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, 1997.
[ ] 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.
(Name of small business issuer in its charter)
COLORADO 84-1028716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 REMINGTON, FORT COLLINS, COLORADO 80524
(Address of principal executive offices0 (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
--------------------------
(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, 1997 were $9,491,000.
The aggregate market value of the voting stock held by non-affiliates of
the issuer as of March 20, 1998 was $24,227,888.
As of March 20, 1998, the issuer had outstanding 3,488,125 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 1998
Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
This document consists of a total of 60 pages including the Exhibit Index
beginning on page 37.
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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 11.
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.
In June, 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 total net proceeds received by the Company from the IPO
and the exercise of the Redeemable Warrants was approximately $4,955,000. The
net proceeds 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. None of the net proceeds has been expended to date. For
additional information concerning the IPO, see "Market for Common Equity" and
related Stockholder Matters, " in Part II, Item 5, below.
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 consist of: criminal records, workers'
compensation histories, driving records, reference checks, credit histories,
social security number use, and education and credential validation and
employment application forms. During the fourth quarter of 1997, the Company
introduced a self screen drug testing kit as a pilot marketing program to it's
customers in Colorado. Results will be assessed to determine if the kit will be
rolled out nationwide.
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 9,640 customers located throughout the United States.
During 1997, sales were made in 49 states, and in addition, District of Columbia
and Puerto Rico. Approximately 63% of total sales were made in 7 states (Texas,
Colorado, Missouri, Oregon, Illinois, Florida, and North Carolina), with Texas
sales representing approximately 18% of total sales, and Colorado sales
representing approximately 15% of total sales. The Company's business strategy
is to accelerate market presence throughout the United States.
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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.
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;
o 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 or put on inactive status.
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. In addition, the Company operates its internet-based customer order
entry system with dual processor Micro servers so that it has complete backup of
its order entry system.
During 1996 The Company budgeted approximately $1.5 million to develop new
software and upgrade its existing software, of which approximately $450,000 was
expended in 1996, and approximately $1,000,000. was expended in 1997. The
upgrade is expected to be completed in 1998. The total cost of the upgrade will
exceed the $1.5 budget. The amount of the excess is not known at this time. 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
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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.
As part of the first phase of its software development project, Automated
Systems for Applicant Processing (ASAP), the Company introduced AvertNet 1.0 in
January of 1997. In November 1997, Avert announced AvertNet 1.4, which was a
major upgrade to the AvertNet order entry system that extended Avert's access to
a substantial base of customers through the integration with Microsoft's
Internet Explorer.
AvertNet is a Virtual Private Data Network that provides a fully secured
and encrypted business environment for Avert's customers to conduct their
pre-employment screening transactions over the Internet or through their own
internal network environment. AvertNet uses HTML and JAVA scripting to provide
Avert customers with a windows style environment.
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
statewide from 32 states or from all 3,300 counties in the United States on a
county-by-county basis. The remaining 18 states do not have an accessible
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.
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.
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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, all Canadian provinces, and Puerto Rico.
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. All forms have been
updated to ensure compliance with the new Fair Credit Reporting Act
requirements. 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.
Test-cup - OnTrak TesTcup5 is a resale product contracted from Roche
Diagnostic Systems. Test-cup provides an integrated collection and testing
device for easy, quick, safe, and affordable on-site drug testing.
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 2,025 such
customers through December 31, 1997.
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:
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o Accelerated Market Presence. Avert intends to continue the acceleration of
its market presence throughout the United States by further 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 resellers; (4)
public relations; (5) participation in trade shows and seminars; (6)
advertising in trade publications; (7) maintaining a web page on the
Internet; and (8) mailing of quarterly news releases to existing customers
and to prospective customers. See "Marketing and Sales" below in this Item
1.
o 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 having a large customer base of their own, which can resell
Avert's products and services as an add on to their own products. Avert
also seeks strategic relationships with companies in other industries. See
"Marketing and Sales" below in this Item 1.
o 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, skills 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) monitor its larger customers
daily and (3) contact each of its customers on a regular basis through
tele-sales and executive briefings at the Company's headquarters in Fort
Collins, Colorado.
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.
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o 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 is in process of developing new software and
upgrading its existing software. See "Products and Services - General,"
below in this Item 1. A total of approximately $1,000,000 was spent in
1997.
o 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
The Company's marketing program consists of direct marketing activities,
advertising, exhibitions at trade shows, the Internet, public relations
activities and in-house telemarketing. All of the leads generated by these
marketing activities are referred to new customer tele-sales representatives for
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 13.5 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 a reseller distribution channel to develop and 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 174
resellers.
Customers
The Company currently has approximately 9,640 customers located throughout
the United States. During 1997, sales were made in 49 states, with approximately
63% of total sales having been made in 7 states (Texas, Colorado, Missouri,
Oregon, Illinois, Florida, and North Carolina), with Texas sales representing
approximately 18% of total sales, and Colorado sales representing approximately
15% of total sales. No single customer of Avert accounted for more than 7.3% of
total Avert sales during 1997.
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 Consumer Credit Reporting Reform Act (CCRRA) of 1996 amended the FCRA
and added new requirements on consumer reporting agencies providing consumer
reports for employment purposes. The requirements include: providing customers
with a notification of their responsibilities under the FCRA, obtaining
certifications from customers that they are performing certain specific actions
as required by the FCRA, providing the subject of the report with a free copy of
the report if adverse action is taken by an employer based on information in the
consumer report, and providing a copy of a Summary of Your Rights under the Fair
Credit Reporting Act with each consumer report.
The CCRRA also placed new requirements on the resale of consumer reports. A
consumer reporting agency providing consumer reports to a reseller must now
obtain the identify of the end user of the information for each report. In
addition, the consumer reporting agency must receive certifications from
resellers that their customers are performing the same specific actions as are
required of the consumer reporting agency's direct customers, and ensure that
reports are being resold only for permissible purposes.
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. 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.
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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
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 eleven states of the 49 states in
which the Company sold its products and services during 1997 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 four of
those states, and is in process of obtaining licenses in the remaining seven
states. In addition, the Company is in process of reviewing the laws of four
other states to determine if licensing is required. Though requirements can
change, the Company believes that the remaining 36 states do not have a
licensing requirement for the Company. Although the Company believes that it
will be able to obtain the licenses from the other seven states, 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.
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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, the
ADA, and all other applicable federal and state laws and regulations including
federal and state equal opportunity laws and regulations. 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.
Avert is in the process of obtaining errors and omissions insurance tp
cover claims by the customers or the subject of reports for alleged inaccurate
or misuse of information. Previously, the Company has not had this type of
insurance.. 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.
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, and because of it's newly developed order entry and report retrieval
system. 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 74 employees, of which 12 are part-time and 62
are full-time employees. Of these 74 employees, 13 full-time and one part-time
employee are involved in sales and marketing, eight full-time employees and two
part-time employee are involved in finance and administration, seven full-time
employees are involved in programming/information system and 34 full-time
employees and nine 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.
10
<PAGE>
Item 2. Description of Property.
The Company owns and is sole occupant of an approximate 14,600 square foot
office building, located in downtown Fort Collins, Colorado. The building,
located on a 29400 square foot parcel of land, was constructed by the Company in
March, 1996 at a total cost of approximately $1.2 million. The land and
construction costs were paid entirely from internal funds of the Company. No
portion of the proceeds of the Company's IPO was used for these purposes.
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:
Possible Acquisitions of Companies and/or Product Lines; Associated Risks.
A business strategy of the Company is to use the net proceeds of the IPO and any
the exercise of the Redeemable Warrants 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.
11
<PAGE>
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 eleven 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 "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 eleven states
of the 49 states in which the Company sold its products and services during 1997
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 four of those states, and is in process of obtaining licenses in the
remaining seven states. In addition, the Company is in process of reviewing the
laws of four other states to determine if licensing is required. Though
requirements can change, the Company believes that the remaining 36 states do
not have a licensing requirement for the Company. Although the Company believes
that it will be able to obtain the licenses from the other seven states, 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. The
Company intends to continue its efforts to obtain insurance coverage for such
claims, and plans to obtain coverage by the end of first quarter 1998. 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.
12
<PAGE>
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 three of the Company's ten existing products is purchased
from other companies. As more companies enter the market, and if larger, direct
competitors place more emphasis on the employment background segment of their
operations and/or indirect competitors expand their businesses to include
background checking products and services, the competition within the industry
could become more intense. Accordingly, no assurance can be given that the
Company will be able to continue to compete favorably in this industry.
13
<PAGE>
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. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
High Low
---- ---
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
1997:
First quarter.................... 9 5-15/16
Second quarter................... 8-7/8 6-1/8
Third quarter.................... 10-1/2 8-3/8
Fourth quarter................... 11-1/8 7-1/2
There were approximately 223 holders of record (approximately 1,364
beneficial holders) of the Company's Common Stock on March 3, 1998.
On February 26, 1998, Avert declared a special cash dividend of $.10 per
common share payable on March 23, 1998 to shareholders of record on March 16,
1998. No other cash dividends had been paid by the Company since the year ended
December 31, 1993. The Company generally intends to retain its earnings to
support the operations and growth of its businesses. Any other 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) In July 1997, options to purchase a total of 663 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
one key employee of the Company. The exercise price for the shares
underlying the options is $7.625 per share, for a total exercise price
under these options of $5,055.00 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, the optionee is a key employee of the
Company and is able to fend for herself with access to information
upon which an investment decision can be made.
14
<PAGE>
(b) During May and June, 1997, 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 $6.375 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
$8.00 per share, for a total exercise price under these options of
$22,375.00. 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.
On June 29, 1994, the Company completed an IPO of 1,000,000 Units at an
initial public offering price of $5.25 per Unit (total gross proceeds of
$5,250,000). Each Unit consisted of one share of the Company's Common Stock and
one Redeemable Warrant. The IPO was made pursuant to a Registration Statement on
Form SB-2 (SEC File No. 33-76726-D) declared effective by the Securities and
Exchange Commission on June 22, 1994. Neidiger/Tucker/Bruner, Inc., Denver,
Colorado, served as Representative of the Underwriters.
