U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 0-23952
AVERT, INC.
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(Name of small business issuer in its charter)
COLORADO 84-1028716
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 REMINGTON, FORT COLLINS, COLORADO 80524
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (970) 484-7722
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, No Par Value REDEEMABLE WARRANTS
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(Title of class) (Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or an
amendment to this Form KSB. [ ]
The issuer's revenues for the year ended December 31, 1996 were $8,033,000.
The aggregate market value of the voting stock held by non-affiliates of
the issuer as of March 14, 1997 was $15,841,839.
As of March 14, 1997, the issuer had outstanding 3,400,000 shares of Common
Stock, No par Value, its only class of Common Stock.
DOCUMENT INCORPORATED BY REFERENCE
The following document is incorporated by reference into Part III of this
Annual Report on Form 10-KSB: Definitive Proxy Statement for the issuer's 1997
Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
This document consists of a total of 36 pages including the Exhibit Index
beginning on page 34.
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Part I
"The Company" or "Avert" is used in this report to refer to Avert, Inc. The
Company may from time to time make written or oral forward-looking statements,
including statements contained in the Company's filings with the Securities and
Exchange Commission and its reports to shareholders. Item 1 contains
forward-looking statements that are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
statements include, without limitation, statements relating to Avert's growth
and business strategies, regulatory matters affecting Avert, other plans and
objectives of Avert, management for future operations and activities, expansion
and growth of Avert's operations and other such matters. The words "believes,"
"expects," "intends," "strategy," "considers" or "anticipates" and similar
expressions identify forward-looking statements. The Company does not undertake
to update, revise or correct any of the forward-looking information. Readers are
cautioned that such forward-looking statements should be read in conjunction
with the Company's disclosures under the heading: "Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995" beginning on page 10.
ITEM 1. Description of Business.
General
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 initial public offering ("IPO")
of 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 began
trading separately on the NASDAQ National Market on that date. The net proceeds
from the IPO, totaling approximately $4,382,300, are currently intended to be
used to acquire other companies, assets, and/or product lines that either
complement or expand the Company's existing business. Two Redeemable Warrants
entitled the holder to purchase one share of Common Stock at a price of $6.50
per share. The expiration date of the Redeemable Warrants was initially December
22, 1995, but was extended to April 30, 1996 and has been further extended to
April 30, 1997.
Avert 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 consists 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 7,500 customers located throughout the United States.
During 1996, sales were made in 50 states, with approximately 64% of total sales
having been made in 11 states (California, Colorado, Florida, Georgia, Illinois,
Kansas, Missouri, North Carolina, Oregon, Tennessee, and Texas), with Colorado
sales representing approximately 15% 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 to develop new ones and pursue acquisitions of other
companies, assets and/or product lines that either complement or expand its
existing business.
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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:
o High risk of liability for negligent hiring lawsuits relating to the action
or inaction of employees; Physically demanding jobs;
o Employees with access to goods and cash of employers;
o High employee turnover; and
o 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 employers 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.
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 persons and
small companies variously located throughout the United States. The couriers are
engaged as independent contractors by written agreements 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
depository for this type of information. This information is retrieved by Avert
through its network courier system, computer access directly into the states and
certain counties or, in some instances, by facsimile, mail, and telephone.
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Workers' Compensation Histories--Used to confirm on-the-job injuries
in compliance with the Americans with Disabilities Act of 1990 (referred to
herein as 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 42 states through the use of its database and network courier system. Such
information from the remaining eight 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 date of attendance,
college degrees earned, or association credentials. This background information
is obtained by Avert personnel directly from the educational 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 and is not a fugitive from justice.
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.
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
Fair Credit Reporting Act, as amended ("FCRA). See "Government Regulation" below
in this Item 1. 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 and Title VII requirements. 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 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.
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 1,050 such
customers through December 31, 1996.
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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 seminar; (6) advertising in
trade publications; (7) maintaining a web page on the Internet; and (8)
mailing of quarterly news release to existing customers and to prospective
customers.
See "Marketing and Sales" below in this Item 1.
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 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 have 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. See "Marketing and Sales" below in this Item 1.
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 Report. No assurance can be
given that the Company will be successful in these efforts.
o 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.
o 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 benefits 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 spent approximately $450,000 during 1996, and
expects to spend an additional $1,050,000 to develop new software and
upgrade its existing software. See "Management's Discussion and Analysis or
Plan of Operation-Liquidity and Capital Resources", in Part II, Item 6,
below. A total of approximately $1,800 was spent in 1995.
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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. A
portion of 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.
Avert employs a direct marketing model for lead generation, marketing
communication and market development. There are 12 employees at the companies
headquarters in Fort Collins, Colorado, who are involved in marketing activities
and are managed by a Director of Marketing and Planning. Additionally, the
Company has established an indirect sales channel to convert leads to sales and
to implement territory development programs.
A significant portion of the Company's marketing budget is used for lead
generation programs. Various forms of direct marketing techniques such as
broadcast fax, direct mail and target advertising are used to generated leads.
Qualified leads are distributed to the Company's independent sales
representatives or handled by an in-house telemarketing expert. The Company's
marketing programs for territory development include, advertising, co-branding
with franchise customers, exhibitions at trade shows and public relations.
