UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-24205
FACTUAL DATA CORP.
-----------------
(Exact name of small business issuer as specified in its charter)
Colorado 84-1449911
-------- ----------
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
5200 Hahns Peak Drive, Loveland Colorado 80538
--------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(970) 663-5700
---------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has 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 registrant was required to file such reports), and (2) has been subject to
such filing requirements for the
past 90 days. [ ] Yes [ X] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of June 19, 1998.
Common Stock 3,180,000
------------- ---------
Class Number of Shares
Transitional Small Business Disclosure Format: [ ] Yes [X] No
<PAGE>
FACTUAL DATA CORP.
------------------
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
---------------------- ---------
Item 1. Financial Statements
Consolidated Balance Sheets - March 31,
1998 (Unaudited) and December 31, 1997 3
Unaudited Consolidated Statements of
Income -- For the Three Months
Ended March 31, 1998 and March 31,
1997 4
Unaudited Consolidated Statements of Cash
Flows -- For the Three Months Ended
March 31, 1998 and March 31, 1997 5
Notes to Unaudited Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART II. OTHER INFORMATION
------------------
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
Index to Exhibits 13
<PAGE>
FACTUAL DATA CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 December 31,
(Unaudited) 1997
-------------- -----------
<S> <C> <C>
Current assets
Cash $ 556,550 $ 396,752
Accounts receivable, net 1,185,634 633,017
Note receivable 120,423 117,160
Prepaid expenses 23,036 7,438
Deferred tax asset 64,577 64,577
--------- ----------
Total current assets 1,950,220 1,218,944
--------- ----------
Property and equipment, net 1,269,977 995,907
Other assets 795,674 649,234
--------- ----------
$ 4,015,871 $2,864,085
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 23,721 $ 16,140
Current portion of
long-term debt 282,396 282,396
Accounts payable 1,119,621 590,467
Accrued payroll and expenses 66,619 152,513
Income taxes payable 275,277 61,154
--------- ---------
Total current liabilities 1,767,634 1,102,670
--------- ---------
Long-term debt 924,924 927,988
Deferred income taxes 211,965 186,354
Commitments and contingency
Shareholders' equity
Common stock, 10,000,000 shares
authorized; 1,800,000 issued and
outstanding 2,500 2,500
Retained earnings 1,108,848 644,573
---------- --------
Total shareholders' equity 1,111,348 647,073
---------- --------
$4,015,871 $2,864,085
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
<PAGE>
FACTUAL DATA CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
---------
1998 1997
-------- --------
<S> <C> <C>
Revenue
System affiliates $ 1,015,875 $ 430,188
Information services 568,196 152,475
Proceeds from the sale of
Company operated territories - 709,679
Training, license and other 1,005 -
--------- ---------
Total revenue 1,585,076 1,292,342
----------- ----------
Operating Expenses
Costs of services provided 446,713 302,233
Costs of Company operated
territories sold - 506,415
Selling, general and administrative 392,686 313,672
----------- ----------
Total operating expenses 839,399 1,122,320
-------- ----------
Income from operations 745,677 170,022
Other income (expense)
Other income 10,236 9,953
Interest expense (18,969) (22,064)
--------- ---------
Total other expense (8,733) (12,111)
-------- ---------
Income before income taxes 736,944 157,911
Income tax expense 272,669 51,850
--------- --------
Net income and comprehensive income $ 464,275 $ 106,061
Basic and diluted earnings per share $ .26 $ .06
========== ==========
Weighted average shares outstanding 1,800,000 1,800,000
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
<PAGE>
FACTUAL DATA CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
--------
1998 1997
------- ------
<S> <C> <C>
Cash flows from operating activities
Net income $ 464,275 $ 106,061
----------- ----------
Adjustments to reconcile net
income to net cash provided by operating
activities
Depreciation and amortization 108,822 105,808
Deferred income taxes 25,611 41,004
Basis of non-current assets of
territories sold - 391,330
Changes in operating assets and liabilities
Accounts receivable (552,617) 39,830
Prepaid expenses (15,598) 881
Other assets 10,301 425
Accounts payable 472,369 (191,232)
Accrued payroll, payroll taxes and expenses (62,173) (50,403)
Accrued taxes and other 214,123 (8,304)
-------- --------
200,838 329,339
