<PAGE>
Filed pursuant to Rule 424(b)(3) under the Securities Act of 1933
File No. 33-76726-D
AVERT, INC.
500,000 SHARES OF COMMON STOCK
UPON EXERCISE OF REDEEMABLE WARRANTS
The shares of Common Stock, No Par Value (the "Common Stock"), of Avert,
Inc. (the "Company"), being offered hereby may be purchased upon exercise of the
Redeemable Warrants included as a part of the Units sold by the Company in an
initial public offering ("IPO") in June 1994. See "The Company." Two
Redeemable Warrants entitle the holder to purchase one share of Common Stock at
a price of $6.50 per share (subject to adjustment) at any time until April 30,
1997. The Redeemable Warrants are redeemable by the Company at a price of $0.05
per Redeemable Warrant at any time on 30 days' prior written notice, provided
that the closing price of the Common Stock equals or exceeds $7.50 per share for
a period of 15 consecutive trading days ending within 15 days prior to the
notice of redemption. See "Description of Securities--Redeemable Warrants."
The Company's Common Stock and Redeemable Warrants are quoted on the
National Association of Securities Dealers, Inc. Automated Quotation
System/National Market ("NASDAQ National Market") under the symbols AVRT and
AVRTW, respectively. On October 18, 1996, the closing sales price of the Common
Stock as reported by the NASDAQ National Market was $5-5/8 per share. See
"Price Range of Common Stock."
WARRANTHOLDERS SHOULD CONSIDER CAREFULLY THE MATTERS SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE 5.
______________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS AND COMPANY(1)(2)
COMMISSIONS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share .............. $ 6.50 - $ 6.50
Total .................. $3,250,000 - $3,250,000
- --------------------------------------------------------------------------------
</TABLE>
(1) Assumes exercise of all Redeemable Warrants, of which there can be no
assurance. There is no minimum purchase requirement.
(2) Before deducting estimated offering expenses of $100,000 payable by the
Company, consisting of legal, accounting, printing, blue sky and
miscellaneous fees (including such expenses previously incurred and paid by
the Company in connection with the preparation and filing of Post-Effective
Amendment No. 1 to the Registration Statement of which this Prospectus is a
part).
_______________________
Warrantholders who desire to exercise their Redeemable Warrants should
complete the Subscription Form on the reverse side of the Redeemable Warrant
certificate and submit the same, together with a check made payable to American
Securities Transfer, Inc. (the "Warrant Agent"), 1825 Lawrence Street, Suite
444, Denver, Colorado 80202-1817, for the account of the Company, to the Warrant
Agent. See "Terms of the Offering."
The date of this Prospectus is November 12, 1996.
<PAGE>
[ARTWORK CONTAINING DIAGRAM OF COMPANY'S BUSINESS WITH LOGO APPEARS HERE]
The Company furnishes its shareholders with annual reports containing
audited financial statements and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year. The
Company is subject to the reporting requirements of the Securities Exchange Act
of 1934. See "Additional Information."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: (I)
ASSUMES NO EXERCISE OF THE WARRANTS SOLD TO THE REPRESENTATIVE
("REPRESENTATIVE") OF THE UNDERWRITERS OF THE COMPANY'S IPO, WHICH PERMIT THE
REPRESENTATIVE TO PURCHASE UP TO 100,000 SHARES OF COMMON STOCK, 100,000
REDEEMABLE WARRANTS AND 50,000 SHARES OF COMMON STOCK UNDERLYING SUCH REDEEMABLE
WARRANTS (THE "REPRESENTATIVE'S WARRANTS"); AND (II) ASSUMES NO EXERCISE OF
OUTSTANDING EMPLOYEE AND NON-EMPLOYEE DIRECTOR STOCK OPTIONS COVERING A TOTAL OF
368,000 SHARES OF COMMON STOCK.
See "Risk Factors" for a discussion of certain factors that should be
considered by warrantholders in evaluating the Company and its business.
THE COMPANY
Avert, Inc. ("Avert" or the "Company") is an information service
bureau engaged primarily in the business of verifying job applicant background
information for employers. The background checks are made through the use of
databases and a national network of couriers (engaged on an independent
contractor basis) developed by Avert since its organization in June 1986. The
background information products and services currently provided by the Company
consist of: criminal records, workers' compensation histories, driving records,
reference checks, credit histories, social security number use, and education
and credential validation. Avert has also developed employment application
forms for sale to customers.
The Company believes that employers increasingly are realizing the
benefits of background checking of employees and verification of employment
applications, not only because of the desire to help assure a better quality
employee, but also, in some industries, the concern with negligent hiring
lawsuits. The Company has approximately 6,000 customers located throughout the
United States. During 1995, sales were made in 49 states, with approximately
72% of total sales having been made in ten states (Colorado, Texas, Missouri,
Oregon, Illinois, North Carolina, Florida, California, Georgia and Kansas), with
Colorado sales representing approximately 20% of total sales. The Company's
business strategy is to accelerate market presence throughout the United States.
Avert also intends to enhance its existing products and to use the net proceeds
received from the IPO and this offering to develop new ones and pursue
acquisitions of other companies, assets and/or product lines that either
complement or expand its existing business. See "Business."
On June 29, 1994, the Company completed an IPO of 1,000,000 Units,
each Unit consisting of one share of the Company's Common Stock and one
Redeemable Warrant. The Units separated on December 7, 1994, and the Common
Stock and Redeemable Warrants began trading separately on the NASDAQ National
Market on that date. The net proceeds from the IPO totalled approximately
$4,382,300.
3
<PAGE>
THE OFFERING
Securities Offered.................... 500,000 shares of Common Stock
issuable upon exercise of the
Redeemable Warrants sold in the IPO.
Two Redeemable Warrants entitle the
holder to purchase one share of
Common Stock at a price of $6.50 per
share at any time until 5:00 p.m.
(Denver time) on April 30, 1997. The
Redeemable Warrants are redeemable by
the Company at $0.05 per Redeemable
Warrant under certain conditions.
See "Description of
Securities--Redeemable Warrants."
Common Stock outstanding at the
date of this Prospectus............. 3,400,000 shares
Common Stock outstanding after
this offering....................... 3,900,000 shares/(1)/
Use of proceeds....................... To be added to the net proceeds of
the IPO and used to acquire other
companies, assets and/or product
lines that either complement or
expand Avert's existing business and
develop and further develop any
companies, assets or product lines
acquired. See "Use of Proceeds."
NASDAQ National Market or
NASDAQ symbols:
Common Stock.......................... AVRT
Redeemable Warrants................... AVRTW
Units................................. AVRTU
- --------------------------------------------------------------------------------
/(1)/ Assumes exercise of all Redeemable Warrants, of which there can be no
assurance.
<TABLE>
<CAPTION>
SUMMARY SELECTED FINANCIAL DATA
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENTS DATA:
Net revenues................. $2,060 $2,654 $3,538 $4,705 $6,065 $2,777 $3,620
Income before income taxes... 501 644 966 1,506 1,371 704 745
Net income................... 313 401 601 970 857 441 462
Net income per common share.. .13 .16 .25 .33 .25 .13 .13
Weighted average of common
stock outstanding.......... 2,409 2,442 2,442 2,971 3,450 3,450 3,428
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEETS DATA: DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Working capital.............. $6,427 $6,138
Total assets................. 8,383 8,626
Long-term debt............... -- --
Retained earnings............ 2,875 3,336
Total shareholders' equity... 7,835 8,186
</TABLE>
4
<PAGE>
THE COMPANY
The Company was organized as a Colorado corporation in June 1986 under the
name Hire Risk Services Corporation. In May 1987, the Company changed its name
to Avert, Inc. On June 29, 1994, the Company completed an IPO of 1,000,000
Units, each Unit consisting of one share of the Company's Common Stock and one
Redeemable Warrant. The Units separated on December 7, 1994, and the Common
Stock and Redeemable Warrants began trading separately on the NASDAQ National
Market on that date. The net proceeds from the IPO totalled approximately
$4,382,300.
The Company's principal executive offices are located at 301 Remington,
Fort Collins, Colorado 80524, and its telephone number at that address is (970)
484-7722.
RISK FACTORS
In addition to the other information contained in this Prospectus,
warrantholders should carefully consider the following factors relating to the
Company and its business when evaluating an investment in the shares offered
hereby through exercise of the Redeemable Warrants.
PROPOSED EXPANSION OF COMPANY OPERATIONS; ASSOCIATED RISKS
The Company's sales have grown significantly since inception.
Historically, the Company has developed its products and services internally
and, until January 1995, when it expanded its sales force in four regions of the
country, conducted its operations from a single office in Fort Collins,
Colorado. In addition, a significant portion of the Company's sales to date
have been made in Colorado. As part of its continuing growth strategy, the
Company intends to accelerate market presence throughout the United States,
which presently includes, among other things, engagement of independent
commission-based sales representatives located in geographic regions of the
country, employment of sales representatives at the Company's headquarters, and
arrangements with resellers of the Company's products and may include
establishing relationships with certain strategic partners. Avert also intends
to use the net proceeds of the IPO and this offering to acquire other companies,
assets and/or product lines that either complement or expand its existing
business. Implementation of these strategies could involve a number of risks,
including diversion of management time and Company financial resources to
increased marketing efforts, review of acquisition candidates and assimilation
of the acquired companies, adverse short-term effects on the Company's reported
operating results and the amortization of acquired intangible assets. The
impact of these strategies on the Company's operations, both long-term and
short-term, remains unknown, but because of the foregoing factors, among others,
the Company's growth rate for at least the short term could be adversely
impacted. See "Business--Business Strategy." In addition, no portion of the
net proceeds of the IPO or this offering has been allocated for any specific
acquisition, and, although the Company has identified and has held, and will
continue to hold, discussions from time-to-time with potential acquisition
candidates, no acquisition has been made and none is considered probable as of
the date of this Prospectus. Accordingly, no assurance can be given that Avert
will be successful in acquiring other companies, assets or product lines. See
"Use of Proceeds."
GOVERNMENT REGULATION
The Company is a "consumer reporting agency" within the meaning of the term
as used in the Fair Credit Reporting Act, as amended ("FCRA"), and, therefore,
must comply with the various consumer credit disclosure requirements of the
FCRA. Willful or negligent noncompliance would result in civil liability to the
subjects of reports. Also, the Americans with Disabilities Act of 1990 ("ADA")
contains pre-employment inquiry and confidentiality restrictions designed to
prevent discrimination against individuals with disabilities in the hiring
process. Although the Company's business is not directly regulated by the ADA,
the use by its customers of certain information sold to them is regulated, both
in respect to the type of information and the timing of its use. State laws
also impact the Company's business. There are a number of states which have
laws similar to the FCRA, and some
5
<PAGE>
states which have human rights laws more strict than the ADA. In addition, to
the Company's knowledge, at least four states require companies engaged in the
type of business conducted by the Company to be licensed in order to conduct
business within those states. The Company has obtained the necessary license in
each of those four states. In addition, several other states may require
licensing of the Company's business. See "Risk Factors--Licensing Requirements."
A large number of states also regulate the type of information which can be made
available to the public and/or impose conditions to the release of the
information. For example, some state laws prohibit access to certain types of
information, such as workers' compensation histories or criminal histories,
while others restrict access without a signed release from the subject of the
report. In addition, many privacy and consumer advocates and federal regulators
have become increasingly concerned with the use of personal information,
particularly credit reports. Attempts have been made and will continue to be
made by these groups to adopt new or additional federal and state legislation to
regulate the use of personal information. Federal and/or state laws relating to
access and use of personal information, in particular, and privacy and civil
rights, in general, amended or enacted in the future could materially adversely
impact Avert's operations. See "Business--Government Regulation."
LICENSING REQUIREMENTS
To the Company's knowledge, at least four states of the 49 states in which
the Company sold its products and services during 1995 require consumer
reporting agencies, such as the Company, to obtain a license to conduct business
within those states. The Company has obtained the necessary licenses in each of
those states. In addition, several other states may require licensing of the
Company's business. Although the Company believes that it will be able to
obtain the licenses from these other states, if required, the inability to do so
could have an adverse impact on the Company's operations. Operation of an
unlicensed business is a misdemeanor under the laws of many states generally
punishable by fines and/or imprisonment and could be grounds for denial of a
license, if required.
LEGAL CONSIDERATIONS
Under general legal concepts and, in some instances, by specific state and
federal statute, the Company could be held liable to customers and/or to the
subjects of background checking reports prepared by the Company for inaccurate
information or misuse of the information. The Company maintains internal
policies designed to help ensure that background information retrieved by it is
accurate and that it otherwise complies with the provisions of the FCRA. Avert,
however, does not currently maintain liability insurance to cover claims by
customers or the subjects of reports. The Company has explored the possibility
and feasibility of liability insurance for this purpose. However, because of
the nature of the Company's business, claims at least from subjects of reports
prepared by the Company would be based at least in part on discrimination.
Based on the Company's research, losses from such claims are either uninsurable
or the insurance that is available is so limited in coverage that it is not
economically practicable. The Company intends to continue its efforts to obtain
insurance coverage for such claims. To date, the Company has been named as a
co-defendant in three lawsuits alleging violations of the FCRA. All three
lawsuits have been dismissed by the court. No assurance can be given that
claims made against the Company in the future can be successfully defended.
Uninsured losses from claims could adversely impact the operations and financial
condition of the Company. See "Business--Legal Considerations."
RELIANCE ON KEY PERSONNEL
The success of the Company continues to be dependent upon the efforts of
the key personnel of Avert, particularly Dean A. Suposs, its President. The
loss of Mr. Suposs' services could have a detrimental effect on the Company.
See "Management." The Company maintains for Avert's benefit a $1 million key
man life insurance policy on Mr. Suposs. See "Management--Employment Agreement"
for information concerning an employment agreement with Mr. Suposs.
6
<PAGE>
COMPETITION
Avert faces both direct and indirect competition for its products and
services. Direct competitors are other background checking companies. Indirect
competitors are companies engaged in, among others, drug, aptitude and attitude
testing, handwriting analysis, and on-the-job trial employment (employee
leasing). The Company believes that there are a large number of direct
competitors. A significant number of these competitors are small companies
operating on a local or regional basis, while some are large companies operating
on a national scale. The Company also believes that there are a number of
indirect competitors, with most of them operating on a national basis. Many of
the Company's competitors have financial and personnel resources substantially
greater than those of the Company. Avert believes that it has a competitive
advantage over many of its direct competitors because it has a wider variety of
products and services to offer to customers. In addition, Avert believes that it
has a price advantage over many of its direct competitors because, unlike these
competitors, Avert obtains substantially all of its background information
directly from the source rather than through the purchase of information from
other companies for resale to its customers. Currently, the information for only
two of the Company's eight existing products is purchased from other companies.
See "Business-- Products and Services." As more companies enter the market, and
if larger, direct competitors place more emphasis on the employment background
segment of their operations and/or indirect competitors expand their businesses
to include background checking products and services, the competition within the
industry could become more intense. Accordingly, no assurance can be given that
the Company will be able to continue to compete favorably in this industry. See
"Business--Competition."