The indirect sales channel includes resellers who value-add to and private
label Avert products and independent sales representatives who are paid
commissions for selling Avert products. Currently there are approximately 179
resellers and eleven independent sale representatives
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 were added and revenues from existing national accounts
grew by more than 43% from 1995. Management expects to expand the national
accounts program during 1997.
In December, 1996, the Company entered into an agreement with an affiliate
of Ameritech Corporation to provide pre-employment screening information to
Ameritech's customer base through Ameritech's on-line service, CivicLink. There
have been no revenues from this agreement.
Customers
The Company currently has approximately 7,500 customers located throughout
the United States. During 1996, sales were made in all 50 states, with
approximately 64% of total sales having been made in 11 states (California,
Colorado, Florida, Georgia, Illinois, Kansas, Missouri, North Carolina, Oregon,
Tennessee, and Texas), with Colorado sales representing approximately 15% of
total sales. No single customer of Avert accounted for more than 8% of total
Avert sales during 1996 or 1995.
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.
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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 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 Averts 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 accuracy of the
information concerning the consumer about whom the report relates. See
subcaption "Legal Considerations" below in this Item 1. 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, education/credential 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.
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
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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 50 states in which
the Company sold its products and services during 1996 require consumer
reporting agencies, such as the Company, to obtain a license to conduce 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 the customers or the subject 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 which 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 only 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.
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Direct Competition. There are a 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 if 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 a total of 56 employees, of which seven are part-time and
49 are full full-time employees. Of these 56 employees, 12 full-time and two
part-time employees are involved in sales and marketing, five full-time
employees and one part-time employee are involved in finance and administration,
six full-time employees are involved in programming/information system and 26
full-time employees and four part-time employees are involved in data
processing/customer service. 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 11 geographic
territories. These independent sales representatives are paid on a commission
basis.
Item 2. Description of Property.
In order to meet its need for additional office space and to accommodate
anticipated growth, the Company has constructed an approximate 14,600 square
foot office building on a 29,400 square foot parcel of undeveloped land
purchased by it 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 1996. The cost of the land, as
well as 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
was 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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Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
--------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statement made by, or on behalf of,
the Company. The factors identified in this cautionary statement are important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its management, expresses an expectation or belief as to the future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
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 Colorado. As part of its continuing growth
strategy, the Company intends to accelerate market presence throughout the
United States, which 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 any proceeds received from the exercise
of the Redeemable Warrants sold as a part of the IPO 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 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. In addition, no portion of the
net proceeds of the IPO 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
Report. Accordingly, no assurance can be given that Avert will be successful in
acquiring other companies, assets or product lines.
Government Regulation. The Company is a "consumer reporting agency" within
the meaning of the term as used in the 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 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 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
10
<PAGE>
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 "Licensing Requirements," below in this section. 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.
Licensing Requirements. To the Company's knowledge, at least four states of
the 50 states in which the Company sold its products and services during 1996
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. 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.
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. The Company maintains for Avert's benefit a $1 million
key man life insurance policy on Mr. Suposs.
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. As more companies enter the market, and if larger, direct
11
<PAGE>
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.
--------------------------
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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 periods
indicated as reported by the NASDAQ National Market:
High Low
---- ---
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................................... 6-1/12 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 .................................. 8 5-3/8
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 above quotations reflect inter-dealer prices, without retail mark-up,
marked-down or commission and may not represent actual transactions.
There were approximately 191 holders of record (approximately 1,019
beneficial holders) of the Company's Common Stock on March 14, 1997.
The Company has not paid any cash dividends since the two-year period ended
December 31, 1993. 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.
The following subparagraphs set forth information concerning equity
securities sold during 1996 that were not registered under the Securities Act of
1933, as amended (the "Securities Act"):
(a) During January, June, July and December 1996, options to purchase a
total of 134,000 shares of the Company's Common Stock were granted under the
Amended and Restated Avert, Inc. 1994 Stock Incentive Plan (the "Stock Incentive
Plan") to four key employees of the Company. The exercise price for 60,000
shares underlying the options is $5.00 per share, the exercise price for 34,000
shares underlying the options is $5.75 per share, and the exercise price for the
remaining 40,000 shares underlying the options is $6.50 per share, for a total
exercise price under these options of $755,500. The options have a ten-year term
and vest at a rate of 20% per year beginning one year after the dates of the
respective grants. No underwriter was involved in the transactions, and no sales
commissions, fees, or similar compensation were paid to any person in connection
with the grant of these options. The Company believes that the grant of the
options and the continuing offer of the shares underlying the options was and is
exempt from the registration requirements of Section 5 of the Securities Act by
virtue of Section 4(2) thereof, as transactions not involving any public
offering. More specifically, each of the optionees is a key employee of the
Company and is able to fend for himself or herself with access to information
upon which an investment decision can be made.
12
<PAGE>
(b) During May and June, 1996, options to purchase a total of 3,000 shares
(1,000 shares each) of the Company's Common Stock were automatically granted
under the Avert, Inc. Non-Employee Directors Stock Option Plan to Stephen D.
