UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number: 0-23952
AVERT, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1028716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
301 Remington, Fort Collins, CO 80524
(Address of principal executive offices)
970/484-7722
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year,
if changed from last report).
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[ X ] Yes [ ] No
As of May 12, 1998 the issuer had 3,485,125 shares of Common Stock, no par
value, outstanding.
Transitional Small Business Disclosure Format.
[ ] Yes [ X ] No
<PAGE>
Form 10-QSB
Quarter Ended March 31, 1998
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial statements
Unaudited balance sheets................................... 3
Unaudited statements of income............................. 4
Unaudited statements of cash flows......................... 5
Notes to unaudited financial statements.................... 6
ITEM 2. Management's Discussion and Analysis or
Plan of Operations......................................... 7
PART II - OTHER INFORMATION
ITEMS 1, 2, 3, 4, 5 and 6 Not applicable.........................
Signatures.......................................................... 11
2
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
AVERT, INC.
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 410,000 $ 580,000
Marketable securities ..................................... 6,193,000 6,113,000
Accounts receivable, net of allowance ..................... 1,047,000 1,135,000
Prepaid expenses and other ................................ 287,000 304,000
----------- -----------
Total current assets ............................. $ 7,937,000 $ 8,132,000
Property and equipment, net ........................................ 3,503,000 3,399,000
Other assets ....................................................... 0 0
----------- -----------
Total assets ....................................................... $11,440,000 $11,531,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 550,000 $ 388,000
Accrued expenses .......................................... 106,000 201,000
Deferred revenue .......................................... 48,000 0
----------- -----------
Total current liabilities ........................ 704,000 589,000
Deferred Taxes ............................................ 507,000 507,000
----------- -----------
Total liabilities ................................ $ 1,211,000 $ 1,096,000
Shareholders' equity:
Preferred shares, no par value; authorized
1,000,000 shares; none outstanding ...................... -- --
----------- -----------
Common stock, no par value; authorized
9,000,000 shares; 3,446,988 shares issued
and outstanding ......................................... 5,253,000 5,276,000
Retained earnings ......................................... 4,976,000 5,159,000
----------- -----------
Total shareholders' equity ....................... $10,229,000 $10,435,000
----------- -----------
Total liabilities and shareholders' equity ......................... $11,440,000 $11,531,000
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AVERT, INC.
STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
-----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net revenues:
Search and product fees ................................... $ 2,147,000 $ 2,018,000
Interest and other income ................................. 86,000 78,000
----------- -----------
2,233,000 2,096,000
Expenses:
Search and product costs .................................. 1,042,000 895,000
Marketing ................................................. 379,000 331,000
General and administrative ................................ 353,000 329,000
Software development ...................................... 73,000 103,000
Depreciation and amortization ............................. 111,000 29,000
----------- -----------
1,958,000 1,687,000
----------- -----------
Income before income taxes ......................................... 275,000 409,000
Income tax expense ........................................ (108,000) (160,000)
----------- -----------
Net income ......................................................... $ 167,000 $ 249,000
=========== ===========
Net income per common share ........................................ $ .05 $ .07
=========== ===========
Weighted average common
shares outstanding ........................................ 3,546,124 3,417,855
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
AVERT, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ............................................................ $ 167,000 $ 249,000
Adjustments to reconcile net income to net cash
provided by operating
activities:
Depreciation and amortization .................................... 111,000 65,000
Bad debt expense ................................................. 16,000 3,000
Increase/(decrease) in marketable securities and
other gains ............................................. (80,000) (75,000)
Changes in operating assets and liabilities:
Accounts receivable ......................................... 73,000 (202,000)
Prepaid expenses and other current assets ................... (116,000) (70,000)
Accounts payable ............................................ 210,000 45,000
Accrued expenses ............................................ (70,000) (48,000)
Income taxes payable ........................................ 108,000 --
Deferred revenue and deposits ............................... (1,000) 5,000
--------- ---------
Net cash provided by operating activities ........................ $ 418,000 $ (28,000)
Cash Flows from Investing Activities:
Additions to furniture and equipment ................................. (215,000) (438,000)
Proceeds from sale of furniture and equipment ........................ -- --
--------- ---------
Net cash provided by investing activities ...................... (215,000) (438,000)
--------- ---------
Cash Flows from Financing Activities:
Purchase of Treasury Stock ....................................... (23,000) --
Dividends declared ........................................................ (350,000) 31,000
--------- ---------
Net cash provided by financing activities ...................... (373,000) 31,000
Increase/(Decrease) in Cash and Cash Equivalents .......................... (170,000) (435,000)
Cash and Cash Equivalents, beginning of period ............................ 580,000 360,000
--------- ---------
Cash and Cash Equivalents, end of period .................................. $ 410,000 $ (75,000)
========= =========
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
The financial information contained herein is unaudited, but includes all
adjustments (consisting of only normal recurring accruals) which, in the opinion
of management, are necessary to present fairly the information set forth. The
financial statements should be read in conjunction with the Notes to Financial
Statements which are included in the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1997.