DIVIDENDS
The Company paid dividends totalling $0.075 per share on its Common Stock
during each of the years in the two-year period ended December 31, 1993. Avert
does not intend to pay any further dividends in the foreseeable future. See
"Dividend Policy."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE REDEEMABLE
WARRANTS
Warrantholders will not be able to exercise their Redeemable Warrants
unless at the time of exercise a current prospectus under the Securities Act of
1933, as amended (the "Securities Act"), covering the shares of Common Stock
issuable upon exercise of the Redeemable Warrants is effective and such shares
have been qualified or are exempt from qualification under the applicable
securities or "blue sky" laws of the states in which the various holders of
Redeemable Warrants then reside. Although the Company has undertaken to use
reasonable efforts to maintain the effectiveness of a current prospectus
covering the Common Stock underlying the Redeemable Warrants, there can be no
assurance that the Company will be able to continue to do so. Although the
Company will continue to use its best efforts to register or qualify the shares
for sale in jurisdictions where the registered holders of at least 5% of the
Redeemable Warrants reside, no assurance can be given that the Company will be
able to do so. Further, the Company may determine not to register or qualify
the shares underlying the Redeemable Warrants in jurisdictions where holders of
less than 5% of the Redeemable Warrants reside and where time and expense do not
justify such registration or qualification. The value of the Redeemable
Warrants may be greatly reduced if a current prospectus covering the shares
underlying the Redeemable Warrants is not effective or if such Common Stock is
not qualified or exempt from qualification in the states in which the holders of
the Redeemable Warrants then reside. See "Description of Securities--Redeemable
Warrants."
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF REDEEMABLE WARRANTS
The Redeemable Warrants are subject to redemption by the Company at a price
of $0.05 per Redeemable Warrant under certain conditions at any time on at least
30 days' prior written notice. If the Redeemable Warrants are redeemed,
warrantholders will lose their right to exercise the Redeemable Warrants except
during such 30-day redemption period. Upon the receipt of a notice of
redemption, warrantholders would be required to: (i) exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so; (ii) sell the Redeemable Warrants at the then market price, if
any, when they might otherwise wish to hold the
7
<PAGE>
Redeemable Warrants; or (iii) accept the redemption price, which is likely to be
substantially less than the market value of the Redeemable Warrants at the time
of the redemption. See "Description of Securities--Redeemable Warrants."
SUPERIOR RIGHTS OF PREFERRED STOCK
The Company has a class of authorized Preferred Stock. The Board of
Directors, without shareholder approval, may issue shares of the Preferred Stock
with rights and preferences adverse to the voting power or other rights of the
holders of the Common Stock. No Preferred Stock has been issued. See
"Description of Securities--Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALES; REGISTRATION RIGHTS
Future sales of Common Stock by existing shareholders under Rule 144 of the
Securities Act or otherwise could have an adverse effect on the market price of
the Units, the Common Stock and the Redeemable Warrants. A total of 3,400,000
shares (the "Outstanding Shares") of the Company's Common Stock is currently
outstanding. Of these Outstanding Shares, 957,750 shares are, and any shares
issued upon exercise of the Redeemable Warrants will be, freely tradeable
without restriction or further registration under the Securities Act, except for
any shares held by "affiliates" of the Company within the meaning of the
Securities Act, which shares will be subject to the resale limitations of Rule
144. The remaining 2,442,250 Outstanding Shares are "restricted securities" as
that term is defined under Rule 144 (the "Restricted Shares"). Sales of
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock and the
Redeemable Warrants. Of the 2,442,250 Restricted Shares, (i) 1,472,556 shares
are eligible for immediate sale in the public market in reliance on Rule 144(k)
and (ii) 969,694 shares are eligible for sale in the public market, subject to
compliance with Rule 144 or Rule 144(k). See "Shares Eligible for Future Sale."
The Representative's Warrants grant to the holders thereof certain
registration rights, which began on June 22, 1995, for the securities issuable
upon exercise of the Representative's Warrants (100,000 shares of Common Stock,
100,000 Redeemable Warrants and 50,000 shares of Common Stock underlying the
Redeemable Warrants). Sales of these securities could also depress the market
price for the Units, the Common Stock and the Redeemable Warrants. See
"Description of Securities--Representative's Warrants."
INVESTMENT COMPANY ACT CONSIDERATIONS
A substantial portion of the Company's assets, including the net proceeds
received in the IPO, are invested in U.S. government securities. As noted in
"Use of Proceeds" below, net proceeds of this offering will also be invested in
interest bearing securities of that type pending their use. The Company has
selected U.S. government securities in part to avoid registration as an
investment company under the Investment Company Act of 1940 (the "1940 Act").
Registration under the 1940 Act would subject the Company to substantial
regulations that could have a material adverse effect on its business. The
Company intends to continue to invest excess cash in a manner designed in part
to avoid being subject to the registration requirements of the 1940 Act and
believes that it is not, and will not be, subject to those registration
requirements; however, no assurance can be given that the Company will be
successful in avoiding the need to register under the 1940 Act.
FORWARD LOOKING STATEMENTS
This Prospectus contains statements which constitute forward looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended. Those statements appear
in a number of places in this Prospectus and include statements regarding the
intent, belief or current expectations of Avert with respect to, among other
things: (i) trends affecting Avert's financial conditions or results of
operations; (ii) Avert's growth strategy; (iii) Avert's anticipated results of
future operations; and (iv) regulatory matters affecting Avert. Warrantholders
are cautioned that any such forward looking statements are not
8
<PAGE>
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward looking
statements as a result of various factors.
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
$3,150,000 assuming all Redeemable Warrants are exercised at the current
exercise price of $6.50 and after deduction of estimated offering expenses. The
net proceeds will be added to the net proceeds received from the IPO and used to
acquire other companies, assets and/or product lines that either complement or
expand the Company's existing business, as such opportunities arise, and develop
or further develop any companies, assets or product lines acquired. See
"Business--Business Strategy." The Company may use cash or stock or a
combination of stock and cash to effect any such acquisitions. No portion of the
net proceeds has been allocated for any specific acquisition, and although the
Company has identified and has held, and will continue to hold, discussions from
time-to-time with potential acquisition candidates, no acquisition has been made
and none is considered probable as of the date of this Prospectus. Accordingly,
no assurance can be given that Avert will be successful in acquiring other
companies, assets or product lines. Although the Company continues to believe
that the net proceeds of the IPO and this offering will be used for
acquisitions, to the extent they are not used for this purpose, they will be
reallocated to working capital and used for general corporate purposes in
connection with the growth of the Company. It is possible, although unlikely,
that, depending upon the financial condition and needs of the Company at the
time of any reallocation, some portion of the unused proceeds could be
distributed to shareholders as a dividend. The Company will continue to seek
acquisition candidates for an indefinite period of time and, therefore, has not
set any deadline for a decision relating to reallocation of the proceeds.
Pending application of the proceeds as described above, the Company intends
to invest the net proceeds of this offering in short-term U.S. government
securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the NASDAQ National Market under
the symbol AVRT and began trading on December 7, 1994. The following table sets
forth the high and low sales prices of the Common Stock for the period indicated
as reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994:
- -----
Fourth Quarter (commencing December 7).. $4 $3-1/2
1995:
- -----
First Quarter........................... 7-1/2 4
Second Quarter.......................... 9-5/8 5-3/8
Third Quarter........................... 6-7/8 5-7/8
Fourth Quarter.......................... 6-1/2 4-1/8
1996:
- -----
First Quarter........................... 5-1/4 4-1/8
Second Quarter.......................... 6-1/2 4-1/8
Third Quarter........................... 6-1/8 5-1/8
Fourth Quarter (through October 18)..... 5-3/4 5-1/8
</TABLE>
On October 18, 1996, the closing sales price for the Common Stock was
$5-5/8.
From June 22, 1994 until December 7, 1994, the Company's Common Stock and
Redeemable Warrants traded as Units, with each Unit consisting of one share of
Common Stock and one Redeemable Warrant. The Units separated, and the Common
Stock and the Redeemable Warrants traded separately, beginning on December 7,
1994. There was no public market for the Company's Common Stock prior to June
22, 1994. The following table sets
9
<PAGE>
forth the high and low bid quotations for the Units for the periods indicated as
reported by the NASDAQ Small Cap Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994:
- -----
Fourth Quarter (commencing December 7).. $5-1/4 $4-3/16
Third Quarter........................... 5-1/2 4
Fourth Quarter (through December 7)..... 5-1/8 4-3/16
</TABLE>
The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
There were approximately 142 holders of record (and 961 beneficial owners)
of the Company's Common Stock on October 16, 1996.
DIVIDEND POLICY
The Company paid dividends totalling $0.075 per share on its Common Stock
during each of the years in the two-year period ended December 31, 1993. No
other cash dividends have been paid, and Avert does not intend to pay any
further dividends in the foreseeable future. The Company instead intends to
retain its earnings to support the operations and growth of its businesses. Any
future cash dividends would depend on future earnings, capital requirements,
the Company's financial condition and other factors deemed relevant by the
Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996.
<TABLE>
<CAPTION>
JUNE 30,1996
--------------
(IN THOUSANDS)
<S> <C>
Short-term debt ...................................... $ ---
Long-term debt ....................................... $ ---
Shareholders' equity:
Preferred Stock, no par value, 1,000,000 shares
authorized, no shares issued or outstanding....
Common Stock, no par value, 9,000,000 shares
authorized, 3,418,250 shares issued and
outstanding ................................... 4,850
Retained earnings ................................ 3,336
Total shareholders' equity ................... 8,186
-------------
Total capitalization ............................. $ 8,186
=============
</TABLE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company as
of the dates and for the periods indicated. The income statements data for each
of the years in the two-year period ended December 31, 1995, and the balance
sheet data as of December 31, 1995, have been derived from the financial
statements of the Company which have been included herein and audited by HEIN +
ASSOCIATES LLP, independent certified public accountants. This data and the
selected financial data presented below as of June 30, 1996, and for the six
months ended June 30, 1995 and 1996, should be read in conjunction with the
Company's financial statements and related notes included elsewhere in this
Prospectus and also with "Management's Discussion and Analysis or Plan of
Operation." Such data as of June 30, 1996 and for the six months ended June 30,
1995 and 1996 is unaudited and
10
<PAGE>
in the opinion of management of the Company, all adjustments, consisting only of
normal recurring adjustments, necessary to a fair presentation of the results of
operations and financial position for, and as of the end of, such periods have
been included. The results of operations for the six months ended June 30, 1996
are not necessarily indicative of the results to be expected for the entire
year.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------- -------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENTS DATA:
Net revenues.................... $2,060 $2,654 $3,548 $4,705 $6,065 $2,777 $3,620
Expenses........................ 1,559 2,010 2,572 3,199 4,694 2,073 2,875
------ ------ ------ ------ ------ ------ ------
Income before income taxes...... 501 644 966 1,506 1,371 704 745
Income tax expense.............. (188) (243) (365) (536) (514) (263) (283)
------ ------ ------ ------ ------ ------ ------
Net income...................... $ 313 $ 401 $ 601 $ 970 $ 857 $ 441 $ 462
====== ====== ====== ====== ====== ====== ======
Net income per common share..... $.13 $.16 $.25 $.33 $.25 $.13 $.13
====== ====== ====== ====== ====== ====== ======
Weighted average of common
shares outstanding............. 2,409 2,442 2,442 2,971 3,450 3,450 3,428
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEETS DATA: DECEMBER 31, 1995 JUNE 30, 1996
----------------- --------------
<S> <C> <C>
Working capital............. $6,427 $6,138
Total assets............... 8,383 8,626
Long-term debt.............. --
Retained earnings........... 2,875 3,336
Total shareholders' equity.. 7,835 8,186
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Net revenues increased from $2,776,600 for the six-month period ended June
30, 1995, to $3,620,100 for the comparable six-month period in 1996, or
approximately 30.4%. The breakdown of net revenues, exclusive of product
discounts and other miscellaneous income items, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED PERCENT OF
JUNE 30, 1996 JUNE 30, 1995 INCREASE
---------------- -----------------
REVENUES % TOTAL REVENUES % TOTAL (DECREASE)
---------------- ---------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Products:
Workers' compensation histories..... $ 610,200 16.9% $ 631,800 22.8% ( 3.4%)
Criminal history reports............ $1,868,700 51.6% $1,293,600 46.6% 44.5%
Previous employment/credit reports.. $ 398,900 11.0% $ 214,000 7.7% 86.4%
Motor vehicle driving records....... $ 448,100 12.4% $ 381,200 13.7% 17.5%
Other products...................... $ 256,100 7.0% $ 122,800 4.4% 108.6%
Education verification
Social security number check
Employment application forms
Interest income....................... $ 161,000 4.5% $ 176,800 6.4% ( 8.9%)
Net Revenues.......................... $3,620,100 $2,776,600 30.4%
</TABLE>
Moderate to strong growth in sales of all of the Company's products
continued during the first six months of 1996 with the exception of workers'
compensation reports. Although sales of workers' compensation histories
actually decreased approximately 3.4% from the six-month period ended June 30,
1995 to the same six-month period in 1996, it is still the second largest
product line representing net revenues of $610,200 for the first six months of
1996 as compared to $631,800 for the first six months of 1995. Sales of
workers' compensation histories are expected to continue to be a viable product
as the Company enters new markets, continues to educate customers, continues
workers' compensation marketing campaigns, and locates new data sources, but to
continue to decrease as a percentage of total revenues. Strong growth of
approximately 44.5% continued in the criminal history reports product line
representing approximately 51.6% of total net revenues in the first six-month
period of 1996, as compared to approximately 46.6% of total net revenues in the
first six-month period of 1995. In total dollar terms, criminal history reports
contributed the largest increase in net revenues. There was an approximate
86.4% growth from the six-month period ended June 30, 1995, to the six-month
period ended June 30, 1996, in the area of previous employment/credit reports.
These products represent approximately 11.0% of total net revenues in the six
months ended June 30, 1996, as compared to approximately 7.7% of total net
revenues in the same period in 1995.
Income before income taxes increased from $704,100 in the six month period
ended June 30, 1995 to $744,800 in the six month period ended June 30, 1996, or
approximately 5.8%, and represented approximately 20.6% of net revenues in the
first six months of 1996 compared to approximately 25.4% in the first six months
of 1995.
Total expenses increased from $2,072,500 for the six-month period ended
June 30, 1995, to $2,875,300 for the comparable period in 1996. A breakdown in
expenses is as follows:
12
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995 INCREASE (DECREASE)
------------------ ---------------------- % OF REVENUE FIRST
% OF % OF SIX MONTHS 1995 OVER
EXPENSES REVENUE EXPENSES REVENUE FIRST SIX MONTHS 1995
-------- ------- -------- ------- ----------------------
<S> <C> <C> <C> <C> <C>
Search and product............. $1,492,400 41.2% $1,047,200 37.7% 3.5%
Marketing...................... 610,100 16.9 363,500 13.1 3.8
General and administrative..... 515,400 14.2 494,100 17.8 (3.6)
Software development........... 176,900 4.9 113,900 4.1 0.8
Depreciation and amortization.. 80,500 2.2 53,800 1.9 0.3
---------- ---- ---------- ---- ----
Expenses....................... $2,875,300 79.4% $2,072,500 74.6% 4.8%
========== ==== ========== ==== ====
</TABLE>
The increase in total expenses is partially due to a change in the
Company's product mix to a greater percentage of lower margin products, mainly
criminal history reports and motor vehicle driving records. The increase was
also due to an increase in marketing expense primarily associated with the
generation of new customer leads and the hiring and training of additional sales
personnel needed for implementation of the Company's nationwide marketing
efforts. The decrease in gross margin and the increase in marketing expense
accounted for an increase in total expenses of 7.3% as a percentage of total net
revenues. There was an approximate 3.6% decrease of general and administrative
expenses in the six-month period ended June 30, 1996, from the same period ended
June 30, 1995. Other areas of expenses remained relatively stable.