Joyce, D. Michael Vaughan, and Stephen C. Fienhold, three of the Company's
directors. The exercise price for the 1,000 shares underlying the options
granted to Mr. Joyce is $5.00 per share and the exercise price of the 2,000
shares (1,000 shares each) underlying the options granted to Messrs. Vaughan and
Fienhold is $5.25 per share, for a total exercise price under these options of
$15,500. The options have a five-year term and vest one year after the dates of
the respective grants. No underwriter was involved in the transactions, and no
sales commissions, fees, or similar compensation were paid to any person in
connection with the grant of the options. The Company believes that the grant of
the options and the continuing offer of the shares underlying the options was
and is exempt from the registration requirements of Section 5 of the Securities
Act by virtue of Section 4(2) thereof, as transactions not involving any public
offering. More specifically, each of the optionees is a director of the Company
and is able to fend for himself with access to information upon which an
investment decision can be made.
Item 6. Management's Discussion and Analysis or Plan of Operation.
This Item 6 contains forward-looking statements that are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These statements include, without limitation, statements relating to
growth in sales, liquidity, Avert expectations regarding new software and
software upgrades and related funding, impact of inflation on operations and
other such matters. The words "expected," "believes," "expects" or "estimates"
and similar expressions identify forward-looking statements. The Company does
not undertake to update, revise or correct any of the forward-looking
information. Readers are cautioned that such forward-looking statements should
be read in conjunction with the Company's disclosures under the heading:
"Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the
Private Securities Litigation Reform Act of 1995" beginning on page 10.
Results of Operations
Comparison of years ended December 31, 1996 and December 31, 1995
Net revenues increased from $6,064,600 in 1995 to $8,032,500 in 1996 or
32.4%. This increase was due to the continued overall growth of the Company's
customer base, the implementation of the Avert Advantage program, the addition
of various services, and expanded reference checking product. 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, 1996 December 31, 1995
------------------ ---------------------
% of % of Percent of
Revenues Revenues Revenues Revenues Increase/(Decrease)
-------- -------- -------- -------- ------------------
Products:
<S> <C> <C> <C> <C> <C>
Workers' compensation
histories ................. $1,240,700 15.4% $1,256,300 20.7% (1.2%)
Criminal history reports ........ $4,078,900 50.8% $2,929,400 48.3% 39.2%
Reference Checking/credit
reports ................... $ 904,300 11.3% $ 554,900 9.1% 63.0%
Motor vehicle driving records .... $ 954,100 11.9% $ 762,200 12.6% 25.2%
Other products/services: ........ $ 412,100 5.1% $ 279,500 4.6% 47.4%
Education/Credential
verification
Social security number
check
Name Link
Employment application
forms
Service sales
Interest income .................... $ 314,700 3.9% $ 369,300 6.1% (14.8)%
Net Revenues ....................... $8,032,500 $ 6,064,600 32.4%
</TABLE>
13
<PAGE>
Moderate to strong growth continued during 1996 on all products of the
Company with one exception, workers' compensation histories. Although net
revenues from workers' compensation histories continue to decrease as a
percentage of total net revenues, workers' compensation histories are still the
second largest product line representing approximately 15.4% of total net
revenues in 1996. Sales of workers' compensation histories are expected to
continue to be a viable product as the Company continues to educate customers
and continues workers' compensation marketing campaigns.
In total dollars, criminal history reports contributed the most net
revenues and the largest increase in net revenues, representing approximately
$1,149,500 of the approximately $1,967,900 increase in net revenues in 1996 over
1995. The criminal history reports product line contributed approximately 50.8%
of total net revenues in 1996 as compared to approximately 48.3% of total net
revenues in 1995. The Company believes there is a continuing trend nationwide to
check prospective employees' criminal records. To take advantage of this trend,
the Company continues to focus on obtaining the quickest, most accurate data
available.
The increase in net revenues from motor vehicle driving records of
approximately $191,900 in 1996 over 1995 represented an approximate 25.2%
increase in net revenues for this product line. The percentage of total net
revenues derived from sales of this product line decreased from approximately
12.6% in 1995 to approximately 11.9% in 1996.
Net revenues generated in the area of reference checking/credit reports
increased from approximately $554,900 in 1995 to approximately $904,300 in 1996,
representing an increase of approximately 63.0%. The reference checking product
was expanded to include four types of references designed to meet specific needs
of customers. These products represented approximately 11.3% of total net
revenues in 1996, as compared to approximately 9.1% of total net revenues in
1995.
There were also increased revenues generated in the areas of
education/credential verification, which increased from $41,600 in 1995 to
$96,400 in 1996, and Name Link, which increased from, $95,200 in 1995 to
$168,900 in 1996.
Service sales, which are not itemized in the chart above, increased from
$69,600 in 1995 to $257,200 in 1996. This is primarily attributable to the
implementation of the Avert Advantage program in July 1996, which accounted for
$54,500 in 1996. Start-up fee income increased from $33,600 in 1995 to $84,300
in 1996. In addition, staff entry fees accounted for $49,700 of service sales in
1996. These fees were incorporated in product sales in 1995, but are in service
sales in 1996. In addition, a variety of services that were not offered in 1995
were offered in 1996 and produced approximately $39,100 in revenues in 1996.
These products and services accounted for the majority portion of "other
products/services" in the above table.
