the Company purchased
Primal Systems, Inc. Mark Nielsen, President and Chief Executive Officer of the
Company, was Chairman of the Board and a significant shareholder of Primal
Systems at the time of the purchase.
In conjunction with the acquisition of PSI, Avery acquired certain notes
payable to the officers of PSI. At December 31, 1999, the total amount due on
these notes was $170,575, net of discount of $6,091. These notes bear interest
at 6%. The current portion of these notes at December 31, 1999 was $88,333 and
the long-term portion of these notes was $82,242.
F-18
<PAGE>
AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 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, 1997............... 592,500 2,283,923 2,876,423 $1.37 $3,946,946
Purchase of option.... (100,000) -- (100,000) $1.50 (150,000)
Granted............... 1,510,000 12,500 1,522,500 $2.32 3,532,502
Exercised............. (17,500) (567,871) (585,371) $1.38 (806,808)
--------- --------- --------- ----------
Outstanding at December
31, 1998............... 1,985,000 1,728,552 3,713,552 6,522,640
Purchase of option.... -- (621,736) (621,736) $1.26 (783,387)
Granted............... 1,257,777 70,000 1,327,777 $1.56 2,066,667
Expired............... -- (121,666) (121,666) $1.50 (182,499)
--------- --------- --------- ----------
Outstanding at December
31, 1999............... 3,242,777 1,055,150 4,297,927 $7,623,421
========= ========= ========= ==========
</TABLE>
The outstanding stock options and warrants expire from August 1998 through
2008.
The following summarizes information about compensatory options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------- -------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ----------------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$.50-
$3.00 3,242,777 6.1 years $1.85 2,281,268 $1.90
</TABLE>
The weighted average fair values of compensatory option exercise prices
equal to and below market price at the date of grant are as follows:
<TABLE>
<CAPTION>
Equal to Below
-------- -----
<S> <C> <C>
1999.......................................................... $ 1.17 $ --
1998.......................................................... $ 1.52 $1.37
</TABLE>
Compensation cost totaling $118,590 was recognized for 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 1998 and 1999 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 income (loss) and net income
(loss) per share would have been (decreased) increased to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998
------------------------
<S> <C> <C> <C>
Net income (loss).................... As reported $ 2,677,064 $ (1,323,478)
Pro forma $ 2,126,579 $ (2,880,877)
Income (loss) per common share (Basic
and Diluted)........................ As reported $ .28 $ (.19)
Pro forma $ .21 $ (.38)
</TABLE>
F-19
<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 1999--dividend yield of 0%, expected
volatility of 100%, expected life of 3 to 5 years and an estimated risk free
interest rate of 6.0%. The following assumptions were used for grants in 1998--
dividend yield of 0%, expected volatility of 89%, expected life of 2 to 5 years
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.
11. 401(k) Plan
PSI has a contributory 401(k) plan which covers substantially all
employees of PSI. PSI made no contribution to the plan during the period from
October 1, 1999 through December 31, 1999. Avery also has a 401(k) plan which
covers substantially all of the employees of Avery and HBS. Avery made
contributions of $27,670 and $16,680 during the years ended December 31, 1999
and 1998, respectively.
12. Subsequent Events
HBS Conversion to Corporation
HBS was converted from a Texas limited partnership to a corporation named
HBS Billing Services Company effective February 15, 2000. In connection with
the conversion, Avery-HBS, Inc., the legal entity which owned the 1% general
partnership interest of HBS, became the owner of 100% of the stock of HBS
Billing Services Company. Avery-HBS intends to reincorporate in Delaware and to
change its name to Thurston Communications Corporation. HBS Billing Services
Company will then become a wholly owned subsidiary of Thurston Communications
Corporation ("TCC"), which in turn will be a wholly owned subsidiary of Avery.
These changes were and are being made in anticipation of the TCC spin-off
discussed below.
TCC Spin-Off
On February 29, 2000, the board of directors approved the spin-off of TCC.