Income taxes remained consistent between the respective six-month periods
at the expected combined federal and state statutory rate of approximately 38%,
resulting in net income of $461,500 or $.13 per share on 3,427,800 (weighted
average) shares for the six months ended June 30, 1996, as compared to net
income of $440,800 or $.13 per share on 3,450,000 (weighted average) shares for
the six months ended June 30, 1995.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Net revenues increased from $4,704,800 in 1994 to $6,064,600 in 1995 or
29%. This increase was due to the continued overall growth of the Company's
customer base and interest earned on the net proceeds received from the IPO. The
breakdown of net revenues, exclusive of product discounts and other
miscellaneous income items, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 PERCENT OF
----------------- ------------------ INCREASE
REVENUES % TOTAL REVENUES % TOTAL (DECREASE)
-------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Products:
Workers' compensation histories..... $1,256,300 20.7% $1,290,500 27.4% (2.7%)
Criminal history reports............ $2,929,400 48.3% $2,041,200 43.4% 43.5%
Previous employment/credit reports.. $ 554,900 9.1% $ 388,500 8.3% 42.8%
Motor vehicle driving records....... $ 762,200 12.6% $ 650,600 13.8% 17.2%
Other products:..................... $ 279,500 4.6% $ 220,100 4.7% 27.0%
Education verification
Social security number check
Employment application forms
Interest income....................... $ 369,300 6.1% $ 158,900 3.4% 132.4%
Net Revenues.......................... $6,064,600 $4,704,800 28.9%
</TABLE>
13
<PAGE>
Moderate to strong growth continued during 1995 on all products of the
Company with one exception, workers' compensation reports. Although sales of
workers' compensation histories remained flat, it still represented
approximately 21% of total net revenues in 1995. Sales of workers' compensation
histories are expected to continue to be a viable product as the Company enters
new markets, but will decrease as a percentage of total revenues.
In total dollars, criminal history reports contributed the largest amount
of the increase in 1995 representing approximately 48.3% of total net revenues
as compared to approximately 43.4% of total net revenue in 1994. The Company
believes there is a continuing trend nationwide to check prospective employees'
criminal records. To take advantage of this trend, the Company completed its
expansion of the criminal history product line to include felony, misdemeanor,
civil and federal court records in 1995.
There were also increased revenues generated in the areas of previous
employment/credit reports from approximately $388,500 in 1994 to $554,900 in
1995, due to the overall company growth. The increase in motor vehicle records
of approximately $111,600 from 1995 over 1994 represented an approximate 17.2%
increase in percentage of sales.
Income before income taxes decreased from $1,505,500 in 1994 to $1,370,900
in 1995 or approximately 9% and represented approximately 23% of net revenue in
1995 compared to approximately 32% in 1994. The decrease from 1994 to 1995 in
the percentage of income before income taxes to total net revenues was primarily
attributable to: (1) marketing expenses doubling, with costs associated with
additional personnel and lead generating activities; (2) a change in product
mix, with a larger percentage of revenue generated from lower margin products;
(3) costs associated with the extension of the Redeemable Warrants; (4)
additional personnel in all areas of the organization; and (5) the Company's
customer base changing to a higher percentage of large customers which generally
received volume discounts. A breakdown of expenses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 INCREASE (DECREASE)
----------------- ------------------ -------------------
% of % of % OF REVENUE
Expenses Revenue Expenses Revenue 1996 OVER 1995
-------- ------- -------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Search and product.......... $2,522,700 41.6% $1,643,500 34.9% 6.7%
Marketing................... 890,600 14.7 453,600 9.7 5.0
General and administrative.. 930,600 15.3 823,500 17.5 (2.2)
Software development........ 245,500 4.1 180,200 3.8 0.3
Depreciation and
amortization.............. 104,300 1.7 98,500 2.1 (0.4)
---------- ---- ---------- ---- ----
Expenses.................... $4,693,700 77.4% $3,199,300 68.0% 9.4%
========== ==== ========== ==== ====
</TABLE>
As mentioned above, a large portion of the increase in total expenses for
1995 was attributable to search and product and marketing costs.
The increase in 1995 over 1994 of search and product fees as a percentage
of total net revenue was due to the larger percentage of revenue generated from
criminal histories, a lower margin product, along with increases in labor costs.
Marketing expenses as a percentage of total net revenues increased from
approximately 9.7% in 1994 to approximately 14.7% in 1995 due to hiring of
marketing personnel in late 1994 and on-going costs to manage the four regional
sales offices opened by the Company. In November 1994 the Company set up one-
person regional sales offices in Chicago, St. Louis/Kansas City, Dallas/Ft.
Worth and Portland/Seattle. These offices opened and were operating by January
1, 1995 in an attempt by the Company to take advantage of the increasing need
and desire of businesses to check employee backgrounds. However, the Company
experienced unacceptable costs-per-sale, and in summary the offices were not as
successful as desired and the offices were closed as of
14
<PAGE>
December 31, 1995. Changes were made to the original marketing plan in late 1995
and the increase in marketing expenses is expected to continue or even increase
as a percentage of net revenues in order to implement these changes.
All other expenses in 1995 as a percentage of total net revenues remained
relatively stable except general and administrative expenses which actually
decreased as a percentage of total net revenues from approximately 17.5% in 1994
to approximately 15.3% in 1995, despite $24,400 of costs expensed in the
extension of the Redeemable Warrants. The main areas of decrease in general and
administrative expenses were that of bonus and legal. Pursuant to the employment
agreement with the President of the Company, bonus is accrued at 6% of income
before taxes and bonus, after deducting investment income. Due to the decrease
in net income, bonus expense also decreased.
The combined federal and state income tax rate for 1995 and 1994 was 37%
and 36%, respectively, resulting in net income in 1995 of $857,200 or $.25 per
share on 3,450,000 (weighted average) shares for 1995 as compared to net income
of $969,800 or $0.33 per share on 2,971,017 (weighted average) shares for 1994.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
Net revenues increased from $3,537,500 in 1993 to $4,704,800 in 1994 or
33%. This increase was due to the continued overall growth of the Company's
customer base and interest earned on the net proceeds received from the IPO. The
breakdown of net revenues, exclusive of product discounts and other
miscellaneous income items, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993 PERCENT OF
------------------------------------ ------------------------- INCREASE
REVENUES % TOTAL REVENUES % TOTAL (DECREASE)
----------------- ----------------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Products:
Workers' compensation histories..... $1,290,500 27.4% $1,168,500 33.0% 10.4%
Criminal history reports............ $2,041,200 43.4% $1,415,100 40.0% 44.2%
Previous employment/credit reports.. $ 338,500 7.2% $ 265,200 7.5% 27.6%
Motor vehicle driving records....... $ 650,600 13.8% $ 473,000 13.4% 37.5%
Other products:..................... $ 220,100 4.7% $ 215,300 6.1% 2.2%
Education verification
Social security number check
Employment application forms
Interest income....................... $ 158,900 3.4% $ 29,700 0.8% 435.0%
Net Revenues.......................... $4,704,800 $3,537,500 33.0%
</TABLE>
Moderate to strong growth continued during 1994 on all products of the
Company with one exception, social security number checks as discussed below.
In total dollars criminal history reports contributed the largest amount of the
increase in 1994 net revenues. The Company believed there to be an emerging
trend nationwide to check prospective employees' criminal records. To take
advantage of this trend, the Company expanded its criminal history reports
product line to include misdemeanor records. The Company was also in the
process of establishing a network to process civil and federal court records
searches.
Although sales of workers' compensation histories continued to increase in
1994, the slow-down in the growth rate of that product continued due to the
impact of the ADA. The ADA became effective in July 1992. The Company believed
there was a general misunderstanding on the part of employers concerning their
use of workers' compensation records under the ADA. The education process of
the public was and did continue to be a slow one and caused the growth of the
Company's workers' compensation histories product to be slower than most
15
<PAGE>
of the Company's other products. Sales of workers' compensation histories were
expected to continue to increase as the Company enters new markets, but decrease
as a percentage of total revenues.
Sales of the social security number check product decreased in 1994 over
1993 primarily due to a change in Company policy which no longer allowed
lawyers, private investigators and resellers to access this data because of
their chronic misuse of the information. The increase in interest income was
primarily attributable to interest earned on the IPO funds.
Income before income taxes increased from $966,000 in 1993 to $1,505,500 in
1994, or approximately 56% and represented approximately 32% of net revenues in
1994 compared to approximately 27% in 1993. The increase from 1993 to 1994 in
the percentage of income before income taxes to total net revenues was due in
part to a one-time charge of $200,000 in 1993 in connection with the settlement
of a dispute with a former director relating to his compensation for services as
a director. A breakdown of expenses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------ ----------------------- INCREASE (DECREASE)
% OF % OF % OF REVENUE
EXPENSES REVENUE EXPENSES REVENUE 1996 OVER 1995
---------- -------- ---------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Search and product.......... $1,643,500 34.9% $1,261,900 35.7% (0.8)
Marketing................... 453,600 9.7 293,600 8.3 1.4
General and administrative.. 823,500 17.5 632,200 17.8 (0.3)
Software development........ 180,200 3.8 109,200 3.1 0.7
Depreciation and 98,500 2.1 74,600 2.1 0.0
amortization..............
Settlement with former -- 0.0 200,000 5.7 (5.7)
director.................. ---------- ---- ---------- ---- ----
Expenses.................... $3,199,300 68.0% $2,571,500 72.7% (4.7%)
========== ==== ========== ==== ====
</TABLE>
The majority of the decrease in total expenses for 1994 was attributable to
the $200,000 settlement in 1993.
Marketing expenses as a percentage of total net revenues were generally
stable during 1993 and 1994 but increased slightly during 1994 due to hiring of
marketing personnel in November to manage the four regional sales offices
recently opened by the Company. The increase in marketing expenses was expected
to continue and even increase as a percentage of net revenues due to the
implementation of a marketing plan that began mid-November 1994. Consistent with
the marketing plan, the Company set up one-person regional sales offices in
Chicago, St. Louis/Kansas City, Dallas/Ft. Worth and Portland/Seattle. These
offices opened and were operating by January 1, 1995 and depending upon their
success the marketing plan called for the opening of eight additional offices by
the end of 1995. The implementation of these regional offices was an attempt by
the Company to take advantage of the increasing need and desire of businesses to
check employee backgrounds. The Company expected that costs associated with the
regional expansion would reduce its return on sales.
All other expenses in 1994 as a percentage of total net revenues remained
relatively stable except for legal and public relations expenses included as a
part of general and administrative, which increased approximately $65,400 in
1994 over 1993. This increase was due primarily to the increased costs
associated with being a publicly held company. This trend of higher legal and
public relations expenses was expected to continue.
The combined federal and state income tax rate for 1994 and 1993 was 36%
and 38%, respectively, resulting in net income in 1994 of $969,800 or $0.33 per
share on 2,971,017 (weighted average) shares for 1994 as compared to net income
of $600,600 or $0.25 per share on 2,442,250 (weighted average) shares for 1993.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position at June 30, 1996 remained strong with
working capital at that date of $6,138,300 compared to $6,426,900 at December 31
1995. Cash and cash equivalents at June 30, 1996 were $73,800 and decreased from
$159,700 at December 31, 1995. Net cash provided from operations for the six-
month period ended June 30, 1996 was $201,900 and consisted primarily of net
income of $461,500, less a $333,800 increase in accounts receivable and a
$97,000 decrease in accounts payable. The Company had capital expenditures of
$720,100 for the six-month period ended June 30, 1996 as compared to $1,005,800
for the year ended December 31, 1995. The majority of the capital expenditures
during the six months ended June 30, 1996 was attributable to the final phase of
construction and purchase of assets for an approximate 14,600 square feet office
building for use as the Company's headquarters. The total construction costs
were approximately $1.2 million. Construction was financed entirely by currently
available cash derived from past operations. No proceeds from the IPO was used
for the purchase of the land or the construction of the building. Construction
was completed in March 1996. Avert has now internally committed to spend up to
$1.5 million to develop new software and upgrade its existing software. The
Company expects the new software and upgrade of its existing software to allow
the Company to: (1) manage its higher volume with a lower cost per transaction;
(2) introduce new products and services at a much quicker pace; (3) directly
integrate the Company's information technology systems with strategic partners,
suppliers, and large customers; and (4) maintain the Company's competitive
position and provide leading edge, but safe and proven, technology for its
customers. Development and upgrade of the software will be financed by available
cash derived from past or continued operations. No proceeds from the IPO or this
offering will be used for development of this new software and upgrade of the
Company's existing software. Development and upgrading of the software presently
is expected to be complete in late 1997 or early 1998, with scheduled software
releases occurring prior to that time.
INFLATION
The Company believes that the results of its operations are not dependent
upon or affected by inflation.
17
<PAGE>
BUSINESS
GENERAL
The Company is an information service bureau engaged primarily in the
business of verifying job applicant background information for employers. The
background checks are made through the use of databases and a national network
of couriers (engaged on an independent contractor basis) developed by the
Company since its organization in June 1986. The background information products
and services currently provided by the Company consist of: criminal records,
workers' compensation histories, driving records, reference checks, credit
histories, social security number use and education and credential validation.
Avert has also developed employment application forms for sale to customers.
The Company believes that employers increasingly are realizing the benefits
of background checking of employees and verification of employment applications,
not only because of the desire to help assure a better quality employee, but
also, in some industries, the concern with negligent hiring lawsuits. The
Company has approximately 6,000 customers located throughout the United States.
During 1995, sales were made in 49 states, with approximately 72% of total sales
having been made in ten states (Colorado, Texas, Missouri, Oregon, Illinois,
North Carolina, Florida, California, Georgia and Kansas), with Colorado sales
representing approximately 20% of total sales. The Company's business strategy
is to accelerate market presence throughout the United States. Avert also
intends to enhance its existing products and to use the net proceeds received
from the IPO and this offering to develop new ones and pursue acquisitions of
other companies, assets and/or product lines that either complement or expand
its existing business.
MARKETS
The Company markets its employment background checking products and
services throughout the United States. Although any company with employees is a
potential customer of Avert, the Company believes that companies or businesses
with one or more of the following characteristics benefit most from background
checking:
. High risk of liability for negligent hiring lawsuits relating to the action
or inaction of employees;
. Physically demanding jobs;
. Employees with access to goods and cash of employers;
. High employee turnover; and
. Desire for better quality employees, not only with respect to competence,
but also integrity.
