-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SE4wEH9pDkPSu6mbMA9U7+vPPnMbGXzvmydGRkCzp0GPS1d5RuOZqAw4TkkI5+Fd ZWHGoOFFumBfZXVtwvS2Eg== 0001021890-99-000038.txt : 19990325 0001021890-99-000038.hdr.sgml : 19990325 ACCESSION NUMBER: 0001021890-99-000038 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVERT INC CENTRAL INDEX KEY: 0000920909 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 841028716 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-23952 FILM NUMBER: 99570639 BUSINESS ADDRESS: STREET 1: 301 REMINGTON CITY: FORT COLLINS STATE: CO ZIP: 80524 BUSINESS PHONE: 9704847722 MAIL ADDRESS: STREET 1: 301 REMINGTON CITY: FT COLLINS STATE: CO ZIP: 80524 10KSB 1 ANNUAL REPORT ON FORM 10-KSB--DECEMBER 31, 1998 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, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO -------- -------- Commission File Number 0-23952 AVERT, INC. (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 offices) (Zip Code) Issuer's telephone number, including area code: (970) 484-7722 SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK, No Par Value (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, 1998 were $9,961,800. The aggregate market value of the voting stock held by non-affiliates of the issuer as of March 19, 1999 was $11,444,984. As of March 19, 1999, the issuer had outstanding 3,323,025 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 1999 Annual Meeting of Shareholders. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] Part I "The Company" or "Avert" is used in this report to refer to Avert, Inc. The Company may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to shareholders. Item 1 contains forward-looking statements that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements relating to Avert's growth and business strategies, regulatory matters affecting Avert, other plans and objectives of Avert, management for future operations and activities, expansion and growth of Avert's operations and other such matters. The words "believes," "expects," "intends," "strategy," "considers" or "anticipates" and similar expressions identify forward-looking statements. The Company does not undertake to update, revise or correct any of the forward-looking information. Readers are cautioned that such forward-looking statements should be read in conjunction with the Company's disclosures under the heading: "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995" beginning on page 10. ITEM 1. Description of Business. General The Company was organized as a Colorado corporation in June 1986 under the name Hire Risk Services Corporation. In May 1987, the Company changed its name to Avert, Inc. 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 Company received total net proceeds received from the IPO and the exercise of the Redeemable Warrants of 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 incorporation 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. The self-screen drug testing kit piloted in 1997 was not added to the Avert product line. 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 10,260 customers located throughout the United States. During 1998, sales were made in 50 states, the District of Columbia, Puerto Rico, and Virgin Islands. Approximately 64% of total sales were made in 10 states (Colorado, Texas, Illinois, Oregon, Missouri, California, North Carolina, Minnesota, Florida, and Kansas), with Colorado sales representing approximately 16% of total sales, and Texas sales representing approximately 13% of total sales. The Company's business strategy is to accelerate market presence throughout the United States. Avert also intends to enhance its existing products and to use the net proceeds received from the IPO to develop new ones and pursue acquisitions of other companies, assets and/or product lines that either complement or expand its existing business. 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; 2 o Employees with access to goods and cash of employers; o High employee turnover; and Desire for better quality employees, not only with respect to competence, but also integrity. Industries in which one or more of these characteristics exist include: construction; retail; manufacturing; property management, including commercial office buildings, apartments and hotels; medical, including nursing homes, hospitals and in-home health care providers; and city and county governments, including schools. Products and Services General. The Company's products and services are designed to verify job applicant background information for 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 Internet, telephone, mail or by facsimile. This network is available 24 hours per day, seven days a week. Avert customizes its Internet service for larger customers on a for fee basis. Avert products and services may be ordered 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, approximately $1,181,000 was expended in 1997, and approximately $191,000 was expended in 1998. The upgrade was completed in April, 1998. The total cost of the upgrade was approximately $1.82 million, and exceeded the $1.5 million budget by $322,000. 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. 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. In first quarter of 1999, the Company began the test phase of an on-line vendor management system to aid in managing of its courier network. 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 or from federal district courts. 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 3 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, 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 a standard reference check confirming dates of employment, salary, duties and title information, with the ability to add custom questions in order to meet specific customer needs. The product gives employers a wide range of reference choices. This background information is also obtained by Avert personnel by telephone, fax or mail directly from previous employers or personal references. First Check--Confirms that the applicant is using a valid social security number and is not a fugitive from justice. Motor Vehicle Driving Reports--Confirms driving records. This background information is retrieved by Avert through a nonaffiliated third party and is available from all 50 states, 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. In 1998, Avert began offering an Instant Credit Link, which is a Credit Link described above, available instantly. 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. Instant Address Link--Through its links with the service bureaus the company offers an address locator service that identifies up to three known addresses for an applicant, based on social security number usage. Customers can match the findings of the report with information provided by the applicant. Additionally, Instant Address Link "builds" a ready to go order for criminal records searches that match the addresses identified. Customers can order the criminal records on-line with just a click of the mouse. Adverse Action--As a result of changes to the FCRA in 1997 and 1998, employers are required to notify applicants of any information obtained from a consumer reporting agency that may adversely affect the applicants employment potential with the employer. Further, the applicant must be informed of his/her rights and be provided a copy of the findings. Avert will provide this Adverse Action service on a fee per applicant basis. AvertSelect--In 1998 the Company contracted with Interactive Voice Technology for the purpose of providing screening services that do not fall under the FCRA regulations. AvertSelect is an automated applicant registration and interview system to pre-screen potential applicants. AvertSelect was tested for market acceptance in 1998 and announced as a new product offering. Currently the Company has one large customer using the system and several prospects for additional users. 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 4 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. Subscription Program In July 1996, the Company began offering customers the Avert Advantage customer subscription service. This service provides access to a library of Human Resources documents including hiring processes and forms, access to the Knowledgelink Help Desk for consulting assistance and unlimited free FirstChecks. Additionally, 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 2,180 such customers through December 31, 1998. 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: 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) Internet marketing programs through links the company's Web Site; and (8) marketing partnerships with providers of human resource software and service products. 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; (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. 5 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. 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. For 1998, the Company completed development of new software and upgraded its existing software. See "Products and Services - General," below in this Item 1. A total of approximately $450,000 was spent in 1996, $1,181,000 was spent in 1997, and approximately $191,000 was spent in 1998. 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. o Distribution Partnerships. Distribution partnerships have been established with several large providers of human resource software and/or services. In January, 1998 the Company announced such an agreement with the Restrac Software Company. Distribution partners introduce Avert to their customer base and encourage the use of Avert products and services through an easy to use Internet connection. Partners also prepay for certain base level services on behalf of their customers. Avert and the Distribution partner share revenues (varying percentages) from the partner customer base. 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 19 employees at the Company's 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 fax, direct mail and target advertising are used to generate leads. Qualified leads are distributed to the Company's in-house telemarketing staff. The Company's marketing programs for territory development include, advertising, co-branding with franchise customers, exhibitions at trade shows and public relations. In 1998 the Company increased its focus on sales to large corporate ($100,000 potential) accounts that match the Company's profile for a "targeted" customer. A "targeted" customer is served through Internet workflow management of its internal hiring process. Avert has several such customers that use AvertNet to this advantage and believes that there is a rapidly growing number of large customers that meet this requirement. During the fourth quarter of 1998 a national sales manager was hired to staff and direct these activities. The indirect sales channel includes resellers who value-add to and private label Avert products and are paid commissions for selling Avert products. Currently there are approximately 427 resellers. Customers The Company currently has approximately 10,260 customers located throughout the United States. During 1998, sales were made in 50 states, District of Columbia, Puerto Rico, and Virgin Islands. Approximately 64% of total sales were made in 10 states (Colorado, Texas, Illinois, Oregon, Missouri, California, North Carolina, Minnesota, Florida, and Kansas), with Colorado sales representing approximately 16% of total sales, and Texas sales representing approximately 13% of total sales. The Company's business strategy is to accelerate market presence throughout the United States. The single largest customer of Avert accounted for more than 9.0% of total Avert sales during 1998. If this customer were lost, Avert's revenues would be materially affected. 