14
<PAGE>
Income before income taxes increased from $1,371,000 in 1995 to $1,774,000
in 1996 or approximately 29.4% and represented approximately 22.1% of net
revenues in 1996 compared to approximately 22.6% in 1995. Search and product and
general and administrative expenses decreased as a percentage of total net
revenues. Marketing, software development and depreciation and amortization
expenses increased as a percentage of total net revenues. A breakdown of
expenses is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
-------------------- ------------------ Increase (Decrease)
% of % of % of Revenue
Expenses Revenue Expenses Revenue 1996 over 1995
-------- ------- -------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Search and product ....... $3,292,700 41.0% $2,522,700 41.6% (0.6)%
Marketing ................ 1,318,900 16.4% 890,600 14.7% 1.7%
General and administrative 1,109,800 13.8% 930,600 15.3% (1.5)%
Software development ..... 352,800 4.4% 245,500 4.0% 0.3%
Depreciation and
amortization .......... 185,200 4.4% 104,300 1.7% 0.6%
---------- ---- --------- ---- ---
Expenses .............. $6,259,400 77.9% $4,693,700 77.4% 0.5%
</TABLE>
The decrease in 1996 over 1995 of search and product fees as a percentage
of total net revenue was due to a continued internal focus on the development of
existing couriers and addition of new couriers and improved methods of
management of those entities used primarily in the retrieval of criminal
records.
Marketing expenses, as a percentage of total net revenues, increased from
approximately 14.7% in 1995 to approximately 16.4% in 1996 due to an on-going
marketing campaign designed to target lead generation, marketing communication
and market development for both current customers and new customers, via both
independent sales representatives and in-house marketing personnel.
The decrease in general and administrative expenses, expressed as a
percentage of total net revenues from 15.3% in 1995 to 13.8% in 1996 was largely
due to revenues increasing at a greater rate than expenses in this category.
The increase in software development expressed as a percentage of total net
revenues from approximately 4.0% in 1995 to approximately 4.4% in 1996 and was
primarily due to the addition of management for the information technology
department as well as consulting services. The Company continues to focus on
improving its computer link with customers, partners and suppliers. Such costs
are expensed in operations as incurred. In addition, as discussed in "Liquidity
and Capital Resources" below in this Item, the Company is developing new
software and upgrading its existing software. These costs are being capitalized.
After completion of this project (which at present is expected to occur in late
1997 or early 1998), the Company expects amortization costs to increase due to
the capitalized cost of this software. However, these increased costs are
expected to be offset by revenues generated by the improvements.
The increase in depreciation and amortization as a percentage of total net
revenues from approximately 1.7% in 1995 to approximately 2.3% in 1996 was
primarily due to $673,000 in computer hardware and $375,000 of furniture and
equipment purchased for the new office facility and placed in service in 1996.
The combined federal and state income tax rate for 1996 and 1995 was 40%
and 37%, respectively, resulting in net income of $1,065,600, or $.31 per share,
on 3,450,000 (weighted average shares plus common stock equivalents) for 1996,
as compared to net income of $857,200 or $0.25 per share, on 3,450,000 (weighted
average shares plus common stock equivalents) for 1995.
15
<PAGE>
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
-------------------- ---------------------
% of % of Percent of
Revenues Revenues Revenues Revenues Increase/(Decrease)
-------- -------- -------- -------- ------------------
Products:
<S> <C> <C> <C> <C> <C>
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/credential
verification
Social security number check
Name Link
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>
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 were 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
believed there to be 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 area 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 driving
records of approximately $111,600 from 1994 to 1995 represented an approximate
17.2% increase in net revenues for this product line.
16
<PAGE>
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>
Years Ended Years Ended
December 31, 1995 December 31, 1994 Increase (Decrease)
------------------ ----------------- ------------------
% of % of % of Revenue
Expenses Revenues Expenses Revenues 1995 over 1994
-------- -------- -------- -------- --------------
<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 4.0% 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 December 31, 1995.
Changes were made to the original marketing plan in late 1995 and the increase
in marketing expenses was 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 $0.25 per
share on 3,450,000 (weighted average) shares for 1994 as compared to net income
of $969,800 or $0.33 per share on 2,971,017 (weighted average) shares for 1994.
17
<PAGE>
Liquidity and Capital Resources
The Company's financial position at December 31, 1996, remained strong with
working capital at that date of $6,375,000 compared to $6,426,900 at December
31, 1995. Cash and cash equivalents at December 31, 1996 were $360,000 and
increased from $159,700 at December 31, 1995. Net cash provided from operations
for the year ended December 31, 1996, was $1,715,000, and consisted primarily of
net income of $1,065,500 less a $390,000 decrease in trading investments, and a
$211,000 net increase in accounts receivable. The Company had capital
expenditures of $1,317,000 for the year ended December 31, 1996, as compared to
$1,005,800 for 1995. The majority of this increase in the prior year was
attributable to the construction of an approximate 14,600 square feet office
building for use as its headquarters. The total construction costs were
approximately $1.2 million. Construction was financed by current available cash
derived from past operations. Completion was March, 1996. In the current year,
capital expenditures consisted of $673,000 in computer hardware and software
development in addition to $375,000 of furniture and equipment for the new
facility.
The Company expects to spend up to $1.5 million to develop new software and
upgrade its existing software, of which approximately $450,000 was incurred in
1996 in connection with this project. The majority of these are costs paid to
independent consultants. 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. 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.
Item 7. Financial Statements.