The results for interim periods are not necessarily indicative of results
to be expected for the fiscal year of the Company ending December 31, 1998. The
Company believes that the three month report filed on Form 10-QSB is
representative of its financial position, its results of operations and its cash
flows as of and for the periods ended March 31, 1998 and 1997 covered thereby.
Impact of recently issued accounting standards. Statement of Financial
Accounting Standards 128, "Earnings per Share" and Statement of Financial
Accounting Standards 129 "Disclosure of Information About an Entity's Capital
Structure". Statement 128 provides a different method of calculating earnings
per share than is currently used in accordance with Accounting Principles Board
Opinion 15 "Earnings per Share". Statement 128 provides for the calculation of
"basic" and "diluted" earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
Statement 129 establishes standards for disclosing information about an entity's
capital structure. Statements 128 and 129 are effective for financial statements
issued for periods ending after December 15, 1997. Their implementation is not
expected to have a material effect on the financial statements.
Statement of Financial Accounting Standards 130. "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards 131 "Disclosures About
Segments of an Enterprise and Related Information". Statement 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, Statement 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that displays with the
same prominence as other financial statements. Statement 131 supersedes
Statement of Financial Accounting Standards 14 "Financial Reporting for Segments
of a Business Enterprise". Statement 131 establishes standards on the way that
public companies report financial information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. Statement 131 defines operating segments
as components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Statements 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on the future financial statement disclosures. Results of operations
and financial position, however, will be unaffected by implementation of these
standards.
6
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Comparison of quarters ended March 31, 1998 and March 31, 1997
Total net revenues increased from $2,096,000 for the three month period
ended March 31, 1997 to $2,233,000 for the comparable three month period in 1998
or approximately 6.5%. The Company believes that the decrease in revenue growth
is at least partially due to the record low unemployment rate in the United
States. There were 4,574 customers that actually used Avert services the first
three months of 1998, as compared to 3,937 the first three months of 1997,
representing approximately a 16.2% increase. However, the dollars spent per
customer in the first quarter 1998 was $456 as compared to $502 in the first
quarter 1997, representing a 9.2% decrease. The Company believes this disparity
to be related to a low unemployment rate job market where there are
substantially fewer job applicants to screen than in a higher unemployment rate
job market. The sales categories that experienced the largest increases had
quick turnaround, and addressed employers' need to fill positions quickly in the
current job market.
Another key element in first quarter revenue growth was that focus on new
product growth and development shifted toward activities such as preparing
literature, converting data, and communicating features and enhancements of the
new computer system implemented in April, 1998. See "Liquidity and Capital
Resources" in this item below. The breakdown of net revenues, exclusive of
product discounts and other miscellaneous income items, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997 Percent of
--------------------- ---------------------- Increase
Revenues % total Revenues % total (Decrease)
-------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Products:
Workers compensation histories .... $ 242,000 10.8% $ 297,000 14.2% (18.5)%
Criminal history reports ......... $1,115,000 50.0% $1,012,000 48.3% 10.2%
Previous employment reports/ ..... $ 268,000 12.0% $ 230,000 11.0% 16.5%
credit reports
Motor vehicle driving records .... $ 251,000 11.2% $ 261,000 12.5% (3.8)%
Other products ................... $ 146,000 6.5% $ 106,000 5.1% 37.7%
Services: .......................... $ 125,000 5.6% $ 114,000 5.4% 9.6%
Interest income .................... $ 84,000 3.8% $ 77,000 3.7% 9.1%
NET REVENUES .............. $2,233,000 $2,096,000 6.5%
</TABLE>
The largest product growth of approximately 37.7% occurred in "Other
Products". The product contributing the most revenue in this category was Name
Link, a product linking names, addresses and social security numbers, increased
from $45,000 in 1997, to $56,000 in 1998, or approximately 24.4% increase. In
addition, there was approximately 48% growth for revenues generated in the areas
of education/credential verification, employment applications, first check, and
alliance products which increased from $61,000 in first quarter 1997 to $90,000
in first quarter 1998.