6 Historically, the Company experiences a seasonal slow down in its business in the fourth quarter due to decreased hiring by retailers, starting in mid-November and continuing through the holiday season, and by industries affected by inclement weather. Government Regulation The Company is a "consumer reporting agency" within the meaning of that term as used in, and therefore is subject to, the provisions of the 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 Consumer Reporting Employment Clarification Act of 1998 ("CRECA") amended the FCRA, among other things, to extend the definition of obsolete information for criminal convictions. Criminal convictions may be reported for an indefinite number of years. 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, and persons who regularly furnish information to the consumer reporting agency. 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 prohibits a person from procuring a consumer report, or causing a consumer report to be procured, on a consumer for employment purposes unless: (a) a clear and conspicuous written disclosure has been made to the consumer before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and (b) the consumer has authorized in writing the procurement of the report by that person. 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 identity 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. Note: This applies mostly to the persons who procure the report for resale. 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. Note: This was done by the CRECA. The CRECA also provides that consumers who apply for employment by mail, telephone, computer or other similar means, must be provided by oral, written or electronic means, notice that a consumer report may be obtained for employment purposes and provided with a copy of a Summary of Your Rights Under the Fair Credit Reporting Act. 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. 7 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 ten 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 10 states of the 50 states in which the Company sold its products and services during 1998 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 eight of those states, and is in the process of obtaining licenses in the remaining two states. In addition, Avert presently is reviewing the laws of four other states to determine if licensing is required. The Company also conducts periodic reviews of state licensing requirements. 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 licenses in other states if necessary, the inability to do so could have an adverse impact on the Company's operations. Operation of an unlicensed business is a misdemeanor under the laws of many states generally punishable by fines and/or imprisonment and could be grounds for denial of a license, if required. Legal Considerations Under general legal concepts and, in some instances, by specific state and federal statute, the Company could be held liable to customers and/or to the subjects of background checking reports prepared by the Company for inaccurate information or misuse of the information. The FCRA contains civil liability provisions for willful and negligent noncompliance with its requirements. The FCRA further provides in effect that, except for liability for willful or negligent noncompliance with the FCRA and false information furnished with malice or willful intent to injure a consumer, neither a consumer reporting agency, any user of information nor any person who furnishes information to a consumer reporting agency will be liable to the consumer for defamation, invasion of privacy or negligence based on information disclosed to such consumer under the provisions of the FCRA. The Company has developed and implemented internal policies designed to help ensure that background information retrieved by it concerning a consumer is accurate and that it otherwise complies with the provisions of the FCRA. In addition, each customer of Avert is required to sign a User Agreement, wherein such customer agrees, among other matters, to accept responsibility for using information provided by Avert in accordance with the provisions of the FCRA, 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. In 1998 Avert obtained errors and omissions insurance to 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. 8 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 internet electronic commerce capabilities. 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 78 employees, of which 69 are full-time employees and 9 are part-time employes. Of these 78 employees, 19 full-time employees are involved in sales and marketing, eight full-time employees and two part-time employees are involved in finance and administration, seven full-time employees are involved in programming/information system, and 35 full-time employees and seven 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. 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 29,400 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. 9 -------------------------- CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Avert 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, Avert. 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, Avert. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, Avert 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, Avert, 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 Avert: Avert's Business Strategy to Acquire Other Companies, Assets, and/or Product Lines Could Divert Management Time and Avert's Financial Resources and Adversely Impact Avert's Growth Rate. A business strategy of Avert is to use the net proceeds of the IPO and 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 Avert's financial resources to increased marketing efforts, review of acquisition candidates and assimilation of the acquired intangible assets. The impact of these strategies on Avert's operations, both long-term and short-term, remains unknown, but because of the foregoing factors, among others, Avert'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 Avert has identified and has held, and will continue to hold, discussions from time-to-time with potential acquisition candidates, no acquisition has been made and none is considered probable as of the date of this Report. Accordingly, no assurance can be given that Avert will be successful in acquiring other companies, assets or product lines. Government Regulation on the Use of Personal Information Could Adversely Impact Avert's Financial Condition and Operations. Avert 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 ADA does not directly regulate Avert's business, Avert's customers use of certain information 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 that have laws similar to the FCRA, and some states that have human rights laws more strict than the ADA. In addition, to Avert's knowledge, at least ten states require companies engaged in the type of business 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. Avert's Inability to Obtain Any Necessary Licenses From States Could Have an Adverse Impact on Avert's Financial Condition and Operations. To Avert's knowledge, at least ten states of the 50 states in which Avert sold its products and services during 1998 require consumer reporting agencies, such as Avert, to obtain a license to conduct business within those states. Avert has obtained the necessary licenses in eight of those states, and is in the process of obtaining licenses in the remaining two states. In addition, Avert presently is reviewing the laws of four other states to determine if licensing is required. Avert conducts periodic reviews of state licensing requirements. Though requirements can change, Avert believes that the remaining 36 states do not have a licensing 10 requirement for Avert. The inability to obtain any necessary licenses from other states could have an adverse impact on Avert'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. Liability for Inaccurate Information or Misuse of Information Could Adversely Impact Avert's Financial Condition and Operations. Under general legal concepts and, in some instances, by specific state and federal statute, Avert could be held liable to customers and/or to the subjects of Avert prepared background checking reports for inaccurate information or misuse of the information. Avert maintains internal policies designed to help ensure that background information it retrieves is accurate and that it otherwise complies with the provisions of the FCRA. In addition, Avert maintains errors and omissions liability insurance to cover claims by customers or the subjects of reports. 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 Avert in the future can be successfully defended. Uninsured losses from claims could adversely impact the operations and financial condition of Avert. The Loss of Avert's President Could Have a Detrimental Effect on Avert. Avert's success continues to be dependent upon the efforts of its key personnel, particularly Dean A. Suposs, its President. The loss of Mr. Suposs' services could have a detrimental effect. Avert maintains for Avert's benefit a $1 million key man life insurance policy on Mr. Suposs. Competition in the Industry Could Have a Material Adverse Impact on Avert's Financial Condition and Operations. 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). Avert 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. Avert also believes that there are a number of indirect competitors, with most of them operating on a national basis. Many of Avert's competitors have financial and personnel resources substantially greater than those of Avert. 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 Avert will be able to continue to compete favorably in this industry. Uncertainties Regarding Year 2000 Issues Could Materially Adversely Impact Avert's Financial Condition and Operations. Given the numerous and significant uncertainties involved, there can be no assurance that Avert's estimates and anticipated results and beliefs regarding the Year 2000 issue will be achieved, and actual results could vary materially. The failure of Avert to identify and correct all relevant computer codes and embedded chips and otherwise obtain Year 2000 readiness, or the failure of Avert's vendors, customers, or other third parties with which Avert transacts business to achieve Year 2000 readiness, could have a material adverse impact on Avert's business, financial condition, and operations. 