UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported)
December 16, 1998
FACTUAL DATA CORP.
(Exact name of registrant as specified in its charter)
Colorado 0-24205 84-1449911
(State of (Commission File (I.R.S. Employer
incorporation) Number) Identification No.)
5200 Hahns Peak Drive
Fort Collins, Colorado 80538
(Address of principal executive offices)
(970) 663-5700
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) The registrant is filing the required financial statements in connection
with its acquisition of Mortgage Credit Services, Inc. and Subsidiary on
December 16, 1998, on this amendment to Form 8-K.
(b) The registrant is also filing the required pro forma information in
connection with the acquisition described in Item 7a above on this
amendment to Form 8-K.
<PAGE>
SIGNATURES
Pursuant to 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 hereunto duly authorized.
FACTUAL DATA CORP.
Date: February 25, 1999 By: /s/Jerald H. Donnan
-----------------------------
Jerald H. Donnan,
Chief Executive Officer
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF
INCOME (LOSS) AND UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
The following unaudited pro forma combined statements of income for the year
ended December 31, 1997 and the nine month period ended September 30, 1998 and
the unaudited pro forma combined balance sheet as of September 30, 1998 give
effect to the business combination of Factual Data Corp. and Mortgage Credit
Services, Inc. and Subsidiary. The transaction between Factual Data Corp., and
Mortgage Credit Services, Inc. and Subsidiary has been accounted for as a
combination of companies under the purchase method. The unaudited pro forma
statements of income have been prepared as if the proposed transaction occurred
on January 1, 1997. The unaudited pro forma balance sheet has been prepared as
if the proposed transaction occurred September 30, 1998. These pro forma
statements are not necessarily indicative of the results of operations or the
financial position as they may be in the future or as they might have been had
the transactions become effective on the above mentioned date.
The unaudited pro forma combined statements of income for the year ended
December 31, 1997 and the nine month period ended September 30, 1998 includes
the results of operations of Factual Data Corp., Mortgage Credit Services, Inc.
and Subsidiary and previous business acquisitions made by Factual Data Corp.
during 1998.
The unaudited pro forma combined statements of income (loss) and the unaudited
pro forma combined balance sheet should be read in conjunction with the separate
historical financial statements and notes thereto of Factual Data Corp. and
Mortgage Credit Services, Inc. and Subsidiary.
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements
The following adjustments are related to the business combination between
Factual Data Corp. (FDC), and Mortgage Credit Services, Inc.
and Subsidiary (MCSI).
1. Reflects the Combined Pro Forma totals as filed in the Form 8-K/A on
December 1, 1998. The Combined Pro-forma amounts include Factual Data
Corp., Factual Data Services (an operating division of Landmark Financial
Services, Inc.) and Factual Data Minnesota, Inc. for the year ended
December 31, 1997 and the six months ended June 30, 1998.
2. Reflects the September 30, 1998 unaudited balance sheet and statement of
income for the three months ended September 30, 1998 of Factual Data Corp.
as filed on Form 10-QSB on November 12, 1998.
3. Records the acquisition of MCSI for $2,259,463. To finance the
acquisitions, FDC placed in escrow 297,334 shares of restricted common
stock valued at $1,784,000 subject to future adjustment, and paid $475,463
in cash at closing. Had the number of shares issued been determined at the
date of acquisition, 217,945 shares would have been issued from escrow. The
purchase price has been allocated as follows:
Asset Category Valuation
- ------------------------- ----------------
Cash $ 18,173
Accounts receivable 366,169
Property and equipment 170,700
Prepaid expenses and other 31,437
Non-compete agreement 30,000
Customer lists 2,029,299
Liabilities assumed (386,315)
---------
$2,259,463
=========
4. To eliminate other income and expenses which will not continue following
the business combinations, including depreciation and amortization.
5. To record depreciation and amortization on fixed assets and intangibles
acquired. Fixed assets are depreciated over a five year life, non-compete
agreements over the life of the agreements and customer lists over fifteen
years.