Industries in which one or more of these characteristics exist include:
construction; retail; manufacturing; property management, including commercial
office buildings, apartments and hotels; medical, including nursing homes,
hospitals and in-home health care providers; and city and county governments,
including schools.
PRODUCTS AND SERVICES
GENERAL. The Company's products and services are designed to verify job
applicant background information for employees and consist of database searches
through the use of the Company's in-house computer system and manual retrieval
and copying of public records by Avert's network courier system. Avert
customers may request and receive records by telephone, mail or by facsimile, or
by using a modem-equipped personal computer or terminal to access the Company's
on-line network. This network is available 24 hours per day, seven days a week.
Avert does not sell or license software to its customers.
18
<PAGE>
The price to Avert's customers of the reports prepared by the Company vary
in price from $4.00 to $50.00 per report depending upon the type and location of
background check requested by the customer. The reports may be viewed on screen
or printed in either Avert's or the customer's offices. The reports remain in a
computer file in Avert's host computer system for two years and are available to
the customer at no additional cost during that period. New Avert customers are
required to pay a $50 set up fee to open an account and to sign a Consumer
Report User Agreement ("User Agreement"). If an existing account is inactive for
12 consecutive months, the account will be closed.
The Company's computer host system consists of two Digital Equipment Alpha
processors with 28 gigabytes of storage configured to operate in a cluster
environment. The dual processor cluster provides backup for data and operating
integrity.
The Company's network courier system consists currently of approximately of
600 persons and small companies variously located throughout the United States.
The couriers are engaged as independent contractors by written agreement which
provides for payment of a fee on a per document, per day or monthly basis. The
number of couriers in each state depends on the size of the state, population
density, number of counties within the state, and the organization of the court
systems within the state.
PRODUCTS AND SERVICES. The Company currently offers the following products
and services:
CRIMINAL HISTORIES--Searches selected geographical areas for the
presence of a criminal record. This background information is available
from 30 states statewide or from all 3,300 counties in the United States on
a county-by-county basis. The remaining 20 states do not have a statewide
repository for this type of information. This information is retrieved by
Avert through its network courier system, a modem directly into the states
and certain counties or, in some instances, by facsimile, mail and
telephone.
WORKERS' COMPENSATION HISTORIES--Used to confirm on-the-job injuries
in compliance with the ADA. Avert has been collecting and storing workers'
compensation data since the Company's inception. The Company currently has
approximately 6.3 million workers' compensation records in its database and
believes that it was the first information service bureau to compile this
type of data on a nationwide basis and offer this background service to
employers. Avert also believes that it has the largest number of workers'
compensation records, and the largest network of workers' compensation
histories in the United States. Avert can currently provide workers'
compensation information from 41 states through the use of its database and
network courier system. Such information from the remaining nine states is
not currently available because of state law prohibiting the release of the
information, refusal by the states to release the information or inadequate
state record retrieval systems.
EDUCATION/CREDENTIAL CONFIRMATION--Confirms dates of attendance,
college degrees earned, or association credentials. This background
information is obtained by Avert personnel directly from the education
institutions or associations through the use of the telephone, fax or mail.
REFERENCE CHECK--Provides four types of references to meet specific
needs. The four types (Basic, Standard, Narrative and Personal) give
employers a wide range of reference choices. This background information
is also obtained by Avert personnel by telephone, fax or mail directly from
previous employers or personal references.
FIRST CHECK--Confirms that the applicant is using a valid social
security number, is not a fugitive from justice and has not been a subject
of a previous Avert background check.
MOTOR VEHICLE DRIVING REPORTS--Confirms driving records. This
background information is retrieved by Avert through a nonaffiliated third
party and is available from all 50 states and all Canadian provinces. This
same information could be obtained directly by the Company from the source
or from other nonaffiliated third parties. These reports and the credit
reports discussed below are the only two products for which Avert serves as
a broker.
19
<PAGE>
CREDIT LINK--Confirms certain credit information. This background
information is a special form of a common "credit report" designed for
employment purposes only. The report complies with current provisions of
the FCRA. See "--Government Regulation" below. Avert serves as a broker
for this information for all three of the major credit bureaus (Equifax,
TRW and TransUnion) and retrieves the information from these credit
bureaus through software purchased by Avert from a nonaffiliated third
party. Avert customers may order any combination of the three credit
bureaus.
NAME LINK--Reports use of a social security number. This product or
service identifies names associated with a Social Security number and, in
some cases, addresses used by those persons. This information is obtained
from insurance records, credit records and death records accessed through
Avert's database.
EMPLOYMENT APPLICATION FORMS--These employment forms have been
developed by Avert and, in Avert's judgment, if used properly by employers,
comply with current provisions of the ADA. The forms contain a universal
release form for those states which require an applicant's signature and
include the required IRS Form W-4 and the Department of Justice Employment
Eligibility Verification (I-9). The forms also include an affirmative
action questionnaire and a conditional job offer form. The application
portion of the form sets forth the questions in a manner which, together
with company policy, will permit an employer to conduct a background
search.
In July 1996, the Company began offering customers the Avert Advantage
customer subscription service. This service provides instant access to
hiring process information. Advantage customers also receive a discount
based on the number of months they have been a customer. A $10.00 monthly
fee is collected for each Advantage customer. The Company has obtained
approximately 1,000 such customers through September 30, 1996.
In addition to the foregoing products and services, Avert will confirm
the validity of the social security number of each subject of a background
check, provided that the customer provides the Company with the number. If
the social security number is valid, Avert will provide the customer with
the state name and year of issuance. This service is currently rendered
for no additional cost to the customer in conjunction with another Avert
product purchased by the customer and regardless of the type of
search.
BUSINESS STRATEGY
Avert's primary objective is to position the Company as one of the highest
quality, most innovative background checking companies in the United States and
ultimately to expand into the international market. The basic elements of
Avert's strategies are as follows:
. ACCELERATED MARKET PRESENCE. Avert intends to accelerate its market
presence throughout the United States by expanding and refining sales and
marketing techniques used by it over the past several years, including:
(1) face-to-face selling with prospective customers, primarily larger
companies; (2) in-house telemarketing to existing customers and to
prospective customers who have shown an interest in purchasing Avert's
products and services; (3) independent sales representatives; (4) public
relations; (5) participation in trade shows and seminars; (6) advertising
in trade publications; (7) maintaining a web page on the Internet; and (8)
mailing of quarterly news releases to existing customers and to prospective
customers; See "--Marketing."
. DEVELOPMENT OF NEW REVENUE. As a general matter, many of Avert's products
and services have been developed and added to the Company's product line as
a result of requests or suggestions from existing or prospective customers.
For this reason, the Company will continue to listen to its customers or
prospective customers for new product and service ideas. In addition, the
Company intends to develop new or additional revenue from: (1) repackaging
of its existing products, such as packaged pricing and price guaranties;
(2) development of new products; and (3) enhancement of existing products,
including database
20
<PAGE>
updates, acquisition of workers' compensation information from additional
states, when and if available, and speeding up delivery times. Furthermore,
the Company is seeking customer relationships with companies having a large
customer base of their own, which can resell Avert's products and services
as an add on to their own products. Avert also intends to seek strategic
relationships with companies in other industries.
. ACQUISITIONS OF OTHER COMPANIES AND/OR PRODUCT LINES. The Company is
pursuing the acquisition of other companies, assets and/or product lines
that either complement or expand Avert's existing business. Target
companies are regional or state background checking companies or companies
with complementary products such as drug testing, psychological testing or
safety and security products. The Company may use cash or stock or a
combination of stock and cash to effect any such acquisitions. The Company
has had, and will continue to have, discussions from time-to-time with
potential acquisition candidates, but no acquisition has been made nor is
any considered probable as of the date of this Prospectus. No assurance can
be given that the Company will be successful in these efforts. See "Use of
Proceeds."
. LONG-TERM CUSTOMER RELATIONSHIPS. The Company is committed to providing
quality products and services to its customers. Management believes that
the Company's emphasis on building long-term relationships with its
customers has played a significant role in Avert's success. Management
further believes that these relationships are important not only to
generate additional sales from existing customers, but also for customer
referrals. A large percentage of the Company's sales have been generated
by referrals from customers. The Company intends to continue to (1) send
monthly newsletters to existing customers, (2) daily monitor its larger
customers and (3) contact each of its customers on a bi-annual basis.
. QUALITY CUSTOMER SERVICE AND SUPPORT. In order to offer customers quality
service and support, Avert has developed and will continue to enhance a
client service and support program which includes: (1) the availability of
a customer service representative twelve hours a day Monday through Friday
and eight hours on Saturday; (2) in-house training of all customer service
representatives on Avert products; (3) quality control checks for Avert
products; and (4) minimum acceptable performance guidelines for employees.
In addition, Avert realizes the importance of long-term employees to the
success of its operations and, therefore, strives to provide a positive
work environment and benefit package for employees.
. TECHNOLOGICAL. Avert will continue to monitor its computer and delivery
systems for enhancements for quality of service to, and ease of use by,
Avert customers. The Company expects to spend up to $1.5 million to
develop new software and upgrade its existing software. See "Management's
Discussion and Analysis or Plan of Operation--Liquidity and Capital
Resources."
. ULTIMATE INTERNATIONAL MARKET DEVELOPMENT. Currently, revenues from
international sales are not significant. Although the Company's ultimate
goal is to expand internationally, Avert will not do so until it has
significantly increased its sales and marketing presence in the United
States. International possibilities include Canada, since Canada most
closely resembles the United States market, sales to foreign companies
hiring Americans and the European market.
MARKETING AND SALES
Avert currently contracts with independent sales representatives supported
by members of the Company's marketing team. The Company's marketing program
consists of direct marketing activities, advertising, exhibitions at trade
shows, the Internet, public relations activities and in-house telemarketing.
Customer leads generated by these marketing activities are referred to the
independent sales representatives for a follow-up and, if applicable, obtaining
the documentation (including executed User Agreements) needed to open new
customer accounts.
As part of a plan to increase the number of national accounts, a National
Accounts Manager was employed in the fourth quarter of 1995. During 1996
several new national accounts have been added and revenues from
21
<PAGE>
existing national accounts have grown by more than 50% from the prior year.
Management expects to expand the national accounts program during the remainder
of 1996 and during 1997.
CUSTOMERS
The Company currently has approximately 6,000 customers located throughout
the United States. During 1995, sales were made in 49 states, with
approximately 72% of total sales having been made in ten states (Colorado,
Texas, Missouri, Oregon, Illinois, North Carolina, Florida, California, Georgia
and Kansas), with Colorado sales representing approximately 20% of total sales.
No single customer of Avert accounted for more than 8% of total Avert sales
during 1995 or 1994.
Historically, the Company experiences a seasonal slow down in its business
in the fourth quarter due to decreased hiring by retailers, starting in mid-
November and continuing through the holiday season, and by industries affected
by inclement weather.
GOVERNMENT REGULATION
The Company is a "consumer reporting agency" within the meaning of that
term as used in, and therefore is subject to, the provisions of the Fair Credit
Reporting Act (referred to herein as the "FCRA") and is regulated by the Federal
Trade Commission ("FTC") under the Federal Trade Commission Act. Under the
provisions of the FCRA, a consumer reporting agency may furnish a "consumer
report" to a customer (other than a consumer or in response to a court order)
only if such agency has reason to believe that, among other matters, the
customer intends to use the information for a permissible purpose, including in
connection with a credit transaction involving the consumer on whom the
information is to be furnished or the review or collection of an account of the
consumer or the customer otherwise has a legitimate need for the information in
connection with a business transaction concerning the consumer. The background
checking reports of Avert are consumer reports for purposes of the FCRA. In
addition, certain of Avert's consumer reports are "investigative consumer
reports" within the meaning of that term under the FCRA. The FCRA also
prohibits disclosure of obsolete information concerning a consumer. Obsolete
information generally means information which is more than seven years old.
The FCRA requires a consumer reporting agency to maintain reasonable
procedures designed to ensure that the proscriptions on the use of obsolete
information are not violated, and that the information contained in a consumer
credit report is used for a proper purpose. In addition, a consumer reporting
agency must follow reasonable procedures to assure maximum possible accuracy of
the information concerning the consumer about whom the report relates. See
subcaption "--Legal Considerations" below. The FCRA also requires a consumer
reporting agency, upon request from a consumer, to disclose all information
about that consumer in a consumer report, together with the source and the
recipients of the information. In some cases, this information must be
delivered to the consumer at no cost, and, in others, the agency may charge a
reasonable fee. Avert historically has not charged such a fee.
The FCRA provides that an investigative consumer report may not be prepared
on any consumer unless (1) such consumer receives notice thereof in writing not
later than three days after the date on which the report was first requested,
which must include a statement, among others, that the consumer has the right to
request complete disclosure of the nature and scope of the investigation
requested, or (2) the report is to be used for employment purposes for which the
consumer has not specifically applied. The FCRA further provides that if the
consumer requests disclosure of the information, the consumer reporting agency
must make such disclosure in writing not later than five days after the date on
which the request for disclosure was received. A consumer reporting agency may
not be held liable for any violation of the FCRA provisions relating to
investigative consumer reports if that agency shows by preponderance of the
evidence that at the time of the violation such agency maintained reasonable
procedures to assure compliance with those provisions. Of the Company's current
products, educational/credentials confirmations and reference checks are
investigative consumer reports for purposes of the FCRA.
The FCRA provides for civil liability sanctions against a consumer
reporting agency by a consumer for willful or negligent noncompliance with the
FCRA and criminal sanctions against officers and directors thereof who knowingly
and willfully disclose information in a report to a person not authorized to
receive the information.
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<PAGE>
The ADA makes it unlawful to discriminate in employment against a qualified
individual with a disability. The ADA does not directly apply to businesses
conducted by consumer reporting companies such as the Company. It does,
however, apply to employers with 15 or more employees and prohibits such
employers from making inquiries of a prospective employee as to medical and
injury inquiries, job-related or not, until after a conditional job offer has
been made. This means, among other matters, that inquiries by an employer as to
prior workers' compensation claims and injuries cannot be made until after a
conditional job offer has been made.
State laws also impact the Company's business. There are a number of
states which have laws similar to the FCRA, and some states which have human
rights laws more strict than the ADA. In addition, to the Company's knowledge,
at least four states require companies engaged in the type of business conducted
by the Company to be licensed in order to conduct business within those states.
See discussion below. A large number of states also regulate the type of
information which can be made available to the public and/or impose conditions
to the release of the information. For example, some state laws prohibit access
to certain types of information, such as workers' compensation histories or
criminal histories, while others restrict access without a signed release from
the subject of the report. In addition, many privacy and consumer advocates and
federal regulators have become increasingly concerned with the use of personal
information, particularly credit reports. Attempts have been made and will
continue to be made by these groups to adopt new or additional federal and state
legislation to regulate the use of personal information. Federal and/or state
laws relating to consumer reporting agencies and/or access and use of personal
information, in particular, and privacy and civil rights, in general, amended or
enacted in the future could materially adversely impact Avert's operations.