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. 11 High Low ---- --- 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 1998: First quarter....................................... 9-1/4 7-1/2 Second quarter...................................... 8 5-1/2 Third quarter....................................... 7-1/8 3-3/4 Fourth quarter...................................... 6-1/4 3-1/2 There were approximately 191 holders of record (approximately 1,029 beneficial holders) of the Company's Common Stock on March 15, 1999. On February 23, 1999, Avert declared a special cash dividend of $0.12 per common share payable on March 24, 1999 to shareholders of record on March 15, 1999. The Company paid a $0.10 per common share cash dividend on March 23, 1998. Avert has not paid any other cash dividends since the year ended December 31, 1993. Avert 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 Avert's financial condition and other factors the Board of Directors deems relevant. The following subparagraphs set forth information concerning equity securities sold during 1998 that were not registered under the Securities Act of 1933, as amended (the "Securities Act"): (a) During May and June, 1998, options to purchase a total of 3,000 shares (1,000 shares each) of Avert'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 Avert's directors. The exercise price for the 1,000 shares underlying the options granted to Mr. Joyce is $6.63 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 $6.875 per share, for a total exercise price under these options of $20,380.00. 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. Avert 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 Avert and is able to fend for himself with access to information upon which an investment decision can be made. On June 29, 1994, Avert 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 Avert'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 Avert 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 Avert or any of their associates, to persons owning 10% or more of any class of security of Avert or to affiliates of Avert. The net 12 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 Avert'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 10. Results of Operations Comparison of years ended December 31, 1998 and December 31, 1997 Net revenues increased from $9,490,800 in 1997 to $9,961,800 in 1998 or approximately 5.0%. This increase was primarily due to the continued overall growth of the customer base and its use of criminal history records. The breakdown of net revenues, exclusive of product discounts and other miscellaneous income items, is as follows:
Year Ended Year Ended December 31, 1998 December 31, 1997 ---------------------- ------------------------ % of % of Percent of Revenues Revenues Revenues Revenues Increase/(Decrease) -------- -------- -------- -------- ------------------ Products: Workers' compensation histories ....................... $ 940,200 9.4% $1,114,200 11.7% (15.6%) Criminal history reports .............. $5,569,900 55.9% $4,754,300 50.1% 17.2% Reference Checking/credit reports ......................... $1,181,600 11.9% $1,223,800 12.9% (3.4%) Motor vehicle driving records ......... $ 988,300 9.9% $1,000,000 10.5% (1.2%) Other products/services: .............. $ 979,300 9.8% $ 986,900 10.4% (.8%) Education/Credential verification Social security number check Name Link Employment application forms Service sales Interest income .......................... $ 319,100 3.2% $ 315,200 3.9% 1.2% Net Revenues ............................. $9,961,800 $9,490,800 5.0%
13 Avert, Inc. experienced relatively flat growth during 1998 on most products and services offered. Management considered 1998 a year of building, transition, and change. It was a year that had negative financial impact, but a year that represented much technological improvement. It is believed, that the activities Avert performed in 1998 were necessary in order to leverage its technology for improved future efficiencies and financial condition. The following three factors contributed to Avert's financial performance in 1998: 1) INCREASED CUSTOMER CREDITS: Avert records customer credits as a direct reduction in the appropriate sales category, rather than one separate"credits given" line. During the implementation period of the new computer system and months that followed, Avert enacted a "no questions asked" credit policy for any problems customers experienced, or perceived they experienced, due to the conversion. This policy resulted in a significant amount of credits of approximately $553,900 or 5.6% of total net revenues in 1998, as compared to approximately $248,900 or 2.6% of total net revenues in 1997. This increase dramatically impacted average selling prices and revenues as a whole for the year. 2) VOLUME DISCOUNTS RESULTING IN REDUCED MARGINS: Avert provides volume discounts, which resulted in reduced margins and revenues. Avert's largest customer, accounting for approximately 9% of total revenues, grew approximately 30%, while the Company's overall business grew approximately 5%. Due to their discounted pricing, this negatively affected Avert's overall revenue growth for 1998. 3) CRIMINAL HISTORY PRICING: Prior to the conversion to the new system, Avert provided combination felony/misdemeanor criminal records for one combined price (2-for-1). Once converted, the Company split the products and attempted to charge for both parts separately. Due to backlash from large customers for this decision, Avert was forced to give misdemeanors free until new prices could be negotiated. This greatly affected Criminal History revenues for 1998. In total dollars, criminal history reports contributed the most net revenues, representing approximately $5,569,900 in net revenues in 1998, as compared to $4,754,300 in net revenues in 1997. The criminal history reports product line has increased to represent approximately 55.9% of total net revenues in 1998, as compared to approximately 50.1% of total net revenues in 1997. The Company believes there is a continuing trend nationwide, as well as increased regulation for mandatory checking of criminal records. The Company continues to focus on obtaining quick and accurate data, by increased leveraging of internal improvements gained from the recent computer system implementation. Net revenues generated in the area of reference checking/credit reports decreased slightly from approximately $1,223,800 in 1997 to approximately $1,181,600 in 1998. These products represented approximately 11.9% of total net revenues in 1998, as compared to approximately 12.9% of total net revenues in 1997. Net revenues from workers' compensation histories continue to decrease as a percentage of total net revenues, and has slipped to represent the fourth largest product line, approximately 9.4% of total net revenues in 1998. Sales of workers' compensation histories are expected to continue to decline in total net revenues due to regulation and necessity of releases from the respective applicant to process the product. Other Products and Services revenue remained flat when comparing 1998 to 1997. The product contributing the most revenue in this category was Name Link, a product linking names, addresses and social security numbers, representing $192,700 in 1998 as compared to $203,800 in 1997. Service sales, which are not itemized in the chart above, increased from $520,100 in 1997 to $559,900 in 1997, representing an approximate 7.7% growth. Service sales include Avert Advantage membership, start-up fees, extended criminal history fees, miscellaneous research fees, and order entry fees charged to clients. All expense categories increased as a percentage of total net revenues except Marketing. As mentioned above, Avert's 1998 focus was to complete the computer conversion project, which resulted in additional indirect expenditures in order to meet that objective. A breakdown of expenses is as follows: 14
Year Ended Year Ended December 31, 1998 December 31, 1997 --------------------------- ------------------------ Increase (Decrease) % of % of % of Revenue Expenses Revenue Expenses Revenue 1998 over 1997 -------- ------- -------- ------- ------------------ Search and product .................. $4,644,100 46.6% $4,182,100 44.1% 2.5 % Marketing ........................... 1,492,700 15.0% 1,435,800 15.1% (0.1)% General and administrative .......... 1,467,400 14.7% 1,246,300 13.1% 1.6% Software development and maintenance ...................... 581,900 5.8% 364,100 3.8% 2.0% Depreciation and amortization ............... 564,000 5.7% 404,500 4.3% 1.4% ---------- ---- ---------- ---- --- Expenses ......................... $8,750,100 87.8% $7,632,800 80.4% 7.4%
The increase in 1998 over 1997 of search and product fees as a percentage of total net revenues, was a result of increased personnel and temporary costs due to the additional training and overtime required for the computer conversion. In addition, there were additional direct costs associated with the reference checking and name link product groups. Marketing expenses, as a percentage of total net revenues, decreased from approximately 15.1% in 1997 to approximately 15.0% in 1998. There was a decreased in personnel related expenses, but an increase in lead generation and advertising costs. Avert has an on-going marketing campaign designed to target lead generation, marketing communication and market development for both current customers and new customers, via in-house marketing personnel and partner relationships. As predicted, there was an increase in software development and maintenance expenses expressed as a percentage of total net revenues from approximately 3.8% in 1997 to approximately 5.8% in 1998. The primary reason for the increase is that personnel costs directly associated with the development and implementation of the computer system were capitalized with the software project in 1997 and the first three months of 1998, but all costs are being expensed since April, 1998. In addition, after implementation of the computer system, payments of approximately $100,000 were made to third parties to troubleshoot problems and other minor software development, which were expensed in operations. See "Liquidity and capital Resources" below in this Item. The Company continues to focus on making technology its strategic advantage in its relationships with customers, partners and suppliers. There was an increase in depreciation and amortization expenses when expressed as a percentage of total net revenues, from approximately 4.3% in 1997 to approximately 5.7% in 1998. The increase was due to the increased capitalized costs associated with the software development project which were fully amortized prior to April, 1998. Depreciation expense will increase in 1999 as 1998 included only nine months of depreciation related to this project. Income before income taxes decreased from $1,858,000 in 1997 to $1,211,700 or approximately 34.8% and represented approximately 19.6% of net revenues in 1997 compared to approximately 12.2% in 1998. The combined federal and state income tax rate for 1998 and 1997 was 39% and 34%, respectively, resulting in net income of $1,218,000, or $.35 per share, on 3,488,000 (weighted average shares plus common stock equivalents) for 1997, as compared to net income of $739,800 or $0.22 per share, on 3,440,000 (weighted average shares plus common stock equivalents) for 1998. This tax increase was primarily a result of state (enterprise zone) tax credits received in 1997, which effectively reduced the prior year rate. 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, increased sales on products having quick turnaround, such as reference checks, credit and name links. The breakdown of net revenues, exclusive of product discounts and other miscellaneous income items, is as follows: 15