Financial Statements are filed as a part of this report at the end of Part
III hereof beginning at page F-1, Index to Consolidated Financial Statements,
and are incorporated herein by this reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
The information required by Part III is omitted from this report because
the Company will file a definitive Proxy Statement for the Company's 1997 Annual
Meeting of Shareholders (the "Proxy Statement") pursuant to Regulation 14A of
the Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year covered by this Form 10-KSB. Certain information included in the
aforementioned definitive Proxy Statement is incorporated herein by reference.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
18
<PAGE>
Item 10. Executive Compensation.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Articles of Incorporation, as amended, of the Registrant.(2)
3.2 Bylaws, as amended, of the Registrant. (2)
4.1 Excerpt from Articles of Incorporation of the Registrant Regarding
Common Stock and Preferred Stock (2)
4.2 Warrant Agreement, including form of Redeemable Warrant Certificate,
Subscription Form and Form of Assignment. (6)
4.3 Form of Representative's Warrant Agreement, including form of Warrant
Certificate, Purchase Form, and Assignment Form. (4)
10.1 Indenture of Lease dated September 3, 1991 re: Registrant's office
facility. (1)
10.1.1 Agreement to Alter Lease dated November 22, 1995. (8)
10.2 Form of Consumer Report User Agreement between Registrant and customer
of Registrant. (1)
10.3 Employment Agreement dated as of January 1, 1994, between the
Registrant and Dean A. Suposs. (2)
10.4 Consulting Agreement dated January 1, 1994, between the Registrant and
Michael D. DeWitt. (2)
10.4.1 Amendment No. 1 to Consulting Agreement between the Registrant and
Michael D. DeWitt, daJune 20, 1994. (4)
10.5 Form of Commission Agreement between the Registrant and Independent
Sales Representative. (1)
10.6 Employer Report Subscriber Agreement, dated March 29, 1991, between
the Registrant and TRW, Inc.(1)
10.7 Credit Bureau Service Agreement, dated March 30, 1992, between the
Registrant and TransUnion (1)
10.9 Amended and Restated 1994 Stock Incentive Plan.(3)
10.10 Non-Employee Directors' Stock Option Plan. (2)
10.11 Vacant Land/Farm and Ranch Contract to Buy and Sell Real Estate dated
September 26, 1994. (5)
10.12 Abbreviated Form of Agreement Between Owner and architect dated
October 9, 1994.(5)
10.13 Letter Agreements, Dated March 24, 1995, with Ace Hardware
Corporation and Loss Prevention Services relating to sales of the
Registrant's Products.(7)
10.14 Consulting Agreement with Neidiger/Tucker/Bruner, Inc.(6)
10.15 Employment Agreement dated January 1, 1996, between Leonard Koch and
the Registrant.(8)
10.15.1 Amended and Restated 1994 Stock Incentive Plan Incentive Stock
Option Agreement between Leonard Koch and the Registrant.(8)
10.16 Employment Agreement, dated June 10, 1996, between Jerry Thurber and
the Registrant. (8)
10.16.1 Amended and Restated 1994 Stock Incentive Plan Incentive Stock
Option Agreement, dated June 10, 1996, between Jerry Thurber and the
Registrant. (9)
10.17 Employment Agreement, dated July 1, 1996, between Jamie Burgat and
the Registrant. (9)
19
<PAGE>
10.17.1 Amendment to the Employment Agreement, dated July 1, 1996, between
Jamie Burgat and the Registrant. (9)
10.17.2 Amended and Restated 1994 Stock Incentive Plan Incentive Stock
Option Agreement, dated July 1, 1996, between Jamie Burgat and the
Registrant. (9)
- -------------------------
(1) Filed as an Exhibit to the initial Registration Statement (File No.
33-76726-D) filed with the Securities and Exchange Commission on March
21, 1994.
(2) Filed as an Exhibit to Amendment No. 1 to the Registration Statement
(File No. 33-76726-D) filed with the Securities and Exchange
Commission on April 26, 1994.
(3) Filed as an Exhibit to Amendment No. 2 to the Registration Statement
(File No. 33-76726-D) filed with the Securities and Exchange
Commission on May 24, 1994.
(4) Filed as an Exhibit to Amendment No. 4 to the Registration Statement
(File No. 33-76726-D) filed with the Securities and Exchange
Commission on June 21, 1994.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-QSB for the
quarterly period ended September 30, 1994, filed with the Securities
and Exchange Commission on November 11, 1994.
(6) Filed as an Exhibit to Form 10-KSB for the year ended December 31,
1994, filed with the Securities and Exchange Commission on March 13,
1995.
(7) Filed as an Exhibit to Post-Effective Amendment No. 1 to the
Registration Statement (File No. 33-76726-D) filed with the Securities
and Exchange Commission on May 4, 1995.
(8) Filed as an Exhibit to Form 10-KSB for the year ended December 31,
1995 filed with the Securities and Exchange Commission on March 9,
1996.
(9) Filed as an Exhibit to Post-Effective Amendment No. 2 to the
Registration Statement (File No. 33-76726-D) filed with the Securities
and Exchange Commission on October 23, 1996.
(b) Reports on Form 8-K.