To the Company's knowledge, at least four states of the 49 states in which
the Company sold its products and services during 1995 require consumer
reporting agencies, such as the Company, to obtain a license to conduct business
within those states. The Company has obtained the necessary licenses in each of
those four states. In addition, several other states may require licensing of
the Company's business. Although the Company believes that it will be able to
obtain the licenses from these other states, if required, the inability to do so
could have an adverse impact on the Company's operations. Operation of an
unlicensed business is a misdemeanor under the laws of many states generally
punishable by fines and/or imprisonment and could be grounds for denial of a
license, if required.
LEGAL CONSIDERATIONS
Under general legal concepts and, in some instances, by specific state and
federal statute, the Company could be held liable to customers and/or to the
subjects of background checking reports prepared by the Company for inaccurate
information or misuse of the information. The FCRA contains civil liability
provisions for willful and negligent noncompliance with its requirements. The
FCRA further provides in effect that, except for liability for willful or
negligent noncompliance with the FCRA and false information furnished with
malice or willful intent to injure a consumer, neither a consumer reporting
agency, any user of information nor any person who furnishes information to a
consumer reporting agency will be liable to the consumer for defamation,
invasion of privacy or negligence based on information disclosed to such
consumer under the provisions of the FCRA.
The Company has developed and implemented internal policies designed to
help ensure that background information retrieved by it concerning a consumer is
accurate and that it otherwise complies with the provisions of the FCRA. In
addition, each customer of Avert is required to sign a User Agreement, wherein
such customer agrees, among other matters, to accept responsibility for using
information provided by Avert in accordance with the provisions of the FCRA and
the ADA. Avert also has internal checks in place regarding access and release
of such information. Additionally, Avert requires that all employees sign a
written acknowledgment covering the proper procedures for handling confidential
information.
The Company does not currently maintain liability insurance to cover claims
by customers or the subjects of reports for alleged inaccurate or misuse of
information. Avert has explored the possibility and feasibility of liability
insurance for this purpose. However, because of the nature of the Company's
business, claims at least from subjects of reports prepared by the Company would
be based at least in part on discrimination. Based on the Company's research,
losses from such claims are either uninsurable or the insurance that is
available is so limited
23
<PAGE>
in coverage that it is not economically practicable. The Company intends to
continue its efforts to obtain insurance coverage for such claims. To date, the
Company has been named as a co-defendant in three lawsuits alleging violations
of the FCRA, all of which have been dismissed by the court.
COMPETITION
The background checking industry is highly fragmented. The Company faces
both direct and indirect competition for its products and services. In
addition, many companies perform employee background checking in-house.
DIRECT COMPETITION. There are large number of companies engaged in the
sale of one or more of the background checking products sold by the Company, and
the Company believes that this number will increase. A significant number of
these competitors are small companies operating on a local or regional basis,
while some are large companies operating on a national scale. To the Company's
knowledge, the background checking portion of the businesses of its larger
direct competitors is currently a small portion of their overall operations.
Unlike many of its direct competitors, the Company serves as a broker for only
two of its products, credit reports and motor vehicle driving records, and
obtains the data for the remainder of its products from the source. The Company
believes that this helps to give it a competitive advantage as to price. The
Company also believes that it has a competitive advantage over many of its
competitors because of the wide variety of products that it can offer to
customers. Many of the Company's competitors, however, have substantially
greater financial and personnel resources than the Company. In addition, it is
possible that one or more of the Company's larger direct competitors could
expand their background checking product line in the future.
INDIRECT COMPETITION. The Company faces indirect competition from a number
of companies engaged in, among others, drug, aptitude and attitude testing,
handwriting analysis and on-the-job trial employment (employee leasing). These
procedures, though often used with background checking, compete with Avert's
products and services. Most of these competitors operate on a national scale
and have substantially greater financial and personnel resources than the
Company. In addition, it is possible that one or more of these competitors
could expand their product lines in the future to include background checking
products and services.
EMPLOYEES
The Company has one part-time and 49 full-time employees, of which ten are
involved in sales and marketing, 28 are involved in data processing/customer
service, six (including one part-time employee) are involved in finance and
administration and six are involved in programming/information systems. None of
the Company's employees is represented by labor unions or is subject to
collective bargaining arrangements. Avert considers its relations with its
employees to be good.
INDEPENDENT SALES REPRESENTATIVES
Avert also contracts with independent sales representatives to follow up on
and generate sales leads, obtain the documentation (including executed User
Agreements) needed to open new customer accounts, and develop sixteen geographic
territories. These independent sales representatives are paid on a commission
basis.
FACILITIES
In order to meet its immediate need for additional office space and to
accommodate anticipated growth, the Company has constructed an approximate
14,600 square foot office building on 29,400 square foot parcel of undeveloped
land it purchased in November 1994. The building is located in downtown Fort
Collins, Colorado. Construction costs of the office building were approximately
$1.2 million. Construction was completed in March
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<PAGE>
1996. The cost of the land and the construction costs for the office building
were paid entirely from internal funds of the Company. No portion of the
proceeds of the Company's IPO were used for these purposes. The Company is the
sole occupant of the building. The Company was partially released from its
leased office facility in March 1996 and totally released from the office
facility at the end of May 1996. The Company had no further obligations with
respect to the leased office facility after May 1996.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dean A. Suposs....... 44 Chairman of the Board; President
Michael D. DeWitt.... 52 Director; Secretary
Jamie Burgat......... 38 Vice President of Operations; Treasurer; Assistant Secretary
D. Michael Vaughan... 55 Director
Stephen C. Fienhold.. 50 Director
Stephen D. Joyce..... 48 Director
</TABLE>
Dean A. Suposs, a co-founder of Avert, has served as Chairman of the Board
and President of the Company on a full-time basis since Avert's inception. Mr.
Suposs graduated from Colorado State University, Fort Collins, Colorado, in 1975
with a Bachelor of Science degree in Animal Science.
Michael D. DeWitt has served as a director of the Company since December
1987 and as Secretary since September 1993. He also served as Executive Vice
President from June 1990 until December 17, 1993, and as Director of Marketing
on a full-time basis from September 1988 until December 17, 1993, when he
resigned from these positions and became a part-time marketing consultant. Mr.
DeWitt was re-employed by the Company on a full- time basis as Executive Vice
President--Director of Marketing on June 20, 1994, to serve in that capacity
pending the employment of a senior marketing person to fill the vacancy caused
by the resignation effective July 1, 1994, of the Company's then current
Director of Sales and Marketing. Mr. DeWitt resigned from his position as
Executive Vice President--Director of Marketing effective September 1995 when
the Company retained a marketing consultant. After such resignation, Mr. DeWitt
served as a part-time marketing consultant to the Company under a consulting
agreement that expired on March 31, 1996. See "--Consultant." Mr. DeWitt also
serves as a director of Applied Computer Technology, Inc., a publicly-held
company. Mr. DeWitt graduated from Grinnell College, Grinnell, Iowa in 1965 with
a Bachelor of Arts degree in Biology and from Keller School, Chicago, Illinois
in 1980 with a Masters degree in Business Administration specializing in
Marketing and Finance.
Jamie Burgat has served as Vice President of Operations of the Company on a
full- time basis since September 1987, as Assistant Secretary since March 1994
and as Treasurer since April 1994. Ms. Burgat graduated from Western State
College, Gunnison, Colorado, in 1978 with a Bachelor of Science degree in
Business Administration.
D. Michael Vaughan, a co-founder of Avert, has served as a director of the
Company since January 1994 and served as Treasurer from October 1987 until April
1994. Mr. Vaughan is a Professor of Accounting and Taxation at Colorado State
University, where he has been employed since 1969. He has been a certified
public accountant for the past 24 years and has been an officer and/or director
of several closely-held businesses. Mr. Vaughan graduated from Texas Tech
University in 1963 with a Bachelor in Business Administration, in 1969 with a
Masters in Business Administration and in 1970 with a Ph.D.
Stephen C. Fienhold, a co-founder of Avert, has served as a director of the
Company since Avert's inception. He is the co-owner with his wife of SR
Products, a lighting manufacturer, located in Fort Collins, Colorado. From
January 1982 until 1989, Mr. Fienhold was co-owner of Creative Engineering, an
engineering and manufacturing firm located in Fort Collins. He graduated from
the University of Arizona, Tucson, Arizona, in
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<PAGE>
1969 with a Bachelor of Science degree in Aerospace and Mechanical Engineering
and has participated in the Colorado State University MBA program.
Stephen D. Joyce has served as a director of the Company since May 1995.
Mr. Joyce is the owner of Supermarket Liquors, Inc., located in Fort Collins,
Colorado, and served as the President of that company since October 1976. He
graduated from Rensselaer Polytechnic Institute in 1971 with a Bachelor of
Science degree in Management. He attended the University of California--
Berkeley from 1971 to 1972, where he studied marketing but did not obtain a
degree.
In March 1994, the Company established an Audit Committee and a
Compensation Committee of the Board of Directors consisting in each case of
Stephen C. Fienhold and D. Michael Vaughan. The Audit Committee's function is
to recommend to the Board of Directors the firm to select as the Company's
outside auditors, to oversee the adequacy of internal controls and to review and
approve the services of Avert's outside public accounting firm. The
Compensation Committee's function is to review and approve management proposals
for compensation to officers and other employees of the Company and also to
administer the Company's 1994 Stock Incentive Plan.
The directors hold office until the next annual meeting of shareholders, or
until their successors are duly elected and qualified. The officers hold office
until their successors are appointed by the Board of Directors. All officers of
the Company, other than Mr. DeWitt, are employed on a full-time basis. There
are no arrangements or understandings between any of the directors or officers
and any other person pursuant to which he or she was or is to be selected as a
director, nominee or officer. There is no family relationship between any
director and executive officer of the Company.
OTHER SIGNIFICANT EMPLOYEES
In addition to the directors, nominee and executive officers set forth
above, the Company believes the following employees are significant to its
operations:
NAME AGE POSITION WITH THE COMPANY
- ----- --- -------------------------
Jerry Thurber.... 40 Director of Information Technology
Leonard J. Koch.. 53 Director of Marketing and Planning
Jerry Thurber was hired by Avert as Director of Information Technology in
June 1996. Mr. Thurber has 14 years of experience managing in the information
system industry. Mr. Thurber spent the last 13 years with American Management
Systems, Inc., a major international systems development and consulting firm,
where he was regional Vice President for Management Systems and Technologies,
Western Region. Mr. Thurber has experience managing client server technologies,
directing information systems departments, and managing information systems
consulting services. He graduated from Colorado State University in 1978 with a
Bachelor of Arts degree in Political Science and from Denver University in 1983
with a Masters of International Management.
Leonard J. Koch was retained by Avert as a marketing consultant in
September 1995 and became employed as Director of Marketing and Planning in
January 1996. Mr. Koch brings to Avert more than 30 years of experience in
marketing and distribution roles with companies such as Honeywell from 1964 to
1983, NBI from 1983 to 1990, and Solburne Computer in 1991 and 1992. From 1991
to 1992, he served as director of Original Equipment Manufacturer and indirect
distribution with Solburn Computer. Most recently, from 1992 to 1995, he was
co-founder and chief operating officer at Audiologic, Inc. Mr. Koch graduated
from Valparaiso University in 1964 with a Bachelor of Arts degree in business
administration and political science.
27
<PAGE>
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Mr. Suposs effective
January 1, 1994 ("Employment Agreement"). The Employment Agreement expires on
January 1, 1999, and is automatically renewed for successive one-year periods
unless Avert or Mr. Suposs elects not to renew. The Employment Agreement
provides for an annual salary of at least $96,000 per year ("Base Salary") and
an annual bonus ("Annual Bonus") of 6% of the income for that year before
deduction of income taxes and before giving effect to the bonus, but after
deduction of investment income; provided, however, if a change of control (as
defined in the Employment Agreement) occurs, the Annual Bonus will be
terminated and the Base Salary will be increased by the average of the annual
bonus paid for each of the preceding three years ("Adjusted Base Salary"). In
the event of death during the term of the Employment Agreement, Mr. Suposs' Base
Salary (but not the Annual Bonus) or the Adjusted Base Salary, as the case may
be, will be continued for six months at the base monthly rate then in effect and
paid to the beneficiary or beneficiaries of Mr. Suposs. Unless a change of
control occurred prior to his death, Mr. Suposs' beneficiary or beneficiaries
will also be paid the Annual Bonus for the portion of the year prior to his
death.
The Employment Agreement may be terminated by the Company with or without
Cause (as defined in the Employment Agreement); provided that, if the Employment
Agreement is terminated without Cause, the Company must pay to Mr. Suposs the
Base Salary and Annual Bonus or Adjusted Base Salary, as the case may be, for
the remaining term of the Employment Agreement. In the event of a change of
control, Mr. Suposs may, in certain instances, terminate his employment within
six months following the change in control, in which event he will be paid an
amount equal to two times his Adjusted Base Salary; provided that the amount
thereof does not exceed the excess parachute payments as defined in Section 280G
of the Internal Revenue Code of 1986, as amended. Mr. Suposs may terminate the
Employment Agreement without being in breach thereof, provided that the Board of
Directors determines that such termination is for reasons beyond the control of
Mr. Suposs. In this event, Mr. Suposs will be paid severance in an amount equal
to six (or, if less, the number of months remaining in the term of the
Employment Agreement) times the monthly Base Salary or Adjusted Base Salary, as
the case may be.
In the event Mr. Suposs' employment is terminated by the Company for Cause,
Mr. Suposs may not engage in a competing business in any location within the
United States for a period equal to the greater of two years or the remaining
term of the Employment Agreement. In the event Mr. Suposs' employment is
terminated for any reason other than Cause or death or permanent disability, Mr.
Suposs may not engage in a competing business in any location within the United
States for a period equal to the greater of the remaining term of the Employment
Agreement or one year. In addition, Mr. Suposs has agreed that during his
employment and during the applicable period of any non-compete, neither he nor
any employer with whom he is at the time affiliated may hire any person employed
by the Company. Mr. Suposs has also agreed that he will not disclose, except in
the normal course of his duties, any Confidential Information (as defined in the
Employment Agreement) to any one else either during the term of the Employment
Agreement or subsequent thereto for the applicable period of any non-compete
provision.
CONSULTANT
As noted under "--Directors and Executive Officers" above, Michael D.
DeWitt, a director of the Company, resigned from his full-time position as the
Company's Executive Vice President--Director of Marketing on December 17, 1993.
At that time, he became a part-time marketing consultant to the Company under
the terms of a consulting agreement ("Consulting Agreement") with the Company.
Mr. DeWitt agreed to reemployment as Executive Vice President--Director of
Marketing on June 20, 1994, and to serve in that capacity at a salary of $8,000
per month pending the employment of a senior marketing person to fill the
vacancy caused by the resignation of the Company's then current Director of
Sales and Marketing. In April of 1995 the Company engaged the services of a
national search firm to assist the Company in locating high quality candidates
for the marketing position. Prior to that time and following Mr. DeWitt's
reemployment, the Company did not aggressively seek candidates because of the
development and implementation during this period of the Company's marketing
plan and Mr. DeWitt's substantial contribution to the plan. Due to the
importance of the marketing plan to the Company's overall growth plans, the
Company felt that the transition to the new senior marketing person should wait
until after implementation, which occurred starting in January 1995. Mr. DeWitt
agreed to remain with the Company on a full-time basis during this period.