Year Ended Year Ended December 31, 1997 December 31, 1996 ---------------------- ------------------------ % of % of Percent of Revenues Revenues Revenues Revenues Increase/(Decrease) -------- -------- -------- -------- ------------------ 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%
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. 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:
Year Ended Year Ended December 31, 1997 December 31, 1996 -------------------------- ---------------------------- Increase (Decrease) % of % of % of Revenue Expenses Revenue Expenses Revenue 1997 over 1996 -------- ------- -------- ------- ------------------ 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 and maintenance ....................... 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%
16 The increase in search and product fees as a percentage of total net revenues of 1997 over 1996, 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". 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 3,488,000 (weighted average shares plus common stock equivalents) for 1997, as compared to net income of $1,065,600 or $0.31 per share, on 3,461,000 (weighted average shares plus common stock equivalents) for 1996. This tax decrease was primarily a result of state enterprise zone tax credits realized in the current year. Liquidity and Capital Resources Avert's financial position at December 31,1998, remained strong with working capital at that date of $7,349,000 compared to $7,543,000 at December 31, 1997. Cash and cash equivalents at December 31, 1997 were $580,000 and decreased to $531,000 at December 31, 1998. Net cash provided from operations for the year ended December 31, 1998, was $1,420,000, and consisted primarily of net income of $740,000 plus a $107,000 decrease in trading investments, a $120,000 net decrease in prepaid expenses, and a depreciation expense of $564,000. 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. Avert had capital expenditures of $305,000 for the year ended December 31, 1998, as compared to $1,299,000 for 1997. The majority of the expenses were attributable to costs associated with the software development project described below. During 1998, Avert used cash in financing activities to purchase $814,000 of its Common shares outstanding, and to pay a $350,000 dividend. During 1997, Avert received $531,000 from financing activities derived from warrant proceeds. Avert has declared an approximate $400,000 dividend in 1999. Avert completed its Internet-based information technology development project first quarter, 1998, and 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 was financed by available cash derived from past or continued operations. Total costs associated with the project were $450,000 in 1996, $1,181,000 in 1997, and $191,000 in 1998. 17 Inflation The Company believes that the results of its operations are not dependent upon or affected by inflation. Year 2000 Issue 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 Year 2000 problems may cause computers and computer-controlled systems to malfunction or incorrectly process data as the year 2000 approaches and once the year 2000 arrives. Because of the potential adverse impact of these Year 2000 problems on Avert's business, operations, and financial condition, Avert has been addressing internal and third-party Year 2000 issues in the following areas: (a) Avert's technology systems, including internally developed software, vendor provided software, and computer and peripheral hardware used in Avert's operations; (b) electronic data interchange systems; (c) non-information technology systems (embedded technology), including heating and air conditioning and other building systems; and (d) Year 2000 compliance of entities or persons from which Avert retrieves or receives data or products (including states and counties and other vendors) and other third parties with which Avert has a material relationship. In general, Avert's Year 2000 program may be separated into four phases. The phases and status of such phase are as follows: 1. The first phase is to determine whether Avert's internal systems (including vendor provided software) are Year 2000 compliant. This phase has been completed and Avert believes that the Year 2000 issue will not pose any significant operational problem for Avert's internal computer systems. In 1998, Avert complete an 18-month project to convert all of its systems to a new Oracle based processing environment. See "Products and Services-General" in Item I above. As part of this project, Avert identified the critical, date-sensitive requirements associated with its services and addressed them in the conversion project. Avert's new Oracle system became fully operational in April, 1998. As part of the project, a series of tests were conducted for year 2000 compliance. No significant operational problems were encountered during these tests. Avert also has been in contact with its telecommunications service provider to assess the provider's state of Year 2000 readiness and was informed that the provider will be Year 2000 compliant. 2. The second phase of the program is to contact all external data sources, vendors, and major customers to determine their Year 2000 readiness, to develop contingency plans, and, for data sources that are not Year 2000 compliant, to locate alternative sources of the data. Avert has sent questionnaires to most of its external data sources and vendors regarding their Year 2000 readiness and has received only a few complete responses. Avert plans to follow-up on these questionnaires and send the remaining questionnaires, and questionnaires to its major customers, in the near future. 3. The third phase of the program involves testing external interfaces. Beginning in the third quarter of 1999, Avert plans to run a series of tests on the external interfaces to verify their Year 2000 compliance. 4. The fourth phase involves verification of Year 2000 compliance of Avert's non-information technology systems, including heating and air conditioning and other building systems. Avert does not have a back-up power system and has contacted its utility provider to assess its state of Year 2000 readiness. The provider informed Avert that it believes it will be Year 2000 ready. The costs of Avert's Year 2000 program has been immaterial. The cost of the project to convert Avert's system to an Oracle based system is not considered as a cost of Avert's Year 2000 program because the project would have been completed even if the Year 2000 issue did not exist. Software programs that were written would have been written in any event and were simply written using four digits to define a year, rather than two digits. In addition, the Year 2000 issue did not accelerate the commencement of the project. Although Avert believes that it's own internal systems will be Year 2000 compliant, no assurance can be given that the systems of the external sources of Avert's data, vendors, telephone and utility providers, customers, and other third parties with which Avert has a material relationship will be Year 2000 compliant. Avert will be continuing to contact these entities in the second quarter of 1999 to assess their state of Year 2000 readiness and to determine or locate alternative sources of data and plan other changes that may be necessary in Avert's data collection processes. If necessary, Avert will manually collect data it currently collects electronically. This would increase the costs of 18 retrieving data and thus reduce Avert's gross margins, at least on products (such as criminal histories) that presently contain data retrieved electronically, and may reduce the volume of products that Avert could deliver. Depending upon the length of time the contingency plans remained in effect, they could have a material adverse effect on Avert's business, operations, and financial condition. Avert believes that it has and will continue to devote the resources necessary to achieve Year 2000 readiness in a timely manner. However, there can be no assurance that Avert's internal systems, the systems of others on which Avert relies, or the systems of Avert's customers will be Year 2000 ready in a timely and appropriate manner or that Avert's contingency plans or the contingency plans of others on which Avert relies will mitigate the effects of the Year 2000 problem. Currently, Avert believes the most likely worse case scenario would be a sustained, concurrent falure of multiple critical systems (internal and external) that support Avert's operations. While Avert does not expect such scenario to occur, if such scenario does occur, it could result in the reduction or suspension of a material portion of Avert's operations, despite the successful execution of Avert's business continuty and contingency plans, and accordingly, have a material adverse effect on Avert's business, operations, and financial condition. 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 1999 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. 19 The information required by this Item is incorporated herein by reference to the Proxy Statement. Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits. 3.1 Articles of Incorporation, as amended, of the Registrant. (2) 3.2 Bylaws, as amended, of the Registration. (2) 3.3 Excerpt from Articles of Incorporation of the Registrant Regarding Common Stock and Preferred Stock. (2) 10.1 Amendment to Consumer Report User Agreement between Registrant and customer of Registrant for changes in FCRA dated September, 1997. 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. (7) 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. (2) 10.3.2 Experian (formerly TRW, Inc.) Reseller Certification of Compliance dated May 4, 1998. 10.4 Credit Bureau Service Agreement, dated March 30, 1992, between the Registrant And TransUnion. (1) 10.4.1 TransUnion Amendment to Service Agreement dated May 5, 1998. 10.5 Amended and Restated 1994 Stock Incentive Plan.(3) 10.6 Non-Employee Directors' Stock Option Plan. (2) 10.7 Letter Agreements, Dated March 24, 1995, with Ace Hardware Corporation and Loss Prevention Services relating to sales of the Registrant's Products.