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 further extended to April 30, 1997, at which date they expired. A total of
176,250 Redeemable Warrants were exercised resulting in the issuance of 88,125
shares of Common Stock and receipt of gross proceeds totalling approximately
$572,800. The total expenses incurred by the Company for its account in
connection with the issuance and distribution of the Units sold in the IPO and
pursuant to the exercise of the Redeemable Warrants, including underwriting
discounts and commissions, expenses paid to or for the Underwriters and other
expenses, were approximately $909,200 ($867,900 for the IPO and $41,300 for the
exercise of the Redeemable Warrants). None of such expenses were paid directly
or indirectly to directors or officers of the Company or any of their
associates, to persons owning 10% or more of any class of security of the
Company or to affiliates of the Company. The net proceeds from the IPO and the
exercise of the Redeemable Warrants (a total of $4,913,600 ($4,382,100 from the
IPO and $531,500 from the exercise of the Redeemable Warrants)) 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. None of the net
proceeds has been expended to date.
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 11.
15
<PAGE>
Results of Operations
Comparison of years ended December 31, 1997 and December 31, 1996
Net revenues increased from $8,032,500 in 1996 to $9,490,800 in 1997 or
18.2%. This increase was primarily due to the continued overall growth of the
customer base and, and increased sales on products having quick turnaround, such
as referencing checks, credit and name links. 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, 1997 December 31, 1996
---------------------- -----------------------
% of % of Percent of
Revenues Revenues Revenues Revenues Increase/(Decrease)
-------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Products:
Workers' compensation
histories ......................... $1,114,200 11.7% $1,240,700 15.4% (10.2%)
Criminal history reports ................ $4,754,300 50.1% $4,078,900 50.8% 16.6%
Reference Checking/credit
reports ........................... $1,223,800 12.9% $ 904,300 11.3% 35.3%
Motor vehicle driving records ........... $1,000,000 10.5% $ 954,100 11.9% 4.8%
Other products/services: ................ $ 986,900 10.4% $ 412,100 5.1% 139.5%
Education/Credential
verification
Social security number
check
Name Link
Employment application
forms
Service sales
Interest income ......................... $ 315,200 3.3% $ 314,700 3.9% 0.16%
Net Revenues ............................ $9,490,800 $8,032,500 18.2%
</TABLE>
Moderate growth continued during 1997 on all products of the Company with
one exception, workers' compensation histories. Net revenues from workers'
compensation histories continue to decrease as a percentage of total net
revenues, workers' compensation histories, and represent the third largest line,
approximately 11.7% of total net revenues in 1997. Sales of workers'
compensation histories are expected to continue to decline in total net
revenues, but the Company continues to educate customers and continues workers'
compensation marketing campaigns.
In total dollars, criminal history reports contributed the most net
revenues, representing approximately $4,754,300 in net revenues in 1997 as
compared to $4,078,900 in net revenues in 1996. The criminal history reports
product line contributed approximately 50.1% of total net revenues in 1997 as
compared to approximately 50.8% of total net revenues in 1996. The Company
believes there is a continuing trend nationwide to check prospective employees'
criminal records. The Company continues to focus on obtaining the quickest, most
accurate data available.
Net revenues generated in the area of reference checking/credit reports
increased from approximately $904,300 in 1996 to approximately $1,223,800 in
1997, representing an increase of approximately 35.3%. The Company believes
growth in these product lines to be attributable to their quick turnaround time.
These products represented approximately 12.9% of total net revenues in 1997, as
compared to approximately 11.3% of total net revenues in 1996.
16
<PAGE>
Other Products and Services had the greatest percentage increase in
revenues of 139%. The product contributing the most revenue in this category was
Name Link, a product linking names, addresses and social security numbers,
increased from $168,900 in 1996 to $203,800 in 1997. Service sales, which are
not itemized in the chart above, increased from $257,200 in 1996 to $520,100 in
1997. Service sales include Avert Advantage membership, start-up fees, extended
criminal history fees, and order entry fees charged to clients.
Search and product expenses, depreciation expenses and general and
administrative expenses increased as a percentage of total net revenues, while
marketing and software development expenses decreased as a percentage of total
net revenues. A breakdown of expenses is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
------------------ ------------------- Increase (Decrease)
% of % of % of Revenue
Expenses Revenue Expenses Revenue 1997 over 1996
-------- ------- -------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Search and product ................... $4,182,100 44.1% $3,292,700 41.0% 3.1%
Marketing ............................ 1,435,800 15.1% 1,318,900 16.4% (1.3)%
General and administrative ........... 1,246,300 13.1% 1,109,800 13.8% (0.7)%
Software development ................. 364,100 3.8% 352,800 4.4% (0.6)%
Depreciation and amortization ........ 404,500 4.3% 185,200 2.3% 2.0%
--------- ----- --------- ----- -----
Expenses .......................... $7,632,800 80.4% $6,259,400 77.9% 2.5%
</TABLE>
The increase in 1997 over 1996 of search and product fees as a percentage
of total net revenues was due to increased direct costs to the state and
counties providing criminal history information. In addition, there was
additional staff added, especially in the area of reference checks, which is a
very labor intensive product, to accommodate the substantial growth in that
area. There was a slight decrease in general and administrative expenses,
expressed as a percentage of total net revenues from 13.8% in 1996 to 13.1% in
1997.
Marketing expenses, as a percentage of total net revenues, decreased from
approximately 16.4% in 1996 to approximately 15.1% in 1997 due to a
reorganization of marketing staff, 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.
There was a decrease in software development expressed as a percentage of
total net revenues from approximately 4.4% in 1996 to approximately 3.8% in
1997. 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 early 1998), the Company expects
amortization costs to increase due to the capitalized cost of this software.
There was an increase in depreciation and amortization expenses when
expressed as a percentage of total net revenues, from approximately 2.3% in 1996
to approximately 4.3% in 1997. The increase was due to the software development
project discussed in "Liquidity and Capital Resources".
17
<PAGE>
Income before income taxes increased from $1,774,000 in 1996 to $1,858,000
or approximately 4.8% and represented approximately 22.1% of net revenues in
1996 compared to approximately 19.6% in 1997.
The combined federal and state income tax rate for 1997 and 1996 was 34%
and 40%, respectively, resulting in net income of $1,218,000, or $.35 per share,
on 3,461,000 (weighted average shares plus common stock equivalents) for 1997,
as compared to net income of $1,065,600 or $0.31 per share, on 3,450,000
(weighted average shares plus common stock equivalents) for 1996. This tax
decrease was primarily a result of an adjustment of prior-year state income
taxes, realized in the current year.
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)
-------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Products:
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>
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.
18
<PAGE>
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, and start up fee income increased from $33,600 in 1995 to
$84,300. 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.
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.
19
<PAGE>
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.
Liquidity and Capital Resources
The Company's financial position at December 31, 1997, remained strong with
working capital at that date of $7,543,000 compared to $6,375,000 at December
31, 1996. Cash and cash equivalents at December 31, 1997 were $579,500 and
increased from $360,300 at December 31, 1996. Net cash provided from operations
for the year ended December 31, 1997, was $988,000, and consisted primarily of
net income of $1,218,000 plus a $536,000 increase in trading investments, and a
$378,000 net increase in accounts receivable. The Company had capital
expenditures of $1,300,000 for the year ended December 31, 1997, as compared to
$1,317,000 for 1996. The majority of the expenses were attributable to costs
associated with the software development project described below.
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 early 1998,
with scheduled software releases occurring prior to that time. As part of the
first phase of its software development project, the Company introduced AvertNet
1.0 in January of 1997. In November, 1997, Avert announced AvertNet 1.4, which
was a major upgrade to the AvertNet order entry system that extended Avert's
access to a substantial base of customers through the integration with
Microsoft's Internet Explorer.
20
<PAGE>
Inflation
The Company believes that the results of its operations are not dependent
upon or affected by inflation.
Year 2000 Issue
The Company believes it has fully addressed the Year 2000 issue in
connection with its internal computer software. The Year 2000 problem is a
result of computer programs being written using two digits, rather than four, to
define the applicable year. Any programs that have time sensitive data may
recognize a date using "00" as the year 1900, rather than the year 2000. The
Company has re-written its internal programs and believes that the Year 2000
will not create any major future system failure or miscalculation.
The Year 2000 problem may impact other entities, with which the Company
transacts business, and the Company cannot predict the effect of Year 2000
problems on such entities.
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 1998 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.
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.
21
<PAGE>
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 Registration. (2)
4.1 Excerpt from Articles of Incorporation of the Registrant Regarding Common
Stock and Preferred Stock. (2)
10.1 Form of Consumer Report User Agreement between Registrant and customer of
Registrant. (1)
10.1.2 Form of Consumer Report User Agreement-Employment between Registrant and
customer of Registrant.
10.1.3 Form of Consumer Report User Agreement-Non Employment between Registrant
and customer of Registrant.
10.2 Employment Agreement dated as of January 1, 1994, between the Registrant
and Dean A. Suposs. (2)
10.3 Employer Report Subscriber Agreement, dated March 29, 1991, between the
Registrant and TRW, Inc. (1)
10.3.1 Reseller Service Agreement, dated September 25, 1997, between the
Registrant and TRW, Inc.
10.3.2 Credit Bureau Service Agreement, dated March 30, 1992, between the
Registrant And TransUnion. (1)
10.4 Amended and Restated 1994 Stock Incentive Plan.(3)
10.5 Non-Employee Directors' Stock Option Plan.
10.6 Letter Agreements, Dated March 24, 1995, with Ace Hardware Corporation
and Loss Prevention Services relating to sales of the Registrant's
Products.(4)
10.7 Amended and Restated 1994 Stock Incentive Plan and Incentive Stock Option
Agreement between Leonard Koch and the Registrant.(6)
10.8 Amended and Restated 1994 Stock Incentive Plan Incentive Stock Option
Agreement, dated June 10, 1996, between Jerry Thurber and the Registrant.
(6)
10.9 Amended and Restated 1994 Stock Incentive Plan Incentive Stock Option
Agreement, dated July 1, 1996, between Jamie Burgat and the Registrant.
(6)
- -------------------------
(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 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.
(5) 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.
(6) 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.
22
<PAGE>
(b) Reports on Form 8-K.
(i) Form 8-K dated October 8, 1997, announcing third quarter revenue
less than analyst estimates.