-------- --------
Net cash provided by operating
activities 665,113 435,400
--------- --------
Cash flow from investing activities
Purchase of property and equipment (292,056) (162,197)
Payments received on note receivable - 35,000
Increase in note receivable (3,263) -
--------- ----------
Net cash used in investing activities (295,319) (127,197)
--------- ----------
Cash flows from financing activities
Line-of-credit, net - (66,000)
Principal payments on long-term debt (100,050) (42,459)
Collection from common stock subscription - 500
Deferred offering costs incurred net
of accounts payable (109,946) (13,966)
--------- ----------
Net cash used in financing activities (209,996) (121,925)
--------- ----------
Net increase in cash 159,798 186,278
Cash, at beginning of period 396,752 48,994
--------- ---------
Cash, at end of period $ 556,550 $ 235,272
========= =========
</TABLE>
Supplemental disclosure of cash flow information:
Interest paid on borrowings for the three months ended March 31, 1998 and 1997
was $18,969 and $22,064, respectively.
Supplemental disclosure of non-cash investing and financing activities:
During 1998, the Company financed fixed asset purchases totaling $80,846
with notes payable.
During 1998, the Company incurred $56,785 in offering costs that were
included in accounts payable.
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Registration Statement
on Form SB-2 dated May 13, 1998, which includes audited financial statements
for the years ended December 31, 1997 and 1996. The results of operations for
the three months ended March 31, 1998, may not be indicative of the results of
operations for the year ended December 31, 1998.
NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes
standards for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income, be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Currently the Company's only component, which would comprise comprehensive
income, is its results of operations.
Also, in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), which supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise."
SFAS 131 establishes standards for the way that public companies report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a company
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Management believes that SFAS 131
will not have a significant impact on the Company's disclosure of segment
information in the future.
SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997, and requires comparative information for
earlier periods to be restated.
NOTE 3: SUBSEQUENT EVENTS
The Company closed its initial public offering ("IPO") on May 18, 1998.
The Company issued 1,380,000 units consisting of 1,380,000 shares of Common
Stock and 1,380,000 Redeemable Common Stock Purchase Warrants. Each unit
consisted of one share of Common Stock with an assigned value of $5.50 and one
Warrant with an assigned value of $0.10. The Company raised $7,728,000 of
gross proceeds from the IPO. The Common Stock and Warrants trade on The
Nasdaq SmallCap Market under the trading symbols FDCC and FDCCW.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This filing contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby.
These forward-looking statements include the plans and objectives of
management for future operations, including plans and objectives relating to
services offered by and future economic performance of the Company.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties that might
adversely affect the Company's operating results in the future in a material
way. Such risks and uncertainties include but are not limited to the
following: interest rate fluctuations, effects of national and regional
economic and market conditions, seasonable housing market fluctuations, labor
and marketing costs, operating costs such as telephone and repository's costs,
intensity of competition, legal claims and the contingencies associated with
year 2000 compliance.
Overview
- --------
The Company provides a broad range of credit, employment and other
information services to mortgage lenders, consumer lenders, employers,
landlords, and other businesses. The Company specializes in preparing
mortgage credit reports that are customized to meet each lender's individual
needs.
The Company provides its services through two different methods. The
first involves services sold directly by the Company to third party customers
such as mortgage lenders, financial institutions, private enterprises, and
individuals (referred to as "information services"). Secondly, the Company
sells its services through franchisees and licensees ("System Affiliates").