(4) 10.8 Amended and Restated 1994 Stock Incentive Plan and Incentive Stock Option Agreement between Leonard Koch and the Registrant.(6) 10.9 Amended and Restated 1994 Stock Incentive Plan Incentive Stock Option Agreement, dated June 10, 1996, between Jerry Thurber and the Registrant. (6) 10.10 Amended and Restated 1994 Stock Incentive Plan Incentive Stock Option Agreement, dated July 1, 1996, between Jamie Burgat and the Registrant. (6) 10.11 Restrac/Avert Avertnet Reseller Agreement dated January 4, 1999 between Registrant and Registrant. - ------------------------- (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. 20 (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. (7) Filed as an Exhibit to Form 10-KSB for the year ended December 31, 1997 filed with the Securities and Exchange Commission on March 30, 1998. (b) Reports on Form 8-K. None 21 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 23, 1999 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 ??, 1998. 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; Jamie M. Burgat and Assistant Secretary (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 22 EXHIBIT INDEX Exhibit Number Document Description 3.1 Articles of Incorporation, as amended, of the Registrant. (2) 3.2 Bylaws, as amended, of the Registration. (2) 3.3 Excerpt from Articles of Incorporation of the Registrant Regarding Common Stock and Preferred Stock. (2) 10.1 Amendment to Consumer Report User Agreement between Registrant and customer of Registrant for changes in FCRA dated September, 1997. 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. (7) 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. (2) 10.3.2 Experian (formerly TRW, Inc.) Reseller Certification of Compliance dated May 4, 1998. 10.4 Credit Bureau Service Agreement, dated March 30, 1992, between the Registrant And TransUnion. (1) 10.4.1 TransUnion Amendment to Service Agreement dated May 5, 1998. 10.5 Amended and Restated 1994 Stock Incentive Plan.(3) 10.6 Non-Employee Directors' Stock Option Plan. (2) 10.7 Letter Agreements, Dated March 24, 1995, with Ace Hardware Corporation and Loss Prevention Services relating to sales of the Registrant's Products.(4) 10.8 Amended and Restated 1994 Stock Incentive Plan and Incentive Stock Option Agreement between Leonard Koch and the Registrant.(6) 10.9 Amended and Restated 1994 Stock Incentive Plan Incentive Stock Option Agreement, dated June 10, 1996, between Jerry Thurber and the Registrant. (6) 10.10 Amended and Restated 1994 Stock Incentive Plan Incentive Stock Option Agreement, dated July 1, 1996, between Jamie Burgat and the Registrant. (6) 10.11 Restrac/Avert Avertnet Reseller Agreement dated January 4, 1999 between Registrant and Registrant. - ------------------------- (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. (7) Filed as an Exhibit to Form 10-KSB for the year ended December 31, 1997 filed with the Securities and Exchange Commission on March 30, 1998. Avert, Inc. Financial Statements December 31, 1998 F-1 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, 1998, and the related statements of income and comprehensive income, shareholders' equity and cash flows for the years ended December 31, 1998 and 1997. 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, 1998, and the results of its operations and its cash flows for the years ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ Hein + Associates LLP HEIN + ASSOCIATES LLP Denver, Colorado February 19, 1999 F-2 AVERT, INC. BALANCE SHEET DECEMBER 31, 1998 ASSETS ------ CURRENT ASSETS: Cash and cash equivalents ................................. $ 531,000 Marketable securities ..................................... 6,006,000 Accounts receivable, net of allowance of $57,000 .......... 1,061,000 Prepaid expenses and other ................................ 172,000 ----------- Total current assets ................................. 7,770,000 PROPERTY AND EQUIPMENT, net .................................... 3,138,000 ----------- TOTAL ASSETS ................................................... $10,908,000 =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .......................................... $ 296,000 Accrued expenses .......................................... 125,000 ----------- Total current liabilities ............................ 421,000 DEFERRED INCOME TAXES .......................................... 476,000 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; 3,323,000 shares issued .............. 4 ,462,000 and outstanding Retained earnings ......................................... 5,549,000 ----------- Total shareholders' equity ........................... 10,011,000 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $10,908,000 =========== See accompanying notes to these financial statements. F-3
AVERT, INC. STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, ------------------------- 1998 1997 ---- ---- NET REVENUES: Search and product fees ............................. $ 9,638,000 $ 9,071,000 Interest and other income ........................... 324,000 420,000 ----------- ----------- 9,962,000 9,491,000 EXPENSES: Search and product costs ............................ 4,644,000 4,182,000 Marketing ........................................... 1,493,000 1,436,000 General and administrative .......................... 1,467,000 1,246,000 Software development and maintenance ................ 582,000 364,000 Depreciation ........................................ 564,000 405,000 ----------- ----------- 8,750,000 7,633,000 ----------- ----------- INCOME BEFORE INCOME TAXES ............................... 1,212,000 1,858,000 Income tax expense .................................. (472,000) (640,000) ----------- ----------- NET INCOME AND COMPREHENSIVE INCOME ...................... $ 740,000 $ 1,218,000 =========== =========== NET INCOME PER COMMON SHARE: Basic ............................................... $ .22 $ .35 =========== =========== Diluted ............................................. $ .21 $ .34 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic ............................................... 3,440,000 3,461,000 =========== =========== Diluted ............................................. 3,504,000 3,593,000 =========== ===========
See accompanying notes to these financial statements. F-4
AVERT, INC. STATEMENT OF SHAREHOLDERS' EQUITY FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1998 COMMON STOCK Total --------------------------- Retained Shareholders' Shares Amount Earnings Equity ------ ------ -------- ------------- BALANCES, January 1, 1997 .................. 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 Dividend paid ......................... -- -- (350,000) (350,000) Shares repurchased .................... (165,000) (814,000) -- (814,000) Net income ............................ -- -- 740,000 740,000 ------------ ------------ ------------ ------------ BALANCES, December 31, 1998 ................ 3,323,000 $ 4,462,000 $ 5,549,000 $ 10,011,000 ============ ============ ============ ============
See accompanying notes to these financial statements. F-5
AVERT, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, --------------------------- 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................ $ 740,000 $ 1,218,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ...................................................... 564,000 405,000 Bad debt expense .................................................. 72,000 31,000 Deferred income taxes ............................................. (19,000) 290,000 Loss (gain) on sale of asset ...................................... 2,000 6,000 Changes in operating assets and liabilities: (Increase) decrease in: Trading investments, net ................................ 107,000 (536,000) Accounts receivable ..................................... 2,000 (378,000) Prepaid expenses and other current assets ............... 120,000 (28,000) Increase (decrease) in: Accounts payable ........................................ (92,000) (65,000) Accrued expenses ........................................ (76,000) 45,000 ----------- ----------- Net cash provided by operating activities ......................... 1,420,000 988,000 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ................................ (338,000) (1,300,000) Proceeds from sale of property and equipment ...................... 33,000 1,000 ----------- ----------- Net cash used in investing activities ........................ (305,000) (1,299,000) CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of shares outstanding .................................... (814,000) -- Proceeds from exercise of warrants ................................ -- 531,000 Dividends declared ................................................ (350,000) -- ----------- ----------- Net cash provided by (used in) financing activities .......... (1,164,000) 531,000 ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS .................................. (49,000) 220,000 CASH AND CASH EQUIVALENTS, beginning of year ........................... 580,000 360,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of year ................................. $ 531,000 $ 580,000 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - Income taxes paid ................................................. $ 415,000 $ 282,000 =========== ===========
