UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to _________
Commission File Number: 0-23952
AVERT, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1028716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
301 Remington, Fort Collins, CO 80524
(Address of principal executive offices)
970/484-7722
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former
fiscal year, if changed from last report).
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[X] Yes [ ] No
As of August 8, 1997 the issuer had 3,488,125 shares of Common Stock, no
par value, outstanding.
Transitional Small Business Disclosure Format.
[ ] Yes [X] No
Form 10-QSB
Quarter Ended June 30, 1997
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Financial statements
Unaudited balance sheets................................ 3
Unaudited statements of income.......................... 4
Unaudited statements of cash flows...................... 5
Notes to unaudited financial statements................. 6
ITEM 2. Management's Discussion and Analysis or
Plan of Operations....................................... 7
PART II - OTHER INFORMATION
ITEMS 1, 2, 3, and 5 Not applicable............................
ITEM 4........................................................... 12
ITEM 6........................................................... 12
Signatures....................................................... 13
2
PART I - FINANCIAL INFORMATION
AVERT, INC.
BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
(unaudited)
Current assets:
Cash and cash equivalents ................................................. $ 693,600 $ 360,300
Marketable securities ..................................................... 5,720,700 5,576,700
Accounts receivable, net of allowance ..................................... 1,150,800 787,900
Prepaid expenses and other ................................................ 176,300 159,000
----------- -----------
Total current assets ............................................. $ 7,741,400 6,883,900
Property and equipment, net ........................................................ 3,242,500 2,510,900
----------- -----------
Total assets ....................................................................... $10,983,900 $ 9,394,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 580,000 $ 464,400
Accrued expenses .......................................................... 540,400 224,600
Deferred revenue .......................................................... 114,600 20,000
----------- -----------
Total current liabilities ........................................ 1,235,000 709,000
Shareholders' equity:
Preferred shares, no par value; authorized
1,000,000 shares; none outstanding ...................................... -- --
Common stock, no par value; authorized
9,000,000 shares; 3,488,125, and 3,446,988
shares issued and outstanding respectively .............................. 5,276,300 4,745,500
Retained earnings ......................................................... 4,472,600 3,940,300
----------- -----------
Total shareholders' equity ....................................... 9,748,900 8,685,800
----------- -----------
Total liabilities and shareholders' equity ......................................... $10,983,900 $ 9,394,800
=========== ===========
See accompanying notes to the financial statements.
3
AVERT, INC.
STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Net revenues:
Search and product fees ....................... $ 2,343,400 $ 1,861,700 $ 4,361,800 $ 3,412,000
Interest and other income ..................... 115,000 106,100 192,600 208,100
----------- ----------- ----------- -----------
2,458,400 1,967,800 $ 4,554,400 $ 3,620,100
Expenses:
Search and product costs ...................... 1,051,000 788,000 1,946,000 1,492,400
Marketing ..................................... 405,200 330,900 736,400 610,100
General and administrative .................... 325,300 280,300 618,800 515,400
Software development .......................... 96,600 83,900 199,800 176,900
Depreciation and amortization ................. 113,200 47,700 177,800 80,500
----------- ----------- ----------- -----------
1,991,300 1,530,800 3,678,800 $ 2,875,300
----------- ----------- ----------- -----------
Income before income taxes ............................. 467,100 437,000 875,600 744,800
Income tax expense ............................ (183,500) (166,500) (343,300) (283,300)
----------- ----------- ----------- -----------
Net income ............................................. $ 283,600 $ 270,500 $ 532,300 461,500
=========== =========== =========== ===========
Net income per common share ............................ $ .08 $ .08 $ .15 $ .13
=========== =========== =========== ===========
Weighted average common
shares outstanding ............................ 3,493,500 3,418,500 3,466,300 3,427,800
=========== =========== =========== ===========
See accompanying notes to the financial statements.
4
AVERT, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30
1997 1996
---- ----
Cash Flows From Operating Activities:
Net income ............................................... $ 532,300 $ 461,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 177,800 80,500
Bad debt expense .................................... 8,100 15,000
(Increase)/decrease in marketable securities and
other gains ................................ (144,000) --
Changes in operating assets and liabilities:
Accounts receivable ............................ (371,000) (333,800)
Prepaid expenses and other current assets ...... (17,300) 87,300
Accounts payable ............................... 115,600 (97,000)
Accrued expenses ............................... 346,200 (16,800)
Income taxes payable ........................... (30,400) 8,200
Deferred revenue and deposits .................. 94,600 (3,000)
--------- ---------
Net cash provided by operating activities ........... 711,900 201,900
Cash Flows from Investing Activities:
Additions to furniture and equipment .................... (909,400) (720,100)
Proceeds from sale of furniture and equipment ........... -- 542,700
--------- ---------
Net cash used in investing activities ............. (909,400) (177,400)
--------- ---------
Cash Flows from Financing Activities:
Purchase of Treasury Stock .......................... -- (110,400)
Warrants exercised .................................. 530,800 --
--------- --------
Net cash provided by (used in) financing activities 530,800 (110,400)
--------- --------
Increase/(Decrease) in Cash and Cash Equivalents ............. 333,300 (85,900)
Cash and Cash Equivalents, beginning of period ............... 360,300 159,700
--------- ---------
Cash and Cash Equivalents, end of period ..................... $ 693,600 $ 73,800
========= =========
See accompanying notes to the financial statements.