(ii) Form 8-K dated November 12, 1997, announcing third quarter 1997
and nine-month results.
(iii)Form 8-K dated November 24, 1997, announcing the release of
AvertNet 1.4.
23
<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 30, 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 30, 1997.
Signature Title
--------- -----
/s/ Dean A. Suposs Chairman of the Board; and President
- -------------------------------------
Dean A. Suposs
(Principal Executive Officer)
/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 Secretary; and Director
- -------------------------------------
Stephen D. Joyce
24
<PAGE>
Avert, Inc.
Financial Statements
December 31, 1997
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,
1997, and the related statements of income, shareholders' equity and cash flows
for the years ended December 31, 1997 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 disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Avert, Inc. as of December 31,
1997, and the results of its operations and its cash flows for the years ended
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Denver, Colorado
February 24, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
AVERT, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 580,000
Marketable securities .................................................... 6,113,000
Accounts receivable, net of allowance of $106,000 ........................ 1,135,000
Prepaid expenses and other ............................................... 304,000
-----------
Total current assets ............................................. 8,132,000
PROPERTY AND EQUIPMENT, net ...................................................... 3,399,000
-----------
TOTAL ASSETS ..................................................................... $11,531,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 388,000
Accrued expenses ......................................................... 201,000
-----------
Total current liabilities ........................................ 589,000
DEFERRED INCOME TAXES ............................................................ 507,000
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; 3,488,000 shares iss 5,276,000
outstanding
Retained earnings ........................................................ 5,159,000
-----------
Total shareholders' equity ....................................... 10,435,000
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................................... $11,531,000
===========
</TABLE>
See accompanying notes to these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AVERT, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
NET REVENUES:
Search and product fees .............................................. $ 9,071,000 $ 7,698,000
Interest and other income ............................................ 420,000 335,000
----------- -----------
9,491,000 8,033,000
EXPENSES:
Search and product costs ............................................. 4,182,000 3,293,000
Marketing ............................................................ 1,436,000 1,319,000
General and administrative ........................................... 1,246,000 1,109,000
Software development ................................................. 364,000 353,000
Depreciation ......................................................... 405,000 185,000
----------- -----------
7,633,000 6,259,000
----------- -----------
INCOME BEFORE INCOME TAXES ................................................... 1,858,000 1,774,000
Income tax expense ................................................... (640,000) (708,000)
----------- -----------
NET INCOME ................................................................... $ 1,218,000 $ 1,066,000
=========== ===========
NET INCOME PER COMMON SHARE:
Basic ................................................................ $ 35 $ .31
=========== ===========
Diluted .............................................................. $ .34 $ .31
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic ................................................................ 3,461,000 3,450,000
=========== ===========
Diluted .............................................................. 3,593,000 3,470,000
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AVERT INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FROM JANUARY 1, 1996 THROUGH DECEMBER 31, 1997
COMMON STOCK TOTAL
-------------------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1996 ................... 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
Warrants exercised ................... 88,000 531,000 -- 531,000
Net income ........................... -- -- 1,218,000 1,218,000
------------ ------------ ------------ ------------
BALANCES, December 31, 1997 ................. 3,488,000 $ 5,276,000 $ 5,159,000 $ 10,435,000
============ ============ ============ ============
</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,
-------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 1,218,000 $ 1,066,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ................................................................. 405,000 185,000
Bad debt expense ............................................................. 31,000 31,000
Deferred income taxes ........................................................ 290,000 192,000
Loss (gain) on sale of asset ................................................. 6,000 (8,000)
Changes in operating assets and liabilities:
(Increase) decrease in:
Trading investments, net ........................................... (536,000) 390,000
Accounts receivable ................................................ (378,000) (211,000)
Prepaid expenses and other current assets .......................... 5,000 24,000
Income taxes receivable ............................................ (33,000)
Other assets ....................................................... -- 3,000
Increase (decrease) in:
Accounts payable ................................................... (65,000) (56,000)
Accrued expenses ................................................... 45,000 175,000
Income taxes payable ............................................... -- (17,000)
Deferred revenue and deposits ...................................... -- (59,000)
----------- -----------
Net cash provided by operating activities .................................... 988,000 1,715,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................................... (1,300,000) (1,317,000)
Proceeds from sale of property and equipment ......................................... 1,000 17,000
----------- -----------
Net cash used in investing activities ........................................ (1,299,000) (1,300,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of shares outstanding ....................................................... -- (215,000)
Proceeds from exercise of warrants ................................................... 531,000 --
----------- -----------
Net cash provided by (used in) financing activities .......................... 531,000 (215,000)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS ........................................................ 220,000 200,000
CASH AND CASH EQUIVALENTS, beginning of year
360,000 160,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of year ....................................................... $ 580,000 $ 360,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Income taxes paid ................................................................ $ 282,000 $ 533,000
=========== ===========
</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, 1997.
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, 1997, approximately $576,000 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, 1997.
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 1997, the Company capitalized $1,000,000 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 early 1998.
F-7
<PAGE>
Impairment of Long-Lived Assets - Effective January 1, 1996, the Company
adopted Financial Accounting Standards Board Statement 121 (FAS 121). In
the event that facts and circumstances indicate that the cost of assets
or other assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value
or discounted cash flow value is required. Adoption of FAS 121 had no
effect on the December 31, 1997 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 presented in accordance
with the provisions of Statement of Financial Accounting Standards No.,
128, Earnings Per Share (SFAS 128). SFAS 128 replaced the presentation
of primary and fully diluted earnings per share (EPS), with a
presentation of basic EPS and diluted EPS. Under SFAS 128, basic EPS
excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted
average number common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock and resulted in the issuance of common stock. In 1997 and 1996,
diluted common and common equivalent shares outstanding includes 132,000
and 20,000 common equivalent shares, respectively, consisting of stock
options and warrants, determined using the treasury stock method.
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.
Impact of Recently Issued Accounting Standards - 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 were recently issued. 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
F-8
<PAGE>
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.
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.
2 PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1997:
Land $ 210,000
Building 1,214,000
Computer hardware and software 2,332,000
Furniture and equipment 598,000
----------
4,354,000
Less accumulated depreciation (955,000)
---------
$ 3,399,000
=========
3. INCOME TAXES:
Income tax expense (benefit) consists of the following:
December 31,
--------------------------
1997 1996
---- ----
Current $ 350,000 $ 516,000
Deferred 290,000 192,000
---------- ----------
Total income tax expense $ 640,000 $ 708,000
========== ==========
F-9
<PAGE>
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 an adjustment of state income taxes realized in
the current year.
Temporary differences between the financial statement carrying amounts
and tax basis of assets and liabilities 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. In
1997, the Company increased the number of authorized shares to 525,000.
Pursuant to the plan, the Company may grant "incentive stock options"
(intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended), non-qualified stock options and restricted stock or a
combination thereof.
Incentive and non-qualified stock options may not be granted at an
exercise price of less than the fair market value of the common stock on
the date of grant (except for holders of more than 10% of common stock,
whereby the exercise price must be at least 110% of the fair market
value at the date of grant for incentive stock options). The term of the
options may not exceed ten years. At December 31, 1997, the Company had
granted options under the plan to purchase 364,000 shares (including
200,000 shares to the Company's President) of which 190,132 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, 1997
have exercise prices that range from $5.00 to $7.63.
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, 1997 range from $5.25 to
$8.00.
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>
OPTIONS OUTSTANDING, January 1, 1996 230,000 5,000 $5.26
Options granted 133,000 3,000 $5.64
---------- ---------- -----
OPTIONS OUTSTANDING, December 31, 1996 363,000 8,000 $5.40
Options granted 1,000 3,000 $7.49
---------- ---------- -----
OPTIONS OUTSTANDING, December 31, 1997 364,000 11,000 $5.42
========== ========== =====
</TABLE>
F-10
<PAGE>
For all options granted during 1997 and 1996, 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, 1997 was approximately 7.82 years. At December 31, 1997,
options for 198,132 shares were exercisable and options for the
remaining shares become exercisable pro rata through 2002. If not
previously exercised, options outstanding at December 31, 1997, will
expire as follows:
Weighted
Average
Number of Exercise
Year Shares Price
---- --------- --------
1999 2,000 $5.25
2000 3,000 $6.17
2001 3,000 $5.58
2002 3,000 $7.46
2004 230,000 $5.25
2006 60,000 $5.00
2007 73,000 $6.17
2008 1,000 $7.63
-------
375,000
=======
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,
------------------------
1997 1996
---- ----
Net income applicable to common stockholders:
As reported $ 1,218,000 $ 1,066,000
Pro forma $ 1,117,000 $ 965,000
Net income per common share - basic:
As reported $ .35 $ .31
Pro forma $ .32 $ .28
Net income per common share - diluted:
As reported $ .34 $ .31
Pro forma $ .31 $ .28
F-11
<PAGE>
The fair value of each employee option and warrant granted in 1997 and
1996 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Year Ended December 31,
----------------------
1997 1996
---- ----
Expected volatility 50.1% 55.0%
Risk-free interest rate 6.5% 6.5%
Expected dividends - -
Expected terms (in years) 7.82 9.9
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. During 1997, 176,250 warrants were exercised for 88,125 shares of
common stock at $6.50 per share and the remaining warrants expired
unexercised. The Company received net proceeds of $530,800.
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 1997 and 1996 was approximately $92,000 and $93,000,
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 1997 and 1996 was insignificant.
6 SUBSEQUENT EVENT (UNAUDITED):
On February 26, 1998, the Company declared a cash dividend of $.10 per share of
common stock to be paid March 23, 1998 to those shareholders of record as of
close of business March 16, 1998. Total cash dividend to be paid is $349,000.
F-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description Page No.
- ------- -------------------- -------
<S> <C> <C>
3.1 Articles of Incorporation, as amended, of the Registrant. (2) N/A
3.2 Bylaws, as amended, of the Registration. (2) N/A
4.1 Excerpt from Articles of Incorporation of the Registrant Regarding
Common Stock and Preferred Stock. (2) N/A
10.1 Form of Consumer Report User Agreement between Registrant and customer
of Registrant. (1) N/A
10.1.2 Form of Consumer Report User Agreement-Employment between Registrant and
customer of Registrant.