See accompanying notes to these financial statements. F-6 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, 1998. Concentration of Credit Risk and Financial Instruments - Concentrations 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, 1998, approximately $645,000 of cash equivalents as well as 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 on revenues, and when specific credit problems arise. Management's estimates have been adequate during historical periods, and management believes that all significant credit risks have been identified at December 31, 1998. 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, except for the Company's building which is 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. In 1996, the Company embarked on a major upgrade to its database system to expand its service to its customers. During 1997 and 1998, the Company capitalized major enhancements costs of approximately $1,182,000 and $191,000, consisting principally of payments to third parties. These capitalized software costs are being amortized over five years commencing as the project phases were completed. In April 1998, the total project was fully completed. Maintenance and routine upgrades are expensed in operations. F-7 AVERT, INC. NOTES TO FINANCIAL STATEMENTS Impairment of Long-Lived Assets - The Company periodically assesses the recoverability of the carrying amount of long-lived assets, including intangible assets. A loss is recognized when expected future cash flows (undiscounted and without interest) are less than the carrying amount of the asset. The impairment loss is determined as the difference by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are carried at the lower of their financial statement carrying amounts or fair value less costs to sell. 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 - Basic earnings per share (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 1998 and 1997, diluted common and common equivalent shares outstanding includes 64,000 and 132,000 common equivalent shares, respectively, consisting of stock options and warrants, determined using the treasury stock method. Comprehensive Income (Loss) - Comprehensive income is defined as all changes in stockholders' equity, exclusive of transactions with owners, such as capital investments. Comprehensive income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation adjustments on investments in foreign subsidiaries, and certain changes in minimum pension liabilities. The Company's comprehensive income was equal to its net income for all periods presented in these financial statements. Stock-Based Compensation - As permitted under the Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation, the Company accounts for its stock-based compensation in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Certain pro forma net income and EPS disclosures for employee stock option grants are also included in the notes to the financial statements as if the fair value method as defined in SFAS No. 123 had been applied. Transactions in equity instruments with non-employees for goods or services are accounted for by the fair value method. F-8 AVERT, INC. NOTES TO FINANCIAL STATEMENTS Impact of Recently Issued Accounting Standards - SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for the Company's financial statements for the year ended December 31, 2000 and the adoption of this standard is not expected to have a material effect on the Company's financial statements. SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, was issued in February 1998. This statement revises the disclosure requirement for pensions and other postretirement benefits. This statement is effective for the Company's financial statements for the year ended December 31, 1999 and the adoption of this standard is not expected to have a material effect on the Company's financial statements. 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, 1998: Land $ 210,000 Building and improvements 1,219,000 Computer hardware and software 2,639,000 Furniture and equipment 572,000 ---------- 4,640,000 Less accumulated depreciation (1,502,000) ---------- $3,138,000 ========== 3 INCOME TAXES: The actual income tax expense differs from the "expected" tax expense (computed by applying the U.S. Federal corporate income tax rate of 34% for each period) as follows: F-9
AVERT, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, ------------------------------ 1998 1997 ---- ---- Amount % Amount % ----- -- ------ -- Computed "expected" tax expense ................... $ 412,000 $ 632,000 34.0% 34.0% State income taxes, net of Federal income ......... 49,000 61,000 tax benefit ..................................... 4.0% 3.3% Refundable credits ................................ -- 0% (59,000) (3.1%) Non-deductible expenses and other ................. 11,000 6,000 --------- ----- --------- ----- 0.9% .2% --------- ----- --------- ----- Total income tax expense .......................... $ 472,000 $ 640,000 ========== ===== ========= ===== 38.9% 34.4% ========== ===== ========= =====
Income tax expense (benefit) consists of the following: Years Ended December 31, ----------------------- 1998 1997 ---- ---- Current $491,000 $350,000 Deferred (19,000) 290,000 -------- -------- Total income tax expense $472,000 $640,000 ======== ======== Temporary differences between the financial statement carrying amounts and tax basis of assets and lia bilities that give rise to the net deferred tax liability relates primarily to differences in capitalized software costs. F-10 AVERT, INC. NOTES TO FINANCIAL STATEMENTS 4 SHAREHOLDERS' EQUITY: Stock Option Plan - In 1994, the Company adopted a stock incentive plan (the Stock Option 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 Stock Option 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 10 years. At December 31, 1998, the Company had granted options under the Stock Option Plan to purchase 354,000 shares of which 240,398 options are vested and the balance will vest over one to five years. Options outstanding for the Stock Option Plan at December 31, 1998 have exercise prices that range from $5.00 to $7.63. In 1994, the Company adopted the Non Employee Directors' Stock Option Plan (the 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. As of December 31, 1998, 14,000 options have been granted, of which 11,000 are vested. Exercise prices for the directors' options outstanding at December 31, 1998 range from $5.25 to $8.00. The following is a table of activity under these plans. Weighted Outside Average Stock Directors' Exercise Option Plan Plan Price ----------- ---------- --------- OPTIONS OUTSTANDING, January 1, 1997 ...... 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 Options expired ........................... (10,000) -- 5.25 Options granted ........................... -- 3,000 6.79 -------- ------- ----- OPTIONS OUTSTANDING, December 31, 1998 .... 354,000 14,000 $ 5.44 ======== ======= ===== F-11 AVERT, INC. NOTES TO FINANCIAL STATEMENTS For all options granted during 1998 and 1997, 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, 1998 was approximately 6 years. At December 31, 1998, options for 251,398 shares were exercisable, with a weighted average exercise price of $5.14, and options for the remaining shares become exercisable pro rata through 2002. If not previously exercised, options outstanding at December 31, 1998, 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 2003 ............................... 3,000 $6.79 2004 ............................... 220,000 $5.25 2006 ............................... 60,000 $5.00 2007 ............................... 73,337 $6.17 2008 ............................... 663 $7.63 -------- 368,000 ======== 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. F-12 AVERT, INC. NOTES TO FINANCIAL STATEMENTS Years Ended December 31, ----------------------- 1998 1997 ---- ---- Net income applicable to common stockholders: As reported ............................. $ 740,000 $ 1,218,000 Pro forma ............................... $ 670,000 $ 1,117,000 Net income per common share - basic: As reported ............................. $ .22 $ .35 Pro forma ............................... $ .20 $ .32 Net income per common share - diluted: As reported ............................. $ .21 $ .34 Pro forma ............................... $ .19 $ .31 For purposes of this disclosure, the weighted average fair value of the options granted in 1998 and 1997 was $4.59 and $4.10, respectively. The fair value of each employee option and warrant granted in 1998 and 1997 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Years Ended December 31, ----------------------- 1998 1997 ---- ---- Expected volatility 80% 50.1% Risk-free interest rate 5.5% 6.5% Expected dividends -- -- Expected terms (in years) 5 7.82 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 entitled the holder to purchase one share of common stock for $6.50 through April 1997. 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. F-13 AVERT, INC. NOTES TO FINANCIAL STATEMENTS 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 1998 and 1997 was approximately $56,000 and $92,000, 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 1998 and 1997 were insignificant. 6 SUBSEQUENT EVENT (UNAUDITED): On February 23, 1999, the Company declared a cash dividend of $.12 per share of common stock to be paid March 24, 1999 to those shareholders of record as of close of business March 15, 1999. Total cash dividend to be paid is approximately $400,000. F-14 EX-10.1 2 AMENDMENT TO CONSUMER REPORT USER AGREEMENT EXHIBIT 10.1 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 8. Recognize that information is reports received from Avert in obtained and managed by fallible strict compliance with all sources, and that for the fee provisions of the Fair Credit charged, Avert does not Reporting Act (FCRA), Public Law guarantee or insure the accuracy 91-508 and the Americans with or the depth of information Disabilities Act (ADA 1990), and provided. all other applicable federal and state laws and regulations 9. Assume responsibility for the including federal and state final verification of the equal opportunity laws and applicant's identity. regulations. 10. Base employment decisions or any 2. Use the information provided by actions on the User's lawful Avert for the user's exclusive policies and procedures and use only, except to disclose recognize that Avert employees said information to the subject are not allowed to render any of the report, and for legal opinions regarding employment purposes only, and information contained in a only in accordance with consumer report. applicable law. 11. Pay for services based on a 3. Make a clear and conspicuous statement system similar to ones disclosure to the applicant or used by telephone companies. employee, in writing and in a Terms are NET 30 days. Accounts separate document, that a in arrears will assume a finance consumer report may be obtained charge of 2% per month or the for employment purposes. highest lawful rate, whichever is less. If an account goes to 4. Make a clear an accurate collection, User agrees to pay disclosure to the applicant or all expenses, including employee if an investigative reasonable legal fees. consumer report (reference check) will be obtained, including a statement informing 12. Provide credit information on the subject of the report that user as may be requested by additional information is Avert, Inc. during the course of available if requested. this agreement. 5. Obtain the proper written 13. Be aware that, if an account authorization from the applicant remains inactive for twelve or employee for any consumer consecutive months, it may be report prior to requesting any closed and a new User Agreement report. may be required to reopen the account. 6. Provide proper notice to the applicant or employee, a copy of 14. Acknowledge that a facsimile of the report obtained, and a this agreement is as valid as an Summary of Rights, as required original. by the FCRA, if an adverse decision regarding employment is 15. Recognize that in order to going to be made due to remain in compliance with laws information in any report and regulations governing obtained from Avert, Inc. consumer reporting agencies Avert may make modifications to 7. Ensure that reports will be this agreement from time to requested only by User's time. These modifications may be designated representatives and mailed to the User and the forbid employees from obtaining User's use of Avert's services reports on themselves, after the date specified in the associates or any other person communication will be construed except in the exercise of their as your agreement and implied official duties. consent to these modifications. Avert agrees to: 1. Comply with all applicable laws 4. Maintain consumer report in the preparation and information and transaction transmission of reports as details for a minimum of two defined in 15 USC-1681 et seq, years. During an inquiry, the regulated by the Federal Trade subject of the report has the Commission. right to learn the name of the User ordering information and 2. Follow reasonable quality has the right to receive a copy assurance procedures to assure of the report ordered by the maximum possible accuracy of User when a lawful request is information. made to Avert. 