6. Pro forma income tax adjustment at the statutory rate of 34%.
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 1998
<TABLE>
<CAPTION>
Pro Form Adjustments
----------------------------
FDC (2) MCSI Total Debit Credit Combined
--------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents ..... $ 3,807,294 $ 165,436 $ 3,972,730 $ 18,173(3) $ 475,463(3) $ 3,350,004
165,436(3)
Short-term
investments ..... 2,044,254 -- 2,044,254 -- -- 2,044,254
Accounts
receivable, net . 2,508,518 486,012 2,994,530 366,169(3) 486,012(3) 2,874,687
Notes receivable . -- -- -- -- -- --
Prepaid expense
and other ....... 121,195 -- 121,195 31,437(3) -- 152,632
Deferred tax asset 64,577 -- 64,577 -- -- 64,577
----------- ----------- ----------- ----------- ----------- -----------
Total current
assets ....... 8,545,838 651,448 9,197,286 415,779 1,126,911 8,486,154
----------- ----------- ----------- ----------- ----------- -----------
Property and
equipment, net .. 1,796,285 170,633 1,966,918 170,700(3) 170,633(3) 1,966,985
Intangible assets
and other ....... 4,407,280 9,869 4,417,149 2,059,299(3) 9,869(3) 6,466,579
----------- ----------- ----------- ----------- ----------- -----------
14,749,403 831,950 15,581,353 2,645,778 1,307,413 16,919,718
----------- ----------- ----------- ----------- ----------- -----------
Line-of-credit ... -- 80,000 80,000 80,000(3) -- --
Notes payable .... 19,078 250,000 269,078 129,000(3) -- 140,078
Current portion
of long-term debt 1,008,417 -- 1,008,417 -- -- 1,008,417
Accounts payable . 2,243,744 98,032 2,341,776 98,032(3) 105,078(3) 2,348,822
Accrued payroll
and expenses .... 225,037 78,913 303,950 78,913(3) 143,154(3) 368,191
Income taxes
payable ......... 695,270 101,878 797,148 101,878(3) 17,083(3) 712,353
----------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities .. 4,191,546 608,823 4,800,369 608,823 386,315 4,577,861
----------- ----------- ----------- ----------- ----------- -----------
Long-term debt,
net of current
liabilities ..... 2,002,258 -- 2,002,258 -- -- 2,002,258
Deferred income
taxes ........... 244,879 -- 244,879 -- -- 244,879
Common stock ..... 6,430,705 30 6,430,735 30(3) 1,784,000(3) 8,214,705
Additional paid-in
capital ......... -- 970 -- 970(3) -- --
Retained earnings 1,880,015 222,127 2,102,142 222,127(3) -- 1,880,015
----------- ----------- ----------- ----------- ----------- -----------
8,310,720 223,127 8,533,847 223,127 1,784,000 10,094,720
----------- ----------- ----------- ----------- ----------- -----------
$14,749,403 $ 831,950 $15,581,353 $ 831,950 $ 2,170,315 $16,919,718
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
Unaudited Pro Forma Combined Statement of Income
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Pro Form Adjustments
----------------------------
FDC(1) FDC (2) MCSI Total Debit Credit Combined
------------ ------------ ----------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
System affiliates .. $ 1,349,299 $ 889,779 $ -- $ 2,249,078 -- -- $ 2,249,078
Information
systems ........... 6,484,097 1,756,516 3,258,330 11,498,943 -- -- 11,498,943
Training, license
and other ......... 1,005 -- -- 1,005 -- -- 1,005
------------ ------------ ------------ ------------ --------- -------- ------------
Total revenue ... 7,834,401 2,656,295 3,258,330 13,749,026 -- -- 13,749,026
------------ ------------ ------------ ------------ --------- -------- ------------
Operating expenses
Cost of
services provided 3,417,110 1,463,144 1,884,626 6,764,880 -- -- 6,764,880
Selling, general
and administration 2,455,038 515,131 1,032,365 4,002,534 138,320(5) 55,533(4) 4,085,321
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total
operating
expenses ....... 5,872,148 1,978,275 2,916,991 10,767,414 138,320 55,533 10,850,201
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income from
operations ........ 1,962,253 678,020 341,339 2,981,612 138,320 55,533 2,898,825
------------ ------------ ------------ ------------ ------------ ------------ ------------
Other income, net .. 60,800 106,992 -- 167,792 -- -- 167,792
Interest expense ... (154,603) (15,172) -- (169,775) -- -- (169,775)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income before