5
AVERT, INC.
NOTES TO FINANCIAL STATEMENTS
The financial information contained herein is unaudited, but includes all
adjustments (consisting of only normal recurring accruals) which, in the opinion
of management, are necessary to present fairly the information set forth. The
financial statements should be read in conjunction with the Notes to Financial
Statements which are included in the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1996.
The results for interim periods are not necessarily indicative of results
to be expected for the fiscal year of the Company ending December 31, 1997. The
Company believes that the three month report filed on Form 10-QSB is
representative of its financial position, its results of operations and its cash
flows as of and for the periods ended June 30, 1997 and 1996 covered thereby.
On June 22, 1994, the Company completed an initial public offering ("IPO")
of 1,000,000 units ("Units"), each consisting of one share of Common Stock and
one Redeemable Warrant. The Units separated on December 7, 1994, and the Common
Stock and the Redeemable Warrants began trading separately as of that date. Two
Redeemable Warrants entitle the holder to purchase one share of Common Stock at
a price of $6.50 per share (subject to adjustment). The expiration date was
extended to April 30, 1997. Net proceeds from the IPO totalled approximately
$4,382,300. As of June 30, 1997 $530,800 had been received in connection with
the exercised warrants (88,125 shares and the balance of the warrants expired).
6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Comparison of quarters ended June 30, 1997 and June 30, 1996
Total net revenues increased from $1,967,800 for the three month period
ended June 30, 1996 to $2,458,400 for the comparable three month period in 1997
or approximately 24.9%. The breakdown of net revenues, exclusive of product
discounts and other miscellaneous income items, is as follows:
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996 Percent of
------------------------ ------------------------ Increase
Revenues % total Revenues % total (Decrease)
-------- ------- -------- ------- ----------
Products:
Workers compensation histories ........ $ 299,600 12.2% $ 326,500 16.6% (8.2)%
Criminal history reports .............. $1,253,200 51.0% $1,027,300 52.2% 22.0%
Previous employment reports/
credit reports ..................... $ 293,600 11.9% $ 222,800 11.3% 31.8%
Motor vehicle driving records ......... $ 260,900 10.6% $ 230,300 11.7% 13.3%
Other products ........................ $ 118,000 4.8% $ 122,000 6.2% (3.3)%
Services ................................ $ 118,800 4.8% $ 0 0.0% 100.0%
Interest income ......................... $ 77,200 3.1% $ 78,100 4.0% (1.2)%
NET REVENUES ................... $2,458,400 $1,967,800 24.9%
Moderate growth in sales of all of the Company's products continued during
the second quarter of 1997. Growth of approximately 22% occurred in the criminal
history reports area. In total dollars, criminal history reports continues to
contribute the most net revenues, representing $1,253,200 in net revenues in the
three month period ended June 30, 1997, as compared to $1,027,300 in the three
month period ended June 30, 1996. The criminal history reports product line
accounted for approximately 51% of total net revenues in the second quarter
1997, and approximately 52.2% of total net revenues in the second quarter 1996.
The Company believes there continues to be a nationwide trend to check
prospective employees' criminal records and it continues to focus on obtaining
the quickest, most accurate data available.
Workers' compensation histories, though continuing to be our second largest
product line in terms of revenues, also continues to decline as a percentage of
net revenues. In second quarter 1997, workers' compensation reports represented
12.2% of net revenues, or $299,600 as compared to 16.6% of net revenues in
second quarter 1996, or $326,500. The Company believes it will continue to
decrease as a percentage of total net revenues, though still a viable product.
The largest product growth of 31.8% continues to be in the area of Previous
Employment/Credit. This product represented $293,600 and approximately 11.9% of
total net revenues in the second quarter 1997, compared to $222,800 in the
second quarter 1996 and approximately 11.3% of total net revenues. Both products
making up this category are quick turnaround products, which the Company
believes employers now consider more important than in the past.