7
<PAGE>
Moderate product growth of approximately 16.5% occurred in the area of
Previous Employment/Credit. This product represented $268,300 and approximately
12.0% of total net revenues in the first quarter 1998, compared to $229,600 in
the first quarter 1997 and approximately 11.0% of total net revenues. The
Company believes growth in these product lines to be attributable to their quick
turnaround time. In addition, the Company continued to customize the Previous
Employment product to enhance attractiveness of the product.
Moderate sales growth occurred in criminal history reports in first quarter
1998 as compared to first quarter 1997. In total dollars, criminal history
reports contributed the most net revenues, representing $1,115,000 in net
revenues in the period ended March 31, 1998, as compared to $1,012,000 in the
period ended March 31, 1997. The criminal history reports product line accounted
for approximately 50.0% of total net revenues in the first quarter 1998, and
approximately 48.3% of total net revenues in the first quarter 1997. The Company
believes there continues to be a trend nationwide to check prospective
employees' criminal records and it continues to focus on obtaining the quickest,
most accurate data available.
Workers' compensation histories continued to decline as a percentage of net
revenues as previously predicted. In first quarter, 1998 workers' compensation
reports, represented $242,000 or approximately 10.8% of total net revenues, as
compared to $297,000 for the first three months of 1997, or approximately 14.2%
of total net revenues. The Company believes it will continue to decrease as a
percentage of total net revenues.
Service sales experienced approximately 9.6% revenue growth from $114,000
in first quarter 1997 to $125,000 in first quarter 1998. This is primarily
attributable to growth of the customer base membership in the Avert Advantage
program, which increased from $33,000 in revenues for the three month period in
1997, to $57,000 in revenues for the three month period in 1998.
Income before income taxes decreased from $409,000 in first quarter 1997 to
$275,000 in first quarter 1998, or approximately 32.7% and represented
approximately 19.5% of total net revenues in 1997 compared to approximately
12.3% in 1997, resulting from increases in several expense categories.
Total expenses increased from $1,687,000 for the three month period ended
March 31, 1997 to $1,958,000 for the comparable period in 1998 or approximately
16.1%. A breakdown in expenses is as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Increase (Decrease)
March 31, 1998 March 31, 1997 % of Revenues
------------------------ ------------------------- --------------
Expenses % of Revenue Expenses % of Revenue 1997 over 1996
-------- ------------ -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Search and product .................... $1,042,000 46.7% $ 895,000 42.7% 4.0%
Marketing ............................. 379,000 17.0 331,000 15.8 1.2
General and administration ............ 353,000 15.8 329,000 15.7 .1
Software development .................. 73,000 3.3 103,000 4.9 (1.6)
Depreciation and amortization ......... 111,000 5.0 29,000 1.4 3.6
---------- ---- ---------- ---- ---
Expenses ..................... $1,958,000 87.8% $1,687,000 80.5% 7.3%
========== ==== ========== ==== ===
</TABLE>
Search and product fees increased approximately 4% as a percentage of net
revenues in the first quarter 1998 over the first quarter 1997. The majority of
the increase was attributable to the increasing costs of obtaining criminal
history information from sources, as well as the criminal history product is the
one most heavily discounted for larger, corporate accounts. The other main area
of increased expenses in this category resulted from increased personnel costs
8
<PAGE>
associated with staffing an expanded customer service department to improve
customer coverage, and increased staffing for the labor intensive products such
as reference checks and education verifications. There was a decrease in
expenses when expressed as a percentage of total net revenues in the areas of
motor vehicle records, workers' compensation reports, credit reports and
telephone.