The Company currently has 29 franchisees and 35 licensees. The System
Affiliates provide information services to customers using the Company's
technology and pay royalty, license and other fees to the Company.
Results of Operations
- -----------------------
The following table sets forth for the periods indicated, as a percentage
of total revenue, those items included in the Company's Unaudited Consolidated
Statements of Income:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
--------
1998 1997
---- ----
<S> <C> <C>
Revenue
System affiliates 64.1% 33.3%
Information services 35.8 11.8
Proceeds from the sale of Company
operated territories - 54.9
Training, license and other 0.1 -
------- ------
Total revenue 100.0% 100.0%
------ ------
Operating expenses
Costs of services provided 28.2 23.4
Costs of Company operated territories sold - 39.2
Selling, general and administrative 24.8 24.3
----- ------
Total operating expenses 53.0% 86.9%
----- -----
Income from operations 47.0 13.1
Other income 0.7 0.8
Interest expense (1.2) (1.7)
----- ----
Income before income taxes 46.5% 12.2%
----- ----
Income tax expense (17.2)% (4.0)%
----- ----
Net income and comprehensive income 29.3% 8.2%
===== ====
</TABLE>
Comparison of three months ended March 31, 1998 and March 31, 1997
Continued low mortgage interest rates, increasing demand for the
Company's core mortgage credit report services, additional aggressive
marketing efforts and positive response to the Company's emerging employee
screening business contributed to the financial performance for the first
quarter 1998. Furthermore, the Company's information services revenue
increased due to the contribution of Mirocon, Inc., a franchise acquired in
December of 1997, pursuant to the Company's consolidation strategy.
Management also believes that the improved 1998 first quarter results are
partly due to the enhanced capabilities of its technology center, ongoing
software development and the increasing demand for the fully automated, thirty
to sixty second reporting service.
Revenue from System Affiliates, which consists of royalties, license fees
and ancillary service fees from the Company's franchisees and licensees,
increased 136%, from $430,188 in the first quarter 1997 to $1,015,875 in the
first quarter 1998. This increase generally reflects the high rate of current
activity in the mortgage industry. New ancillary services recently introduced
by the Company contributed $248,032 to revenue in first quarter 1998, as
compared with $0 in first quarter 1997.
Company information services revenue increased 273% from $152,475 in
first quarter 1997 to $568,196 in first quarter 1998. Included in this
increase is $334,000 from Mirocon, Inc., a franchise acquired in December
1997. Same location sales growth in the information services business,
excluding Mirocon, increased 54% between first quarter 1997 and first quarter
1998.
Training, license and other revenue was immaterial in both the 1998 and
1997 periods.
Proceeds from the sale of Company operated territories decreased by
$709,679, or 100%, from 1997 to 1998. Revenue generated in first quarter 1997
represented the Texas Territories sale. This $709,679 represented 55% of
total revenue for 1997. The decrease of $506,415 in cost of Company operated
territories is in direct relation to Company operated territories formerly
operated by the Company. These costs were associated with the Texas Territory
sale in January 1997. No territory sales occurred in the three months ended
March 31, 1998. The Company does not intend to sell Company operated
territories in the foreseeable future.
Costs of services provided increased $144,480 when compared with the same
period of the prior year. This increase directly relates to the costs of
information services revenue associated with the Mirocon, Inc. acquisition in
December of 1997. Included in the costs of services are direct costs such as
salaries, employment taxes, telephone, rent and repository costs. Although
costs of services increased during the first quarter, 1998, management is
highly encouraged by the profit margins shown by the Mirocon, Inc. acquisition
as compared to the similar period in 1997. As indicated in the table above,
cost of services as a percentage of total revenue increased by 4.8% in
comparison to the 24.0% increase in information services revenue for the first
quarter 1998.
Selling, general and administrative expenses increased 25% from $313,672
in first quarter 1997 to $392,686 in first quarter 1998, or by $79,014. This
increase was primarily due to the on-going maintenance and support of the
Company's technology center. Technology center expenses increased over the
same period in the prior year by $49,900. Depreciation and amortization
expense excluding amortization of software cost, accounted for the remaining
$29,000 increase.