10.1.3 Form of Consumer Report User Agreement-Non Employment between Registrant
and customer of Registrant.
10.2 Employment Agreement dated as of January 1, 1994, between the Registrant
and Dean A. Suposs. (2) N/A
10.3 Employer Report Subscriber Agreement, dated March 29, 1991, between the
Registrant and TRW, Inc. (1) N/A
10.3.1 Reseller Service Agreement, dated September 25, 1997, between the
Registrant and TRW, Inc.
10.3.2 Credit Bureau Service Agreement, dated March 30, 1992, between the
Registrant And TransUnion. (1) N/A
10.4 Amended and Restated 1994 Stock Incentive Plan.(3) N/A
10.5 Non-Employee Directors' Stock Option Plan.
10.6 Letter Agreements, Dated March 24, 1995, with Ace Hardware Corporation
and Loss Prevention Services relating to sales of the Registrant's
Products.(4) N/A
10.7 Amended and Restated 1994 Stock Incentive Plan and Incentive Stock
Option Agreement between Leonard Koch and the Registrant.(6) N/A
10.8 Amended and Restated 1994 Stock Incentive Plan Incentive Stock Option
Agreement, dated June 10, 1996, between Jerry Thurber and the
Registrant. (6) N/A
10.9 Amended and Restated 1994 Stock Incentive Plan Incentive Stock Option
Agreement, dated July 1, 1996, between Jamie Burgat and the Registrant.
(6) N/A
</TABLE>
- -------------------------
(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 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.
(5) 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.
(6) 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.
EXHIBIT 10.1.2
Consumer Report User Agreement EMPLOYMENT
Amended September 1, 1997
This agreement by and between Avert, Inc. and the company named below ("User")
and/or its designated agent(s), consists of the following understandings and
conditions:
User certifies and agrees to:
1. Use the services of and the reports received from Avert in strict
compliance with all provisions of the Fair Credit Reporting Act (FCRA),
Public Law 91-508 and the Americans with Disabilities Act (ADA 1990), and
all other applicable federal and state laws and regulations including
federal and state equal opportunity laws and regulations.
2. Use the information provided by Avert for the user's exclusive use only,
except to disclose said information to the subject of the report, and for
employment purposes only, and only in accordance with applicable law.
3. Make a clear and conspicuous disclosure to the applicant or employee, in
writing and in a separate document, that a consumer report may be obtained
for employment purposes.
4. Make a clear and accurate disclosure to the applicant or employee if an
investigative consumer report (reference check) will be obtained, including
a statement informing the subject of the report that additional information
is available if requested.
5. Obtain the proper written authorization from the applicant or employee for
any consumer report prior to requesting any report.
6. Provide proper notice to the applicant or employee, a copy of the report
obtained, and a Summary of Rights, as required by the FCRA, if an adverse
decision regarding employment is going to be made due to information in any
report obtained from Avert, Inc.
7. Ensure that reports will be requested only by User's designated
representatives and forbid employees from obtaining reports on themselves,
associates or any other person except in the exercise of their official
duties.
8. Recognize that information is obtained and managed by fallible sources, and
that for the fee charged, Avert does not guarantee or insure the accuracy
or the depth of information provided.
9. Assume responsibility for the final verification of the applicant's
identity.
10. Base employment decisions or any actions on the User's lawful policies and
procedures and recognize that Avert employees are not allowed to render any
legal opinions regarding information contained in a consumer report.
11. Pay for services based on a statement system similar to ones used by
telephone companies. Terms are NET 30 days. Accounts in arrears will assume
a finance charge of 2% per month or the highest lawful rate, whichever is
less. If an account goes to collection, User agrees to pay all expenses,
including reasonable legal fees.
12. Provide credit information on user as may be requested by Avert, Inc.
during the course of this agreement.
<PAGE>
13. Be aware that, if an account remains inactive for twelve consecutive
months, it may be closed and a new User Agreement may be required to reopen
the account.
14. Acknowledge that a facsimile of this agreement is as valid as an original.
15. Recognize that in order to remain in compliance with laws and regulations
governing consumer reporting agencies, Avert may make modifications to this
agreement from time to time. These modifications may be mailed to the User
and the User's use of Avert's services after the date specified in the
communication will be construed as your agreement and implied consent to
these modifications.
Avert agrees to:
1. Comply with all applicable laws in the preparation and transmission of
reports as defined in 15 USC-1681 et seq, regulated by the Federal Trade
Commission.
2. Follow reasonable quality assurance procedures to assure maximum possible
accuracy of information.
3. Re-verify at no cost any disputed report when either the User or the
subject makes a request in accordance with applicable law. Avert's response
shall be made in writing and delivered in a timely manner.
4. Maintain consumer report information and transaction details for a minimum
of two years. During an inquiry, the subject of the report has the right to
learn the name of the User ordering information and has the right to
receive a copy of the report ordered by the User when a lawful request is
made to Avert.
5. Provide all information to the consumer as required by the Fair Credit
Reporting Act.
6. Maintain confidentiality of its data acquisition and verification
methodology.
7. Avert may, at its sole discretion, terminate service to any user.
<PAGE>
Consumer Report User Agreement
Please read both sides and complete this agreement,
attach a check or provide credit card information as
payment of the $50.00 set up fee, and mail to Avert.
You will be billed NET 30 days for Avert products and
services. When your account is established, we will
call you with you customer number and send you a copy
of this agreement. The security and dissemination of
this unique customer number are the responsibility of
the person signing this agreement for the User as
defined on the back. Avert will neither release AVERT
information nor take orders for services unless the Your Customer Number Is
customer number is provided. If you are dissatisfied
for any reason, notify Avert in writing within 30 days -----------------------
of the date you signed this agreement. Your account
will be closed and your setup fee (less any charges for
products and services ordered) will be refunded.
Delivery Address for Reports
One address must be the physical location of your company.
Business Name (User)
------------------------------------------------------------
Address
------------------------------------------------------------------------
City State Zip Code
Phone# Fax #
------------------------------------ ------------------------------
Contact Name(s)
-----------------------------------------------------------------
First Last Title
Billing Address
Invoices to be sent here.
Business Name (User)
-----------------------------------------------------------
Address
------------------------------------------------------------------------
City State Zip Code
Phone# Fax #
----------------------------------- -------------------------------
Contact Name(s)
-----------------------------------------------------------------
First Last Title
1. Please describe your company's business.
-----------------------------------------------------------------------------
2. List approximate number of employees.
----------------------------------------
3. How long has your company been in business?
---------------------------------
4. Is your company in a: [] Commercial [] Residential [] Other (please explain)
location?
-----------------------------------------------------------------------------
5. If you intend to use Name Link or Credit Link reports, please attach a copy
of your business license.
6. Identify two principals (or owners) of your business, or, if your company
stock is traded on a recognized stock exchange give symbol and exchange.
Name: Title: Phone:
----------------------- --------------------- ---------
Name: Title: Phone:
----------------------- --------------------- ---------
Symbol: Exchange:
----------------------------- ------------------------------
<PAGE>
7. Check here to join AVERTadvantage for $10/month. [ ]
8. If paying $50 setup fee by credit card, please complete the following:
Credit Card: Card Number:
-------------------- -------------------------------
Cardholder Name: Expiration Date:
------------------------------- -------------
User certifies that the "Terms for Consumer Report User Agreement" on the
back of this page have been read and agrees to the terms as written.
X
-------------------------------------------------------------------------------
User Authorized Signature Title Date
- --------------------------------------------------------------------------------
Avert, Inc. Authorized Signature Title Date
EXHIBIT 10.1.3
Terms for Consumer Report User Agreement NONEMPLOYMENT
Amended September 1, 1997
This agreement by and between Avert, Inc. and the company named below ("User")
and/or its designated agent(s), consists of the following understandings and
conditions:
User certifies and agrees to:
1. Use the services of and the reports received from Avert in strict
compliance with the provisions of 15 U.S.C. 1681 et. seq. (Fair Credit
Reporting Act, and all other applicable federal and state laws and
regulations.
2. Use the information provided by Avert for the user's exclusive use only,
except to disclose said information to the subject of the report.
3. Order and use Avert services and reports only for the permissible purposes
indicated on the reverse side of these terms.
4. Ensure that reports will be requested only by the User's designated
representatives and forbid employees from obtaining reports on themselves,
associates or any other person except in the exercise of their official
duties.
5. Recognize that information is obtained and managed by fallible sources, and
that for the fee charged, Avert does not guarantee or insure the accuracy
or the depth of information provided.
6. Assume responsibility for the final verification of the applicant's
identity.
7. Base or any actions on the User's lawful policies and procedures and
recognize that Avert employees are not allowed to render any legal opinions
regarding information contained in a consumer report.
8. Pay for services based on a statement system similar to ones used by
telephone companies. Terms are NET 30 days. Accounts in arrears will assume
a finance charge of 2% per month or the highest lawful rate, whichever is
less. If an account goes to collection, User agrees to pay all expenses,
including reasonable legal fees.
9. Provide two trade references and a bank reference, included with this
agreement.
<PAGE>
10. Be aware that, if an account remains inactive for twelve consecutive
months, it may be closed and a new User Agreement may be required to reopen
the account.
11. Acknowledge that a facsimile of this agreement is as valid as an original.
12. Recognize that in order to remain in compliance with laws and regulations
governing consumer reporting agencies, Avert may make modifications to this
agreement from time to time. These modifications may be mailed to the User
and the User's use of Avert's services after the date specified in the
communication will be construed as your agreement and implied consent to
these modifications.
Avert agrees to:
1. Comply with all applicable laws in the preparation and transmission of
reports as defined in 15 USC-1681 et seq, regulated by the Federal Trade
Commission.
2. Follow reasonable quality assurance procedures to assure maximum possible
accuracy of information.
3. Re-verify at no cost any disputed report when either the User or the
subject makes a request in accordance with applicable law. Avert's response
shall be made in writing and delivered in a timely manner.
4. Maintain consumer report information and transaction details for a minimum
of two years. During an inquiry, the subject of the report has the right to
learn the name of the User ordering information and has the right to
receive a copy of the report ordered by the User when a lawful request is
made to Avert.
5. Provide all information to the consumer as required by the Fair Credit
Reporting Act.