There was an approximate 1.2% increase as a percentage of total net
revenues in marketing expenses, in the first three months of 1998 as compared to
the first three months of 1997. There is an on-going marketing campaign designed
to target lead generation, marketing communication and market development for
both current customers and new customers, via in-house marketing personnel and
outside resellers. Specifically, the lead generation costs as a percentage of
total net revenues in the first quarter 1998 as compared to the first quarter
1997 represent the increase in the marketing expense category. In addition,
there was a separate marketing campaign targeted toward current Avert customers
that occurred in the first quarter 1998 and into the second quarter 1998. This
campaign communicated the implementation of the new computer system, its
features and benefits. See "Liquidity and Capital Resources" below in this item
for further discussion.
General and Administrative expenses remained relatively stable in first
quarter 1998, representing approximately 15.8% of total net revenues, as
compared to first quarter 1997 representing 15.7% of total net revenues. The
decrease in software development expenses as a percentage of total net revenues
in the three month period ended March 31, 1998 as compared to the three month
period ended March 31, 1997, resulted from the capitalization of expenses
related to the development of new software and upgrade of existing software. See
"Liquidity and Capital Resources" below in this Item for further discussion. The
depreciation and amortization expenses have increased as a percentage of total
net revenues due to the fact that a portion of the software previously developed
had been put into actual use. Capitalization has occurred in the software
development activities as well as additional computer hardware purchases.
Income taxes remained stable for the combined federal and state statutory
rate of approximately 39% in both first quarter 1998 and first quarter 1997,
resulting in net income of $248,700 or $.07 per share on 3,417,855 shares for
the first three months ended March 31, 1997, as compared to net income of
$167,000 or $.05 per share on 3,546,124 shares for the first three months ended
March 31, 1998.
Liquidity and Capital Resources
The Company's financial position at March 31, 1998 remained strong with
working capital at that date of $7,233,000 compared to $7,543,000 at December
31,1997. Cash and cash equivalents and marketable securities at March 31, 1998
were $6,603,000 and decreased from $6,693,000 at December 31, 1997. Net cash
provided from operations for the three month period ended March 31, 1998 was
$418,000 and consisted primarily of net income of $167,000 plus a $210,000
increase in accounts payable, a $73,000 decrease in accounts receivable, and a
$116,000 decrease in prepaid expenses and other current assets. The Company had
capital expenditures of $215,000 for the three month period ended March 31, 1998
as compared to $438,000 for the three months ended March 31, 1997. The majority
of the capital expenditures during the three months ended March 31, 1998 was
attributable to the development of new software and upgrade of existing hardware
and software. The Company expects to spend over $1.5 million 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. Implementation of the
new software will be April, 1998 with ongoing enhancements and upgrades through
1998. Net cash used in financing activities for the three month period ended
March 31, 1998 was $373,000 and consisted primarily of $350,000 for a special
cash dividend of $.10 per common share payable on March 23, 1998 to shareholders
of record on March 16, 1998.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
NONE
ITEM 6. Exhibits and Reports on Form 8-K
(a) NONE
(b) NONE
10
<PAGE>
SIGNATURES
In accordance with the requirements 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: May 13, 1998 BY: /s/ Dean A. Suposs
--------------------------------------
Dean A. Suposs, President
DATE: May 13, 1998 BY: /s/ Jamie M. Burgat
--------------------------------------
Jamie M. Burgat, Vice President of
Operations and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 410,000
<SECURITIES> 6,193,000
<RECEIVABLES> 1,168,000
<ALLOWANCES> (121,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,937,000
<PP&E> 4,569,000
<DEPRECIATION> (1,066,000)
<TOTAL-ASSETS> 11,440,000
<CURRENT-LIABILITIES> 704,000
<BONDS> 0
0
0
<COMMON> 5,253,000
<OTHER-SE> 4,976,000
<TOTAL-LIABILITY-AND-EQUITY> 10,229,000
<SALES> 2,147,000
<TOTAL-REVENUES> 2,233,000
<CGS> 1,042,000
<TOTAL-COSTS> 1,958,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 275,000
<INCOME-TAX> 108,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,000
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