Interest expense decreased by $3,095 due to a reduction in long-term
debt. Interest expense should continue to decrease as management intends to
retire a portion of its long-term debt using certain proceeds from the
Company's May 1998, public offering.
The Company's income taxes increased $220,819, from $51,850 for the first
quarter 1997 to $272,669 for the first quarter 1998. The Company's effective
tax rate increased from 33% to 37% for the first quarter 1998.
As a result of the above-mentioned factors, net income and comprehensive
income increased $358,214, or 337%, from $106,061 in first quarter 1997 to
$464,275 for first quarter 1998. Basic and diluted earnings rose to $0.26 per
share for the quarter from the prior years quarter of $0.06 per share, a 338 %
increase.
The Company's mortgage credit reporting business is subject to
fluctuation due to seasonal effects, which influence the public's home buying
tendencies. Various seasonal events such as holidays and school calendars
impact the mortgage industry overall, particularly as it relates to new and
existing home sales. Seasonality is expected to continue to influence the
Company's results of operations.
Liquidity and Capital Resources
- ----------------------------------
The Company continues to meet its capital requirements through cash flows
provided by operations, which includes a $100,000 line of credit, which had no
outstanding balance at March 31, 1998. The total cash and cash equivalents
increased $159,798 in the three months ended March 31, 1998. The increase for
the current period was primarily due to cash generated by operating
activities, offset in part by capital expenditures and repayment of debt. The
Company also had an increase in its accounts receivable of $552,617. The
Company's cash balances at March 31, 1998 were $556,550.
For the first quarter 1998 net cash provided by operating activities was
$665,113. Net cash used in investing activities was $295,319, and net cash
used in financing activities was $209,996. Capital expenditures accounted for
$292,656, which included $116,693 for the capitalized software costs. Cash
used for the repayment of long-term debt amounted to $100,050 and deferred
offering costs paid were $109,946.
In connection with the acquisition of Mirocon, Inc. in December of 1997
the Company is required to make a payment for the lesser of $160,000 or the
outstanding balance of the note upon completion of the IPO. Upon the closing
of the IPO, the $160,000 payment was made to Mirocon, Inc.
Management believes that its anticipated cash requirements for the
immediate future will be met from internally generated funds and the proceeds
from the IPO. The Company's current consolidation plan calls for use of
proceeds from the IPO of $3.0 million for acquisitions. This funding will not
complete the consolidation plan and, therefore, the Company will be required
to obtain additional public, private or debt financing or combination of the
foregoing to complete the plan.
Year 2000 Compliance
- ----------------------
The Company has completed its Year 2000 (Y2K) assessment for software and
hardware compliance. This assessment concluded with a schedule for Y2K
equipment and software updates as necessary, and testing for Y2K compliance.
The Company Y2K Project has been broken down into two distinct categories: one
category for hardware and one for software.
Hardware Project
The Company's primary systems are Intel-based PCs running either Windows
95 or Windows NT 4.0. Additionally, the Company uses and maintains switches
and routers from 3 Com and Cisco Systems. All potential hardware problems are
expected to be identified by second quarter 1998. Potential problems include,
but are not limited to: PC BIOS incompatibility, router and switch
incompatibility, and PC operating system incompatibility. The Company
believes that it will complete all necessary PC BIOS upgrades and operating
system patches by fourth quarter 1998. Additionally, all necessary systems
will be replaced to be Y2K compliant by fourth quarter 1998.
In the first quarter 1999, the Company will begin implementing Windows 98
and Windows NT 5.0 for all of its major systems. The Company believes that
these operating systems are fully Y2K compliant without the need for operating
system patches.