The Registrant filed the following report on Form 8-K with the Securities
and Exchange Commission during the fourth quarter of 1996:
(i) Form 8-K dated October 28, 1996, reporting issuance of a press
release announcing financial results for the third quarter and
nine month period (Item 5).
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AVERT, INC.
Date: March 28, 1997 By: /s/ Dean A. Suposs
------------------------------------
Dean A. Suposs
President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities indicated as of March 28, 1997.
Signature Title
--------- -----
/s/ Dean A. Suposs Chairman of the Board; and President
- -----------------------------------
Dean A. Suposs
(Principal Executive Officer)
/s/ Michael D. DeWitt Secretary and Director
- -----------------------------------
Michael D. DeWitt
/s/ Jamie M. Burgat Vice President of Operations;
- ----------------------------------- Treasurer; and Assistant Secretary
Jamie M. Burgat
(Principal Financial and Accounting Officer)
/s/ D. Michael Vaughan Director
- -----------------------------------
D. Michael Vaughan
/s/ Stephen C. Fienhold Director
- -----------------------------------
Stephen C. Fienhold
/s/ Stephen D. Joyce Director
- -----------------------------------
Stephen D. Joyce
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants.................................. F-2
Financial Statements:
Balance Sheet......................................... F-3
Statements of Income ................................. F-4
Statement of Shareholders' Equity..................... F-5
Statements of Cash Flows..................... ........ F-6
Notes to Financial Statements......................... F-7
F-1
<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,
1996, and the related state ments of income, shareholders' equity and cash flows
for the years ended December 31, 1995 and 1996. 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 disclo sures 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,
1996, and the results of its operations and its cash flows for the years ended
December 31, 1995 and 1996, in conformity with generally accepted accounting
principles.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
February 21, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
AVERT, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 360,000
Marketable securities ........................................ 5,577,000
Accounts receivable, net of allowance of $75,000 ............. 788,000
Prepaid expenses and other ................................... 259,000
---------
Total current assets ................................ 6,984,000
PROPERTY AND EQUIPMENT, net ..................................... 2,511,000
---------
TOTAL ASSETS .................................................... $ 9,495,000
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................. $ 453,000
Accrued expenses ............................................. 156,000
---------
Total current liabilities ........................... 609,000
DEFERRED INCOME TAXES ........................................... 200,000
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;
3,400,000 shares issued and outstanding .................. 4,745,000
Retained earnings ............................................ 3,941,000
---------
Total shareholders' equity ........................... 8,686,000
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 9,495,000
=========
</TABLE>
See accompanying notes to these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AVERT, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
NET REVENUES:
Search and product fees .............................. $ 7,698,000 $ 5,691,000
Interest and other income ............................ 335,000 374,000
---------- ---------
8,033,000 6,065,000
EXPENSES:
Search and product costs ............................... 3,293,000 2,523,000
Marketing .............................................. 1,319,000 891,000
General and administrative ............................. 1,109,000 931,000
Software development ................................... 353,000 245,000
Depreciation ........................................... 185,000 104,000
---------- ---------
6,259,000 4,694,000
---------- ----------
INCOME BEFORE INCOME TAXES ................................. 1,774,000 1,371,000
Income tax expense ...................................... (708,000) (514,000)
---------- ---------
NET INCOME ................................................. $ 1,066,000 $ 857,000
========== =========
NET INCOME PER COMMON SHARE ................................ $ .31 $ .25
========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ................. 3,450,000 3,450,000
========== =========
</TABLE>
See accompanying notes to these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AVERT INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1996
COMMON STOCK TOTAL
----------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- ------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1995 ................... 3,442,000 $ 4,960,000 $ 2,018,000 $ 6,978,000
Net income ................................ -- -- 857,000 857,000
--------- --------- --------- ---------
BALANCES, December 31, 1995 ................. 3,442,000 4,960,000 2,875,000 7,835,000
Shares repurchased ...................... (42,000) (215,000) -- (215,000)
Net income .............................. -- -- 1,066,000 1,066,000
--------- --------- --------- ---------
BALANCES, December 31, 1996 ................. 3,400,000 $ 4,745,000 $ 3,941,000 $ 8,686,000
========= ========= ========= =========
</TABLE>
See accompanying notes to these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
AVERT INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 1,066,000 $ 857,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................. 185,000 104,000
Bad debt expense ............................................. 31,000 42,000
Deferred income taxes ........................................ 192,000 49,000
Loss (gain) on sale of asset ................................. (8,000) 1,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Trading investments, net ........................... 390,000 (460,000)
Accounts receivable ................................ (211,000) (118,000)
Prepaid expenses and other current assets .......... 24,000 (62,000)
Other assets ....................................... 3,000 23,000
Increase (decrease) in:
Accounts payable ................................... (56,000) 270,000
Accrued expenses ................................... 175,000 (51,000)
Income taxes payable ............................... (17,000) (184,000)
Deferred revenue and deposits ...................... (59,000) (47,000)
--------- --------
Net cash provided by operating activities .................... 1,715,000 424,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................. (1,317,000) (1,006,000)
Proceeds from sale of property and equipment ....................... 17,000 4,000
--------- --------
Net cash used in investing activities ................ (1,300,000) (1,002,000)
CASH FLOWS FROM FINANCING ACTIVITY -
Purchase of shares outstanding ..................................... (215,000) --
--------- --------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS ........................ 200,000 (578,000)
CASH AND CASH EQUIVALENTS, beginning of year ............................ 160,000 738,000
--------- --------
CASH AND CASH EQUIVALENTS, end of year .................................. $ 360,000 $ 160,000
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-
Income taxes paid .............................................. $ 533,000 $ 735,000
========= ========
</TABLE>
See accompanying notes to these financial statements.