Net revenues generated in the area of motor vehicle driving records
increased approximately 13.3%, from approximately $230,300 in the second three
months of 1996, representing 11.7% of total net revenues, to approximately
$260,900 in the second three months of 1997, representing 10.6% of total net
revenues.
Growth of approximately 20.4% occurred in the Name Link product growing
from $47,000 in the second quarter 1996 to $56,600 in the second quarter 1997.
Overall, the "other products" category experienced a slight decrease of
approximately 3.3% in revenues, which consists of education/credential
verifications, employment applications and first checks.
7
Service sales, which have been added in the chart above, increased from $0
in second quarter 1996 to $118,800 in second quarter 1997. A large portion is
attributable to the implementation of the Avert Advantage program in July, 1996,
which accounted for $37,600 in revenues for the three month period in 1997, and
was not in effect at all in the three month period in 1996. In addition, a
variety of services that were not offered until July, 1996 produced
approximately $54,000 in second quarter 1997. There was also strong growth in
second quarter 1997 over second quarter 1996 for two services Avert provides
which allow for customization of reports.
Income before income taxes increased from $437,000 in second quarter 1996
to $467,100 in second quarter 1997, or approximately 6.9% and represented
approximately 19.0% of total net revenues in 1997 compared to approximately
22.2% in 1996. The change resulted from increases in two expense categories and
decreases in three.
Total expenses increased from $1,530,800 for the three month period ended
June 30, 1996 to $1,991,300 for the comparable period in 1997 or approximately
30.1% A breakdown in expenses is as follows:
Three Months Ended Three Months Ended Increase (Decrease)
June 30, 1997 June 30, 1996 % of Revenues
------------------------ --------------------------- ------------------
Expenses % of Revenue Expenses % of Revenue 1997 over 1996
-------- ------------ -------- ------------ --------------
Search and product ........................ $1,051,000 42.8% $ 788,000 40.0% 2.8%
Marketing ................................. 405,200 16.5 330,900 16.8 (0.3)
General and administrative ................ 325,300 13.2 280,300 14.3 (1.1)
Software development ...................... 96,600 3.9 83,900 4.3 (0.4)
Depreciation and amortization ............. 113,200 4.6 47,700 2.4 2.2
---------- ---- ---------- ------ ----
Expenses ......................... $1,991,300 81.0% $1,530,800 77.8% 3.2%
========== ===== ========== ======= =====
Search and product fees increased from 40% of total net revenues for second
quarter 1996 to 42.8% of total net revenues for second quarter 1997. With
criminal history reports representing a large portion of our product mix, there
is a continued belief that the development of existing couriers and addition of
new couriers and improved methods of retrieval of criminal records has the
potential to lower the product costs. The Company believes that there are
enhancements planned in these specific areas once the new software is completed,
that will positively impact turnaround and ultimately benefit customers, as well
as positively impact efficiencies in this area. See "Liquidity and Capital
Resources" below in this Item for further discussion. Costs associated with the
criminal history product line represent the bulk of this expense category.
There were decreases in the expense categories of marketing, software
development and general and administrative when expressed as a percentage of
total net revenues. As Avert has become more departmentalized internally, there
have been some reclassifications from general and administrative categories to
the other various departments in areas such as telephone, office supplies and
postage. Detail won't be provided on these reclassifications, but a brief
explanation of expense category variances follow.
There is a continued 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. This expense increased from .9% of total net
revenues in the second quarter 1996 to approximately 1.3% in the second quarter
1997. Due to a decrease in the number of trade shows Avert is attending, there
was a decrease in trade show expenses in the second quarter 1997 as compared to
the second quarter 1996. The Company believes that lead generation can be
performed more effectively using other methods.
Though, as predicted, there have been a number of increased expenses within
software development resulting from the software conversion project in which
Avert is currently involved, the overall decrease in software development
expenses as a percentage of total net revenues in the three month period ended
June 30, 1997 as compared to the three month period ended June 30, 1996. The
Company also capitalizes certain software development costs associated with the
further development of its internal software system used in revenue generation.
The majority of these development costs are paid to third parties. See
"Liquidity and Capital Resources" below in this Item for further discussion. The
depreciation and amortization expenses have increased from second quarter 1996
to second quarter 1997 as a percentage of total net revenues due to the fact
8
that substantial computer hardware purchases were required for the computer
software project Avert has undertaken. In addition, Phase I of the software
began depreciation in the second quarter 1997 resulting in a $41,600 increase in
software depreciation in second quarter 1997 over second quarter 1996. Phase II
of software depreciation is expected to begin in fourth quarter 1997.