TCC is a holding company and its only operating subsidiary is HBS. Essentially,
the spin-off of TCC is a spin-off of HBS. The spin-off will be accomplished
through a distribution of one share of TCC for each share of Avery held by
stockholders as of the record date for the spin-off. The board of directors
approved the spin-off primarily due to the fact that it appears that investors
will be better able to understand the PSI and HBS businesses in separate
entities rather than being combined into one entity. The exercise and
conversion prices of our stock warrants, options and convertible securities
will all be adjusted to reflect the spin-off. The valuation of the TCC stock to
be distributed will be determined through an appraisal of the HBS business. For
accounting purposes, the spin-off will be recorded at book value since HBS is
an ongoing business. The spin-off will be a taxable transaction for federal
income tax purposes. The financial information contained in this document
presents HBS as a discontinued operation due to the spin-off. Accordingly, the
amounts in the statement of operations through the provision for income taxes
are PSI's plus expenses of Avery not associated with the discontinued
operations segment.
F-20
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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>
Avery.................................................................... 3
Risk Factors............................................................. 4
A Note About Forward-Looking Statements.................................. 7
Use of Proceeds.......................................................... 9
Plan of Distribution..................................................... 9
Selling Securityholders.................................................. 10
Price Range of Common Stock.............................................. 13
Dividend Policy.......................................................... 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 14
Business................................................................. 19
Management............................................................... 25
Certain Transactions..................................................... 31
Stock Ownership of Directors, Executive Officers and Principal Holders... 32
Description of Capital Stock............................................. 33
Legal Proceedings........................................................ 35
Where You Can Find More Information...................................... 35
Experts.................................................................. 35
Index to Financial Statements............................................ 36
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
9,326,994
Avery Communications, Inc.
Common Stock
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 and receiving $57,500 gross proceeds. The BC Note
was exchanged for 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.
II-3
<PAGE>
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.
On July 1, 1998, Avery granted to Patrick J. Haynes, III, its Chairman and
then Chief Executive Officer, pursuant to his employment agreement, a ten-year
warrant to purchase 420,000 shares of Avery's Common Stock at $3.00 per share.
On December 1, 1998, Avery granted to Mark J. Nielsen, its new Chief Executive
Officer, pursuant to his employment agreement, a ten-year option to purchase
425,000 shares of Avery's Common Stock at $2.00 per share. These securities
were issued in reliance upon the exemption set forth in Rule 701 under the
Securities Act.
II-4
<PAGE>
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.
The shares of convertible preferred stock issued in the Primal merger were
issued to seven individuals who were the stockholders of Primal. Each of these
persons was either an accredited investor or a person who either alone or with
his purchaser representative(s) had such knowledge and experience in financial
and business matters that he was capable of evaluating the risks of the
investment in Avery, or who Avery reasonably believed came within this
description. Each of such persons confirmed that he was acquiring such shares
for investment and not with a view to the distribution thereof within the
meaning of the Securities Act, and agreed not to sell such shares except
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from such registration requirements. The certificate
representing such shares contains a legend to such effect, and appropriate stop
transfer orders were given to Avery's transfer agent. Such shares were issued
in a transaction not involving a public offering in reliance upon the exemption
set forth in Section 4(2) of the Securities Act and in reliance on the safe
harbor provided by Rule 506 thereunder.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<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
2.7 Amendment No. 2 to the Primal Merger Agreement (filed as Exhibit 2.1
to the registrant's Current Report on Form 8-K, dated
September 27, 1999, and incorporated herein by reference thereto)
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
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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
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
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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
10.14 Avery Communications, Inc. 1999 Flexible Incentive Plan (filed as
Exhibit 99.1 to the registrant's registration statement on Form S-8
(File No. 333-33486) and incorporated herein by reference thereto)
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, 1999
</TABLE>
- --------
* Filed with Post-Effective Amendment No. 1.
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
II-7
<PAGE>
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 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 April , 2000
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
- --------------------------------- April , 2000
Patrick J. Haynes, III
/s/ Mark J. Nielsen* Director, President and Chief
- --------------------------------- Executive Officer (Principal April , 2000
Mark J. Nielsen Executive Officer)
/s/ Scot M. McCormick Director, Vice President, Chief
- --------------------------------- Financial Officer and Secretary April , 2000
Scot M. McCormick (Principal Accounting Officer)
/s/ Norman M. Phipps* Director
- --------------------------------- April , 2000
Norman M. Phipps
/s/ J. Alan Lindauer* Director
- --------------------------------- April , 2000
J. Alan Lindauer
/s/ Stephen L. Brown* Director
- --------------------------------- April , 2000
Stephen L. Brown
/s/ Robert T. Isham, Jr.* Director
- --------------------------------- April , 2000
Robert T. Isham, Jr.