F-6
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
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 and 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.
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, 1996.
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 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, 1996, approximately $427,000 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 more than adequate during
historical periods, and management believes that all significant credit
risks have been identified at December 31, 1996.
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 commenced in 1996 and will be
over 30 years.
The Company incurs costs for computer software development for enhancing
and maintaining its data base system and to provide "on-line" services to
its customers. During 1996, the Company capitalized $450,000 of internal
software costs, consisting principally of payments to third parties. These
capitalized software costs generally will be amortized over five years once
the project is completed, which is expected to be in late 1997.
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
F-7
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
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
December 31, 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.
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 by 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.
F-8
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1996:
Land ................................... $ 210,000
Building ............................... 1,211,000
Computer hardware and software ......... 1,120,000
Furniture and equipment ................ 540,000
-----------
3,081,000
Less accumulated depreciation .......... (570,000)
-----------
$ 2,511,000
===========
3. INCOME TAXES:
Income tax expense (benefit) consists of the following:
December 31,
-------------------
1996 1995
---- ----
Current .......................... $516,000 $465,000
Deferred ......................... 192,000 49,000
-------- --------
Total income tax expense .......... $708,000 $514,000
======== ========
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 lia bilities that give rise to the net deferred tax
liability related primarily to differences in capitalized software costs.
4. 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.
F-9
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
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. At December 31, 1996, the Company had granted options
under the plan to purchase 364,000 shares (including 200,000 shares to the
Company's President) of which 122,499 options are vested and the balance
will vest over one to five years. No options have been exercised. Options
outstanding for this plan at December 31, 1996 have exercise prices that
range from $5.00 to $6.50.
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. No options have
been exercised. Exercise prices for the directors' options outstanding at
December 31, 1996 range from $5.25 to $6.25.
The following is a table of activity under these plans.
<TABLE>
<CAPTION>
Weighted
Stock Non-employee Average
Incentive Directors Stock Exercise
Option Plan Option Plan Price
----------- --------------- --------
<S> <C> <C> <C> <C>
OPTIONS OUTSTANDING, January 1, 1995 ......... 230,000 2,000 $ 5.25
Options granted ........................... -- 3,000 $ 6.17
------- ------- ----
OPTIONS OUTSTANDING, December 31, 1995 ....... 230,000 5,000 $ 5.26
Options granted ............................ 134,000 3,000 $ 5.64
------- ------- ----
OPTIONS OUTSTANDING, December 31, 1996 ....... 364,000 8,000 $ 5.40
======= ======= ====
</TABLE>
For all options granted during 1996 and 1995, the weighted average market
price of the Company's common stock on the grant date was approximately
equal to the weighted average exercise price. The weighted average
remaining contractual life for all options and warrants as of December 31,
1996 was approximately 9.9 years. At December 31, 1996, options for 127,499
shares were exercisable and options for the remaining shares became
exercisable pro rata through 2001. If not previously exercised, options
outstanding at December 31, 1996, will expire as follows:
F-10
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
Weighted
Average
Number of Exercise
Year Shares Price
---- --------- --------
1999 ....................... 2,000 $ 5.25
2000 ....................... 3,000 $ 6.17
2001 ....................... 3,000 $ 5.58
2004 ....................... 230,000 $ 5.25
2006 ....................... 60,000 $ 5.00
2007 ....................... 74,000 $ 6.17
-------
372,000
=======
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options
and warrants which are granted to employees. Accordingly, no compensation
cost has been recognized for grants of options and warrants to employees
since the exercise prices were not less than the fair value of the
Company's common stock on the grant dates. Had compensation cost been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of FAS 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below.
Year Ended December 31,
-----------------------
1996 1995
---- ----
Net income applicable to common stockholders:
As reported ........................... $ 1,066,000 $ 857,000
Pro forma ............................. $ 965,000 $ 854,000
Net income per common share:
As reported ........................... $ .31 $ .25
Pro forma ............................. $ .28 $ .25
F-11
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
The fair value of each employee option and warrant granted in 1996 and 1995
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Year Ended December 31,
----------------------
1996 1995
---- ----
Expected volatility .............. 55.0% 70.0%
Risk-free interest rate .......... 6.5% 6.5%
Expected dividends ............... -- --
Expected terms (in years) ........ 9.9 5.0
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, 1996.
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.
5. COMMITMENTS:
Employee Bonus - In 1994, the Company formalized a five-year employment
agreement whereby the Company president receives a bonus of 6% of income
before taxes and bonus, but after deducting investment income. The total
bonus expense for 1996 and 1995 was approximately $93,000 and $64,000,
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. Company contributions to
the Plan in 1996 and 1995 was insignificant.