taxes ............. 1,868,450 769,840 341,339 2,979,629 138,320 55,533 2,896,842
Income tax expense . 875,649 284,841 118,526 1,279,016 18,881(6) 312,971(6) 984,926
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income ......... $ 992,801 $ 484,999 $ 222,813 $ 1,700,613 $ 147,026 $368,504 $1,911,916
============ ============ ============ ============ ============ ============ ===========
Basic earnings
per share ......... $ .45 $ .79
============ ===========
Weighted average
pro forma shares
outstanding -
basic 2,204,012 2,421,957
============ ===========
Diluted earnings
per share $ .39 $ .69
============ ===========
Weighted average
pro forma shares
outstanding -
diluted 2,537,762 2,755,707
============ ===========
</TABLE>
<PAGE>
Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Pro Form Adjustments
-------------------------
FDC(1) MCSI Total Debit Credit Combined
------------ ------------ ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
System affiliates ..... $ 1,539,652 $ -- $ 1,539,652 -- -- $ 1,539,652
Information systems ... 8,706,760 3,383,239 12,089,999 -- -- 12,089,999
Training, license and
other ................ 119,692 -- 119,692 -- -- 119,692
------------ ------------ ------------ ------------- ------------ ------------
Total revenue ... 11,080,469 3,383,239 14,463,708 -- -- 14,463,708
------------ ------------ ------------ ------------- ------------ ------------
Operating expenses
Cost of services
provided .......... 5,585,578 2,118,483 7,704,061 -- -- 7,704,061
Cost of sale of
territories ....... 506,101 -- 506,101 -- -- 506,101
Selling, general and
administrative .... 4,055,371 1,301,513 5,356,884 184,427(5) 62,676(4) 5,478,635
------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses ....... 10,147,050 3,419,996 13,567,046 184,427 62,676 13,688,797
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from
operations .......... 933,419 (36,757) 896,662 184,427 62,676 774,911
------------ ------------ ------------ ------------ ------------ ------------
Other income .......... 33,817 -- 33,817 -- -- 33,817
Interest expense ...... (302,253) -- (302,253) -- -- (302,253)
------------ ------------ ------------ ----------- ------------ ------------
Income (loss) before
taxes ................ 664,983 (36,757) 628,226 184,427 62,676 506,475
Income tax expense .... 247,044 (7,463) 239,581 21,310(6) 88,689(6) 172,202
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) ..... $ 419,939 $ (29,294) $ 388,645 $ 205,737 $ 151,365 $ 334,273
============ ============ ============ ============ ============ ===========
Basic earnings per share .22 .16
============ ===========
Weighted average pro
forma shares
outstanding - basic 1,874,012 2,091,957
============ ===========
Diluted earnings per
share .22 .16
============ ===========
Weighted average pro
forma shares
outstanding - diluted 1,874,012 2,091,957
============ ==========
</TABLE>
<PAGE>
MORTGAGE CREDIT SERVICES, INC.
AND WHOLLY OWNED SUBSIDIARY
Financial Statements
December 31, 1997
<PAGE>
MORTGAGE CREDIT SERVICES, INC.
AND WHOLLY OWNED SUBSIDIARY
Table of Contents
Independent Auditors' Report......................................F - 1
Consolidated Financial Statements
Consolidated Balance Sheets...................................F - 2
Consolidated Statements of Operations.........................F - 3
Consolidated Statement of Changes in Stockholders' Equity.....F - 4
Consolidated Statements of Cash Flows.........................F - 5
Notes to Consolidated Financial Statements........................F - 6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Mortgage Credit Services
Houston, Texas
We have audited the accompanying consolidated balance sheet of Mortgage Credit
Services, Inc. and wholly owned subsidiary as of December 31, 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the two year period then ended December
31, 1997. These consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mortgage Credit
Services, Inc. and wholly owned subsidiary as of December 31, 1997 and the
results of its operations and its cash flows for each of the years in the two
year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
December 18, 1998
Denver, Colorado
F - 1
<PAGE>
MORTGAGE CREDIT SERVICES, INC.