*By: /s/ Scot M. McCormick
------------------------------ April , 2000
Scot M. McCormick
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
2.7 Amendment No. 2 to the Primal Merger Agreement (filed as
Exhibit 2.1 to the registrant's Current Report on Form 8-K,
dated September 27, 1999, and incorporated herein by
reference thereto)
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
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Document Number
------- ----------------------- ------
<C> <S> <C>
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
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
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit Number Description of Document Page Number
-------------- ----------------------- -----------
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
10.14 Avery Communications, Inc. 1999 Flexible Incentive Plan (filed as
Exhibit 99.1 to the registrant's registration statement on Form S-
8 (File No. 333-33486) and incorporated herein by reference
thereto)
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, 1999
</TABLE>
- --------
* Filed with Post-Effective Amendment No. 1
II-12
<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, 1999
------------------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------------- ----------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net loss from continuing operations (81,587)
Preferred stock dividend (287,200)
----------------
Net loss from continuing operations available to
common stockholders (368,787) 8,643,526 (.04)
Income from discontinued operations 2,758,651 8,643,526 .32
----------------
Net loss available to common stockholders 2,389,864 8,643,526 .28
================ =========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants -
Convertible Preferred Stock -
Convertible Debt -
-----------------
DILUTED EPS
Net loss from continuing operations (81,587)
Preferred stock dividend (287,200)
----------------
Net loss from continuing operations available to
common stockholders (368,787) 8,643,526 (.04)
Income from discontinued operations 2,758,651 8,643,526 .32
----------------
Net loss available to common stockholders
including assumed conversions 2,389,864 8,643,526 .28
================ ================= =========
</TABLE>
<PAGE>
<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 (1,316,322)
Preferred stock dividend (338,582)
----------------
Net loss from continuing operations available to
common stockholders (1,654,904) 8,541,575 (0.19)
Loss from discontinued operations (7,156) 8,541,575 -
----------------
Net income available to common stockholders (1,662,060) 8,541,575 (0.19)
================ =========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants - -
Convertible Preferred Stock - -
Convertible Debt - -
------------------
DILUTED EPS
Net loss from continuing operations (1,316,322)
Preferred stock dividend (338,582)
----------------
Net loss from continuing operations available to
common stockholders (1,654,904) 8,541,575 (0.19)
Loss from discontinued operations (7,156) 8,541,575 -
Net loss available to common stockholders
including assumed conversions (1,662,060) 8,541,575 (0.19)
================ ================= =========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT FOR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in Post-Effective Amendment No. 1 to Form SB-2,
Registration Statement under the Securities Act of 1933, of Avery
Communications, Inc. of our report dated March 15, 2000, on the financial
statements of Avery Communications, Inc. as of and for the years ended December
31, 1999 and 1998, accompanying the financial statements contained in Post-
Effective Amendment No. 1 to Form SB-2, and to the use of our name and the
statements with respect to us as appearing under the heading "Experts" in Post-
Effective Amendment No. 1 to Form SB-2.
/s/ King Griffin & Adamson P.C.
_____________________________________
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
April 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,777,015
<SECURITIES> 0
<RECEIVABLES> 993,406
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,139,009
<PP&E> 1,632,276
<DEPRECIATION> (23,431)
<TOTAL-ASSETS> 13,961,539
<CURRENT-LIABILITIES> 6,519,757
<BONDS> 0
27,100
38,904
<COMMON> 98,040
<OTHER-SE> 5,162,386
<TOTAL-LIABILITY-AND-EQUITY> 13,961,539
<SALES> 0
<TOTAL-REVENUES> 4,547,703
<CGS> 1,069,108
<TOTAL-COSTS> 3,056,255
<OTHER-EXPENSES> (6,349)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372,625
<INCOME-PRETAX> 56,064
<INCOME-TAX> 137,651
<INCOME-CONTINUING> (81,587)
<DISCONTINUED> 2,758,651
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,677,064
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
</TABLE>