6. Maintain confidentiality of its data acquisition and verification
methodology.
7. Avert may, at its sole discretion, terminate service to any user.
<PAGE>
Consumer Report User Agreement
Please read both sides and complete this agreement,
attach a check or provide credit card information as
payment of the $50.00 set up fee, and mail to Avert.
You will be billed NET 30 days for Avert products and
services. When your account is established, we will
call you with you customer number and send you a copy
of this agreement. The security and dissemination of
this unique customer number are the responsibility of
the person signing this agreement for the User as
defined on the back. Avert will neither release AVERT
information nor take orders for services unless the Your Customer Number Is
customer number is provided. If you are dissatisfied
for any reason, notify Avert in writing within 30 days -----------------------
of the date you signed this agreement. Your account
will be closed and your setup fee (less any charges for
products and services ordered) will be refunded.
Delivery Address for Reports
One address must be the physical location of your company.
Business Name (User)
------------------------------------------------------------
Address
------------------------------------------------------------------------
City State Zip Code
Phone# Fax #
------------------------------------ ------------------------------
Contact Name(s)
-----------------------------------------------------------------
First Last Title
Billing Address
Invoices to be sent here.
Business Name (User)
-----------------------------------------------------------
Address
------------------------------------------------------------------------
City State Zip Code
Phone# Fax #
----------------------------------- -------------------------------
Contact Name(s)
-----------------------------------------------------------------
First Last Title
1. Please describe your company's business.
-----------------------------------------------------------------------------
2. List approximate number of employees.
----------------------------------------
3. How long has your company been in business?
---------------------------------
4. Is your company in a: [] Commercial [] Residential [] Other (please explain)
location?
-----------------------------------------------------------------------------
5. Permissible purposes for which reports are obtained from Avert (check all
that apply to your account):
[] Legitimate business nee in connection with a transaction initiated by the
consumer.
[] For the underwriting of insurance as a result of an application from a
consumer.
[] For the extension of credit as a result of an application from the consumer
or the review or collection of a consumer's account.
<PAGE>
[] For use by a potential investor or servicer, or current insurer, in a
valuation of, or an assessment of, the credit or repayment risks associated
with an existing credit obligation.
6. Identify two principals (or owners) of your business, or, if your company
stock is traded on a recognized stock exchange give symbol and exchange.
Name: Title: Phone:
----------------------- --------------------- ---------
Name: Title: Phone:
----------------------- --------------------- ---------
Symbol: Exchange:
----------------------------- ------------------------------
7. Check here to join AVERTadvantage for $10/month. [ ]
8. If paying $50 setup fee by credit card, please complete the following:
Credit Card: Card Number:
-------------------- -------------------------------
Cardholder Name: Expiration Date:
------------------------------- -------------
User certifies that the "Terms for Consumer Report User Agreement" on the
back of this page have been read and agrees to the terms as written.
X
-------------------------------------------------------------------------------
User Authorized Signature Title Date
- --------------------------------------------------------------------------------
Avert, Inc. Authorized Signature Title Date
<PAGE>
Consumer Report User Agreement Trade and Bank References
Consumer Name:
------------------------------------------------------------------
To become an Avert customer, please submit two current trade references and one
bank reference. Include contact names, phone numbers, and account numbers.
Understand that signature below authorizes any references to provide account
information and balance, account status, and length of business.
Trade:
1.
-----------------------------------------------------------------------------
Name Phone
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Account Number
2.
-----------------------------------------------------------------------------
Name Phone
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Account Number
Bank:
- --------------------------------------------------------------------------------
Name Phone
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Account Number
- --------------------------------------------------------------------------------
User Authorized Signature Date
EXHIBIT 10.3.1
RESELLER
SERVICE AGREEMENT
This Agreement is made this 25 day of September, 1997, by and between
Avert, Inc. (hereinafter referred to as "Reseller") and Trans Union Corporation
(hereinafter referred to as "Trans Union") to provide for credit reporting
services.
WHEREAS, Reseller is in the business of obtaining consumer reports
from third party sources and providing credit reporting services to its
customers ("Reselling"); and
WHEREAS, Trans Union owns and maintains a national database of
consumer credit information; and
WHEREAS, Reseller desires to Resell Trans Union consumer credit
reports, or information therefrom, to users of reports who have a permissible
purpose.
NOW THEREFORE, in consideration of the premises and the mutual
benefits expressed herein, the parties agree as follows:
I. Reseller Responsibilities
A. Reseller shall provide Trans Union consumer reports or information
from Trans Union consumer reorts only to users who have a permissible
purpose for obtaining consumer reports, as defined by Section 604 of
the Federal Credit Reporting Act (15 USC 1681b), hereinafter called
"FCRA." Such users shall be provided access to the Trans Union credit
reporting system or data therefrom may be transferred without change,
may be reformatted by Reseller, or may be merged with those obtained
from other consumer reporting agencies (Merged Reports).
B. Reseller shall obtain Subscriber Agreements from such users, wherein
each user will state the nature of its business, certify the specific
purpose for which consumer reports will be obtained, and agree that
reports will be obtained for no other purpose. The permissiable
purpose specified shall be one or more of the following:
1. In connection with a credit transaction involving the consumer on
whom the information is to be furnished and involving the
extension of credit to, or review or collection of an account of
the consumer; or
2. For employment purposes, in which case the Subscriber must
execute an agreement in substantially the same format as Exhibit
A hereto; or
PLEASE SEE AVERT USER AGREEEMENTS
3. In connection with the underwriting of insurance involving the
consumer; or
4. For tenant screening purposes.
A. Reseller may advertise its services on the Internet or another
proprietary computer system. However, reports may not be sold and
delivered on a public computer network. In the event Reseller believes
that adequate security has been established to permit on line network
or Internet access, with no risk of any party other than the
appropriate party obtaining an individual's consumer report, Reseller
<PAGE>
shall apply to Trans Union for approval of its security procedures.
Approval must then be obtained from Tran Union's computer access
Security Department, in writing, before any such deliveries of
consumer reports can occur. Failure to obtain such prior approval
shall result in termination of this Agreement.
B. Reseller shall not sell Trans Union consumer reports to customers that
are private investigative agencies, detective agencies, or law firms.
Reseller shall take the following steps to verify the identify of its
customers who will obtain Trans Union credit reports or information
therefrom to make certain that none are such agencies:
1. Confirm that the stated purpose for obtaining consumer reports is
compatible with the type of busines conducted by the potential
customer.
2. Conduct a physical inspection of the company's premises to assure
that it is a legitimate business facility (not a residence) and
that the furnishings, etc. are commensurate with the size and
purported type of business, and in order to determine if it is a
detective agency, private investigative agency, security service,
investigator, law firm, or other unauthorized user. This is a
material requirements of this Agreement.
3. Confirm that advertisements or signs are compatible with
purported business.
4. Verify that the company has a business checking account and that
the account balance is compatible with the size and nature of the
company.
5. Verify business references to ensure that the potential customer
has clientele which would support the stated business.
6. Verify business phone numbers by checking the phone directory or
other phone records.
7. Check the yellow pages listings for the area where the customer
is located, under the following types of businesses to see if the
prospective customer is listed:
a) Detective Agencies
b) Private Investigators
c) Security Services
d) Investigators
e) Lawyers or Attorneys At Law
8. Theactions taken to verify the type of customer will be notated
on the Subscriber Agreement. Records which document the
investigation, and the Subscriber Agreement, must be retained as
long as the customer continues to maintain access and for two
years thereafter. Those records (or copies thereof) must be made
available to appropriate Trans Union personnel on request.
A. If, as a result of the verifications outlined above, the prospective
customer is found to be a detective agency, private investigative agency,
security service, investigator, or law firm, or is found to have no
permissible purpose to obtain credit reports, no agreement will be signed
and no subscriber number will be issued.
B. No customer of Reseller shall be a government law enforcement agency. C.
Reseller shall not sell consumer reports or information therefrom to
another reseller. D. Trans Union reserves the right to terminate any
customer of Reseller at any time with or without notice.
<PAGE>
II. Merged Report Guidelines
Reseller agrees to adhere to the following guidelines when it sells Merged
Consumer Reports:
1) Reseller shall comply with the requirements of FCRA dealing with
consumer disclosure, interviews and reinvestigation procedures.
2) Reseller shall retain each Merged Report so that it can provide a
consumer disclosure as required by FCRA.
3) Reseller shall be able to easily identify the source(s) of each
element of data in the Merged Report. Consumer disclosures must
clearly show this data as it was originally reported by each of
the sources when providing the consumer disclosure.
4) When a customer of the Reseller requests and reviews a Merged
Report and the consumer is denied credit based on information in
that Report, the consumer must be referred to the Reseller for a
complete disclosure.
5) In making a disclosure, the Reseller will provide the names,
addresses and telephone numbers of the consumer reporting agency
that was used to provide information for the report.
6) In making a disclosure, the Reseller must advise the consumer
about her/his FCRA rights to dispute information with the
appropriate source credit bureau, to requrest reinvestigation,
and to have corrected reports issued to previous recipients.
7) Reseller must obtain information from sources other than the
applicant. The Reseller must obtain information from a minimum of
two national consumer reporting agencies. Separate inquiries are
necessary when the co-borrowers have individualloy obtained
credit.
8) The Merged Report must contain the date the report was created,
the name, address, and phone number of the consumer reporting
agency which prepared the Merged Report. The Merged Report must
show the names of the repository(ies) from which the information
was obtained and must identify the organization that ordered the
Merged Report.
9) Once the merge logic is applied, the Merged Report must contain
the following list of tradeline or credit grantor information for
each tradeline if it was furnished by one or more of the credit
reporting agencies.
a. Account Name
b. Account Number
c. Date Reported
d. Date Opened
e. Type of Account
f. Current Status
g. Current Balance
h. High Credit (Credit Limit)
i. Terms (Payment)
j. Historical Status
k. Inquiries
l. Account Association Code
III. Trans Union Responsibilities
A. Trans Union shall maintain credit information on individuals as
furnished by its subscribers or obtained from other available sources.