Software Project
The Company currently maintains a combination of DOS, 16-bit Windows, and
32-bit Windows software that was developed in-house for use by the Company and
its customers. The Company's 32-bit Windows software is believed to be fully
Y2K compliant today. Additionally, the Company's DOS and 16-bit Windows
software currently uses either 4-digit years, or wherever necessary is using a
2-digit windowing technology as follows:
Years ranging from 00 - 49 interpreted as century 20
Years ranging from 50 - 99 interpreted as century 19
All new software developed by the Company is 32-bit Windows software and
is Y2K compliant to the standards set forth by Microsoft Corporation's
published guidelines.
By fourth quarter 1998, the Company will implement a test bed for Y2K
compliance. This test bed will be used to fully test all of the Company's
software. Testing of software and systems will begin immediately by setting
all of the dates at and past the year 2000.
By fourth quarter 1998, the Company believes that it will have completed
all software updates necessary to upgrade its information source vendors to
their proprietary Y2K versions. This project is material, but unnecessary for
Y2K compliance as the Company already interprets the 2-digit year
representations of these vendors using windowing technology.
Beginning first quarter 1999, the Company expects to begin testing for
Y2K compliance with key vendors and customers in an industry-wide effort
sponsored by Federal Home Loan Mortgage Corp.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 27, 1998, the Company received a letter from Venture Funding,
Ltd. ("VFL") alleging, among other things, the existence of a compensation
arrangement between VFL, through its authorized representative, and the
Company. VFL has alleged the existence of a valid, enforceable agreement
between the Company and VFL for unspecified services rendered by VFL. Prior
to April 2, 1997, the Company and its representatives had engaged in certain
correspondence with persons believed to be associated with VFL, and with VFL
itself, concerning a possible finder's fee arrangement between the Company and
VFL. In a private placement memorandum issued by the Company in August 1997,
which was reviewed by representatives of VFL, no disclosure of any finder's
arrangement was provided, consistent with the Company's understanding that no
such arrangement had been made or entered into.
Prior to April 27, 1998, the Company had received no demand for
compensation from VFL. Based solely upon a review of the correspondence by
and between VFL and its representative, on the one hand, and the Company on
the other, and certificates of Company officers, the Company's counsel
believes the claim is without foundation or merit. The Company intends to
vigorously contest any action brought, or claim asserted, by VFL, and intends
to assert any and all counterclaims as may be appropriate in any action
initiated by VFL.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As discussed in Note 3 to the Financial Information contained in Part I
to this Form 10-QSB, the Company completed the IPO of 1,380,000 units on May
18, 1998. Pursuant to Rule 463 of the Securities Act of 1933, the Company
will report its use of proceeds from the offering in its Form 10-QSB for the
quarterly period ending June 30, 1998, and in subsequent filings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Included as exhibits are the items listed on the exhibit index included in
this filing.
b. Reports on Form 8-K
The Company was not subject to the periodic reporting requirements of the
Securities Exchange Act of 1934 during the quarter ended March 31, 1998.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 22, 1998
FACTUAL DATA CORP.
(Registrant)
/s/ Jerald H. Donnan
-----------------------
Jerald H. Donnan
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Todd A. Neiberger
------------------------
Todd A. Neiberger
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
27. Financial data schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 556,550
<SECURITIES> 0
<RECEIVABLES> 1,185,634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,905,220
<PP&E> 1,269,977
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,015,871
<CURRENT-LIABILITIES> 1,767,634
<BONDS> 0
0
0
<COMMON> 2,500
<OTHER-SE> 1,108,848
<TOTAL-LIABILITY-AND-EQUITY> 4,015,871
<SALES> 1,585,076
<TOTAL-REVENUES> 1,585,076
<CGS> 0
<TOTAL-COSTS> 446,713
<OTHER-EXPENSES> 392,686
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,969
<INCOME-PRETAX> 736,944
<INCOME-TAX> 272,669
<INCOME-CONTINUING> 464,275
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464,275
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
