Avalon Reports Pre-Merger Results for Quarter Ended September 30; Company Also Reports $4.4 Million in Pro Forma Revenue, Reduction in Operating Costs Going Forward

Business Wire, Nov 15, 2002

Business Editors

HUNTINGTON BEACH, Calif.--(BUSINESS WIRE)--Nov. 15, 2002

Avalon Digital Marketing Systems, Inc. (Nasdaq: AVLN), a leading provider of digital marketing software and services, announced it had filed the SEC quarterly report on Form 10-Q containing financial results for pre-merger operations for the three months ended September 30, 2002. "The report reflects the merger of Category 5 Technologies, Inc. and MindArrow Systems, Inc., which closed on September 30," explained Michael Friedl, CFO for Avalon.

"Pursuant to SEC and accounting guidelines, the balance sheet contains data for both companies as of that date, while the income statement is that of Category 5, which was the larger pre-merger entity, for the quarter ended September 30," Friedl continued. "On a pro forma basis, the combined entity reported $4.4 million in revenues, with a net loss of $4.2 million. We caution that neither the pro forma results from the two companies nor Category 5's operating results for the three month period take into account the expected operating synergies going forward, and therefore may not be indicative of the combined entities' future performance post-merger."

"The Avalon management team remains confident that our previously announced targets for calendar 2003 are attainable," stated Robert Webber, Avalon's President and CEO. "Based on our deal pipeline and other initiatives, we have announced a target of $35 million in revenues and earnings of $3.5 million, or $0.50 per share, for the calendar year ending December 31, 2003. The merger integration is proceeding well, we had record revenues from our large enterprise group in October, and we are focused on building a business with sustainable profitability."

"Going forward, we will distinguish our small business sales (primarily former Category 5 operations) from our large enterprise sales (primarily former MindArrow and CaptureQuest operations)," stated Friedl. "We are already seeing improved operating margins for the former, and year-over-year growth of more than 50% for the latter. The combined entity, Avalon, has adopted the June 30 fiscal year end of Category 5."

"Although the summer months are traditionally Category 5's slowest time, we were able to decrease our cost base and improve operational efficiencies and customer service metrics significantly in anticipation of the merger," stated Paul Anderson, former Chairman and CEO of Category 5, and now President of Avalon's small business unit. "We look forward to more profitable growth in 2003 as we implement several new initiatives for the Avalon Business Direct unit, and take advantage of additional technology and corporate resources that the merger brings."

STATEMENT OF OPERATIONS DATA:  CATEGORY 5 ONLY

                                     For the               For the
                                  Quarter Ended         Quarter Ended
                                  September 30,          September 30,
                                      2001                   2002
                                   (unaudited)           (unaudited)

Revenues                           $4,356,205         $   3,304,808
Operating income (loss)               (38,897)           (2,454,157)
Write-down of short-term investment        --            (1,021,135)
Interest and other income (expense)    (4,050)              144,058
Benefit for income taxes.                  --             1,144,000
Net income (loss)                     $34,847          $ (2,187,234)

Net loss per common share outstanding  $ 0.01               $ (0.57)
Shares used in computation of basic
     loss per share                 2,738,769             3,828,756


BALANCE SHEET DATA:  MINDARROW AND CATEGORY 5 COMBINED
                                        September 30,
                                            2002
                                         (unaudited)

Cash and cash equivalents                  $821,750
Working capital                          (6,016,776)
Total assets                             35,672,133
Total liabilities                        10,686,927
Stockholders' equity                    $24,985,206

About Avalon Digital Marketing Systems

Avalon Digital Marketing Inc., (NASDQ: AVLN) with headquarters in Southern California and offices in New York, Salt Lake City, and Hong Kong, provides digital marketing software and services that enable clients to communicate and sell more effectively and efficiently over the web and via email. The company's expertise is centered on three key areas of eBusiness -- content, commerce, and communications. Avalon provides complete digital marketing solutions to large enterprise customers, as well as small business software and products through Avalon Business Direct.

In addition to a growing customer base of more than 10,000 small businesses, Avalon's large enterprise clients include more than 100 leading companies including Ceridian, Johnson & Johnson, Cendant, Avaya, and the NBA (National Basketball Association). The company's solutions are designed to establish a more effective line of communication between a company and its customers -- using the right media to deliver the right message at the right time.