28
<PAGE>
The Consulting Agreement was suspended pending the hiring of the senior
marketing person. After his resignation effective September 1995 as Executive
Vice President--Director of Marketing when the Company retained a marketing
consultant, Michael D. DeWitt was again engaged by the Company as a part-time
marketing consultant under the terms of the Consulting Agreement. See "--
Directors and Executive Officers." Pursuant to the Consulting Agreement, Mr.
DeWitt received a retainer of $2,000 per month and a fee of $125 per hour or
$400 per day, whichever was less, and was reimbursed for all reasonable out-of-
pocket expenses incurred by him in connection with his services to the Company.
The Consulting Agreement expired on March 31, 1996. The Consulting Agreement
contains confidentiality and noncompete provisions.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid to Mr. Suposs,
the President (chief executive officer) of the Company, for each of the years in
the three-year period ended December 31, 1995. No other executive officer of
the Company had total annual salary and bonus for the year ended December 31,
1995, in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
------------------------------------------------- --------------
Name and Other Annual All other
Principal Position Year Salary ($) Bonus($)/(1)/ Compensation($)/(1)/ Options(#) Compensation/(2)/
- ---------------------------- ---- ----------- -------------- -------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Dean A. Suposs, President
and Chairman of the Board.. 1995 $96,000/(3)/ $ 63,923/(3)/ -- -- $1,200
1994 $96,000/(3)/ $ 86,000/(3)/ -- 200,000 --
1993 $40,000/(4)/ $ 107,355/(4)/ -- -- --
</TABLE>
________________
(1) Does not include: (i) board fees of $9,600, $9,600 and $6,400 for the years
ended December 31, 1995, 1994, and 1993, respectively; or (ii) compensation
for the personal use by Mr. Suposs of a Company-owned vehicle. The vehicle
is used primarily for business purposes. Compensation for personal use did
not exceed 10% of Mr. Suposs' total salary and bonus for the respective
years stated.
(2) Represents Company contribution for the benefit of Mr. Suposs under the
Avert, Inc. 401(k) Profit Sharing Plan (the "Plan"). The Plan is for the
benefit of all eligible employees of the Company. Eligible employees may
make voluntary contributions to the Plan which are then matched 50% by the
Company up to a maximum of $1,500.
(3) Represents a fixed annual salary of $96,000 and a bonus of 6% of income
before deduction of income taxes and before giving effect to the bonus, but
after deduction of investment income. See "Management--Employment
Agreement" above.
(4) Represents a fixed annual salary of $40,000 and a bonus of 10% of income
before income taxes and before giving effect to the bonus.
OPTION GRANTS IN 1995
No grants of stock options of the Company were made to Dean A. Suposs,
President and Chairman of the Board of the Company, during the year ended
December 31, 1995.
29
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE
The following table sets forth information concerning each exercise of
stock options during the period ended December 31, 1995, by the Company's
President and Chairman of the Board and the fiscal year-end value of unexercised
options held by him.
<TABLE>
<CAPTION>
Aggregated Option Exercises
For Year Ended December 31, 1995
And Year-End Option Values
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT YEAR IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE END(#)/(2)/ YEAR-END ($)/(3)/
EXERCISE REALIZED --------------------------------- -----------------------------
NAME (#)/(1)/ ($)/(1)/ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- ------------ ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dean A. Suposs 0 0 66,666 133,667 0 0
- ----------
</TABLE>
/(1)/ No options were exercised during the year ended December 31, 1995.
/(2)/ The total number of unexercised options held as of December 31, 1995,
separated between those options that were exercisable and those options
that were not exercisable.
/(3)/ For all unexercised options held as of December 31, 1995, the aggregate
dollar value of the excess of the market value of the stock underlying the
options over the exercise price of those options. On December 31, 1995,
the closing sale price of the Common Stock was $4.125 per share. The
exercise price is $5.25 per share.
STOCK INCENTIVE PLAN
In March 1994, the Company adopted the 1994 Stock Incentive Plan (the
"Stock Incentive Plan"). The purpose of the Stock Incentive Plan is to provide
continuing incentives to the Company's key employees, which may include officers
and employee members of the Board of Directors (excluding members of the
Compensation Committee). The Stock Incentive Plan provides for an authorization
of 363,337 shares of Common Stock for issuance thereunder. Under the Stock
Incentive Plan, the Company may grant to participants awards of stock options
and restricted stock or any combination thereof.
The Stock Incentive Plan is to be administered by the Compensation
Committee of the Board of Directors composed of no fewer than two disinterested
members. Subject to the terms of the Stock Incentive Plan, the Compensation
Committee determines, among other matters, the persons to whom awards are
granted, the type of award granted, the number of shares granted, the vesting
schedule, employment requirements or performance goals relating to restricted
stock awards, the type of consideration to be paid to the Company upon exercise
of options and the terms of any option (which cannot exceed ten years).
Under the stock option component of the Stock Incentive Plan, the Company
may grant both incentive stock options ("incentive stock options") intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and options which are not qualified as incentive stock options;
provided that incentive stock options cannot be granted to any participant who
is not an employee of the Company. Stock options may not be granted at an
exercise price of less than the fair market value of the Common Stock on the
date of grant. The exercise price of incentive stock options granted to holders
of more than 10% of the Common Stock must be at least 110% of the fair market
value of the Common Stock on the date of grant, and the term of these options
cannot exceed five years. Options granted under the Stock Incentive Plan are
not transferrable otherwise than by will or
30
<PAGE>
the laws of descent and distribution and, during the lifetime of the
optionholder, options are exercisable only by such optionholder. In addition,
outstanding options may not be exercised more than three months (but in no event
beyond the expiration date of the option) after the optionholder ceases to be an
employee of the Company, except that in the event of the death or permanent and
total disability of the optionholder, the option may be exercised by the holder
(or his estate, as the case may be) until the first to occur of the expiration
of the option period or the expiration of one year after the date of death or
permanent or total disability. The exercise price may be paid in cash, in shares
of Common Stock (valued at fair market value at the date of exercise), by
delivery of a promissory note or by a combination of such means of payment, as
may be determined by the Compensation Committee.
Under the restricted stock component of the Stock Incentive Plan, the
Company may, in selected cases, issue to a plan participant a given number of
shares of restricted stock. Restricted stock under the Stock Incentive Plan is
Common Stock restricted as to sale pending fulfillment of such vesting schedule,
employment requirements or performance goals as the Compensation Committee shall
determine. The purchase price, if any, for restricted stock will be specified by
the Compensation Committee. Prior to the lifting of the restrictions, the
participant will nevertheless be entitled to receive distributions in
liquidation and dividends on, and to vote the shares of, the restricted stock.
The Stock Incentive Plan provides for forfeiture of restricted stock for breach
of conditions of grant.
Upon a change in control (as defined in the Stock Incentive Plan) of the
Company, all stock options granted under the Stock Incentive Plan will become
exercisable in full, and all restricted stock grants will become immediately
vested and any applicable restrictions will lapse. Also, in the event the
number of outstanding shares of Common Stock is increased or decreased or
changed into or exchanged for a different number or kind of shares of stock or
other securities of the Company or of another company, whether as a result of a
stock split, stock dividend, combination or exchange of shares, merger or
otherwise, each share subject to an unexercised option shall be substituted for
the number and kind of shares of stock into which each share of the outstanding
Common Stock is to be changed or for which each such share is to be exchanged
and the option price shall be increased or decreased proportionately.
Stock options covering a total of 360,000 shares of Common Stock have been
granted to date under the Stock Incentive Plan to two executive officers,
including Mr. Suposs (options covering 200,000 shares), and three key employees
of the Company. The options granted to Mr. Suposs were effective on June 22,
1994, the date of the Company's IPO. Such options have a 10-year term, are
exercisable at a price of $5.25 (the price at which the Company's Units were
sold in the IPO) and vest at a rate of approximately 16.7% (approximately 33,333
shares) per year beginning on the date of grant. Options covering 99,999 shares
of Common Stock currently are exercisable by Mr. Suposs.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In March 1994, the Company also adopted the Non-Employee Directors' Stock
Option Plan ("Outside Directors' Plan"). The purpose of the Outside Directors'
Plan is to encourage and provide incentive for high level performance by non-
employee directors of the Company. An aggregate of 30,000 shares of Common
Stock are reserved for issuance under the Outside Directors' Plan, to directors
who are not employees of Avert. The exercise price of the options will be the
fair market value of the stock on the date of grant. Outside directors are
automatically granted options to purchase 1,000 shares initially and an
additional 1,000 shares for each subsequent year that they serve up to a maximum
5,000 shares per director. Each option is exercisable one year after the date
of grant and expires five years from the date of grant.
The options are not transferrable otherwise than by will or the laws of
descent and distribution and, during the lifetime of the optionholder, options
are exercisable only by such optionholder. In addition, outstanding options may
not be exercised more than three months (but in no event beyond five years from
the grant date of the option) after the optionholder ceases to be a director of
the Company, except that in the event of the death or permanent and total
disability of an optionholder while a director, the option may be exercised by
the holder (or his estate as the case may be), until the first to occur of the
expiration of the option period or the expiration of one year following the date
of death or permanent and total disability. The options become immediately
exercisable in the event of a change in control (as defined in the Outside
Directors' Plan) of Avert. As a result of these automatic
31
<PAGE>
grants, Messrs. Fienhold and Vaughan presently have options covering a total of
3,000 shares each and Mr. Joyce presently has options covering a total of 2,000
shares. Of these outstanding options, options covering a total of 2,000 shares
currently are exercisable by each of Messrs. Fienhold and Vaughan and options
covering a total of 1,000 shares currently are exercisable by Mr. Joyce.
DIRECTOR'S COMPENSATION
Each director of Avert is paid a monthly fee of $800 as compensation for
services as a board member.
SETTLEMENT OF DISPUTE WITH FORMER DIRECTOR
During March 1994, the Company settled a dispute with Lawrence L.
Frederick, a former director of Avert concerning compensation for Mr.
Frederick's services as a director. Mr. Frederick served as a director of Avert
from September 1993 until March 1, 1994. Pursuant to the terms of the
settlement, Avert paid $200,000 to Mr. Frederick in full satisfaction of all
claims Mr. Frederick may have had against Avert at the time of the settlement,
including, but not limited to, claims for compensation, for stock options or
arising out of alleged agreements between Avert and Mr. Frederick with regard to
compensation or stock options or claims arising therefrom. Mr. Frederick and
Avert also released each other from any claims they may have had against each
other with regard to this matter, and Mr. Frederick tendered his resignation as
a board member.
SPECIAL PROVISIONS IN ARTICLES OF INCORPORATION
The Company's Articles of Incorporation contain a provision limiting the
liability of directors of the Company to the fullest extent permitted under the
Colorado Business Corporation Act (the "Act"). The Act allows a corporation to
limit the personal liability of a director to the corporation or its
shareholders for monetary damages for breaches of fiduciary duty as a director
except for (1) breaches of a director's duty of loyalty, (2) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (3) certain other acts specified in the Act, and (4) transactions from
which the director derived an improper benefit. The provisions of the Act will
not impair the Company's ability to seek injunctive relief for breaches of
fiduciary duty. Such relief, however, may not always be available as a
practical matter.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following subparagraphs briefly describe indemnification provisions for
directors, officers and controlling persons of the Company against liability,
including liability under the Securities Act:
1. Under provisions of the Bylaws of the Company and the Act, each person
who is or was a director or officer of the Company will be indemnified by the
Company as a matter of right to the extent permitted or authorized by law. The
effects of the Bylaws and the Act may be summarized as follows:
(a) Under Colorado law, a person who is wholly successful on the
merits in defense of a suit or proceeding brought against him by reason of
the fact that he is a director or officer of the Company shall be
indemnified against reasonable expenses (including attorneys' fees)
incurred in connection with such suit or proceeding;
(b) Except as provided in subparagraph (c) below, a director may be
indemnified under such law against both (1) reasonable expenses (including
attorneys' fees), and (2) judgments, penalties, fines and amounts paid in
settlement, if he acted in good faith and reasonably believed, in the case
of conduct in his official capacity as a director, that his conduct was in
the Company's best interests, or in all other cases that his conduct was
not opposed to the best interests of the Company, and with respect to any
criminal action, he had no reasonable cause to believe his conduct was
unlawful, but the Company may not indemnify the director if the director is
found liable to the Company or is found liable on the basis that
32
<PAGE>
personal benefit was improperly received by the director in connection with
any suit or proceeding charging improper personal benefit to the director;
(c) In connection with a suit or proceeding by or in the right of the
Company, indemnification is limited to reasonable expenses incurred in
connection with the suit or proceeding, but the Company may not indemnify
the director if the director was found liable to the Company; and
(d) Officers of the Company will be indemnified to the same extent as
directors as described in (a), (b) and (c) above, and officers who are not
also directors may be indemnified to such further extent, consistent with
law, as provided by the Articles of Incorporation, bylaws, resolution of
the shareholders or the Board of Directors, or in a contract.
2. The underwriters of the Company's IPO agreed, pursuant to the
Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement of
which this Prospectus is a part, to indemnify directors, officers and
controlling persons of the Company against certain liabilities, including
liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company 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.
PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of October 18, 1996, with
respect to the beneficial ownership of the Company's Common Stock, by (i) each
shareholder known by the Company to own beneficially more than 5% of the
outstanding Common Stock, (ii) each director or nominee as director and the
President and Chief Executive Officer of the Company, and (iii) all directors,
Board nominees and executive officers of the Company as a group. Except as
otherwise indicated below, each of the persons named in the table has sole
voting and investment power with respect to all shares of Common Stock
beneficially owned by him as set forth opposite his name.
<TABLE>
<CAPTION>
NUMBER
OF
SHARES OF PERCENT OF CLASS
COMMON -------------------------------------
NAME AND ADDRESS STOCK/(1)/ BEFORE OFFERING AFTER OFFERING/(2)/
- ---------------- ----------- --------------- --------------------
<S> <C> <C> <C>
Charles S. Hatchette................... 400,000 11.8% 10.3%
700 East Elizabeth
Fort Collins, Colorado 80524
Dean A. Suposs/(3)/.................... 205,593/(4)/ 5.9% 5.1%
1526 Remington
Fort Collins, Colorado 80524
Michael D. DeWitt/(3)/................. 105,200/(5)/ 3.1% 2.7%
931 Sailors Reef
Fort Collins, Colorado 80525
D. Michael Vaughan/(3)/................ 154,000/(6)/ 4.5% 3.9%
3437 Greystone Court
Fort Collins, Colorado 80525
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Stephen C. Fienhold/(3)/............... 102,000/(7)/ 3.0% 2.6%
1637 Tanglewood Drive
Fort Collins, Colorado 80525
Stephen D. Joyce/(3)/.................. 140,500/(8)/ 4.1% 3.6%
1124 Cobblestone Court
Fort Collins, Colorado 80525
All directors and executive officers.. 725,418/(9)/ 20.5% 18.0%
as a group (6 persons)
</TABLE>
_______________
(1) Beneficial ownership includes shares over which the indicated beneficial
owner exercises voting and/or investment power. Shares of Common Stock
subject to Redeemable Warrants of the Company or to options currently
exercisable or exercisable within 60 days are deemed outstanding for
computing the percentage ownership of the person holding the options but
not deemed outstanding for computing the percentage ownership of any other
person.