B. Trans Union shall use good faith in obtaining and assembling such
information from sources deemed reliable, but does not guarantee the
accuracy of any information reported, and TRANS UNION MAKES NO
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE
<PAGE>
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, RESPECTING THE ACCURACY OF ANY TRANS UNION CREDIT INFORMATION
FURNISHED BY TRANS UNION TO RESELLER OR TO ANY SUBSCRIBERS OF
RESELLERS. IN NO EVENT SHALL TRANS UNION BE LIABLE TO RESELLER IN ANY
MANNER WHATSOEVER FOR ANY LOSS OR INJURY TO RESELLER RESULTING FROM
THE OBTAINING OR FURNISHING OF CREDIT REPORTS AND, FURTHER, RESELLER
AGREES TO HOLD TRANS UNION HARMLESS AND INDEMNIFY IT FROM ANY AND ALL
CLAIMS, LOSSES AND DAMAGES ARISING OUT OF THE ISSUANCE OF SUCH REPORTS
OR THE FAILURE OF RESELLER TO KEEP AND PERFORM ANY OF ITS OBLIGATIONS
DESCRIBED HEREIN.
IV. Identify End User
A. Reseller shall provide to Trans Union as to each customer who will
obtain Trans Union credit reports or information therefrom as a result
of Reseller's solicitation, its identity by subscriber number, name,
address and telephone number, and the permissible purpose for which
each report is sought, so that such information may be noted on the
report for the consumer who is the subject of the report accessed.
Such end user identification shall be made by either Option (1) or
Optionn (2) below, as indicated by Subscriber. Failure of Reseller to
comply with the requirements of this Section IV shall result in
termination of this Agreement.
[] Option (1): Each customer signed up by Reseller may access the
Trans Union system after appropriate identification procedures
have been established, and a separate customer code shall be
issued for each customer. When such code is established, Reseller
shall provide Trans Union with the customer's name, address,
telephone number, and the permissible purpose for which reports
will be accessed. If the customer intends to access reports for
more than one permissible purpose, separate codes will be issued
to enable Trans Union to identify the permissible purpose for
each access to a consumer report; or
[] Option (2): the customer name and permissible purpose shall be
identified by inquiry on each consumer report accessed. Reseller
agrees to establish and provide Trans Union a toll free number,
which will be answered between the hours of 9 a.m. to 5 p.m.
Monday through Friday, exclusive of federal holidays, that Trans
Union can call to obtain the customer's address and telephone
number.
B. If any current customers of Reseller have been assigned a Trans Union
access code, they shall be identified, and Reseller shall determine
that the certifications required herein and all other obligations
stated herein are complied with by such customers. All detective or
investigative agencies, government law enforcement agencies, or law
firms who have an access code for the Trans Union system, shall be
terminated and access to the Trans Union system by them shall be
canceled.
V. Fees & Chages
A. Reseller shall pay to Trans Union for each access by it or one of its
customers the price then in effect for the type of credit report
ordered. Trans Union shall have no obligation to collect any account
owing from Reseller's customers.
B. Trans Union shall provide monthly invoices to Reseller for all access
by it or Reseller's customers, and such invoices shall be paid by
Reseller within thirty (3) days of receipt. Past due amounts shall
accrue interest at the rate of 1.5% per month. If collection efforts
are required, Reseller shall be liable for all cost of collection,
including reasonable attorney's fees.
<PAGE>
VI. Miscellaneous
A. This Agreement shall remain in force and effect for one (1) year from
the date hereof, and thereafter, from year to year, on the same basis
as set forth herein, except that either party may cancel this
Agreement at any time upon at least sixty (60) days notice, and Trans
Union may cancel this Agreement or any customer solicited by Reseller
immediately if it determines that the requirements of this Agreement
or any law have not been met. Trans Union may also terminate this
Agreement immediately without notice if invoices hereunder are not
paid as of the due date.
B. The parties hereto agree that this instrument is the full and complete
Agreement between them regarding the furnishing of credit information,
supersedes all prior agreements or discussions, and is not to be
altered, varied, or enlarged upon by any verbal promises, statements,
or representations not expressed herein.
C. The parties acknowledge the special and unique purposes of this
Agreement and, therefore, agree that, notwithstanding any other
provisions to the contrary contained in this Agreement, neither this
Agreement nor any of the rights or obligations hereunder shall be
assignable by Reseller without the prior written consent of Trans
Union.
D. Each of the parties to this Agreement are independent contractors and
nothing contained in this Agreement shall be construed as creating a
joint venture, partnership, licensor-licensee, prinicpal-agent or
mutual agency relationship between or among the parties hereto and no
party shall, by virtue of this Agreement, have any right or power to
create any obligation, express or implied, on behalf of any other
party. No party, nor any employee of a party, shall be deemed to be an
employee of the other party by virtue of this Agreement.
Agreed to on the date first above written.
Trans Union Corporation Reseller Name: Avert, Inc.
By: By: /s Jamie M. Burgat
-------------------------------- ------------------------------
Print Name Print Name: Jamie M. Burgat
------------------------ ---------------------
Title Title: V.P. Operations/Treasurer
----------------------------- ---------------------------
Reseller Address: 301 Remington
Fort Collins, CO 80524
EXHIBIT 10.5
AMENDED AND RESTATED
AVERT, INC.
1994 STOCK INCENTIVE PLAN
1. General. This Amended and Restated Stock Incentive Plan (the "Plan")
provides eligible employees of Avert, Inc., (the "Company") with the opportunity
to acquire or expand their equity interest in the Company by making available
for award or purchase Common Shares, without par value, of the Company ("Common
Shares"), through the granting of nontransferable options to purchase Common
Shares ("Stock Options") and the granting of Common Shares subject to temporal
restrictions on transfer and substantial risks of forfeiture ("Restricted
Stock"). Stock Options and Restricted Stock shall be collectively referred to
herein as "Grants"; an individual grant of Stock Options or Restricted Stock
shall be individually referred to herein as a "Grant." It is intended that key
employees may be granted, simultaneously or from time to time, Stock Options
that qualify as incentive stock options ("Incentive Stock Options") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
Stock Options that do not so qualify ("Non-qualified Stock Options"). No
provision of the Plan is intended or shall be construed to grant employees
alternative rights in any Incentive Stock Option granted under the Plan so as to
prevent such Option from qualifying under Section 422 of the Code.
2. Purpose of the Plan. The purpose of the Plan is to provide continuing
incentives to key employees of the Company and of any subsidiary corporation of
the Company, by encouraging such key employees to acquire new or additional
share ownership in the Company, thereby increasing their proprietary interest in
the Company's business and enhancing their personal interest in the Company's
success.
For purposes of the Plan, a "subsidiary corporation" consists of any
corporation at least fifty percent (50%) of the stock of which is directly or
indirectly owned or controlled by the Company.
3. Effective Date of the Plan. The Plan shall become effective upon March
19, 1994, subject to approval by holders of a majority of the outstanding shares
of voting capital stock of the Company. If the Plan is not so approved within
twelve (12) months after the date the Plan is adopted by the Board of Directors,
the Plan and any Grants made hereunder shall be null and void. However, if the
Plan is so approved, no further shareholder approval shall be required with
respect to the making of Grants pursuant to the Plan, except as provided in
Section 11 hereof.
4. Administration of the Plan. The Plan shall be administered by the
Compensation Committee of the Board of Directors of the Company, or by any other
committee selected by such Board of Directors by majority vote and composed of
no fewer than two (2) members of such Board of Directors (the "Committee"). No
person shall be appointed to the Committee who, during the one-year period
immediately preceding such person's appointment to the Committee, has received
any Grants under the Plan or any similar stock option or stock incentive plan,
other than a formula-based plan, maintained by the Company or any subsidiary
corporation. A member of the Committee (i) must be a "disinterested person"
within the meaning of Rule 16b-3 promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934 or any successor definition
adopted by the Securities and Exchange Commission and (ii) shall not be eligible
to participate in this Plan while serving on the Committee.
<PAGE>
A majority of the Committee shall constitute a quorum. The acts of a
majority of the members present at any meeting at which a quorum is present (or
acts unanimously approved in writing by the members of the Committee) shall
constitute binding acts of the Committee.
Subject to the terms and conditions of the Plan, the Committee shall be
authorized and empowered:
(a) To select the key employees to whom Grants may be made;
(b) To determine the number of Common Shares to be covered by any
Grant;
(c) To prescribe the terms and conditions of any Grants made under the
Plan, and the form(s) and agreement(s) used in connection with such Grants,
which shall include agreements governing the granting of Restricted Stock
and/or Stock Options;
(d) To determine the time or times when Stock Options will be granted
and when they will terminate in whole or in part;
(e) To determine the time or times when Stock Options that are granted
may be exercised;
(f) To determine, at the time a Stock Option is granted under the
Plan, whether such Option is an Incentive Stock Option entitled to the
benefits of Section 422 of the Code; and
(g) To establish any other Stock Option agreement provisions not
inconsistent with the terms and conditions of the Plan or, where the Stock
Option is an Incentive Stock Option, with the terms and conditions of
Section 422 of the Code.
5. Employees Eligible for Grants. Grants may be made from time to time to
those key employees of the Company or a subsidiary corporation, who are
designated by the Committee in its sole and exclusive discretion. Key employees
may include, but shall not necessarily be limited to, management (employee)
members of the Board of Directors (excluding members of the Committee), and
officers, of the Company and any subsidiary corporation; however, Stock Options
intended to qualify as Incentive Stock Options shall only be granted to key
employees while actually employed by the Company or a subsidiary corporation.
The Committee may grant more than one Stock Option to the same key employee. No
Stock Option shall be granted to any key employee during any period of time when
such key employee is on a leave of absence.
6. Shares Subject to the Plan. The shares to be issued pursuant to any
Grant made under the Plan shall be Common Shares. Either Common Shares held as
treasury stock, or authorized and unissued Common Shares, or both, may be so
issued, in such amount or amounts within the maximum limits of the Plan as the
Board of Directors shall from time to time determine.
Subject to the provisions of the next succeeding paragraph of this Section
6 and the provisions of Section 7(h), the aggregate number of Common Shares that
can be actually issued under the Plan (exclusive of Restricted Stock forfeited
under the Plan before the holder thereof received any benefits of ownership,
such as dividends) shall be Five hundred twenty five thousand (525,000) Common
Shares.