AND WHOLLY OWNED SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
Assets
<S> <C> <C>
Current assets
Cash ..................................................... $ 36,663 $ 165,436
Accounts receivable - trade (net
of allowance for doubtful accounts
of $32,073 (1997) and $10,000 (1998) .................... 373,069 481,468
Accounts receivable - other .............................. 48,723 4,544
--------- ---------
Total current assets ................................. 458,455 651,448
--------- ---------
Property and equipment, net (Note 2) ...................... 132,594 170,633
Other assets
Deferred tax asset, net .................................. 17,605 1,903
Deposits and other assets ................................ 10,992 7,966
--------- ---------
Total other assets ................................... 28,597 9,869
--------- ---------
$ 619,646 $ 831,950
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Line-of-credit (Note 3) ................................. $ 185,000 $ 80,000
Note payable (Note 3) ................................... 250,000 250,000
Accounts payable ........................................ 69,274 98,032
Accrued payroll and taxes ............................... 57,770 41,309
Accrued sales taxes ..................................... 23,999 13,772
Income taxes payable .................................... 3,471 101,878
Other accrued liabilities ............................... 29,818 23,832
--------- ---------
Total current liabilities ............................ 619,332 608,823
--------- ---------
Commitments (Notes 4 and 6)
Stockholders' equity (Note 5)
Common stock
Class A, .01 par value, 700,000 shares
authorized, 2,000 shares issued and
outstanding at December 31, 1997 and
September 30, 1998 (unaudited) ......................... 20 20
Class B, non-voting, .01 par value,
100,000 shares authorized, 1,030 shares
issued and outstanding at December 31,
1997 and September 30, 1998 (unaudited) ................ 10 10
Additional paid-in-capital .............................. 970 970
Retained earnings ....................................... (686) 222,127
--------- ---------
Total stockholders' equity ........................... 314 223,127
--------- ---------
$ 619,646 $ 831,950
========= =========
</TABLE>
See notes to consolidated financial statements.
F - 2
<PAGE>
MORTGAGE CREDIT SERVICES, INC.
AND WHOLLY OWNED SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended
December 31, September 30,
---------------------------- ----------------------------
1996 1997 1997 1998
---------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue ....................... $ 3,027,440 $ 3,383,239 $ 2,576,278 $ 3,258,330
----------- ----------- ----------- -----------
Operating Expenses
Costs of services provided .. 1,761,664 2,118,483 1,528,397 1,884,626
General and administrative .. 1,291,369 1,301,513 926,164 1,032,365
----------- ----------- ----------- -----------
Total operating expenses . 3,053,033 3,419,996 2,454,561 2,916,991
----------- ----------- ----------- -----------
Net (loss) income before
income taxes ................. (25,593) (36,757) 121,717 341,339
Income tax expense (benefit)
Current ..................... 300 4,934 54,909 102,825
Deferred .................... (5,208) (12,397) (11,045) 15,701
----------- ----------- ----------- -----------
(4,908) (7,463) 43,864 118,526
----------- ----------- ----------- -----------
Net (loss) income ............. $ (20,685) $ (29,294) $ 77,853 $ 222,813
=========== =========== =========== ===========
Basic (loss) earnings per share $ (6.83) $ (9.67) $ 25.69 $ 73.54
=========== =========== =========== ===========
Weighted average number of
shares outstanding ........... 3,030 3,030 3,030 3,030
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
MORTGAGE CREDIT SERVICES, INC.
AND WHOLLY OWNED SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 1997 and 1996
And the Period Ended September 30, 1998
<TABLE>
<CAPTION>
Common Stock Common Stock
Class A Class B Additional Total
------------------------- ----------------------- Paid-in Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
----------- ---------- ---------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,000 $ 20 1,030 $ 10 $ 970 $ 49,293 $ 50,293
Net loss for the year
ended December 31, 1996 ... -- -- -- -- -- (20,685) (20,685)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 2,000 20 1,030 10 970 28,608 29,608
Net loss for the year
ended December 31, 1997 ... -- -- -- -- -- (29,294) (29,294)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 2,000 20 1,030 10 970 (686) 314
Net income for the nine
months ended September 30,
1998 (unaudited) .......... -- -- -- -- -- 222,813 222,813
--------- --------- --------- --------- --------- --------- ---------
Balance at September 30,
1998 (unaudited) .......... 2,000 $ 20 1,030 $ 10 $ 970 $ 222,127 $ 223,127
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
MORTGAGE CREDIT SERVICES, INC.