F-12
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
3.1 Articles of Incorporation, as amended, of the Registrant.(2)
3.2 Bylaws, as amended, of the Registrant. (2)
4.1 Excerpt from Articles of Incorporation of the Registrant Regarding
Common Stock and Preferred Stock (2)
4.2 Warrant Agreement, including form of Redeemable Warrant Certificate,
Subscription Form and Form of Assignment. (6)
4.3 Form of Representative's Warrant Agreement, including form of Warrant
Certificate, Purchase Form, and Assignment Form. (4)
10.1 Indenture of Lease dated September 3, 1991 re: Registrant's office
facility. (1)
10.1.1 Agreement to Alter Lease dated November 22, 1995. (8)
10.2 Form of Consumer Report User Agreement between Registrant and customer
of Registrant. (1)
10.3 Employment Agreement dated as of January 1, 1994, between the
Registrant and Dean A. Suposs. (2)
10.4 Consulting Agreement dated January 1, 1994, between the Registrant and
Michael D. DeWitt. (2)
10.4.1 Amendment No. 1 to Consulting Agreement between the Registrant and
Michael D. DeWitt, daJune 20, 1994. (4)
10.5 Form of Commission Agreement between the Registrant and Independent
Sales Representative. (1)
10.6 Employer Report Subscriber Agreement, dated March 29, 1991, between
the Registrant and TRW, Inc.(1)
10.7 Credit Bureau Service Agreement, dated March 30, 1992, between the
Registrant and TransUnion (1)
10.9 Amended and Restated 1994 Stock Incentive Plan.(3)
10.10 Non-Employee Directors' Stock Option Plan. (2)
10.11 Vacant Land/Farm and Ranch Contract to Buy and Sell Real Estate dated
September 26, 1994. (5)
10.12 Abbreviated Form of Agreement Between Owner and architect dated
October 9, 1994.(5)
10.13 Letter Agreements, Dated March 24, 1995, with Ace Hardware
Corporation and Loss Prevention Services relating to sales of the
Registrant's Products.(7)
10.14 Consulting Agreement with Neidiger/Tucker/Bruner, Inc.(6)
10.15 Employment Agreement dated January 1, 1996, between Leonard Koch and
the Registrant.(8)
10.15.1 Amended and Restated 1994 Stock Incentive Plan Incentive Stock
Option Agreement between Leonard Koch and the Registrant.(8)
10.16 Employment Agreement, dated June 10, 1996, between Jerry Thurber and
the Registrant. (8)
10.16.1 Amended and Restated 1994 Stock Incentive Plan Incentive Stock
Option Agreement, dated June 10, 1996, between Jerry Thurber and the
Registrant. (9)
10.17 Employment Agreement, dated July 1, 1996, between Jamie Burgat and
the Registrant. (9)
10.17.1 Amendment to the Employment Agreement, dated July 1, 1996, between
Jamie Burgat and the Registrant. (9)
10.17.2 Amended and Restated 1994 Stock Incentive Plan Incentive Stock
Option Agreement, dated July 1, 1996, between Jamie Burgat and the
Registrant. (9)
- -------------------------
(1) Filed as an Exhibit to the initial Registration Statement (File No.
33-76726-D) filed with the Securities and Exchange Commission on March
21, 1994.
(2) Filed as an Exhibit to Amendment No. 1 to the Registration Statement
(File No. 33-76726-D) filed with the Securities and Exchange
Commission on April 26, 1994.
(3) Filed as an Exhibit to Amendment No. 2 to the Registration Statement
(File No. 33-76726-D) filed with the Securities and Exchange
Commission on May 24, 1994.
<PAGE>
Exhibit
Number Document Description
- ------- --------------------
(4) Filed as an Exhibit to Amendment No. 4 to the Registration Statement
(File No. 33-76726-D) filed with the Securities and Exchange
Commission on June 21, 1994.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-QSB for the
quarterly period ended September 30, 1994, filed with the Securities
and Exchange Commission on November 11, 1994.
(6) Filed as an Exhibit to Form 10-KSB for the year ended December 31,
1994, filed with the Securities and Exchange Commission on March 13,
1995.
(7) Filed as an Exhibit to Post-Effective Amendment No. 1 to the
Registration Statement (File No. 33-76726-D) filed with the Securities
and Exchange Commission on May 4, 1995.
(8) Filed as an Exhibit to Form 10-KSB for the year ended December 31,
1995 filed with the Securities and Exchange Commission on March 9,
1996.
(9) Filed as an Exhibit to Post-Effective Amendment No. 2 to the
Registration Statement (File No. 33-76726-D) filed with the Securities
and Exchange Commission on October 23, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 360,000
<SECURITIES> 5,577,000
<RECEIVABLES> 863,000
<ALLOWANCES> (75,000)
<INVENTORY> 0
<CURRENT-ASSETS> 6,984,000
<PP&E> 3,081,000
<DEPRECIATION> (570,000)
<TOTAL-ASSETS> 9,495,000
<CURRENT-LIABILITIES> 609,000
<BONDS> 0
0
0
<COMMON> 4,745,000
<OTHER-SE> 3,941,000
<TOTAL-LIABILITY-AND-EQUITY> 8,686,000
<SALES> 7,698,000
<TOTAL-REVENUES> 8,033,000
<CGS> 3,293,000
<TOTAL-COSTS> 6,259,000
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 1,774,000
<INCOME-TAX> 708,000
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<CHANGES> 0
<NET-INCOME> 1,066,000
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
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