(2) Assumes exercise of all Redeemable Warrants and issuance of the underlying
500,000 shares of Common Stock.
(3) A director and/or an executive officer of Avert.
(4) Consists of: (i) the 100,064 shares owned by the wife of Mr. Suposs; (ii)
4,530 shares owned directly by Mr. Suposs; (iii) 99,999 shares purchasable
under exercisable employee stock options (see "Management--Stock Incentive
Plan"); and (iv) 1,000 shares purchasable under Redeemable Warrants owned
directly by Mr. Suposs.
(5) Consists of: (i) 100,000 shares owned jointly by Mr. DeWitt and his wife;
(ii) 5,000 shares owned by the wife of Mr. DeWitt; and (iii) 200 shares
owned by the children of Mr. DeWitt.
(6) Consists of: (i) 122,000 shares owned by the wife of Mr. Vaughan; (ii)
30,000 shares owned by a family-owned corporation in which Mr. Vaughan's
wife is a director but not a shareholder; and (iii) 2,000 shares
purchasable under exercisable non-employee director stock options (see
"Management--Non-Employee Directors' Stock Option Plan").
(7) Consists of: (i) 100,000 shares owned by the wife of Mr. Fienhold; and
(ii) 2,000 shares purchasable under exercisable non-employee director stock
options (see "Management--Non-Employee Directors' Stock Option Plan").
(8) Consists of: (i) 110,000 shares held directly or indirectly by Mr. Joyce;
(ii) 14,500 shares purchasable under Redeemable Warrants owned directly or
indirectly by Mr. Joyce; (iii) 14,000 shares owned by the children of Mr.
Joyce, and 1,000 shares purchasable under Redeemable Warrants owned by the
children of Mr. Joyce; and (iv) 1,000 shares purchasable under exercisable
non-employee director stock options (see "Management--Non-Employee
Directors' Stock Option Plan").
(9) Includes: (i) a total of 99,999 shares purchasable under currently
exercisable employee stock options held by Mr. Suposs (see Note 4 above);
(ii) a total of 5,000 shares held by Messrs. Vaughan, Fienhold and Joyce
under currently exercisable non-employee director stock options (see Notes
6, 7 and 8 above); (iii) 1,000 shares purchasable under Redeemable Warrants
held directly by Mr. Suposs (see Note 4 above); and (iv) 14,500 shares
purchasable under Redeemable Warrants held directly or indirectly by Mr.
Joyce and 1,000 shares purchasable under Redeemable Warrants owned by the
children of Mr. Joyce (see Note 8 above).
DESCRIPTION OF SECURITIES
The Company is authorized to issue (i) 9,000,000 shares of Common Stock, No
Par Value, of which 3,400,000 shares are issued and outstanding and (ii)
1,000,000 shares of Preferred Stock, No Par Value, of which no shares have been
issued.
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<PAGE>
The following summary description of the Company's securities does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles of Incorporation, Bylaws, Warrant Agreement and
Representative's Warrant Agreement, copies of which have been filed as exhibits
to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share of Common
Stock held of record on all matters submitted to a vote of shareholders.
Holders of a majority of the shares of Common Stock outstanding may authorize a
merger, consolidation, dissolution of the Company, the sale of all or
substantially all of the Company's assets if not made in the usual or ordinary
course of the Company's business, or an amendment of the Company's Articles of
Incorporation. In the event of liquidation, holders of Common Stock are
entitled to share pro rata in any distribution of the Company's assets to
holders of Common Stock after payment of liabilities and liquidation
preferences, if any, granted to holders of Preferred Stock. There are no
preemptive, subscription, conversion or redemption rights regarding the Common
Stock. Holders of Common Stock are entitled to receive such dividends as may be
declared on the Common Stock by the Board of Directors in its discretion out of
funds legally available for that purpose.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series and the designation
of such series, without further vote or action by the shareholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the shareholders and
may adversely affect the voting power and other rights of the holders of Common
Stock, including the loss of voting control to others.
REDEEMABLE WARRANTS
The Redeemable Warrants were issued pursuant to an agreement, dated June
22, 1994 (the "Warrant Agreement"), between the Company and American Securities
Transfer, Inc. (the "Warrant Agent") and are evidenced by warrant certificates
in registered form.
Two Redeemable Warrants represent the right of the registered holder to
purchase one share of Common Stock at an exercise price of $6.50 per share at
any time ending 5:00 p.m. (Denver time) on April 30, 1997 (the "Expiration
Date"), subject to adjustment (the "Purchase Price"). The Redeemable Warrants
will be entitled to the benefit of adjustments in the Purchase Price and in the
number of shares of Common Stock and/or other securities deliverable upon
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger. In addition, the
Company has the right to reduce the Purchase Price for a period of not less than
30 days upon not less than 30 days' prior written notice to holders of the
Redeemable Warrants.
Each Redeemable Warrant expires on the Expiration Date, subject to
extension. The Company may at any time extend the Expiration Date of all
outstanding Redeemable Warrants for such increased period of time as it may
determine.
Under the provisions of the Warrant Agreement, the Company has the right to
redeem the Redeemable Warrants in whole for cancellation at a price of $.05
each, by written notice mailed at least 30 days prior to the redemption date to
each Redeemable Warrant holder at his or her address as it appears on the books
of the Warrant Agent, provided, however, that such notice may only be given
within 15 days following any period of 15 consecutive trading days during which
the average closing bid price for the Common Stock (if then traded on the over-
the-counter market) or the average closing price of the Common Stock (if then
listed on NASDAQ National
35
<PAGE>
Market or on a national securities exchange) equals or exceeds $7.50 per share,
subject to adjustment for stock dividends, splits and similar events. If the
Redeemable Warrants are called for redemption and cancellation, they must be
exercised prior to the close of business on the date of any such redemption and
cancellation or the right to purchase the applicable shares of Common Stock is
forfeited. See "Risk Factors--Adverse Effect of Possible Redemption of
Redeemable Warrants."
The Redeemable Warrants may be exercised upon surrender of the Redeemable
Warrant certificate on or prior to the Expiration Date (or earlier redemption
date) at the offices of the Warrant Agent, with the Subscription Form on the
reverse of the Redeemable Warrant certificate completed and executed as
indicated, accompanied by payment of the full exercise price (by certified check
payable to the order of the Warrant Agent for the account of the Company) for
the number of Redeemable Warrants being exercised.
No holder, as such, of any Redeemable Warrant shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock for any purpose
whatsoever until such Redeemable Warrant has been duly exercised and the
Purchase Price has been paid.
The Company has undertaken to use reasonable efforts to continue to
maintain the effectiveness of a registration statement with the Securities and
Exchange Commission with respect to the Common Stock underlying the Redeemable
Warrants. See "Risk Factors--Current Prospectus and State Registration Required
to Exercise Redeemable Warrants."
REPRESENTATIVE'S WARRANTS
In connection with the IPO, the Company sold to the Representative of the
underwriters of the Company's IPO, for nominal consideration, warrants to
purchase up to 100,000 shares of Common Stock and 100,000 Redeemable Warrants
(referred to herein as the "Representative's Warrants). The Representative's
Warrants are initially exercisable for a period of four years commencing June
22, 1995, at a price of $6.00 per share and $0.30 per Redeemable Warrant (120%
of the Price to Public in the IPO). The shares of Common Stock and Redeemable
Warrants issuable upon exercise of the Representative's Warrants are identical
to those offered to the public. Holders of the Representative's Warrants are
protected against dilution of the equity interest represented by the underlying
shares upon the occurrence of certain events, including stock splits and stock
dividends. In the event of liquidation, dissolution or winding up of the
Company, holders of the Representative's Warrants are not entitled to
participate in the Company's assets.
The Company has agreed that, upon written request of the then holders of at
least a majority of the Representative's Warrants and of the securities issued
upon exercise of the Representative's Warrants made at any time during the four-
year exercise period, the Company will file not more than once, a Registration
Statement under the Securities Act registering for sale the shares of Common
Stock and the Redeemable Warrants underlying the Representative's Warrants and
the shares of Common Stock underlying the Redeemable Warrants (collectively the
"Warrant Securities"). This right is given at no additional cost to the holders
of the Representative's Warrants. The Company also will file a Registration
Statement upon the request of the holders of at least a majority of the
Representative's Warrants and of the securities issued upon exercise of the
Representative's Warrants to register the Warrant Securities at the holders'
expense at any time during the period beginning June 22, 1995 and ending June
22, 2001. In addition, if at any time during the period commencing June 22,
1995 and ending June 22, 2001, the Company registers any of its securities, the
holders of the Representative's Warrants will have the right, in certain
circumstances, to include in such Registration Statement, at the Company's
expense, the Warrant Securities.
TRANSFER AND WARRANT AGENT
The transfer agent and warrant agent for the Common Stock and Redeemable
Warrants, respectively, is American Securities Transfer, Inc., 1825 Lawrence
Street, Suite 444, Denver, Colorado 80202-1817.
36
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, 3,400,000 shares (the "Outstanding
Shares") of the Company's Common Stock are outstanding. A total of 957,750
Outstanding Shares are, any shares issued upon exercise of the Redeemable
Warrants (up to 500,000 shares) will be, freely tradeable without restriction or
further registration under the Securities Act, except for any shares held by
"affiliates" of the Company within the meaning of the Securities Act, which
shares will be subject to the resale restrictions of Rule 144. The remaining
2,442,250 Outstanding Shares are "restricted securities" as that term is defined
under Rule 144 (the "Restricted Shares"). Sales of Restricted Shares in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the Units, the Common Stock and the Redeemable
Warrants.
Of the 2,442,250 Restricted Shares, (i) 1,472,556 shares are eligible for
immediate sale in the public market without restriction pursuant to Rule 144(k)
and (ii) 969,694 shares (plus 104,999 shares issuable upon exercise of employee
and non-employee director stock options vested as of the date of this
Prospectus) will be eligible for sale in the public market subject to compliance
with Rule 144 or Rule 144(k).
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who has beneficially owned
"restricted securities," as that term is defined in Rule 144, for at least two
years is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of (i) one percent of the then outstanding
shares of Common Stock of the Company or (ii) the average weekly trading volume
in Common Stock during the four calendar weeks preceding such sale, provided
that certain public information about the Company, as required by Rule 144, is
then available and the seller complies with certain other requirements. A
person who is not an affiliate, has not been an affiliate within three months
prior to sale and has beneficially owned restricted securities for at least
three years, is entitled to sell such shares under Rule 144(k) without
restriction under Rule 144, including the volume limitations described above.
"Affiliates" of the Company generally would include the directors and officers
of the Company and any other person or entity which controls, is controlled by,
or is under common control with the Company.
The Company is unable to estimate accurately the number of Restricted
Shares that will be sold under Rule 144 since this will depend in part on the
market price for the Common Stock, the personal circumstances of the sellers and
other factors.
TERMS OF THE OFFERING
The shares of Common Stock being offered hereby may be purchased upon the
exercise of the Redeemable Warrants sold by the Company as part of the IPO in
June 1994. Two Redeemable Warrants entitle the holder to purchase one share of
Common Stock at a price of $6.50 (subject to adjustment in certain instances) at
any time until April 30, 1997, unless extended. Warrantholders who wish to
exercise their Redeemable Warrants must deliver executed Redeemable Warrants
with the Subscription Form, duly completed and executed, accompanied with a
check made payable to the Warrant Agent for the account of the Company. All
payments must be received by the Warrant Agent no later than 5:00 p.m. (Denver
time) on April 30, 1997, and Redeemable Warrants not exercised on or prior to
that date will expire. See "Description of Securities--Redeemable Warrants."
No sales commissions will be paid in connection with this offering.
The Company has made no decision as of the date of this Prospectus to
either redeem the Redeemable Warrants or to extend the Expiration Date.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
has been passed upon for the Company by Baker & Hostetler, Denver, Colorado.
37
<PAGE>
EXPERTS
The financial statements as of December 31, 1995 and the years ended
December 31, 1994 and 1995 included in this Prospectus and the Registration
Statement have been audited by HEIN + ASSOCIATES LLP, independent certified
public accountants, to the extent and for the periods indicated in their report
appearing elsewhere herein. Such financial statements have been included in
reliance upon such report and upon the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 with respect to the shares
of Common Stock being offered hereby. This Prospectus, filed as part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company, the Common Stock and the Redeemable
Warrants, reference is made to the Registration Statement and to the exhibits
thereto. Statements made in the Prospectus as to the contents of any contract,
agreement or document referred to are not necessarily complete, and in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, and each such statement is
qualified in its entirety by such reference. Any interested party may inspect
the Registration Statement and exhibits thereto, without charge, at the public
reference facilities of the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its
regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New
York, New York 10048. Any interested party may obtain copies of all or any
portion of the Registration Statement and exhibits thereto at prescribed rates
from the Public Reference Section of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices referenced
above. Copies of such material may also be obtained from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants like the Company that file electronically with the
Commission. The address of such site is http://www.sec.gov. The Common Stock and
Redeemable Warrants are quoted on the NASDAQ National Market, and certain of the
Company's reports, proxy statements and other information should be available
for inspection at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Accountants..................... F-1
Financial Statements:
Balance Sheets...................................... F-2
Statements of Income................................ F-3
Statements of Shareholders' Equity.................. F-4
Statements of Cash Flows............................ F-5
Notes to Financial Statements....................... F-6
</TABLE>
39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Avert, Inc.
Fort Collins, Colorado
We have audited the accompanying balance sheet of Avert, Inc. as of December 31,
1995, and the related statements of income, shareholders' equity and cash flows
for the years ended December 31, 1994 and 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Avert, Inc. as of December 31,
1995, and the results of its operations and its cash flows for the years ended
December 31, 1994 and 1995, in conformity with generally accepted accounting
principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 16, 1996
F-1
<PAGE>
AVERT, INC.