Slight decreases occurred in the general and administrative expenses in
second quarter 1997 as compared to second quarter 1996 as a percentage of sales.
This is expected to continue as revenue increases.
Income taxes varied slightly for the combined federal and state statutory
rate of approximately 38% in the second quarter 1996 and approximately 39% in
the second quarter 1997, resulting in net income of $270,500 or $.08 per share
on 3,418,500 shares for the second three months ended June 30, 1996, as compared
to net income of $283,600 or $.08 per share on 3,493,500 shares for the second
three months ended June 30, 1997.
Comparison of six months ended June 30, 1997 and June 30, 1996
Net revenues increased from $3,620,100 for the six month period ended June
30, 1996, to $4,554,400 for the comparable six month period in 1997 or
approximately 25.8%. The breakdown of net revenues, exclusive of product
discounts and other miscellaneous income items, is as follows:
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996 Percent of
--------------------- ------------------------ Increase
Revenues % total Revenues % total (Decrease)
-------- ------- -------- ------- ----------
Products:
Workers compensation histories ........ $ 596,200 13.1% $ 610,200 16.9% (2.3)%
Criminal history reports .............. $2,265,500 49.7% $1,868,700 51.6% 21.2%
Previous employment reports/ .......... $ 523,200 11.5% $ 398,900 11.0% 31.2%
credit reports
Motor vehicle driving records ......... $ 522,400 11.5% $ 448,100 12.4% 16.6%
Other products ........................ $ 223,600 4.9% $ 256,100 7.1% (12.7)%
Interest income ......................... $ 154,400 3.4% $ 161,000 4.4% (4.1)%
NET REVENUES ................... $4,554,400 $3,620,100 25.8%
Moderate to strong growth in sales of most all of the Company's products
continued during the first six months of 1997 with the biggest exception being
workers' compensation reports. Although sales of workers' compensation histories
actually decreased approximately 2.3% from the six month period ended June 30,
1996 to the same six month period in 1997, it is still the second largest
product line representing $596,200 for six months of 1997 and $610,200 for six
months of 1996. The Company believes that it will continue to decrease as a
percentage of total revenues, though still a viable product.
Moderate growth of approximately 21.2% continued in the criminal history
product line representing approximately 49.7% of net revenues in the first six
month period of 1997 as compared to approximately 51.6% of net revenues in the
first six month period of 1996. Criminal history reports continues to represent
the most net revenues, representing $2,265,500 in the first six month period of
1997 as compared to $1,868,700 in the first six month period of 1996.
9
The strongest growth occurred in the area of previous employment and credit
reports representing an approximate 31.2% growth from the six month period ended
June 30 1996 to the six month period ended June 30 1997. These products
accounted for approximately 11.5% of net revenues in the six months ended June
30, 1997 as compared to approximately 11.0% of net revenues in the same period
in 1996.
Other products experienced an approximate 12.7% decline in revenues,
consisting primarily of a reduction in sales from employee application forms,
though only representing approximately 4.9% of total net revenues in the first
six month period of 1997 as compared to approximately 7.1% of total net revenues
in the same period of 1996.
Income before income taxes increased from $744,800 in the six month period
ended June 30, 1996 to $875,600 in the six month period ended June 30, 1997 or
approximately 17.6% and represented approximately 19.2% of net revenues in the
first six months of 1997 compared to approximately 20.6% in the first six months
of 1996.
Total expenses increased from $2,875,300 for the six month period ended
June 30, 1996 to $3,678,800 for the comparable period in 1997. A breakdown in
expenses is as follows:
Six Months Ended Six Months Ended Increase (Decrease)
June 30, 1997 June 30, 1996 % of Revenues
------------------------- ------------------------- ------------------
Expense % of Revenue Expense % of Revenue 1996 over 1995
------- ------------ ------- ------------ ------------------
Search and product ................... $1,946,000 42.7% $1,492,400 41.2% 1.5%
Marketing ............................ 736,400 16.2 610,100 16.9 (0.7)
General and administration ........... 618,800 13.6 515,400 14.2 (0.6)
Software development ................. 199,800 4.4 176,900 4.9 (0.5)
Depreciation and amortization ........ 177,800 3.9 80,500 2.2 1.7
---------- ------ ---------- ------ -----
Expenses .................... $3,678,800 80.8% $2,875,300 79.4% 1.4%
========== ======= ========== ======= ======
Total expenses remained relatively stable as a percentage of total net
revenues in the first six month period of 1997 as compared to the first six
month period of 1996. There were some reclassifications from general and
administrative categories to the other various departments in areas such as
telephone, office supplies, and postage. Explanations of other variances follow.