If, at any time subsequent to March 19, 1994, the effective date of the
Plan, the number of Common Shares is increased or decreased, or changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation (whether as a result of a stock split,
stock dividend, combination or exchange of shares, exchange for other
<PAGE>
securities, reclassification, reorganization, redesignation, merger,
consolidation, recapitalization or otherwise): (i) there shall automatically be
substituted for each Common Share subject to an unexercised Stock Option (in
whole or in part) granted under the Plan, the number and kind of shares of stock
or other securities into which each outstanding Common Share shall be changed or
for which each such Common Share shall be exchanged; (ii) the option price per
Common Share or unit of securities shall be increased or decreased
proportionately so that the aggregate purchase price for the securities subject
to a Stock Option shall remain the same as immediately prior to such event; and
(iii) any outstanding Restricted Stock that is converted, exchanged or otherwise
changed into a different number or kind of stock or security, shall continue to
be subject to any and all terms, conditions and restrictions originally
applicable to such Restricted Stock. In addition to the foregoing, the Committee
shall be entitled in the event of any such increase, decrease or exchange of
Common Shares to make other adjustments to the securities subject to a Stock
Option, the provisions of the Plan, and to any related Stock Option agreements
(including adjustments which may provide for the elimination of fractional
shares), where necessary to preserve the terms and conditions of any Grants
hereunder.
7. Stock Option Provisions.
(a) General. The Committee may grant to key employees (also referred
to as "optionees") nontransferable Stock Options that either qualify as
Incentive Stock Options under Section 422 of the Code or do not so qualify.
However, any Stock Option which is an Incentive Stock Option shall only be
granted within 10 years from the earlier of (i) the date this Plan is
adopted by the Board of Directors of the Company; or (ii) the date this
Plan is approved by the shareholders of the Company.
(b) Stock Option Price. The option price per Common Share which may be
purchased under a Stock Option under the Plan shall be determined by the
Committee at the time of Grant, but shall not be less than one hundred
percent (100%) of the fair market value of a Common Share, determined as of
the date such Option is granted; however, if a key employee to whom an
Incentive Stock Option is granted is, at the time of the grant of such
Option, an "owner," as defined in Section 422(b)(6) of the Code (modified
as provided in Section 424(d) of the Code) of more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company
or any subsidiary corporation (a "Substantial Shareholder"), the price per
Common Share of such Option, as determined by the Committee, shall not be
less than one hundred ten percent (110%) of the fair market value of a
Common Share on the date such Option is granted. Except as specifically
provided above, the fair market value of a Common Share shall be determined
in accordance with procedures to be established by the Committee. The day
on which the Committee approves the granting of a Stock Option shall be
considered the date on which such Option is granted, unless the grant is
expressly made subject to the occurrence of an event specified by the
Committee at the time of the approval, in which case, the date on which
such event occurs shall be considered the date on which the Option is
granted.
(c) Period of Stock Option. The Committee shall determine when each
Stock Option is to expire. However, no Stock Option shall be exercisable
for a period of more than ten (10) years from the date upon which such
Option is granted. Further, no Incentive Stock Option granted to an
employee who is a Substantial Shareholder at the time of the grant of such
Option shall be exercisable after the expiration of (5) years from the date
of grant of such Option.
(d) Limitation on Exercise and Transfer of Stock Options. Only the key
employee to whom a Stock Option is granted may exercise such Option, except
where a guardian or other legal representative has been duly appointed for
such employee, and except as otherwise provided in the case of such
employee's death. No Stock Option granted hereunder shall be transferable
by an optionee other than by will or the laws of descent and distribution.
No Stock Option granted hereunder may be pledged or hypothecated, nor shall
any such Option be subject to execution, attachment or similar process.
<PAGE>
(e) Employment, Holding Period Requirements For Certain Options. The
Committee may condition any Stock Option granted hereunder upon the
continued employment of the optionee by the Company or by a subsidiary
corporation, and may make any such Stock Option immediately exercisable.
However, the Committee will require that, from and after the date of grant
of any Incentive Stock Option granted hereunder until the day three (3)
months prior to the date such Option is exercised, such optionee must be an
employee of the Company or of a subsidiary corporation, but always subject
to the right of the Company or any such subsidiary corporation to terminate
such optionee's employment during such period. Each Stock Option shall be
subject to such additional restrictions as to the time and method of
exercise and sale of the Common Shares acquired upon exercise as shall be
prescribed by the Committee. Upon completion of such requirements, if any,
a Stock Option or the appropriate portion thereof may be exercised in whole
or in part from time to time during the option period; however, such
exercise right(s) shall be limited to whole shares.
(f) Payment for Stock Option Price. A Stock Option shall be exercised
by an optionee giving written notice to the Company of his intention to
exercise the same, accompanied by full payment of the purchase price in
cash or by check, or, with the consent of the Committee, in whole or in
part with a promissory note or with a surrender of Common Shares having a
fair market value on the date of exercise equal to that portion of the
purchase price for which payment in cash or check is not made. The
Committee may, in its sole discretion, approve other methods of exercise
for a Stock Option or payment of the option price, provided that no such
method shall cause any option granted under the Plan as an Incentive Stock
Option to not qualify under Section 422 of the Code, or cause any Common
Share issued in connection with the exercise of an option not to be a fully
paid and non-assessable Common Share. (g) Certain Reissuances of Stock
Options. To the extent Common Shares are surrendered by an optionee in
connection with the exercise of a Stock Option in accordance with Section
7(f), the Committee in its sole discretion grant new Stock Options to such
optionee (to the extent Common Shares remain available for Grants), subject
to the following terms and conditions:
i) The number of Common Shares shall be equal to the number of
Common Shares being surrendered by the optionee;
ii) The option price per Common Share shall be equal to the fair
market value of Common Shares, determined on the date of
exercise of the Stock Options whose exercise caused such
Grant; and
iii) The terms and conditions of such Stock Options shall in all
other respects replicate such terms and conditions of the
Stock Options whose exercise caused such Grant, except to
the extent such terms and conditions are determined to not
be wholly consistent with the general provisions of this
Section 7, or in conflict with the remaining provisions of
this Plan.
(h) Cancellation and Replacement of Stock Options and Related Rights.
The Committee may at any time or from time to time permit the voluntary
surrender by an optionee who is the holder of any outstanding Stock Options
under the Plan, where such surrender is conditioned upon the granting to
such optionee of new Stock Options for such number of shares as the
Committee shall determine, or may require such a voluntary surrender as a
condition precedent to the grant of new Stock Options. The Committee shall
determine the terms and conditions of new Stock Options, including the
prices at and periods during which they may be exercised, in accordance
with the provisions of this Plan, all or any of which may differ from the
terms and conditions of the Stock Options surrendered. Any such new Stock
Options shall be subject to all the relevant provisions of this Plan. The
Common Shares subject to any Stock Option so surrendered, shall no longer
<PAGE>
be charged against the limitation provided in Section 6 of this Plan and
may again become shares subject to the Plan. The granting of new Stock
Options in connection with the surrender of outstanding Stock Options under
this Plan shall be considered for the purposes of the Plan as the granting
of new Stock Options and not an alteration, amendment or modification of
the Plan or of the Stock Options being surrendered.
(i) Limitation on Exercisable Incentive Stock Options. The aggregate
fair market value of the Common Shares first becoming subject to exercise
as Incentive Stock Options by a key employee during any given calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). Such
aggregate fair market value shall be determined as of the date such Option
is granted, taking into account, in the order in which granted, any other
incentive stock options granted by the Company, or by a parent or
subsidiary thereof.
8. Restricted Stock.
(a) Grant. The Committee shall determine the key employees to whom,
and the time or times at which, Grants of Restricted Stock will be made,
the number of shares of Restricted Stock to be granted, the price (if any)
to be paid by such key employees (subject to Section 8(b)), the time or
times within which such Restricted Stock grants may be subject to
forfeiture, and the other terms and conditions of the grants in addition to
those set forth in Section 8(b). The Committee may condition the grant of
Restricted Stock upon the attainment of specified vesting schedules,
employment requirements or performance goals or such other factors as the
Committee may determine in its sole discretion.
(b) Terms and Conditions. Restricted Stock granted under the Plan
shall contain any terms and conditions, not inconsistent with the
provisions of the Plan, which are deemed desirable by the Committee. A key
employee who receives a grant of Restricted Stock shall not have any rights
with respect to such Grant, unless and until such key employee has executed
an agreement evidencing such Grant in the form approved from time to time
by the Committee, has delivered a fully executed copy thereof to the
Company, and has otherwise complied with the applicable terms and
conditions of such Grant. In addition, Restricted Stock granted under the
Plan shall be subject to the following terms and conditions:
i) The purchase price for Common Shares consisting of
Restricted Stock, if any, will be specified by the
Committee.
ii) Grants of Restricted Stock shall only be accepted by
executing a Restricted Stock agreement and paying, in cash
or by check, whatever price (if any) is required under
Section 8(b)(i).
iii) Each key employee granted Restricted Stock shall be issued a
stock certificate in respect of such shares of Restricted
Stock. Such certificate shall be registered in the name of
such key employee, and shall bear an appropriate legend
referring to the terms, conditions, and restrictions
applicable to such Grant.
iv) Any stock certificates evidencing Common Shares consisting
of Restricted Stock shall either (A) be held in custody by
the Company until the employment and other restrictions
thereon shall all have lapsed; or (B) be affixed with a
legend, identifying such Shares as Restricted Stock and
expressly prohibiting the sale, transfer, tender, pledge,
assignment or encumbrance of such Shares, as the Committee
shall determine. With respect to any Restricted Stock held
in custody by the Company, the key employee granted such
<PAGE>
Restricted Stock shall deliver to the Company a stock power,
endorsed in blank, relating to the Common Shares represented
by such Stock. With respect to any Restricted Stock held by
a key employee under legend, the key employee granted such
Restricted Stock shall deliver to the Company an
acknowledgement that such Stock remains subject to a
substantial risk of forfeiture in the event of termination
of employment under certain circumstances, and that the
certificates representing ownership of such Stock will be
surrendered to the Company immediately upon any such
termination of employment.
v) Subject to the provisions of the Plan and the Restricted
Stock agreement, during a temporal period set by the
Committee and commencing with the date of such Grant (the
"Restriction Period"), a key employee shall not be permitted
to sell, transfer, tender, pledge, assign or otherwise
encumber any Restricted Stock granted under the Plan.