BALANCE SHEETS
December 31, June 30,
1995 1996
------------ ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 159,700 $ 73,800
Marketable securities 5,966,500 5,423,800
Accounts receivable, net of allowance
of $47,900 and $62,800, respectively 607,900 926,800
Prepaid expenses and other 240,600 153,000
---------- ----------
Total current assets 6,974,700 6,577,400
PROPERTY AND EQUIPMENT, net 1,389,100 2,028,700
OTHER ASSETS 19,400 19,400
---------- ----------
TOTAL ASSETS $8,383,200 $8,625,500
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 407,900 $ 310,700
Accrued expenses 81,300 72,900
Deferred revenue 58,600 55,500
---------- ----------
Total current liabilities 547,800 439,100
COMMITMENTS (NOTE 5)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
authorized 1,000,000 shares; none
outstanding - -
Common stock, no par value, authorized
9,000,000 shares; 3,442,250 and
3,418,250 shares issued and
outstanding, respectively 4,960,600 4,850,200
Retained earnings 2,874,800 3,336,200
---------- ----------
Total shareholders' equity 7,835,400 8,186,400
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $8,383,200 $8,625,500
========== ==========
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
AVERT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the
For the Years Ended Six Months Ended
December 31, June 30,
------------------------ ------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES:
Search and product fees $4,534,800 $5,690,900 $2,579,900 $3,412,000
Interest and other income 170,000 373,700 196,700 208,100
---------- ---------- ---------- ----------
4,704,800 6,064,600 2,776,600 3,620,100
EXPENSES:
Search and product costs 1,643,500 2,522,700 1,047,200 1,492,400
Marketing 453,600 890,600 363,500 610,100
General and administrative 823,500 930,600 494,100 515,400
Software development 180,200 245,500 113,900 176,900
Depreciation 98,500 104,300 53,800 80,500
---------- ---------- ---------- ----------
3,199,300 4,693,700 2,072,500 2,875,300
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,505,500 1,370,900 704,100 744,800
Income tax expense (535,700) (513,700) (263,300) (283,300)
---------- ---------- ---------- ----------
NET INCOME $ 969,800 $ 857,200 $ 440,800 $ 461,500
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $.33 $.25 $.13 $.13
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,971,000 3,450,000 3,450,000 3,427,800
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
AVERT INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FROM JANUARY 1, 1994 THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1994 2,442,250 $ 578,300 $ 1,047,800 $ 1,626,100
Proceeds from sale of units
in public offering, net 1,000,000 4,382,300 - 4,382,300
Net income - - 969,800 969,800
------------- ------------ ----------- --------------
BALANCES, December 31, 1994 3,442,250 4,960,600 2,017,600 6,978,200
Net income - - 857,200 857,200
------------- ------------ ----------- --------------
BALANCES, December 31, 1995 3,442,250 4,960,600 2,874,800 7,835,400
Payments to retire common stock
(unaudited) (24,000) (110,500) - (110,500)
Net income (unaudited) - - 461,500 461,500
------------- ------------ ----------- --------------
BALANCES, June 30, 1996
(Unaudited) 3,418,250 $ 4,850,100 $ 3,336,300 $ 8,186,400
============= ============ =========== ==============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
AVERT INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
For the Years Ended Six Months Ended
December 31, June 30,
------------------------- ---------------------
1994 1995 1995 1996
----------- ----------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 969,800 $ 857,200 $ 440,800 $ 461,500
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 98,500 104,300 53,800 80,500
Bad debt expense 24,600 42,200 11,000 14,900
Deferred income taxes (38,400) 49,000 - -
Loss (gain) on sale of asset (2,500) 400 - -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (185,900) (117,900) (125,200) (333,800)
Prepaid expenses and other current assets (69,100) (61,800) 33,000 87,600
Other assets (22,100) 22,000 (2,500) -
Increase (decrease) in:
Accounts payable 46,400 270,100 170,700 (97,100)
Accrued expenses (156,400) (50,900) (50,800) (16,800)
Income taxes payable 103,800 (184,000) (184,000) 8,200
Deferred revenue and deposits 14,900 (47,200) (17,900) (3,000)
----------- ----------- --------- ---------
Net cash provided by operating activities 783,600 883,400 328,900 202,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (357,300) (1,005,800) (387,400) (720,100)
Purchase of marketable securities (6,000,000) (9,237,000) (272,800) -
Proceeds from maturity of marketable securities 1,093,400 8,777,100 - 542,700
Proceeds from sale of property and equipment 2,500 3,700 - -
----------- ----------- --------- ---------
Net cash used in investing activities (5,261,400) (1,462,000) (660,200) (177,400)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to retire common stock - - - (110,500)
Proceeds from sale of units (net) 4,382,300 - - -
----------- ----------- --------- ---------
Net cash provided by (used in)
financing activities 4,382,300 - - (110,500)
DECREASE IN CASH AND CASH EQUIVALENTS (95,500) (578,600) (331,300) (85,900)
CASH AND CASH EQUIVALENTS, beginning of year 833,800 738,300 738,300 159,700
----------- ----------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 738,300 $ 159,700 $ 407,000 $ 73,800
=========== =========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-
Income taxes paid $ 470,200 $ 734,700 $ 279,900 $ 181,000
=========== =========== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1995 is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Organization and Nature of Operations - Avert, Inc. (the Company) was
-------------------------------------
incorporated in Colorado in 1986 to develop the use of databases to
accumulate and provide information for sale relating to an individual's
workers' compensation claims, criminal history, driving record, credit
rating, education, and previous employment. The Company provides this
service to a diverse group of customers throughout the United States.
Cash Equivalents - For purposes of the statement of cash flows, all
----------------
highly liquid debt instruments with original maturities of three months
or less are considered to be cash equivalents. As of December 31, 1995,
the Company had $223,200 in cash equivalents, which consisted of money
market funds at one financial institution.
Marketable Securities - Marketable securities consist of government
---------------------
backed debt securities which mature within one year or less. The
securities are classified as trading securities and are stated at market
which approximates cost at December 31, 1995.
Concentration of Credit Risk and Financial Instruments - Financial
------------------------------------------------------
instruments which potentially expose the Company to concentrations of
credit risk, as defined by Financial Accounting Standards Board's
Statement No. 105, "Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentration
of Credit Risk," consist primarily of cash equivalents, short-term
investments and accounts receivable with the Company's various customers.
The estimated fair values for financial instruments are determined at
discrete points in time based on relevant market information. These
estimates involve uncertainties and cannot be determined with precision.
At December 31, 1995, the estimated fair market value of the Company's
financial instruments approximate the carrying value.
The Company's cash equivalents and short-term investments consist of
money market funds and government backed debt securities issued by
various institutions. As of December 31, 1995, approximately $245,000 of
cash equivalents and short-term investments were not covered by the
FDIC's basic depository insurance. The Company's credit policy is
designed to limit the Company's exposure to concentrations of credit
risk. Accordingly, the Company's accounts receivable include a variety of
organizations throughout the United States. The Company estimates an
allowance for uncollectible amounts based upon a percentage of revenue,
and when specific credit problems arise. Management's estimates have been
adequate during historical periods, and management believes that all
significant credit risks have been identified at December 31, 1995.
Property and Equipment - Property and equipment are stated at cost.
----------------------
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which is generally five years. In
1995, the Company began construction on a new building, which was
completed in early 1996. Depreciation on this building will commence in
1996 and will be over 30 years.
F-6
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
Capitalized computer software, for which the net carrying value was
approximately $11,500 at December 31, 1995, was purchased from unrelated third
parties. The Company also incurs internal costs for computer software
development for enhancing and maintaining its data base system and to provide
"on-line" services to its customers. Capitalized software costs generally will
be amortized five years once the project is completed.
Impairment of Long-Lived Assets - Effective January 1, 1996, the Company
- -------------------------------
adopted Financial Accounting Standards Board Statement 121 (FAS 121). In the
event that facts and circumstances indicate that the cost of assets or other
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
required. Adoption of FAS 121 had no effect on the unaudited June 30, 1996
financial statements.
Income Taxes - The Company accounts for income taxes under the liability
- ------------
method, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Deferred Revenue - This amount generally represents amounts received in
- ----------------
advance from customers for future service.
Net Income Per Share - Net income per share is computed based upon the
- --------------------
weighted average number of shares outstanding during the periods, including
common stock equivalents outstanding during the periods.
Stock Based Compensation - In October 1995, the Financial Accounting Standards
- ------------------------
Board issued a new statement titled "Accounting for Stock-Based Compensation"
(FAS 123). The new statement is effective for fiscal years beginning after
December 15, 1995. FAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and other
equity instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the new
method in the notes to the financial statements. Transactions in equity
instruments with non-employees for goods or services must be accounted for on
the fair value method. The Company has elected not to adopt the fair value
accounting prescribed by FAS 123 for employees, and will be subject only to the
disclosure requirements prescribed by FAS 123.
Use of Estimates - The preparation of the Company's financial statements in
- ----------------
conformity with generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Actual results could differ
from those estimates.
Unaudited Information - The balance sheet as of June 30, 1996 and the income
- ---------------------
statements for the six months ended June 30, 1995 and 1996 were taken from the
Company's books and records without audit.
F-7
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
However, in the opinion of management, such information includes all
adjustments (consisting only of normal recurring accruals) which are necessary
to properly reflect the financial position of the Company as of June 30, 1996
and the results of operations for the six months ended June 30, 1995 and 1996.
The results of operations for the interim periods presented are not
necessarily indicative of those expected for the year.
2 SHAREHOLDERS' EQUITY:
--------------------
Stock Option Plan - In 1994, the Company adopted a stock incentive plan that
-----------------
authorizes the issuance of up to 366,337 shares of common stock. Pursuant to
the plan, the Company may grant "incentive stock options" (intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended), non-
qualified stock options and restricted stock or a combination thereof.
Incentive and non-qualified stock options may not be granted at an exercise
price of less than the fair market value of the common stock on the date of
grant (except for holders of more than 10% of common stock, whereby the
exercise price must be at least 110% of the fair market value at the date of
grant for incentive stock options). The term of the options may not exceed
ten years. In June 1994, options were granted under the plan to purchase
230,000 shares (including 200,000 shares to the Company's President) of which
approximately 124,500 options are vested as of June 30, 1996, and the balance
will vest over two to three years. These options are exercisable through
April 2004 at $5.25 per share. In 1996, an additional 130,000 options were
granted, exercisable at prices ranging from $5.00 to $6.50. These options
vest over the next five years and none are currently vested. No options have
been exercised.
In 1994, the Company adopted the Non Employee Directors' Stock Option Plan
(Outside Directors' Plan), which provides for the grant of stock options to
non-employee directors of the Company and any subsidiary. An aggregate of
30,000 shares of common stock are reserved for issuance under the Outside
Directors' Plan. The exercise price of the options will be the fair market
value of the stock on the date of grant. Outside directors are automatically
granted options to purchase 1,000 shares initially and an additional 1,000
shares for each subsequent year that they serve, up to a maximum of 5,000
shares per director. Each option is exercisable one year after the date of
grant and expires four years thereafter. In June 1994, two outside directors
were granted options to purchase 1,000 shares each, exercisable at $5.25 per
share. In 1995, three outside directors were granted 1,000 shares each
exercisable between $6.00 and $6.25 per share. No options have been
exercised.
F-8
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1995 is Unaudited)
The following is a table of activity under these plans.
<TABLE>
<CAPTION>
Stock Non-employee
Incentive Directors Stock Exercise
Option Plan Option Plan Price
----------- --------------- -----------
<S> <C> <C> <C>
OPTIONS OUTSTANDING, January 1, 1994 - - $ -
Options granted 230,000 2,000 5.25
----------- ---------------
OPTIONS OUTSTANDING, December 31, 1994 230,000 2,000
Options granted - 3,000 $ 6.00-6.25
----------- ---------------
OPTIONS OUTSTANDING, December 31, 1995 230,000 5,000
Options granted 130,000 3,000 $5.25-$5.75
----------- ---------------
OPTIONS OUTSTANDING, June 30, 1996 360,000 8,000
=========== ===============
</TABLE>
Public Offering - In June 1994, the Company completed its initial public
---------------
offering of 1,000,000 units and received net proceeds of $4,382,300. Each
unit sold for $5.25 and consisted of one share of common stock and one
redeemable warrant. Two redeemable warrants entitles the holder to purchase
one share of common stock for $6.50 through April 1997, unless further
extended by the Company. The warrants are redeemable under certain
circumstances by the Company. In connection with this offering, the
underwriter received a redeemable warrant to purchase 100,000 units at $6.30
per unit. This redeemable warrant is exercisable through June 1999. No
redeemable warrants have been exercised as of December 31, 1995.
Preferred Stock - The Company has authorized 1,000,000 shares of preferred
---------------
stock. Such shares are issuable in such series and preferences as may be
determined by the Board of Directors.
3. INCOME TAXES:
Income tax expense (benefit) consists of the following:
December 31, June 30,
-------------------- -------------------
1994 1995 1995 1996
-------- -------- -------- --------
Current $574,100 $464,700 $263,300 $283,200
Deferred (38,400) 49,000 - -
-------- -------- -------- --------
Total income tax expense $535,700 $513,700 $263,300 $283,200
======== ======== ======== ========
F-9
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1995 is Unaudited)
Total income tax expense differed from the amounts computed by applying the
Federal income tax rate of 34% to income before income taxes, primarily as a
result of the effect of state income taxes.
Temporary differences between the financial statement carrying amounts and
tax basis of assets and liabilities that give rise to the net deferred tax
assets (which are classified with other assets) relate primarily to the
following at December 31, 1995:
Deferred tax assets (liabilities) - current:
Deferred revenue $ 21,900
Allowance for doubtful accounts and other 18,000
Accrued interest (31,000)
--------
$ 8,900
========
Deferred tax assets - long-term -
Depreciation and amortization $ 8,000
========
4. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment consist of the following:
December 31, June 30,
1995 1996
------------ ----------
Land $ 210,000 $ 210,300
Building - construction in progress 940,200 -
Building - 1,177,600
Computer hardware and purchased software 426,300 688,100
Furniture and equipment 245,000 465,500
------------ ----------
1,821,500 2,541,500
Less accumulated depreciation (432,400) (512,800)
------------ ----------
$ 1,389,100 $2,028,700
============ ==========
5. COMMITMENTS:
-----------
Leases - The Company leases its office space under a lease which expires in
------
1996. The total future commitment, net of sublease income, is approximately
$16,000 for 1996. Total rent expense in connection with this lease was
$38,400 and $39,200 for the years ended December 31, 1994 and 1995,
respectively.
F-10
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Period Subsequent to December 31, 1995 is Unaudited)
Employee Bonus - In 1994, the Company formalized a five-year employment
--------------
agreement with the president effective January 1, 1994, under which his base
salary increased to $96,000 per year and he will receive a bonus of 6% of
income before taxes and bonus, but after deducting investment income. The
total bonus expense for 1994 and 1995 was approximately $86,000 and $63,900,
respectively.
401(k) Savings - In 1995, the Company implemented a 401(k) profit sharing
--------------
plan (the Plan). Eligible employees may make voluntary contributions to the
Plan, which are matched by the Company equal to 50% of the employee's
contribution up to a maximum of $1,500. The amount of employee contributions
is limited as specified in the Plan. Total company contributions to the Plan
in 1995 was $6,600.
F-11
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
___________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
The Company.............................. 5
Risk Factors............................. 5
Use of Proceeds.......................... 9
Price Range of Common Stock.............. 9
Dividend Policy.......................... 10
Capitalization........................... 10
Selected Financial Data.................. 10
Management's Discussion and Analysis or
Plan of Operation..................... 12
Business................................. 18
Management............................... 26
Principal Shareholders................... 33
Description of Securities................ 34
Shares Eligible for Future Sale.......... 37
Terms of the Offering.................... 37
Legal Matters............................ 37
Experts.................................. 38
Additional Information................... 38
Index to Financial Statements............ 39
</TABLE>
500,000 SHARES OF
COMMON STOCK
UPON EXERCISE OF
REDEEMABLE WARRANTS
AVERT, INC.
____________________
PROSPECTUS
____________________
November 12, 1996