Search and product costs increased slightly resulting from the large
proportion of criminal history reports in Avert's product mix. The decrease in
Marketing expenses in the six month period ended June 30, 1997 over the six
month period ended June 30, 1996 resulted primarily from a decrease in lead
generation costs and trade show expenses. The slight decrease in general and
administrative expenses in the first six month period ended June 30, 1997 as
compared to the same period in 1996 resulted from a reduction in underwriter
consulting expenses. Due to the development of new software used in revenue
generation activities and increased computer hardware costs associated with this
software, depreciation and amortization expenses have increased approximately
1.7% of total net revenues from the six month period ended June 30, 1996 to the
six month period ended June 30, 1997. Phase I of the software began depreciating
in the second quarter 1997 and with Phase II software depreciation expected to
begin in fourth quarter 1997.
Income taxes varied slightly for the combined federal and state statutory
rate of approximately 38% in the first six months of 1996 and approximately 39%
in the first six months of 1997. This resulted in an increase of net income of
$461,500 or $.13 per share on 3,427,800 shares for the six months ended June 30,
1996, to net income of $532,300 or $.15 per share on 3,466,300 shares for the
six months ended June 30, 1997.
10
Liquidity and Capital Resources
The Company's financial position at June 30 , 1997 remained strong with
working capital at that date of $6,506,400 compared to $6,174,900 at December
31,1996. Cash and cash equivalents and marketable securities at June 30, 1997
were $5,720,700 and increased from $5,576,700 at December 31, 1996. Net cash
provided from operations for the six month period ended June 30, 1997 was
$711,900 and consisted primarily of net income of $532,300 plus $177,800 in
depreciation, a $115,600 increase in accounts payable, a $371,000 increase in
accounts receivable, and a $346,200 increase in accrued expenses. The Company
had capital expenditures of $909,400 for the six month period ended June 30,
1997 as compared to $720,100 for the six months ended June 30, 1996. The
majority of the capital expenditures during the six months ended June 30, 1997
was attributable to the development of new software and upgrade of existing
software and hardware. The Company expects to spend up to $1.5 million in
connection with this project. The majority of these are costs paid to
independent consultants. The Company expects the new software and upgrade of its
existing software to allow the Company to: (1) manage its higher volume with a
lower cost per transaction; (2) introduce new products and services at a much
quicker pace; (3) directly integrate the Company's information technology
systems with strategic partners, suppliers, and large customers; and (4)
maintain the Company's competitive position and provide leading edge, but safe
and proven, technology for its customers. Development and upgrade of the
software will be financed by available cash derived from past or continued
operations. Development and upgrading of the software presently is expected to
be complete in late 1997 with scheduled software releases occurring prior to
that time. In addition, April 30, 1997, there was $530,800 attributable to the
exercise of warrants, which represented 88,125 shares of common stock.
11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
On June 11, 1997, the Company held an annual meeting of stockholders. The
following table sets forth certain information relating to each matter voted
upon at the meeting.
Votes
------------------------------------------------------------------
Withheld/ Broker
Matters Voted Upon For Against Abstain Non-Votes
- ------------------ --- ------- --------- ---------
Election of Directors:
Dean A. Suposs 2,877,119 29,603
D. Michael Vaughan 2,877,319 29,403
Stephen C. Fienhold 2,877,319 29,403
Stephen D. Joyce 2,876,319 30,403
Ratification of the selection of
Hein + Associates LLP as independent 2,829,027 48,640 13,055
Auditors for 1997
Amendment to the Avert, Inc. 1994 Stock
Incentive Plan to increase the number of
Shares of the Company's Common Stock 2,525,360 271,166 74,996
To 525,000 shares
ITEM 6. Exhibits and Reports on Form 8-K
(a) NONE
(b) Reports on Form 8-K
The registrant filed the following reports on Form 8-K
during the first quarter ended June 30, 1997:
(i) Form 8-K dated April 14, 1997, announcing fourth quarter and
year end 1996 results
(ii) Form 8-K dated April 14, 1997, announcing termination of
agreement with Ameritech
(iii)Form 8-K dated April 14, 1997, announcing adherence to
warrant expiration date
(iv) Form 8-K dated May 14 1997, announcing first quarter 1997
results
(v) Form 8-K dated June 19, 1997, announcing results of annual
meeting
12
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVERT, INC.
DATE: August 8, 1997 BY:/s/ Dean A. Suposs
---------------------------------------
Dean A. Suposs, President
DATE: August 8, 1997 BY:/s/ Jamie M. Burgat
---------------------------------------
Jamie M. Burgat, Vice President of
Operations and Chief Financial Officer
13