AND WHOLLY OWNED SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months Ended
December 31, September 30,
------------------------ ------------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss) ........... $ (20,685) $ (29,294) $ 77,853 $ 222,813
--------- --------- --------- ---------
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities
Allowance for doubtful
accounts ................... 28,836 (3,849) 9,078 (22,073)
Depreciation and amortization 57,516 62,676 46,334 55,533
Changes in operating assets
and liabilities
Accounts receivable ........ (27,057) (47,525) (123,679) (42,147)
Deposits and other assets .. 5,718 (3,001) 1,254 3,026
Accounts payable ........... (17,419) (54,376) (20,056) 28,758
Accrued liabilities ........ (5,460) 66,627 95,571 81,435
--------- --------- --------- ---------
42,134 20,552 8,502 104,532
--------- --------- --------- ---------
Net cash provided by
(used in) operating
activities ............ 16,241 (21,139) 75,310 327,345
--------- --------- --------- ---------
Cash flows from investing
activities
Purchase of property and
equipment .................. (70,877) (33,471) (28,459) (93,572)
--------- --------- --------- ---------
Net cash used in
investing activities . (70,877) (33,471) (28,459) (93,572)
--------- --------- --------- ---------
Cash flows from financing
activities
Line-of-credit, net ......... 53,626 66,374 1,374 (105,000)
Repayment on advances from
Shareholder ................ (10,000) -- -- --
--------- --------- --------- ---------
Net cash provided by
(used in) financing
activities ............ 43,626 66,374 1,374 (105,000)
--------- --------- --------- ---------
Net increase (decrease) in cash (11,010) 11,764 48,225 128,773
Cash, at beginning of period .. 35,909 24,899 24,899 36,663
--------- --------- --------- ---------
Cash, at end of period ........ $ 24,899 $ 36,663 $ 73,124 $ 165,436
========= ========= ========= =========
</TABLE>
Supplemental disclosure of cash flow information:
Interest paid on borrowings for the years ended December 31, 1997 and 1996
and for the nine months ended September 30, 1997 (unaudited) and 1998
(unaudited) was $7,134, $8,474, $5,648 and $10,506, respectively.
Cash paid for taxes for the years ended December 31, 1997 and 1996 and for
the nine months ended September 30, 1997 (unaudited) and 1998 (unaudited)
was $300, $9,000, $300 and $4,345, respectively.
See notes to consolidated financial statements.
F - 5
<PAGE>
MORTGAGE CREDIT SERVICES, INC.
AND WHOLLY OWNED SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
Mortgage Credit Services, Inc. (MCSI) was incorporated in the state of Texas in
1989. The Company was established for the purpose of providing information
services, to financial lending institutions primarily in the mortgage lending
industry. The Company provides these services in the states of Texas, Oklahoma,
Arizona, Kansas and Ohio.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company's wholly owned subsidiary Credit Profile Services, Inc. (CPS). All
significant intercompany transactions have been eliminated.
Concentration of Credit Risk
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers related to providing information services. The
Company's customers are located in Texas, Oklahoma, Arizona, Kansas and Ohio.
Additionally, at times, the Company maintains cash balances in excess of FDIC
limits.
Accounts Receivable
Because of the credit risks involved, management has provided an allowance for
doubtful accounts of $32,073 and $10,000 at December 31, 1997 and September 30,
1998 (unaudited), respectively, which reflects its opinion of amounts which will
eventually become uncollectible.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based on the estimated useful lives of the assets which
range from five to seven years.
Advertising Costs
Advertising costs are expensed as incurred.
<PAGE>
Note 1 - Organization and Summary of Significant Accounting Policies
(continued)
Income Taxes
The Company recognizes deferred tax assets and liabilities based on the
difference between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amount in future years. The primary temporary differences which result in net
deferred tax assets consist of depreciation differences on property and
equipment, the allowance for doubtful accounts receivable and accrued vacation
expense.
Revenue Recognition
The Company recognizes revenue generated from mortgage credit reports and other
information services when the information has been provided to the customer, as
substantially all required services have been performed.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash, receivables,
accounts payable and accrued liabilities approximate their fair values as of
December 31, 1997 and September 30, 1998 (unaudited) because of the relatively
short maturity of these instruments.
The carrying amount of the line-of-credit outstanding also approximates fair
value as of December 31, 1997 and September 30, 1998 (unaudited) because the
interest rate on the line-of-credit approximates the interest rate on debt with
similar terms available to the Company.
Basic Earnings Per Common Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standard No. 128. The Company has presented only basic
earnings per share as the Company has no dilutive potential common shares. Basic
earnings per share has been computed based on the weighted average number of
shares outstanding.
Recently Issued Accounting Pronouncements
In September 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 September 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.
SFAS No.'s 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier periods to be restated.
In February of 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" (SFAS No. 132), which supercedes SFAS No.'s 87, 88, and 106. SFAS No.
132 addresses disclosure only and is effective for fiscal years beginning after
December 15, 1997. Restatement of disclosures for prior periods is required. The
adoption of SFAS No. 132 will have no current impact on the Company's financial
statements, as no prior disclosures under SFAS No. 87, 88, or 106 were
applicable.
In June of 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities"(SFAS No.