However, the Committee, in its sole discretion, may provide
for the lapse of such transfer or other restrictions in
installments, or accelerate or waive such restrictions in
whole or in part, based on service, performance or other
factors and criteria selected by the Committee.
vi) Except as provided in this Section 8(b)(vi) and Section
8(b)(v), a key employee shall have, with respect to shares
of Restricted Stock granted to him, all of the rights of a
shareholder of the Company, including the right to vote such
Stock and the right to receive any dividends thereon. The
Committee, in its sole discretion and as determined at the
time of a Grant of Restricted Stock, may permit or require
cash dividends otherwise due and payable to be deferred and,
if the Committee so determines, reinvested either in
additional Restricted Stock (to the extent Common Shares are
available), or otherwise. Stock dividends issued with
respect to Restricted Stock shall be treated as additional
shares of Restricted Stock. As Restricted Stock, such
additional Common Shares will be subject to the same
restrictions, terms and conditions applicable to the
Restricted Stock with respect to which such additional
Common Shares were issued.
vii) No Restricted Stock shall be transferable by a key employee
other than by will or by the laws of descent and
distribution.
viii)In the event Restricted Stock is forfeited by a key
employee, the Company will refund to such key employee any
payment(s) made by such key employee to purchase such Stock,
promptly upon such forfeiture (and any corresponding
surrender of stock certificates).
(c) Minimum Value Provisions. To ensure that Grants of Restricted
Stock actually reflect the performance of the Company and service of the
key employee, the Committee may provide, in its sole discretion, for a
tandem performance-based award, or other grant, designed to guarantee a
minimum value, payable in cash or Common Shares, to the recipient of a
Restricted Stock Grant, subject to such performance, future service,
deferral and other terms and conditions as may be specified by the
Committee.
9. Termination of Employment. If a key employee ceases to be an employee of
the Company and every subsidiary corporation, for a reason other than death,
retirement, or permanent and total disability, his Grants shall, unless extended
by the Committee on or before his date of termination of employment, terminate
on the effective date of such termination of employment. Neither the key
<PAGE>
employee nor any other person shall have any right after such date to exercise
all or any part of his Stock Options, and all Restricted Stock which is not
vested or otherwise subject to restriction shall thereupon be forfeited, and/or
declared void and without value.
If termination of employment is due to death or permanent and total
disability, then outstanding Stock Options may be exercised within the one (1)
year period ending on the anniversary of such death or permanent and total
disability. In the case of death, such outstanding Stock Options shall be
exercised by such key employee's estate, or the person designated by such key
employee by will, or as otherwise designated by the laws of descent and
distribution. Notwithstanding the foregoing, in no event shall any Stock Option
be exercisable after the expiration of the option period, and in the case of
exercises made after a key employee's death, not to any greater extent than the
key employee would have been entitled to exercise such Option at the time of his
death. Restricted Stock held by a key employee whose employment by the Company
or any subsidiary corporation terminates by reason of death shall thereupon vest
and all restrictions and risks of forfeiture thereon shall thereupon lapse.
Subject to the discretion of the Committee, in the event a key employee
terminates employment with the Company and all subsidiary corporations because
of normal or early retirement, or, in the case of Restricted Stock, permanent
and total disability, (a) any then-outstanding Stock Options held by such key
employee shall lapse at the earlier of the end of the term of such Stock Option
or three (3) months after such retirement or permanent and total disability; and
(b) any Restricted Stock held by such key employee shall thereafter vest and any
applicable restrictions shall lapse, to the extent such Restricted Stock would
have become vested or no longer subject to restriction within one year from the
time of termination had the key employee continued to fulfill all of the
conditions of the Restricted Stock during such period (or on such accelerated
basis as the Committee may determine at or after date of Grant).
In the event an employee of the Company or one of its subsidiary
corporations is granted a leave of absence by the Company or such subsidiary
corporation to enter military service or because of sickness, his employment
with the Company or such subsidiary corporation shall not be considered
terminated, and he shall be deemed an employee of the Company or such subsidiary
corporation during such leave of absence or any extension thereof granted by the
Company or such subsidiary corporation.
10. Change of Control. Upon the occurrence of a Change of Control (as
defined below), notwithstanding any other provisions hereof or of any agreement
to the contrary, all Stock Options granted under this Plan shall become
immediately exercisable in full and remain exercisable under the terms of the
applicable Option Agreement(s) and all Restricted Stock grants shall become
immediately vested and any applicable restrictions shall lapse.
For purposes of this Plan, a Change of Control shall be deemed to have
occurred if: (i) a tender offer shall be made and consummated for the ownership
of 50% or more of the outstanding voting securities of the Company; (ii) the
Company shall be merged or consolidated with another corporation and, as a
result of such merger or consolidation, less than 50% of the outstanding voting
securities of the surviving or resulting corporation shall be owned in the
aggregate by the former shareholders of the Company as the same shall have
existed immediately prior to such merger or consolidation; or (iii) the Company
shall sell substantially all of its assets to another corporation which is not a
wholly owned subsidiary; or (iv) a person, within the meaning of Section 3(a)(9)
or of Section 13(d)(3) (as in effect on the date hereof) of the Exchange Act,
shall acquire, other than by reason of inheritance, fifty percent (50%) or more
of the outstanding voting securities of the Company (whether directly,
indirectly, beneficially or of record). In making any such determination,
transfers made by a person to an affiliate of such person (as determined by the
Board of Directors of the Company), whether by gift, devise or otherwise, shall
not be taken into account. For purposes of this Plan, ownership of voting
securities shall take into account and shall include ownership as determined by
applying the provisions of Rule 13d-3(d)(1)(i) as in effect on the date hereof
pursuant to the Exchange Act.
Notwithstanding the provisions of subparagraph (iv) of this Section 10,
"person" is used in that subparagraph shall not include any holder who was the
beneficial owner of more than ten percent (10%) of the voting securities of the
company on the date the Plan was adopted by the Board of Directors.
<PAGE>
11. Amendments to Plan. The Committee is authorized to interpret this Plan
and from time to time adopt any rules and regulations for carrying out this Plan
that it may deem advisable. Subject to the approval of the Board of Directors of
the Company, the Committee may at any time amend, modify, suspend or terminate
this Plan. In no event, however, without the approval of shareholders, shall any
action of the Committee or the Board of Directors result in:
(a) Materially amending, modifying or altering the eligibility
requirements provided in Section 5 hereof;
(b) Materially increasing, except as provided in Section 6 hereof, the
maximum number of shares subject to Grants; or
(c) Materially increasing the benefits accruing to participants under
this Plan;
except to conform this Plan and any agreements made hereunder to changes in the
Code or governing law.
12. Investment Representation, Approvals and Listing. The Committee may, if
it deems appropriate, condition its grant of any Stock Option hereunder upon
receipt of the following investment representation from the optionee:
"I agree that any Common Shares of Avert, Inc., which I may acquire by
virtue of this Stock Option shall be acquired for investment purposes
only and not with a view to distribution or resale, and may not be
transferred, sold, assigned, pledged, hypothecated or otherwise
disposed of by me unless (i) a registration statement or post-effective
amendment to a registration statement under the Securities Act of 1933,
as amended, with respect to said Common Shares has become effective so
as to permit the sale or other disposition of said shares by me; or
(ii) there is presented to Avert, Inc., an opinion of counsel
satisfactory to Avert, Inc., to the effect that the sale or other
proposed disposition of said Common Shares by me may lawfully be made
otherwise than pursuant to an effective registration statement or
post-effective amendment to a registration statement relating to the
said shares under the Securities Act of 1933, as amended."
The Company shall not be required to issue any certificate or certificates
for Common Shares upon the exercise of any Stock Option granted under this Plan
prior to (i) the obtaining of any approval from any governmental agency which
the Committee shall, in its sole discretion, determine to be necessary or
advisable; (ii) the admission of such shares to listing on any national
securities exchange on which the Common Shares may be listed; (iii) the
completion of any registration or other qualifications of the Common Shares
under any state or federal law or ruling or regulations of any governmental body
which the Committee shall, in its sole discretion, determine to be necessary or
advisable or the determination by the Committee, in its sole discretion, that
any registration or other qualification of the Common Shares is not necessary or
advisable; and (iv) the obtaining of an investment representation from the
optionee in the form stated above or in such other form as the Committee, in its
sole discretion, shall determine to be adequate.
13. General Provisions. The form and substance of Stock Option agreements
and Restricted Stock agreements made hereunder, whether granted at the same or
different times, need not be identical. Nothing in this Plan or in any agreement
shall confer upon any employee any right to continue in the employ of the
Company or any of its subsidiary corporations, to be entitled to any
remuneration or benefits not set forth in this Plan or such Grant, or to
interfere with or limit the right of the Company or any subsidiary corporation
to terminate his employment at any time, with or without cause. Nothing
contained in this Plan or in any Stock Option agreement shall be construed as
entitling any optionee to any rights of a shareholder as a result of the grant
of a Stock Option, until such time as Common Shares are actually issued to such
optionee pursuant to the exercise of such Option. This Plan may be assumed by
the successors and assigns of the Company. The liability of the Company under
<PAGE>
this Plan and any sale made hereunder is limited to the obligations set forth
herein with respect to such sale and no term or provision of this Plan shall be
construed to impose any liability on the Company in favor of any employee with
respect to any loss, cost or expense which the employee may incur in connection
with or arising out of any transaction in connection with this Plan. The cash
proceeds received by the Company from the issuance of Common Shares pursuant to
this Plan will be used for general corporate purposes. The expense of
administering this Plan shall be borne by the Company. The captions and section
numbers appearing in this Plan are inserted only as a matter of convenience.
They do not define, limit, construe or describe the scope or intent of the
provisions of this Plan.
14. Termination of This Plan. This Plan shall terminate on March 17, 2004,
and thereafter no Stock Options or Restricted Stock shall be granted hereunder.
All Stock Options and outstanding at the time of termination of this Plan shall
continue in full force and effect according to their terms and the terms and
conditions of this Plan.