3. Re-verify at no cost any 5. Provide all information to the disputed report when either the consumer as required by the Fair User or the subject makes a Credit Reporting Act. request in accordance with applicable law. Avert's response 6. Maintain confidentiality of its shall be made in writing and data acquisition and delivered in a timely manner. verification methodology. 7. Avert may, at its sole discretion, terminate service to any user. I certify that I have read the terms for this Consumer Report User Agreement and I agree to the terms as written. X ------------------------------------------------------------------------------- User Authorized Signature Title Date ================================================================================ Avert, Inc. Authorized Signature Title Date Customer Name: ______________________________________________ Customer Number: ____________________________________________ MAIL OR FAX THIS SIGNED AGREEMENT TO AVERT, INC. NO LATER THAN SEPTEMBER 30, 1997. 301 Remington Street Fort Collins, CO 80524 800.367.5933 FAX 800.237.4011 EX-10.1.2 3 FORM OF CONSUMER REPORT USER AGREEMENT EXHIBIT 10.1.2 Avert, Inc. 301 Remington Street Fort Collins, CO 80524 800-367-5933 Consumer Report User Agreement Please read and complete this agreement and fax to Avert. Payment of the $50.00 set up fee is accepted by check or credit card. You will be billed net 30 days for Avert products and services. When your account is established, we will call you with your customer number and send you a copy of this agreement. The security and dissemination of this unique customer number is the responsibility of the person signing this agreement. Avert will neither release information nor take orders for services unless the 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 set up fee (less charges for products and services ordered) will be refunded. YOUR CUSTOMER NUMBER IS DELIVERY ADDRESS FOR REPORTS (One address must be the physical location of your company) Business Name (User)____________________________________________________________ Address ________________________________________________________________________ Phone # _____________________________________ Fax #_____________________________ Email Address___________________________________________________________________ Contact(s)______________________________ Second_________________________________ BILLING ADDRESS (Invoices to be sent here) Business Name (User)____________________________________________________________ Address ________________________________________________________________________ Phone # _____________________________________ Fax #_____________________________ Email Address___________________________________________________________________ Contact(s)______________________________ Second_________________________________ First Last Title First Last Title BILLADDRESS Invoices to be sent here. 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 ( ) Industrial ( ) Residential ( ) Other (please explain) _________________________________________________ ________________________________________________________________________________ 5. If you intend to use Name Link, Instant Address Link and/or Credit Link (for employment purposes only) please provide a copy of ONE of the following items listed below: ( ) Your business license ( ) Federal/StateTax ID Form (Government Issued) ( ) Articles of Incorporation ( ) Sales Tax License 6. Identify two principals (or owners) of your business, or if your company stock is traded on a recognized stock exchange, please provide the symbol and exchange. - -------------------------- -------------------------------------- ------------ Name Title Phone - -------------------------- -------------------------------------- ------------ Name Title Phone - -------------------------- ----------------------------------- Symbol Exchange 7. Basic Account ( ) AVERTadvantage for $10/month ( ) AVERTadvantage Plus for $20/month ( ) 8. If paying $50 set up fee by credit card, please complete the following: (Visa, Mastercard and American Express accepted) User certifies that the "Terms for Consumer Report User Agreement" have been read and agrees to the terms as written. X ------------------------------------------------------------------------------- User Authorized Signature Title Date - -------------------------------------------------------------------------------- Avert, Inc. Authorized Signature Title Date EMPLOYMENTUA98.10 EX-10.3.2 4 RESELLER CERTIFICATION OF COMPLIANCE EXHIBIT 10.3.2 RESELLER CERTIFICATION OF COMPLIANCE California Civil Code - Section 1785.14(a) and Section 1785.14(d) Section 1785.14(a), as amended, states that a consumer credit reporting agency does not have reasonable grounds for believing that a consumer credit report will be used only for a permissible purpose unless all of the following requirements are met: Section 1785.14(a)(1) states: "If a prospective user is a retail seller, as defined in Section 1802.3, and intends to issue credit to a consumer who appears in person on the basis of an application for credit submitted in person, the consumer credit reporting agency shall, with a reasonable degree of certainty, match at least three categories of identifying information within the file maintained by the consumer credit reporting agency on the consumer with the information provided to the consumer credit reporting agency by the retail seller. The categories of identifying information may include, but are not limited to, first and last name, month and date of birth, driver's license number, place of employment, current residence address, previous residence address, or social security number. The categories of information shall not include mother's maiden name." Section 1785.14(a)(2) states: "If the prospective user is a retail seller, as defined in Section 1802.3, and intends to issue credit to a consumer who appears in person on the basis of an application for credit submitted in person, the retail seller must certify, in writing, to the consumer credit reporting agency that it instructs its employees and agents to inspect a photo identification of the consumer at the time the application was submitted in person. This paragraph does not apply to an application for credit submitted by mail." Section 1785.14(a)(3) states: "If the prospective user intends to extend credit by mail pursuant to a solicitation by mail, the extension of credit shall be mailed to the same address as on the solicitation unless the prospective user verifies any address change by, among other methods, contacting the person to whom the extension of credit will be mailed." Section 1785.14(d) states: "A consumer credit reporting agency shall provide a written notice to any person who regularly and in the ordinary course of business supplies information to the consumer credit reporting agency concerning any consumer or to whom a consumer credit report is provided by the consumer credit reporting agency. The notice shall specify the person's obligations under this title. Copies of the appropriate code sections shall satisfy the requirement of this subdivision." In compliance with Section 1785.14(a) of the California Civil Code, ______________________________ ("Reseller") hereby certifies to Experian Information Solutions, Inc. ("Experian") as follows: (Please circle) (Please check the appropriate box) - -------------------------------------------------------------------------------- Reseller [ ] (does) [ ] (does not) do business with reseller customers ("End Users") who are retail sellers, as defined in Section 1802.3 of the California Civil Code ("Retail Seller") and issue credit to consumers who appear in person on the basis of applications for credit submitted in person in California ("Point of Sale"). - -------------------------------------------------------------------------------- Reseller also certifies that if Reseller does business with End Users who are Retail Sellers conducting Point of Sale transactions, Reseller will obtain certification from each End User that, beginning on or before July 1, 1998, such End User will instruct its employees and agents to inspect a photo identification of the consumer at the time an application is submitted in person. Reseller also certifies that it will provide notices of obligations under the Consumer Credit Reporting Agencies Act to all of its End Users it provides a consumer credit report, as required by Section 1785.14(d) of the California Civil Code. Reseller also certifies that it will only use, and if applicable, instruct its End Users to use, the appropriate subscriber code number(s) designated by Experian for accessing consumer credit reports for Point of Sale transactions conducted by Retail Sellers. When Reseller establishes new End Users who are Retail Sellers conducting Point of Sale transactions, Reseller agrees that it shall provide written notice of such to Experian prior to selling consumer credit reports to such End Users. Such notice to Experian should be directed to: Experian Information Solutions, Specialized Services Department, 425 Martingale Rd., Suite 600, Schaumburg, Illinois 60173. Reseller shall obtain a certification of compliance from each End User who is a Retail Seller conducting Point of Sale transactions, and shall only allow access to consumer credit reports for such purposes utilizing subscriber code number(s) designated by Experian. Reseller also agrees to provide notices of obligations, as required by Section 1785.14(d) of the California Civil Code, to all new End Users it provides a consumer credit report. AVERT, INC. Reseller By: /s/Kathryn Carlson ---------------------------- Title: Operations Manager Date: May 4, 1998 EX-10.4.1 5 AMENDMENT TO SERVICE AGREEMENT FOR RETAILERS EXHIBIT 10.4.1 Amendment to Service Agreement for Retailers This Amendment to the Service Agreement is entered into by and between Trans Union LLC and the undersigned Subscriber, on this 5th day of May 1998. WHEREAS the parties have previously entered into a Service Agreement for consumer reporting services; and WHEREAS the State of California has passed new legislation, AB 156, amending the California Consumer Credit Reporting Agencies Act, requiring certain certifications to be made by retail sellers who are users of consumer reports pertaining to California consumers. NOW THEREFORE, the parties agree to amend their Service Agreement as follows: Subscriber agrees to instruct its employees responsible for receiving in-person credit applications from California consumers, including point of sale applications, to inspect the applicant's photo identification prior to requesting a consumer report. Subscriber will identify to Trans Union, either by subscriber code or by flag on the affected inquiry, when it requests a report for an in-person credit application. In all other respects, the Service Agreement shall remain in full force and effect. Agreed to on the date first above written. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. Trans Union LLC AVERT, INC. Subscriber Name By: /s/ Kevin Lambert By: /s/ Kathryn M. Carlson --------------------------- -------------------------------- Print Name: Kevin Lambert Print Name: Kathryn M. Carlson Title: Data Acquisition Specialist Title: Operations Manager EX-10.11 6 RESTRAC/AVERT AVERTNET RESELLER AGREEMENT EXHIBIT 10.11 RESTRAC/AVERT AVERTNET RESELLER AGREEMENT This Agreement is made as of January 4, 1999 between Restrac, Inc. ("Restrac"), a corporation with its principal place of business at 91 Hartwell Avenue, Lexington, MA 02173, and Avert, Inc. ("Avert"), a corporation with its principal place of business at Remington Street, Fort Collins, CO 80524, to provide for the resale by Restrac of Avert's "Avertnet" and other Internet-based pre-employment screening and background checking services (collectively referred to herein as the "Services"). 1. Creation of Private Brand for Services. (a) Promptly following the execution of this Agreement, Avert will develop, at its own expense, an order form for the Services presently offered, customized for use by Restrac's customers (the "Order Form"). Restrac will have the right to approve the Order Form, such approval not to be unreasonably withheld. During the term of this Agreement, the parties will collaborate to update the Order Form to reflect Services being offered on a current basis. (b) Restrac will develop, at its own expense, a link in its "WebHire" service to launch the Order Form for the Services in a separate browser window. Restrac will also make the Services available to its "Hire" software customers. 2. Resale Methodology. (a) Restrac customers will purchase Services directly from Avert, initially by executing an agreement with Avert in a form to be approved by both Avert and Restrac (the "Customer Agreement"), and subsequently by initiating orders in accordance with the Order Form. The Customer Agreement will provide that charges for the Services in the amounts listed in the Order Form (or otherwise established by Restrac) will be billed to the customer by, and that payments will be made to, Restrac. At Restrac's option, the Customer Agreement will require that customers provide Avert with copies of any written authorizations necessary to obtain information provided as part of the Services, and Restrac will be entitled to receive copies of such authorizations. Results of Services will be provided to Restrac customers via email (when the customer has standard email protocols), fax, the Internet or U.S. mail. (b) Restrac will be responsible for paying Avert for all Services purchased by Restrac customers. Restrac will pay Avert $18 per month per subscriber for basic Services consisting of account setup and maintenance, all releases of Avertnet and OrderXpert (and/or other Services currently offered), and unlimited "First Checks". Restrac will pay Avert for additional Services purchased by Restrac Customers at rates equal to 63.75% of Avert's current published standard retail rates for the Services. Restrac will have the opportunity to receiving additional discounts, based upon the achievement of mutually agreed upon revenue goals. Avert will provide Restrac with not less than 60 days' prior written notice of any increase in such rates. Restrac will have the right to determine, in its sole discretion, the amounts charged to Restrac customers for the Services. Restrac will be established as a "parent account" in the Avert "ASAP" customer system, and will be provided with a full monthly accounting of all Services purchased by Restrac customers. Restrac will remit all amounts due to Avert within 60 days after receiving the monthly accounting. 3. Joint Marketing Activities. (a) During the initial 120 days of this Agreement, Avert and Restrac will collaborate on a project plan for tighter integration of Avert's services with Restrac's products. (b) Restrac will promote the availability of the Services to its existing and new customers as soon as the Services are available to them. Restrac will display Avert's logo in Restrac's sales material in a manner reasonably approved by Avert. (c) Avert and Restrac will establish web sites for cooperative marketing activities. (d) Avert will introduce Restrac products to its customers through the Avert Alliance catalog of products and services. (e) Unless specifically requested by a customer on the customer's own initiative, for a period of six months after the execution of this Agreement, neither Restrac nor Avert will enter into a joint marketing arrangement with a direct competitor of the other. During the entire term of this Agreement, neither party will enter into such an arrangement without giving the other a minimum of 60 days' prior written notice. If either party shall enter into such an arrangement pursuant to this Section 3(e), the other party's obligations under this Section 3(e) shall terminate. 4. Avert Warranty. (a) Avert warrants that it has or will have all rights necessary to provide the Services to Restrac customers, and, except for liabilities covered by Restrac's indemnity obligations provided in Section 4(b) below, will indemnify Restrac and hold it harmless with respect to any and all claims arising in connection with the Services, provided that Restrac will give Avert prompt notice of any such claim and the right to defend or settle same. (b) Restrac will indemnify Avert and hold it harmless with respect to any and all claims arising from errors resulting from modifications made by Restrac to any applicant information passed to Avert via the WebHire system, provided that Avert shall give Restrac prompt notice of any such claim and the right to defend or settle same. (c) Without limiting the generality of the foregoing, Avert will maintain all security precautions and releases necessary to ensure that confidential information is only ordered by and released to authorized parties. 5. Referral Fees Payable to Avert by Restrac. (a) Avert may identify to Restrac certain customers as prospective referrals for sales of Restrac software product licenses and WebHire services. Such a customer will be treated as a "Referral" for purposes of this Agreement only if Restrac so agrees in writing, and Avert effects an introduction to the customer occurring within 30 days after such agreement. (b) If, as a result of the introduction by Avert, a Referral purchases a Restrac software product license and/or WebHire services within nine months after such introduction, Restrac will pay referral fees to Avert equal to 5% of Restrac's net first year revenue from all Restrac software product licenses and WebHire services purchased by such Referral. Referral fees shall not be earned on payments received by Restrac for implementation, consulting or other services (c) If, as a result of the introduction by Restrac, a Referral purchases Avert services within nine months after such introduction, Avert will pay referral fees to Restrac equal to 5% of Avert's net first year revenue from all Avert services purchased by such Referral. Referral fees shall not be earned on payments received by Avert for implementation and consulting services. 6. Confidentiality. (a) Each party agrees to treat all information of the other party which is not generally known and which is either identified as confidential or is normally understood to be confidential ("Confidential Information") as confidential, and not to disclose the other party's Confidential Information to any third party during the term hereof and for a period of five years after the termination or expiration of this Agreement. The existence and terms of this Agreement shall be treated as Confidential Information, except as otherwise agreed by the parties. (b) A party's obligation of confidentiality will not apply to information which is known to the receiving party prior to disclosure, which is or becomes publicly available without breach of this Agreement, which is received from a third party or developed independently by the receiving party, or which is required to be disclosed by court or governmental order. 7. Independent Contractors. The parties to this Agreement are independent contractors. Except as expressly provided herein, neither party is authorized to enter into any commitments on behalf of, or legally bind, the other. 8. No-Hire Commitment. During the term of this Agreement and for one year thereafter, neither party will hire an employee of the other party or induce an employee of the other party to leave his or her employment. 9. Term and Termination. (a) The initial term of this Agreement will be two years. Thereafter, this Agreement will automatically renew for successive one-year terms, unless either party gives the other written notice of its intention not to renew not less than 90 days prior to the renewal date. (b) Notwithstanding the foregoing, either party may terminate this Agreement effective upon written notice during the continuance of a material breach by the other party which remains uncured more than 30 days after written notice thereof. (c) All rights and obligations of the parties accruing prior to the termination of this Agreement, and all rights and obligations under Sections 4, 6 and 8 hereof shall survive such termination. 10. General. (a) All notices hereunder shall be in writing and shall be delivered to the attention of a party's designated contact, with a copy to its president, at the address set forth on the first page of this Agreement, or to such other person or address as shall have been provided by notice hereunder. The contacts initially designated are: Restrac: Michael Pittenger, Director, Business Development Avert: Leonard Koch, VP of Business Development (b) Except as expressly provided herein, a party's rights and obligations under this Agreement are not assignable other than to its parent or subsidiary or a successor to substantially all of its business. (c) This Agreement is the entire agreement of the parties on the subject hereof and supersedes all prior oral and written discussions. It may not be modified, nor may any of its provisions be waived, other than by a written instrument signed by the party sagainst whom such waiver or modification is to be enforced. (d) This Agreement shall be governed by and construed in accordance with the laws of Massachusetts. EXECUTED UNDER SEAL as of the date set forth above. AVERT, INC. RESTRAC, INC. By: /s/ Leonard Koch Its: VP Business Dev. By: /s/ Cindy Eades Its: CFO ------------------------------------- ---------------------------- -----END PRIVACY-ENHANCED MESSAGE-----