133). SFAS No. 133 addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15,1999. Initial application of SFAS No. 133
shall be as of the beginning of an entity's fiscal quarter, on that date,
hedging relationships shall be designated anew and documented under the
provisions of this statement. The adoption of SFAS No. 133 shall not be
retroactively applied. This statement currently has no impact on the financial
statements of the Company, as the Company does not hold any derivative
instruments or participate in any hedging activities.
<PAGE>
Note 2 - Property and Equipment
Property and equipment consist of the following:
December 31, September 30,
1997 1998
---------- ----------
(Unaudited)
Equipment $ 264,582 $ 343,259
Furniture and fixtures 66,056 80,953
---------- ----------
330,638 424,212
Less accumulated depreciation (198,044) (253,579)
---------- ----------
$ 132,594 $ 170,633
========== ==========
Note 3 - Notes Payable
Line-of-Credit
The Company maintains a $400,000 line-of-credit with a bank of which $185,000
and $80,000 was outstanding at December 31, 1997 and September 30, 1998
(unaudited), respectively. The line-of-credit expires on June 10, 1999. The line
accrues interest at the bank's prime rate plus 2% (10.25% at December 31, 1997
and 9.75% at September 30, 1998). The line is collateralized by substantially
all the assets of the Company and is personally guaranteed by officers of the
Company.
December 31, September 30,
1997 1998
---------- -----------
(Unaudited)
The Company also has a note payable from a
shareholder, interest at 15%, due in full by
September 1999. The note is secured by
accounts receivable and general intangibles. $ 250,000 $ 250,000
========== ==========
Note 4 - Stockholders' Equity
Subsequent to September 30, 1998, MCSI merged with CPS with MCSI as the
surviving entity governed under its articles of incorporation adopting the name
of CPS.
In addition to Class A and Class B common stock authorized, MSCI has also
authorized preferred stock for issuance as follows:
Preferred stock, .01 par value, 200,000 shares authorized with none issued or
outstanding at December 31, 1997 and September 30, 1998 (unaudited).
<PAGE>
Note 5 - Income Taxes
The net long-term deferred tax assets in the accompanying balance sheets include
the following:
December 31, September 30,
1997 1998
----------- ------------
(Unaudited)
Long-term deferred liability $ (10,920) $ (12,539)
Long-term deferred assets 28,525 14,442
---------- ----------
$ 17,605 $ 1,903
========== ==========
The reconciliation of income tax expense by applying federal statutory tax rates
to the Company's effective tax rate is as follows:
For the Year Ended For the Year Ended
December 31, September 30,
-------------------- -------------------
1996 1997 1997 1998
-------- -------- -------- --------
Federal statutory rate 34.0% 34.0% 34.0% 34.0%
Federal surtax exemption (19.0) (19.0) (6.1) -
Other, net 4.2 5.3 8.1 0.7
-------- -------- -------- --------
19.2% 20.3% 36.0% 34.7%
======== ======== ======== ========
Note 6 - Commitments
Operating Leases
The Company leases office space for its corporate location under an operating
lease agreement which provides for the payment of rent totaling approximately
$3,574 per month. The Company renewed their leases on February 1, 1998 which
increased the payment of rent to approximately $8,120 per month and expires in
May 2003. Rent expense under this operating lease, totaled $66,749, $63,690,
$50,200 and $65,735 during the years ended December 31, 1997 and 1996 and the
nine months ended September 30, 1997 and 1998 (unaudited), respectively.
<PAGE>
Note 6 - Commitments (continued)
Operating Leases (continued)
Future minimum annual office space lease payments are as follows:
Year Ended December 31,
1999 $ 97,440
2000 97,440
2001 97,440
2002 97,440
2003 32,480
--------
$422,240
========
The Company also leases several pieces of office equipment under operating lease
agreements which provide for monthly lease payments of various amounts.
Future minimum annual lease payments are as follows:
Year Ended December 31,
1999 $ 14,006
2000 14,006
2001 7,308
--------
$ 35,020
========
Note 7 - 401(k) Plan
The Company maintains a profit sharing plan and trust under section 401(k) of
the Internal Revenue Code. All employees of age 21 or older who complete 1,000
hours a year are eligible for the plan. Employees have an option to contribute
compensation up to the ceiling set by the Internal Revenue Service (15% in
1998). The Company matches $1.00 on the dollar up to 6% of the employees salary.
Company contributions for the year ended December 31, 1997 and the nine months
ended September 30, 1998 (unaudited) were approximately $19,848 and $40,398,
respectively.
<PAGE>
